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

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

Greetings, and welcome to the LKQ Corporation First Quarter 2016 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 first quarter 2016 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 this 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 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 am happy to turn the call over to our CEO, Rob Wagman..

Thank you, Joe. Good morning and thank you for joining us on the call today.

This morning, I will begin our review of the quarter with a few high level financial metrics, followed by an update on our operating segments in the various macro trends, each segment witnessed in their respective markets and conclude with an update on our corporate development achievements in the quarter.

Nick will follow with a detailed overview of our Q1 financial performance. Turning to slide three, Q1 revenue reached a record $1.92 billion, an increase of 8.3% as compared to $1.77 billion in the first quarter of 2015.

Net income for the first quarter of 2016 was a $107.7 million, an increase of 0.6% as compared to $107.1 million for the same period of 2015. On an adjusted basis, net income was $128.7 million, an increase of 10.2% as compared to the $116.8 million for the same period of 2015.

Diluted earnings per share of $0.35 for the first quarter ended March 31 2016 was unchanged from the $0.35 for the first quarter of 2015.

It is important to note, however, that the Q1 2016 diluted earnings per share included charges equal to $0.07 per share resulting from restructuring and acquisition related expenses, losses on debt extinguishment, amortization of acquired intangibles, change in the fair value of contingent consideration liabilities, and an adjustment for gains associated with the hedging the Rhiag purchase price.

So on an adjusted basis, EPS grew 10.5% year-over-year in Q1. Nick will provide more specifics on the adjustment shortly. Organic revenue growth for parts and services was 6.3% in the quarter, a solid number, given what mild weather headwinds we faced in North America and Europe and a tough comp in 2015. Turning to North America.

According to the National Center for Environmental Information, March snow cover in the U.S. was 48% lower than the average coverage witnessed from 1981 to 2015. And the second smallest in the 50-year period on record was February and March of 2012 ranking third and fourth respectively.

And February of this year was not far behind, recording 13th smallest level over that same 50-year period.

With that as a backdrop, North America delivered organic revenue growth for parts and services of 4.9% in the quarter, which compared to the 3.6% achieved in Q1 2012 is solid, given we experienced similar weather anomalies in each of those quarters.

During Q1, we purchased over 72,000 vehicles for dismantling by our North American wholesale operations, a 2.8% increase over Q1 2015. During Q1, our pricing at auction increased over Q1 2015 by 9%. But we were also buying a younger vehicle by over one year or 13% younger.

This younger vehicle procurement strategy positions us to take advantage of the inevitable reduction in the average age of the vehicle being repaired, a direct result of the increase in the SAAR rates.

Illustrating this point, during the quarter, the average model year age of a vehicle being repaired was younger by over a year compared to the same period in 2015.

For our North American aftermarket business, we continue to see improvements in our total collision SKU offerings, as well as the total number of certified parts available, each growing 18.5% and 58.4% respectively year-over-year in the quarter In our self-service retail business, during Q1, we acquired over 125,000 lower-cost self-service and crush-only cars, which is a 25% increase over Q1 2015.

Compared to the prior year, we increased our self-service procurement in the quarter to take advantage of the favorable pricing for higher quality vehicles in this line of business, given the year-over-year decline in scrap pricing. As of way, we have seen a stabilization of scrap pricing.

Turning to our ongoing intelligent parts solution initiative with CCC Information Systems. In March of 2015, we introduced LKQ's recycled parts offering through this platform with initial base of 100 shops in Portland, Grand Rapids, and Oklahoma City. From a base of zero and within less than a year, the initial results are encouraged.

Through the end of Q1, LKQ's recycled parts are now accessible to over 2,500 shops in virtually every major city throughout the United States. During Q1, the revenue and number of aftermarket parts purchased processed through the CCC platform, through 82% and 84% respectively year-over-year.

And lastly, on North America, I want to provide an update on our productivity initiatives to identify potential operational efficiencies. As mentioned on previous calls, we've identified several significant opportunities in four key areas, with one being sales force effectiveness and the second one being (7:06) optimization.

During the quarter, our sales responsibilities were separated from our operations across the United States, resulting in a more focused structure. This structure has three regional sales vice presidents, a leadership team of district sales manager and inside sales managers as well.

We now have a geographically focused sales force that is positioned to compete at a local level allowing our broader team to handle increased call volumes. During the quarter, we implemented additional sales KPIs focused on increasing total talk time, outbound calls and peer coaching.

The initial results of these KPIs are positive with total talk time and outbound calls increasing 27% and 15% respectively in the quarter. Under our peer coaching, we have engaged each inside sales manager to increase his or her time on the floor with their sales force.

But we also have each sales manager spend 18 hours per week on the floor engaging in side-by-side coaching, which will increase sales skills with higher volume of sales per rep and simultaneously improve the overall experience to our customer.

Though this coaching structure may create a slight head room with sales, the long-term benefit of driving the performance of our top sales people should lead to reduction in the overall size of our sales force.

