Joseph P. Boutross - LKQ Corp. Robert L. Wagman - LKQ Corp. Dominick P. Zarcone - LKQ Corp..

Benjamin Bienvenu - Stephens, Inc. Craig R. Kennison - Robert W. Baird & Co., Inc. (Broker) Jamie Albertine - Consumer Edge Research LLC Sam J. Darkatsh - Raymond James & Associates, Inc. Nate J. Brochmann - William Blair & Co. LLC Bret Jordan - Jefferies LLC William R. Armstrong - C.L. King & Associates, Inc. Jason A. Rodgers - Great Lakes Review.

Good morning. My name is Sean and I will be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation Third Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. Thank you.

I will now turn the conference over to Joseph Boutross, Director of Investor Relations. Please go ahead, sir..

Thank you, operator. Good morning, everyone, and welcome to LKQ's third 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 and slide presentation. And with that, I'm 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 with a few high-level financial metrics followed by an update on our operating segments and some macro trends we witnessed in Q3. Nick will follow with a detailed overview of our financial performance.

Turning to slide 3, Q3 revenue reached $2.39 billion, an increase of 30.3% as compared to $1.83 billion in the third quarter of 2015. Net income for the third quarter of 2016 was $122.7 million, an increase of 21.1% as compared to $101.3 million for the same period of 2015.

On an adjusted basis, net income was $139.3 million, an increase of 26.8% as compared to $109.9 million for the same period of 2015. Diluted earnings per share for the third quarter 2016 was $0.40, an increase of 21.2%, as compared to the $0.33 for the same period of 2015.

On an adjusted basis, diluted earnings per share was $0.45 in the third quarter of 2016, reflecting a 25% increase over $0.36 for the same period of 2015. During the quarter, we continued to witness the lingering effects of a mild winter and the headwinds of certain trends in the North American car park.

Despite these dynamics the company delivered organic revenue growth for parts and services of 3.7%, an enviable performance compared to many companies in the global auto industry that were confronted with similar challenges and subsequently witnessed negative growth in the quarter.

Turning to our North American organic revenue growth, during the quarter, organic revenue growth for parts and services was 2.1%, which is down from the first half of the year and below our expectations. Clearly, the macro trends in North America, such as miles driven and the size of the car park, continue to trend in our favor.

But in order to grow our business, the number of collisions need to grow that will then increase the demand for our collision parts. According to CCC, collision and liability related auto claims for the first 9 months of 2016 were up only 2.4% nationally, not far from the 2.3% increase witnessed for the first 6 months of 2016.

Furthering that point, when looking at state-level claims data from CCC, we continue to experience large regional variations. The Northeast and Midwest regions faced soft conditions, both experiencing year-over-year declines in repairable claims in certain key states. These two regions combined represent over 30% of our North American revenue.

In addition, according to the U.S. Department of Transportation, miles driven in the U.S. were up 3.4% in August, a measure that also witnessed significant regional differences. During August, miles driven in the Northeast and North Central regions were up only 1.2% and 2.1%, respectively.

Lastly, though difficult to quantify, we believe the surge in the SAAR rate over the last 3 years is initially a headwind, as new vehicles tend to get new collision parts. The surge also impacts our engine and transmission sales, because these type of mechanical parts are covered under manufacturer's warranty.

We also believe that the increase in vehicles in operation of model years 11 years and older has played a role in driving total loss rates above historical levels. Regardless of these short-term headwinds, we continue to believe that the car park is shifting in the right direction towards our collision sweet spot of vehicles 3 to 10 model years old.

In fact, the number of vehicles in that sweet spot is expected to increase by a few percentage points in 2017. And now turning to operations. During Q3, we purchased 70,000 vehicles for dismantling by our North American wholesale operations, a 1.4% decrease over Q3 2015. Procurement cost at auctions decreased over Q3 2015 by 1.9%.

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 12% and 17%, respectively, year-over-year in the quarter.

In our self-service retail business, during Q3 we acquired 132,000 lower-cost self-service and crush-only cars, which is a 3.1% increase over Q3 2015. Similar to the first half of the year, we increased our self-service procurement during Q3 to take advantage of the favorable pricing for higher quality vehicles in this line of business.

And lastly, I am pleased with the benefits we are witnessing with our productivity initiatives. During the quarter, North America realized 60 basis points of gross margin improvement from the aftermarket procurement savings alone.

And now that we are fully installed with Roadnet, our route optimization technology, we are optimistic about its potential savings. Today, 95% of our delivery routes are actively using Roadnet. And we are already witnessing some initial cost savings per stop across 49,000 daily deliveries with 3,300 trucks.