In addition, during the quarter, we made great strides with the implementation of Roadnet, the Tier 1 provider we've selected for the technology component of our route optimization efforts.

Roadnet's fleet in mobile management software provides strategic territory and street level route plans, multi-stock vehicle routing and scheduling, wireless dispatch, vehicle telematics, fuel management and real-time vehicle GPS tracking.

Our current utilization rate with Roadnet represents 65% of our North American fleet which today is accounting for over 2,500 vehicles driving over 140,000 miles and make over 22,000 stops on a daily basis. Our goal is to be at a 100% utilization by the end of 2016. Now moving on to our European operations.

In Q1, our Europe segment had organic revenue growth for parts and services of 6.9% and acquisition growth of 9.9%, which was offset by a decrease of 4.5% related to foreign exchange rates.

During Q1, ECP drove organic revenue growth for parts and services of 7.4%, and for branches open more than 12 months, ECP's organic revenue growth was 5.8%, a solid performance given that ECP had one less selling day year-over-year.

During the quarter, ECP did not open any additional branches, providing our team the bandwidth to focus on capturing incremental margin expansion year-over-year in Q1. During Q1, collision parts sales at ECP had year-over-year revenue growth of 15.5%.

I am pleased with the continued double-digit performance in this line of business, especially given the mild Q1 weather in the UK, a tough comp in 2015 and again with one less selling day. Now turning to our Sator business.

During Q1, Sator drove organic revenue growth for parts and services of 6.2%, its highest quarterly rate since we acquired the business in May of 2013.

We believe that our investments in 2014 and 2015 to convert our distribution model from three step to two step is predominantly responsible for not only this acceleration of organic growth, but also the year-over-year improvements in gross and EBITDA margins. And now on to our Specialty segment.

Our Specialty segment continued strong performance by posting year-over-year total revenue growth of 19.5% in the quarter, including the benefits of the Coast acquisition and strong organic revenue growth of 10.8%. I'm also pleased with the margin expansion at Specialty realized in the quarter, which Nick will cover shortly.

During the quarter, Specialty continued their integration activities from the Coast acquisition by consolidating two additional warehouses into our network. Also the Coast administrative synergies continue to be ahead of our schedule.

In addition, our previously mentioned Specialty distribution centers in Michigan and Washington State were both fully operational at the end of Q1. Now on to corporate development.

On March 21, 2016, the company closed its previously announced acquisition of Rhiag, a leading pan-European business-to-business distributor of aftermarket spare parts for passenger cars and commercial vehicles. Rhiag operates through 252 distribution centers and 10 warehouses and serve more than 100,000 professional clients in 10 European countries.

And on April 21, 2016, the company closed on its previously announced acquisition of PGW, a leading global distributor and manufacturer of automotive glass products.

With the acquisition of PGW and our entrance into the sizable $3.5 billion automotive glass market, we continue to grow our industry leading position and product offerings to further serve the needs of our professional repair customers. PGW's offerings are complementary to LKQ's existing business and product offerings.

And together, our respective teams now have the technology, products and expertise to introduce automotive glass to LKQ's global growth strategy. I am also pleased to announce that PGW has secured two new material OE contracts since we announced the acquisition in late February. I am excited to welcome the folks at both Rhiag and PGW to the LKQ team.

In addition to the Rhiag and PGW acquisitions, during the first quarter of 2016, the company acquired an additional wholesale salvage business based in Sweden. At this time, I'd like to ask Nick to provide more detail and perspective on our financial results and our updated 2016 guidance..

Thanks, Rob, and good morning to everyone on the call. I am delighted to run you through the financial summary for the quarter.

And over the next few minutes, I will address the consolidated results for our company and review the performance of each of our three segments, before touching on the balance sheet and addressing our revised guidance for 2016, now that the Rhiag and PGW transactions have closed.

The short version of our financial performance in the first quarter of 2016 is that we had a very good quarter and taken as a whole was right in line with our expectations. We experienced solid revenue and earnings growth. And the headwinds from lower scrap prices and the strong dollar have started to abate.

To be clear, Rhiag closed in late March and was included in our first quarter for only a few days. PGW just closed last week and had no impact on our Q1 results. As Rob mentioned, consolidated revenue for the first quarter of 2016 was $1.9 billion representing an 8.3% increase over last year.

That reflects a 10.5% increase in revenue from parts and services, partially offset by a 20% decrease in other revenue, primarily related to the decline in prices for scrap steel and other metals on a year-over-year basis.

The components of the parts and services revenue growth include approximately 6.3% from organic, plus 6% from acquisitions, for constant currency growth of 12.3%, before backing out the translation impact of FX, which was a 1.8% decline.

I will provide a bit more detail on the organic growth of each of the businesses as I walk through the segment results. As noted on slide 10 of the presentation, consolidated gross margins improved 20 basis points to 39.6% during the quarter.

The uptick reflected approximately a 40-basis point improvement from operations, largely in Europe offset by a 20-basis point decline due to revenue mix, as the revenue growth in our Specialty business, which has the lowest gross margin structure, continued to outpace that of our other operations.

We lost about 50 basis points of efficiencies in our operating expenses, largely due to our North American operations. This was due primarily to the continued impact of lower revenue from scrap and core, which was down $39 million on a year-over-year basis, and particularly impacted our self-service operation.

Outside of the impact of metal prices, our consolidated distribution cost 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 $237 million for the quarter, reflecting a 7% increase from 2015.

As a percent of revenue, segment EBITDA was 12.3%, a 20-basis-point decrease over the 12.5% recorded last year. The increase in segment EBITDA was offset by an increase in restructuring costs.

And operating income for the first quarter of 2016 was flat in dollar terms, and down a bit as a percent of revenue when compared to the same period of the prior year. The restructuring items primarily relate to expenses connected to the Rhiag acquisition.

You will note a couple of relatively large non-operating items in our income statement during the first quarter of 2016, including a loss on debt extinguishment and significant other income. As you may recall, we amended our credit facility at the end of January. In addition, we repaid all of Rhiag's debt shortly after closing.

Collectively, that accounted for approximately $26.7 million of one-time expenses related to unamortized issuance costs on the former credit agreement and the prepayment penalty associated with the high cost Rhiag debt.

Going in the other direction, we hedged the anticipated payment for the Rhiag acquisition, and given the movement in the euro between when we set the hedge and the closing date, we had sizable gain, about $18 million on the hedge.

On a combined basis, the net effect of these one-time items was a negative impact on pre-tax margins, which contracted by about 90 basis points to 8.6%. Our net tax rate during the first quarter was 34.75%, down from 35.5% in 2015 and even with the annual guidance we provided this past February.

Diluted EPS for the quarter was $0.35, which was flat with last year. However, adjusted EPS before restructuring charges, a loss on debt extinguishment, the hedging gain and intangible asset amortization was $0.42 a share compared to $0.38 reflecting the 10.5% improvement.

As mentioned, the impact of scrap and currency fluctuations have abated quite a bit and collectively impacted EPS by less than a penny during the first quarter.

While we have included the details on scrap and currencies in the presentation material, given the minor impact, I am happy to say I won't be spending much time on those topics during this discussion.

As highlighted on slide 11, the composition of our revenue continues to change due to the varying growth rates of our different businesses and the impact of acquisitions. Since each of our segments has a different margin structure, this mix shift impacts the trend in consolidated margins.

This will become more accentuated now that we have closed both Rhiag and PGW and you will begin to see a shift in the second quarter results. And with that, let's get into the details on the segments. Revenue in our North American segment during the first quarter of 2016 increased to $1.088 billion or a 4% increase over 2015.

This is the combination of a 7.3% growth rate in parts and services, offset by a 20% decline in other revenue, the latter of which was primarily due to the lower prices received for scrap steel and other metals.

The 7.3% growth in North American parts and services was a combination of 4.9% organic growth and 3.1% acquisition growth, offset by a 70 basis point FX-related decline, due to the weakness of the Canadian dollar. There is no doubt that the mild weather had an impact on our revenue, as collision claims were down in many states.

But it's hard to quantify the impact, and in the end, we simply need to work through Mother Nature. All-in-all, this was a solid quarter in revenue for our North American business. Gross margins in North America during the first quarter were 42.7%, up just a few basis points.

With respect to operating expenses, we lost about 80 basis points of margin, compared to the comparable quarter of last year. Our self-service unit experienced an increase in operating expenses, but meaningfully lower revenue due to the significant decline in commodity prices.

And as a result, operating expenses as a percent of revenue for our self-service operation increased very significantly on a year-over-year basis. For the North American segment as a whole, the impact of the lower revenue from the sale of scrap and other commodities increased operating costs as a percent of revenue by approximately 110 basis points.

On the upside, we continue to experience improvements in fuel costs, relative to last year, picking up about 20 basis points of margin, as diesel averaged $2.08 a gallon, compared to $2.92 a gallon last year, a 29% decline.

Importantly, we began to experience some preliminary benefit from our productivity initiatives during Q1 with our non-inventory related purchasing activities benefiting from about $400,000 of savings. We would expect this to pick up as we move throughout the year.

The inventory related savings will begin as we purchase inventories at new negotiated prices, the products are received and placed in our warehouses and we turn the inventory.

In total, EBITDA for the North American business during the first quarter was $147 million, and as a percent of revenue, EBITDA for the segment was 13.6% in Q1 of 2016, down from 14.3% reported in the comparable period of prior year.

The impact of lower revenue from commodities should dissipate in the second half assuming we get to more comparable scrap pricing. Moving on to our European segment. Total revenue in the first quarter accelerated to $547 million from $487 million, a 12.2% increase.

Organic growth for parts and services in Europe during the first quarter was 6.9%, reflecting the combination of 7.4% growth at ECP and 6.2% at Sator. The impact of the acquisitions in Europe resulted in an additional 9.9% increase in revenues, which includes only two weeks of activity for Rhiag.