During his presentation, Nick will discuss the financial impact of these initiatives in the coming quarters. Now moving to our European operations.

In Q3, our Europe segment had organic revenue growth for parts and services of 6.7% and acquisition growth of 54.6%, primarily related to the Rhiag, which were offset by a decrease of 10.6% related to foreign exchange rates. During Q3, ECP drove organic revenue growth for parts and services of 6.9%.

And for branches open more than 12 months, ECP's organic revenue growth was 5.3%. During the quarter, ECP opened three new branches, bringing our network to 209 branches. During Q3, collision parts sales at ECP had year-over-year revenue growth of 13.2%. Turning to Sator. During Q3, Sator had organic revenue growth for parts and services of 5.1%.

This organic revenue growth was primarily driven by the ongoing three-step conversion and integration efforts we have put in place. Now on to Rhiag. Rhiag tracked in line with our expectations during the quarter.

Importantly, and as mentioned on the last call, we continue to aggressively gather the necessary data and communication plan amongst our European businesses to create a targeted and sustainable pan-European procurement function.

To highlight the opportunity, Sator had an existing agreement on a particular brand and product category that Rhiag is also buying, but at a 10% higher cost. By leveraging the Sator agreement, Rhiag has budgeted a savings of €200,000 annually, and again on one product.

Rhiag continues to execute on its growth initiatives and expand its footprint (9:23). During the quarter, the Rhiag team opened eight branches in Eastern Europe. Given the growth opportunities in the market, I am happy to announce that we have an additional 14 branches scheduled for Q4. Now onto our Specialty segment.

Our Specialty segment posted a year-over-year total revenue growth of 9.9% in the quarter, including the benefits of The Coast [Distribution System] acquisition, and organic revenue growth of 3.7%.

We believe the modest organic growth was related the overall specialty market facing an unfavorable mix shift, as certain key product areas witnessed model year changes. Though still relatively high, we also faced a slight reduction in the year-over-year SAAR rate during the quarter.

Lastly, Specialty finalized the integration activities from The Coast acquisition by consolidating all of The Coast distribution centers and sales processing into our existing network. And now an update on PGW. During the quarter, the PGW team secured another manufacturing renewal agreement for an existing OE platform with a new model launch.

On PGW's aftermarket business, the team continues to receive industry accolades as the supplier of choice. These accolades were validated this quarter by signing an agreement with a major customer to procure an incrementally higher volume of windshields and sidelights in 2017. Turning to corporative development.

In early October 2016, we acquired substantially all the business assets of Andrew Page Limited, a distributor of automotive parts in the United Kingdom. As part of this transaction, we acquired 102 Andrew Page branch locations. Andrew Page has a proud history of being a value-added supplier to the automotive repair industry in the UK.

With this acquisition, we believe that the transaction will benefit Andrew Page's customers with an extended range of products and a continuation of the exceptional level of service that their employees have historically provided.

As we did expect, the UK Competition and Markets Authority, or CMA, commenced the review of the acquisition to assess whether the transaction would unreasonably lessen competition in the UK market. During the CMA's review, we are not allowed to integrate the business subject to certain exceptions to allow us to support key operations.

And there's always a risk that they may ask us to divest some or all of the business. Accordingly, until the CMA approves the transaction, we will not be able to achieve any of the projected synergies afforded by the integration of the combined businesses.

We do anticipate the acquired business will continue to be modestly unprofitable during the review process.

In addition to the Andrew Page announcement, during the third quarter of 2016, we acquired a distributor of automotive products in the Netherlands, a distributor of recreational vehicle products and accessories in the United Kingdom, a distributor of aftermarket automotive products in Ireland and a heavy-duty truck salvage yard in Minnesota.

Our acquisition strategy has always been to acquire the best assets we can with high-quality management teams and use those strengths to lever the growth of the business.

As we look across our key segments, the pipeline is healthy with tremendous opportunities to grow our existing market share in key markets, expand the depth of our product lines and enter new geographic markets and, in particular, throughout Europe.

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 everybody on the call. I'm delighted to run you through the financial summary for the quarter.

And over the next few minutes, I will address the consolidated results of our company and review the performance of each of our core segments during the third quarter before touching on the balance sheet and addressing our revised guidance for 2016.

The third quarter of 2016 when taken as a whole was an excellent quarter with revenue, Segment EBITDA and adjusted EPS of 30%, 32% and 25%, respectively, when compared to the third quarter of last year. While the revenue growth in North America was a bit behind expectations, the margins in this segment were very strong.