So, on a constant currency basis, European parts and services revenue was up 16.8% for the quarter. These gains were offset by a 4.5% decline due to the translation impact of the strong dollar, particularly relative to the pound sterling. Gross margins in Europe increased to 38.1%, a 110 basis point improvement over the comparable period of last year.

Both ECP and Sator experienced higher gross margins from operations as we continued to benefit from approved procurements in the UK in the internalization of the gross margins from the acquisitions in the Netherlands. These are the highest first quarter gross margins we have achieved in Europe in several years.

As mentioned, when we announced the Rhiag acquisition back in December given the three-step distribution model in Italy and Switzerland. Rhiag has lower gross margins than either ECP or Sator, and beginning in the second quarter, you will see the impact of that on our consolidated European gross margins.

With respect to operating expenses as a percent of revenue, we experienced a 10 basis points increase on a consolidated European basis. We started paying rents and related property costs on the new distribution facility in Tamworth, England, which we call T2 back in February.

The incremental costs related to this project (24:48) in Q1 were about £1.2 million or about $1.8 million, which reflects a 30 basis point increase in operating expenses as a percent of revenue for Europe.

Offsetting some of this increase in expense were some FX gains related to hedges utilized to manage our foreign currency exposure on inventory purchases in the UK. European EBITDA totaled $57.5 million, a 23.6% increase over last year.

As a percent of revenue, European EBITDA in the first quarter of 2016 was 10.5% versus 9.5% last year, a full 100 basis point improvement even after taking into account the impact of the T2 project. Relative to the first quarter of 2015, the pound had declined 6% and the euro declined 3% against the dollar.

Given the significant margin improvement, constant currency EBITDA growth in Europe was 28.6%, which we believe is robust. Turning to our Specialty segment, revenue for the first quarter totaled $288 million, a 19.5% increase over the comparable quarter of 2015.

The organic growth rate of 10.8% was very strong, while the impact of the acquisition of Coast in August of 2015 added 9.4% to revenue growth.

Gross margins in our Specialty segment for the first quarter increased by about 20 basis points compared to last year, due to some favorable product mix and favorable inventory capitalization adjustments related to the acquisition integration activities. Operating expenses as a percent of revenue in Specialty were down about 30 basis points.

We continue to see the leverage from integrating the acquisitions into our existing network, as well as the benefit of lower fuel prices and lower advertising expenses. These savings were in part offset by higher cost related to the two new distribution facilities added in late 2015 and slightly higher freight expense.

EBITDA for the Specialty segment was $32 million, up 25% from the first quarter of last year and as a percent of revenue, EBITDA for the Specialty segment increased 50 basis points to 11% in 2016 compared to 10.5% last year.

Remember, this is a highly seasonal business and the first quarter is typically pretty strong as demonstrated by the graph in the lower right corner of slide 16. Consistent with the normal seasonal patterns, you should assume these margins will moderate as we move through the back half of the year. Let's move on to capital allocation.

As presented on slide 17, you will note that our after-tax cash flow from operations during the first quarter was approximately $119 million as we experienced strong earnings and only a moderate increase in working capital.

During the quarter, we deployed $625 million of capital to support the growth of our businesses, including $50 million to fund capital expenditures and $575 million to fund the acquisitions and other investments.

The latter amount includes the monies paid for Rhiag, net of the hedging gain on the purchase price and net of the proceeds from the previously announced sale of our interest in the Australian joint venture. The Rhiag acquisition was financed by drawing down on our line of credit, thus the big inflow from financing.

We closed the quarter with about $229 million of cash, of which $177 million was held outside of the United States. The big increase in foreign cash relates to the amounts on Rhiag's balance sheet at the time of acquisition.

At March 31, we had about $2.8 billion of total debt outstanding, which reflected the monies borrowed to complete the Rhiag acquisition in late March. That quarter-end balance does not include any borrowings related to PGW as that transaction closed in Q2.

On a pro forma basis, taking into account the PGW closing, our net debt was approximately $3.3 billion or about three times pro forma EBITDA. Also, we completed a very successful €500 million issuance of senior notes in early April, and we used those proceeds to in part pay down the revolving credit facility used to finance the Rhiag transaction.

The key terms of that offering were bullet maturity of eight years and a fixed interest rate of 3.875%. Today, our total availability under the new credit facility is approximately $1 billion, which we believe is more than sufficient to support the growth of our business.

Finally, as noted in our press release, we have provided updated guidance on some of our key financial metrics for 2016 to include the impact from the Rhiag and PGW acquisitions. Again, Rhiag closed in late March and PGW in late April, so we effectively will record a tad more than nine months and eight months of the respective results in 2016.

As relates to the organic growth rates for parts and services, we continue to be comfortable with the range of 6% to 8%, essentially consistent with our recent experience.