In addition, the European operations continue to perform well and the two big acquisitions generally performed on target. As Rob mentioned, consolidated revenue for the third quarter of 2016 increased 30% over last year. That reflects a 33.2% increase in revenue from parts and services, partially offset by a 9.4% decrease in other revenue.

The components of the parts and services revenue growth include approximately 3.7% from organic, plus 32.6% from acquisitions for constant currency growth of 36.4% before backing up the translation impact of FX which was a 3.2% decline. I will provide a bit more detail on the organic growth of each business as I walk through the segment results.

As noted on page 11 of the presentation, consolidated gross margins declined 190 basis points to 37.0% due primarily to the impact of the acquisitions. You will recall that both Rhiag and PGW have lower gross margins than our historical businesses. Excluding the two big acquisitions, gross margins were actually up about 60 basis points.

While the consolidated gross margins were down, consolidated operating expenses as a percent of revenue were also down about 200 basis points lower than last year. Some of that reflects the impact of the different margin structure of the two acquisitions and some of it reflects improved efficiencies in the historical businesses.

Segment EBITDA totaled $274 million for the quarter, reflecting a 32% increase from 2015, and as a percent of revenue, Segment EBITDA was 11.5%, a 20-basis-point improvement over the 11.3% recorded last year. On a year-over-year basis, we experienced a $3.8 million increase in restructuring costs related to the integration of our acquisitions.

Depreciation and amortization was up about $26 million, mostly related to the addition of Rhiag and PGW. The same holds true for interest expense which was up about $12 million. And with that, pre-tax income increased 16% in the quarter relative to last year. Our effective tax rate during the quarter was 31.7%, down from the 33.9% recorded in 2015.

This lower rate reflects an ongoing rate of 34.75% and a $5 million benefit associated with the adoption of ASU 2016-09 which tax benefits associated with stock-based compensation. All companies need to adopt this new accounting standard by the first quarter of 2017, and we elected to adopt early.

We have excluded this benefit from our adjusted EPS calculation in order to provide an apples-to-apples comparison. Diluted EPS for the quarter was $0.40, which was up 21% compared to last year.

Adjusted EPS, again, excluding restructuring charges, intangible asset amortization and the discrete tax benefit just mentioned, was $0.45 versus $0.36, reflecting a 25% improvement. Scrap had a small negative impact on earnings per share for the quarter, about $0.005, and currency fluctuations negatively impacted EPS growth by about $0.01 as well.

As highlighted on page 13, the composition of our revenue continues to change due to the impact of acquisitions. Since each of our segments has a different margin structure, this revenue mix shift impacts the trends in consolidated margins. This has become more accentuated with our ownership of both Rhiag and PGW.

And you saw a shift in the third quarter metrics where in North American parts and services revenue accounted for less than 40% of total consolidated revenue. And with that, let's get into the details on the segments. Total revenue in our North American segment during the third quarter of 2016 increased to $1.047 billion or about 1% over 2015.

This is the combination of a 2.3% growth rate in parts and services offset by a 9.5% decline in other revenue, the latter of which was due primarily to lower volumes and, to a lesser extent, lower prices received for a variety of metals.

When looking at the North American growth, it's important to recognize that there were variations across the platform. As Rob mentioned, there were geographic differences with the Central and West regions performing much better than the Northeast and Midwest regions.

Recycling grew at a faster rate than aftermarket, and even within aftermarket, certain car types like the core Keystone fenders, hoods, and lights grew faster than some other products related to cooling or aluminum wheels. So, there were spots of strength and spots of weakness.

Gross margins in North America during the third quarter of 2016 were 43.8%, a 160 basis point increase over last year. Approximately 90 basis points of the improvement relate to the aftermarket operations, and the benefits of the procurement initiatives accounted for approximately 50 basis points of the 90 basis point improvement.

Our salvage and Self Service operations contributed 70 basis points of increase to the North American gross margins. You will note that while scrap averaged $118 a ton during Q3, in October, scrap has rolled back down to slightly below $100 a ton.

With respect to operating expenses in our North American segment, we lost about 50 basis points of margin compared to the comparable quarter of 2015. On the upside, we continued to experience improvements in both fuel and facilities cost relative to last year. On the downside, we lost a bit of margin in personnel cost and freight expense.

In total, EBITDA for the North American business during the third quarter of 2016 was $141 million. As a percent of revenue, EBITDA for the segment was 13.5% in Q3 of 2016, an increase of 110 basis points from the 12.4% reported in the comparable period of last year.

Last call, we indicated that we expected the benefit of our productivity initiatives to pick up as we move throughout the year. As just mentioned, we saw some benefit in our cost of goods sold related to the procurement savings in connection with our aftermarket parts inventory.