Our range for adjusted EPS, which again now excludes the after-tax impact of intangible amortization is $1.76 at the low end to $1.86 per share at the high end with the midpoint of $1.81 a share. Again, this includes the anticipated impact from our ownership of Rhiag and PGW for nine months and eight months respectively in 2016.

The EPS guidance also assumes that the pound sterling and the euro remain at budgeted levels of $1.45 and $1.10 respectively, and importantly that scrap remains at current levels as well. Based on our shares outstanding, that range implies an adjusted net income of approximately $545 million to $575 million, with a midpoint to $560 million.

Our assumed tax rate for 2016 remains at 34.75%. As part of the PGW transaction under U.S. GAAP, we need to mark the closing date inventory up to market value, which means about an $8 million to $12 million increase in the inventory valuation. This amount will get amortized as a non-cash expense as we turn the inventory.

It won't affect the adjusted net income or adjusted EPS, but it will be a one-time impact on diluted net income and diluted EPS in Q2 and perhaps a bit in Q3. I believe all the analysts have adapted to the new adjusted EPS format, which we greatly appreciate, and that will ensure we have consistency in the EPS estimates.

The appendices to this presentation include the relevant reconciliations for prior year periods. Our guidance for cash flow from operations is approximately $575 million to $625 million, with the midpoint of $600 million, and finally, we set the adjusted guidance for capital spending at $200 million to $225 million.

And at this point, I will turn the call back over to Rob to wrap things up..

Thanks, Nick. To summarize, I am proud of the momentum we have created with our Q1 performance, our recently completed strategic acquisitions and our recent financings.

Combined these achievements position LKQ well to deliver another year of organic and acquisition-related revenue growth in 2016 that has us now annualizing in excess of $10 billion of revenue.

Obviously, we can't predict weather patterns, so we remain focused on the things we can control, which include continuing to offer an attractive value proposition to our insurance carrier partners, maintaining and increasing our industry leading fulfillment rates and providing superior and responsive customer service to the professional vehicle repair and supply businesses we serve, all supported by a highly effective and unmatched alternative parts distribution network in North America.

And most importantly, I believe we have a stellar team of 35,000 plus fellow employees dedicated to carrying on our mission globally, and I want to thank each and every one of them for their collective efforts. 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 Bret Jordan with Jefferies. Please proceed with your question..

Hey. Good morning, guys..

Good morning, Bret..

Hey. On that ECP growth for stores open over 12 months of 5.8%, that's pretty strong.

Is there anything going on? Is the market that strong or are you gaining market share in that region?.

Hey, Bret. We're still taking market share for sure. And what I'm most excited about is we still haven't introduced our other product lines, being used, re-man to a (34:55) great extent. So, there's still opportunity there as well, but we believe we're taking market share. A little bit of a headwind there actually with the strong SAAR rate.

We have to wait for those cars obviously to get into the independent aftermarket. So, we're very pleased with that number, it is very strong and we expect it to continue..

Okay. And then on the PGW side, you mentioned you picked up a couple of contracts since you initially announced the deal.

Can you share with us what those are? And is there a capacity constraint as far as your production capability or is it just the ability to outsource that class?.

Yeah. We can't share who they were, but they are locked in for future models. And as far as capacity, we do have the capacity to continue to take on new accounts. So that's not going to be a problem..

Okay. Great.

And then a housekeeping, do you have a feeling for what alternative parts were as a percentage of North American repair?.

The last – we did that annually update, and it was at – at the end of 2015, Bret, it was still 36%..

Okay. Great. And thank you..

Thanks, Bret..

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

Yeah. Thanks. Good morning, guys..

Good morning, Ben..

Thanks for taking my questions. So in your self-service business, you accelerated the number of vehicles you purchased pretty materially, up 25%. Obviously, scrap still – trends have improved, but I'd be curious to hear your thoughts on that business line.

Do you think we're reaching a turning point there?.

Yeah, I think the downturn in scrap, Ben, allowed us to buy a better car for less money and that's what's really driving the revenue there. We're putting better cars through the system and they are plentiful. So long term, scrap has ticked up slightly finally, so it seems to have bottomed out nicely.

So we plan on continuing to buy aggressively in that line of business. Business has been very good there..

Okay. And then, we've heard some news recently about pretty severe hailstorms in the southern U.S., Texas primarily. Can you talk a little bit about what you think this means for your business going forward? Obviously, you've got the glass business now, it's good for your collision business as well, but just curious to hear your thoughts there..

Yeah, absolutely. When we look at Q1, it was really a tale of two countries. We meet with CCC regularly, and they gave us some stats on the Northeast and the Mid-West being down and the number of – accident frequency and that was not the case in the Southwest and the West.

And we actually had a strong double digit organic growth in both of those markets. So we do expect – I did see an ad by Caliber Collision that they are booked through September for collision repair. So, we do expect some nice tailwinds coming out of that market..

Great. And then just one housekeeping....

(37:41) PGW will also be able to realize that benefit as well..

Great. And then, just one last housekeeping. You said your guidance reflects a continuation of current scrap steel prices.

Should we think of that $93 per ton that you realized in the first quarter as the price that's embedded in your guidance?.

Ben, this is Nick. Good morning. The $93 was the average for the quarter. Actually, as we came to the end of the quarter, was up a little bit, so we're kind of sitting right at around triple digits, which is great to be out of double digits, if you will. And so, that's really what's embedded in the guidance.

Again, it's up a little bit which is good, but it's not up meaningful enough to really drive any sort of EPS accretion or....

Got it.

So, it's end of the quarter price?.

Yeah..

Great. Thanks. Best of luck..

Thanks, Ben..

Thank you. Our next question comes from the line of Nate Brochmann with William Blair. Please proceed with your question..

Good morning, everyone..

Nate, good mooning..

And so, if we kind of – and I know, Nick, you pointed this out in terms of you can't really tease it out in terms of the weather impact in the first quarter.

But if we exclude that and kind of come in April a little bit in terms of more mile patterns year-over-year, can you talk about – like I mean, I would assume that the tailwinds are still existing in terms of increased miles driven, more parts per repair, and you talked about the more certified parts.

I mean I would assume that, kind of moving out of that first quarter on the weather comp issue that you're still feeling good about the trends in the business and the tailwinds there..

Absolutely, no change in the longer term tailwinds, Nate. We feel very good about what's happening to the car park. The age of the car park. The number of miles driven. The distractions on the road. I mean, all that is absolutely no change from our perspective.

As Rob noted, there are parts of the countries that had a soft winter, particularly the Northeast, Mid-West and importantly Canada, which Rob didn't mention. The shops did not have a big backlog in April. But by the time you hit May and June, all that's flushed through the system and it shouldn't be an issue..

Okay. Great. And then....

Just to add one more thing to that – what Nick said. The auctions and I think as a result of some of the flooding that's happened on the Houston and the hailstorm, we expect the auctions to be very healthy here for a while..

Okay. Great. And then kind of on the facility expense line, as we've talked about, you have the new distribution facilities with Specialty, you have the UK one that's starting to come into costs.

Should we anticipate that that line item continues to go up a little bit particularly as we move through the UK? And if so, is the UK still on track to kind of take out what was originally thought to be $0.02 to $0.03 this year?.

Nate, this is Nick. Yes, actually $0.03 is our estimate. We've quantified that I think in past calls of about $13 million of total expense. As noted in my comments a bit earlier, it was about $1.8 million for the first quarter.

So we still have the better part of $11 million of costs related to the T2 facility to absorb in the back three quarters of the year. And so that will be a slightly larger kind of weight that we need to bear as relates to facility cost.

Again the two new facilities from the Specialty segment that we introduced in Q4 of last year, those are, as Rob indicated, fully up and running. The impact of that expense should begin to moderate a little bit. And we have kind of rearranged some of our people as to where they are hitting on the P&L. Rob talked about the change in the sales structure.

That meant there was also a change in our operating structure as well. And so, there's a little bit of cost that was moving out of actually selling expense and up into facilities and warehousing expense..

Okay..

A little bit northward movement..

And as Rhiag and PGW come on, would we expect that line item to again take a little bit of a relative jump before kind of paring down as you kind of consolidate facilities and routes and et cetera..

Well, again, there will be no kind of distribution synergies coming out of Rhiag, because they operate in geographies where we don't operate today. So we're not going to be consolidating warehouses or distribution routes and the like. They're going to operate as they have operated. It's going to take us a little bit of time on PGW.

The only natural synergies will be in their aftermarket business where they have 120 locations around the country, we have 300 locations. We do believe that over time, there will be the ability to combine some of those operations and the like but you shouldn't see anything on that front near-term..

Okay. And then just one last housekeeping, Nick.

Do you have, now that the deals have closed, a rough amortization number for us to think about in terms of – if you went back to a non-adjusted amortization earnings?.

Yeah. The best that we have right now, Nate, is what we provided back when we announced the transactions in December and in late February. Again, we're just working through the opening balance sheet on Rhiag, that will probably.

We still have some valuation work that we have outside experts helping us with as to how much the excess purchase price over book value is going to go to goodwill versus amortized assets, and that relates to both transactions. So, we'll come back and provide a better estimate, once we have some of that work done..

Okay. Fair enough. Thanks for the time, guys..

Thanks, Nate..

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

Good morning. Thanks for taking the question..

Good morning..

Good morning..

Wanted to ask on the cost of goods sold side in North America with Manheim coming down here quite precipitously last few months, it would seem to be a benefit to your margins. But at the same time, you noted you're buying a higher quality and fewer higher quality vehicles.

So, just wanted to get a better understanding of how we should think about modeling gross margin, imagining it's a benefit for 2Q and the balance of the year, but if you could help us sort of understand the magnitude there..