In addition, there are procurement benefits in other expense categories across North America. In total, we estimate the aggregate benefit of the productivity initiatives during the third quarter was approximately $8.6 million, up from the $5 million reported in Q2 or a little bit less than $0.02 a share.

Moving on to our European segment, the total revenue in the third quarter accelerated to $770 million from $511 million, a 51% increase. Organic growth for parts and services in Europe during the third quarter was 6.7%, reflecting the combination of 6.9% growth at ECP and 5.1% growth at Sator.

The impact of the acquisitions in Europe resulted in an additional 55% increase in revenue with the most significant amount reflecting the addition of Rhiag. So, on a constant currency basis, European parts and services revenue was up 61%.

These constant currency increases were offset by an 11% decline due to the translation impact of the strong dollar, particularly relative to the pound sterling. As you can see on page 19, the average rate during the quarter was about 15% below last year, and the sterling was at $1.30 (sic) [$1.31] (22:54) at [ph] quarter end (22:55).

More recently, the sterling has fallen a further 7%, down to $1.22. And the euro is also down about 3% to $1.09 (sic) [$1.08] (23:10). The translation impact of these latest drops will weigh on our reported U.S. dollar results for the rest of the year, probably to the tune of about $0.01 in the fourth quarter.

Gross margins in Europe were 36.2%, a 210 basis point decline from the comparable period of last year, largely reflecting the impact of Rhiag. As mentioned in prior calls, Rhiag has a lower gross margin structure than either ECP or Sator.

During Q3, Rhiag had a gross margin of about 33.5%, which reduced the consolidated European gross margin by about 150 basis points.

Excluding the impact of Rhiag, gross margins decreased 60 basis points, primarily due to ECP, which experienced an increase in customer rebates, and the impact of some of the incremental costs of the new distribution facility in Tamworth rolling through cost of goods sold.

With respect to operating expenses as a percent of revenue, we experienced a 150 basis point improvement on a consolidated European basis. We benefited from a 240 basis point reduction in operating expenses due to the addition of Rhiag, which has lower operating expenses as a percent of revenue than ECP or Sator.

Offsetting these gains was an 80 basis point increase in facility and warehouse expense, reflecting some of the cost of the Tamworth facility as well as new branches and hubs at ECP. In addition, we lost about 30 basis points of margin in the U.K.

related to the impact of translation losses on inventory purchases, which are denominated in a foreign currency. With respect to the Tamworth project, the incremental costs related to this project in the third quarter were approximately £2 million or about $2.6 million. Again, some of this was recorded in cost of goods sold and some in SG&A.

In total it reflects a 30 basis point impact on European margins. European EBITDA totaled $73 million, a 38% increase over last year, reflecting a solid performance at ECP and Sator and the positive impact of real.

As a percent of revenue, European EBITDA margins in the third quarter were 9.4% versus 10.3% last year, a 90 basis point decline, again 30 basis points of which relate to the Tamworth project. Turning to our Specialty segment, revenue for the third quarter totaled $313 million, a 10% increase over the comparable quarter of last year.

The organic growth rate was 3.7%, while the impact of the acquisition of Coast in August of 2015 added 6.2% to revenue growth. In the last couple of calls, we indicated that the high level of organic growth in Specialty was not sustainable, and overall, we were happy with the third quarter growth rate.

Gross margins in our Specialty segment for the third quarter were flat compared to last year, as the impact of stocking two new specialty distribution centers in Michigan and Washington State, which were not in operation at this time last year, was offset by an increase in advertising credits.

Operating expenses as a percent of revenue in Specialty were down about 100 basis points. Facility expense increased, as certain costs related to the two new distribution centers just mentioned.

But on the plus side, we continue to see SG&A leverage from integrating the acquisitions into our existing network as well as the benefit of the lower fuel prices. EBITDA for Specialty was $32 million in the quarter, up 24% from the third quarter of last year.

And as a percent of revenue, EBITDA for the Specialty segment increased 120 basis points to 10.4% in 2016, compared to 9.2% last year. Remember this is a highly seasonal business, and you should assume these margins will decline as we move through the historically soft Q4 period. On page 22, you can see the impact of the acquisition of PGW.

Revenue for the quarter was $259 million, while gross margins in Q3 were 22.6%, which is very consistent with the expectations we highlighted at the time the transaction was announced. EBITDA margins for PGW were 10.7% in the third quarter. Let's move on to capital allocation.

As presented on slide 23, you will note that our after-tax cash flow from operations during the first 9 months was approximately $524 million, as we experienced strong cash earnings and only a moderate increase on working capital.