Yeah, Jamie. This is Nick. We're not anticipating a major pickup in – or a benefit on the cost of goods sold line. Again, the Manheim index is down a little bit, which ultimately helped us at the auctions a little bit. That said we are buying a newer car.

You would have noticed that the average cost of the vehicle that we're buying was actually up, I think was about 9% in Q1 relative to last year. Now, our goal is to get more parts dollars off the car.

And actually what we've been very consistent over the last several years in mentioning, as we've started to move towards buying a newer vehicle, while the gross margin dollars that we can get off that car go up, actually the gross margin percentage actually comes down a little bit. So there's probably going to be a little bit of a yin and a yang.

We're not anticipating a major movement either way as it relates to our salvage cost of goods sold..

So if I'm hearing you correctly and if I can just paraphrase, it sounds like you're assuming X for your cost of purchase of a vehicle and that's roughly flattish if you will year-over-year, but the amount you can get in terms of per parts – and Rob, you used the example of the F150 tail light, I believe, and with a blind spot detection, is about 10x with the predecessor tail light cost.

So it sounds like COGS is flattish but you're going to be making more per vehicle.

Do I hear that correctly?.

Yes..

Okay. Great. And then just a quick question and apologies if you've gone through this on the CGW call or any detail in the slide that we missed it. But to our understanding, it's a little different to take the glass and put it into trucks and some trucks need to be specialized to handle different types of glass.

And I'm thinking more on the sort of distribution synergies over the longer term side here.

So is there any incremental investments you need to make into either trucks or whether its existing trucks or new trucks? Or just how should we think about that, or conversely, is there really not much to worry about as it relates to the handling of the glass?.

Yeah, as far as the warehousing goes, Jamie, no changes there whatsoever, the racking is identical. But you are correct. The trucks are different. They have a different handling capability.

What our plan would be to do is, we start integrating those businesses, and as trucks retire, we're retiring almost 600 trucks a year, we're replacing because of our large fleet. Those will be retrofitted appropriately to carry both glass and salvage.

So, we don't see it being a major hindrance given the timeframe we have to integrate the businesses first..

Okay.

And at this point, it's maybe too early to start thinking about sort of balance sheet and P&L impacts and sort of percentage that we should attribute to that, is that fair?.

Yeah. That's fair..

Okay. Great. Awesome, thanks guys, and best of luck in the second quarter..

Thanks, Jamie..

Thank you..

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.

First, following upon on Bret's earlier question, have you run any scenarios at ECP, to evaluate the impact of T2 on your fulfillment rates or ultimately your growth rate there?.

We do know Craig that, we're going to have a lot more capacity of the store products. We run at about a 98% fill rate today.

What we think we'll be able to do though is rather than having, in some cases, where we have limited, much limited supply in the field, will be able to put more in the field because of these regional hubs we're developing as well. So, we will have a lot better ability to backfill quickly.

So, we do think our speed to market will be quicker, as a result. And of course, just with the automation, we do expect a lot more efficiencies as well, both in terms of pulling quicker and getting to our customers even quicker as well..

Do you see any impact on inventory turns as a result of T2?.

The near term, the inventory will go up a bit, Craig, only because we're going to be filling that warehouse while we will still have inventory in the two warehouses that we'll ultimately shut down. That's more of a timing issue. Ultimately it'll work through the system. The inventory may go up a bit but it's not going to be a wholesale change.

The key of what the large national distribution facilities allow us to do is that's where some of the longer dated inventory is held, and being able to have that and get it to our branches when needed quickly and through some of the automated picking processes and alike, that's the real benefit of that.

So near-term inventory will go up a little bit as we're working through the transition going from four facilities down to two facilities because you need to have inventory ready for the customer but longer term, there shouldn't be a major impact..

Thanks.

And then finally on your projects with Accel Partners on efficiency, are you in a position at all to quantify or at least help us frame, what you think the financial implications could be once you're up and running on these major projects?.

Again, we'll report that really as we go. When we were in New York last month for the Investor Day, Justin Jude had mentioned tens of millions of dollars. Ultimately on a run rate basis, we're not going to get there, Craig, here in 2016.

Again on the non-inventory related purchasing, again, we were at $400,000 in the first quarter, that will probably double in the coming quarters.

So there will be, I don't know, $2.5 million to $3 million potential savings rolling through in 2016 related to things like logistics and our telecom and our corrugate and supplies buying and office supplies and all that kind of activity. The real key will come in from actually the aftermarket product that we procure from Taiwan.

Again, we're just beginning to buy some of that at new pricing. Some of it's going to be based on demand that we have for those parts, as to how much we need to buy and the ability to make sure we retain the savings in-house, as opposed to passing any of that along to our customers. So, we'll be able to document that on a quarter-by-quarter basis..

And just one follow-up to what Nick said, Craig. Even though we've only been with PGW a week, we've already put their transportation guys with our transportation guys and we're working on ocean freight to leverage that. So, We're quickly already addressing that with the new acquisitions..

Great. 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..

Thank you. Good morning..

Good morning, Tony..

First question I had with respect to some of these initiatives on Roadnet and as well as on the sales force. I wonder if you could add a little bit more color in terms of which one do you think over the long term will give you a bit more of a benefit or greater efficiencies.

And with respect to particularly the sales force initiative, some of the KPIs that are being implemented, are they going to drive overall higher fill rates or traction or customer service scores, or what should we think about in terms of the near-term benefit?.

Sure. If I rank them both, I would say, Roadnet's got the bigger impact for a couple of reasons. One, we can just be so much more confident with our customers as to when their products are going to be there. The route optimization is just incredible and how they route the drivers.

For example, one thing it tries to do is take more right turns than left turns. So you can turn right on red as oppose to crossing traffic when you have to turn left.

Those little efficiencies add up dramatically and the effect of ultimately probably putting fewer trucks on the road with better service is really going to have an impact on our customer base.

As far as the sales KPIs, Tony, we're looking at total clock time, sitting with our reps, I think – and coaching, just pure coaching that we're doing and monitoring the outbound calls more effectively. I think the net effect of that is better customer service, you're absolutely right.

We'll have better contact with our customers, more time on the phone with our customers and really become that vendor of choice as a result because we'll be so much more responsive to their requests and needs. So, that's moving full steam ahead. Back to the route optimization I mentioned in my prepared remarks, with 65% rolled out.

We expect to have that 100% rolled out by the end of this year. So, I think the combination of the two, where we'll provide better customer service on the phone and then better customer service on the delivery end, really will raise the bar significantly on our customer service levels, so both are equally important..

And does return rate – is that ever influenced by either one of these, meaning either the – it was miscommunicated in terms of which part was actually needed and/or the part didn't get there in the right amount of time and thus was a return because it ended up coming from somewhere else? Does this – I don't know if that's a big number or not, but is there an influence there as well?.

Yeah, I think the biggest factor on return rate is cars totaling after the estimate's repaired – an estimate's written and the parts are ordered, or the customer never shows up. They say they're coming in on Tuesday, and they don't bring the car in. I think that's a bigger factor.

However, obviously getting the part – making sure the customer is ordering the right part and our rep is making sure they are writing up the right part is critical. We do expect some improvement in return rates, in terms of getting the right part on the truck.

But again, there's so many other factors that affect return rates that I don't think it's going to be a huge diminishment in the return rates..

Okay. And if you look at your other businesses, the newer ones with the glass and with Rhiag.

Are there any other seasonality effects that we should consider as we go through the balance of this year and into next year or do they pretty much mirror sort of the normal seasonality you have in your existing business?.

Yeah. The Rhiag business is pretty consistent with our other European businesses. It tends to slow down a little bit around the holidays if you will. The glass business, the fourth quarter tends to turn down a little bit as well. Some of the OE is going to shut down around the holidays and the like.

And so it's not a perfect spread of 25% a quarter across the year, if you will. So there are some gives and takes..

Yeah. On the aftermarket side of the glass, Tony, obviously winter weather is good for them, with salts, and – causing stone chips and rock chips. So a little bit of seasonality in the winter as well..

Great. Thank you for your time..

Thanks, Tony..

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

Good morning, guys. Most of mine have been answered. But on the Rhiag and PGW acquisitions, you've indicated what you thought the accretion might be in 2017 for a full annualized run rate.

Any change to your – what are you seeing there?.

No. Nothing, Bill. I mean the increase in our guidance is basically $0.17 a share. That's the exact same $0.17 that collectively we announced when we chatted about those transactions in December and February respectively, again picking up $0.11 from the Rhiag acquisition and $0.06 from the PGW transaction.

When you think about how that gets spread for the quarters, obviously, the second quarter is going to have the smallest impact because while we have three months of Rhiag, we only have two months of PGW. So you probably want to think about that as maybe being a nickel of the $0.17.

Then Q3 and Q4 would suggest about $0.06 a piece against – it may be $0.065 in Q3 and $0.055 in Q4 just because of the seasonality, some of the seasonality that we just talked about. But again, the $0.17 increase in our guidance is exactly consistent with what we've previously announced for the two transactions.

And on – what we saw in Q1 even though they weren't on our ledger, if you will, they're tracking the plan which is good..

Okay. Great. Thanks for that color..

Thanks, Bill. Devon, I think we have time for one more call..

Okay. Our next and final question comes from the line of Jason Rodgers with Great Lakes Review. Please proceed with your question..

Thanks for squeezing me in..

Hello, Jason..

My questions are answered. Did want to ask though, if you could provide an estimate for interest expense for the year? Thanks..

I don't have that at my fingertips. For the first quarter, our interest cost was running at about 3.8% on a total blended basis with all the fees and everything else. And we've got about $3.4 billion of debt, roughly probably $100 million, when you do that math..

Thank you very much..

No problem..

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

Thank you, everyone, for your time today. And we look forward to speaking with you in July, when we report our 2016 Q2 results. Have a great day..

Thanks, everyone..

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