During the first 9 months of 2016, we deployed a little bit more than $1.9 billion of capital to support the growth of our businesses, including $153 million to fund capital expenditures and about $1.8 billion to acquire businesses. We closed the quarter with approximately $272 million of cash, of which $226 million was held outside of the U.S.

And we had roughly $3.3 billion of total debt outstanding. So our net debt was approximately $3 billion. And on a pro forma basis, taking into account the impact of the acquisitions, our net leverage was a little bit less than 2.7 times latest 12 months EBITDA.

At quarter-end the total availability under our credit facility was approximately $1.2 billion, which we believe is more than sufficient to support the continued 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.

As it relates to the organic growth for parts and services, we reduced the organic growth guidance for full year 2016 to 4.5% to 5%, reflecting the 5.1% rate for the first 9 months, and an expectation that we don't anticipate any major movements during the fourth quarter.

For those trying to back into the Q4 growth, the range implies a 2.6% to 4.6% growth rate. But it is important to note that there is one less business day in Q4 of 2016 than Q4 of 2015, and while that may sound trivial, it's a 1.5% fewer business days compared to last year.

Customers don't buy more on other days to make up the difference, so the calendar simply puts us in a 1.5% hole to start. In addition, the hurricane earlier this month closed some of our operations and some of our customers' operations in Florida and the Carolinas for a couple of days.

Our range for adjusted EPS which excludes the after-tax impact of intangible amortization and the tax benefit of adopting ASU 2016-09 is $1.78 to $1.84 per share with a midpoint of $1.81. As in the past, we have narrowed the range to reflect the fact that we are nine months through the year.

The new range reflects the fact that Q3 results were right on track, and the outlook for the core business for the rest of the year is largely unchanged, except for the anticipated headwinds from currencies, lower scrap prices, and the dilutive impact of owning Andrew Page as a completely independent company without the ability to integrate operations.

To be clear, the new EPS guidance assumes pound sterling and euro exchange rates of $1.22 and $1.09, respectively, and importantly, that scrap remains at the current levels as well. Our assumed tax rate for 2016 remains at 34.75%, excluding the benefit of adopting the new accounting pronouncement.

Our current guidance for cash flow from operations also narrowed a bit to approximately $575 million to $600 million, and the guidance for capital spending is unchanged at $200 million to $225 million. At this point in time, I'll turn the call back over to Rob to wrap up..

Thanks, Nick. As a company, we are always focused on financial performance, but we are equally focused on facing change head on and rapidly adapting in order to continuously deliver positive results for our stockholders, employees, and most importantly, our customers.

There is no question that weather impacted various lines of business and many markets for our companies thus far in 2016, a similar scenario to what we witnessed in 2012. We firmly believe that like 2012, this impact is temporary and that the macro trends continue to present opportunities for all of our segments.

Yet we don't rest on our laurels and simply blame softness in our business on uncontrollable circumstances. Rather, during those periods, we strive to maintain our historical growth rates and our leading positions by focusing on what we can control such as the margin improvements we recognized in this quarter.

It is clear as headwinds present themselves, our team of nearly 41,000 employees globally actively adjust to market conditions to effectively and profitably manage their businesses not only for today but to position us well for the future. This focus allowed us again to deliver double-digit EPS growth in the midst of a challenging environment.

So, a big thank you to the LKQ team. And with that, operator, we are now ready to open the call for the questions..

And your first question comes from the line of Ben Bienvenu from Stephens Inc. Your line is now open..

Yeah. Thanks. Good morning, guys..

Good morning, Ben..

You talked about some of the performance disparity in the CCC numbers across geography persisting into 3Q. That's a little bit surprising I guess with the thought that maybe the impact from weather would be less substantial in 3Q across the markets.

Maybe your thoughts as to why there's that disparity still in 3Q despite what I would think would be a little bit less impacted..

Yeah. Thanks, Ben. We certainly look into that with CCC and with some of our customers. And what we find is that the vast majority in collisions are drivable collisions. So, they do tend to take time to get repaired when the customer is ready to get the car into the shop.

So, it does tend to drag on through the entire year actually with the drivable collisions. And then you look at just the overall claims volume being up just 2.4% for the whole year. There is just been a light amount of claims being filed this year. It's just been a really soft year that has carried through all through Q3..

Maine, New Hampshire, Vermont, Massachusetts, Connecticut, New York, Pennsylvania, Ohio, Michigan, and Indiana. The only big states missing there in that swath are New Jersey and Illinois. New Jersey was up 0.5% and Illinois was up 0.2%. So, that whole Northeast and Midwest section of the country just has lower claim volumes..

One other area too, Ben, that we saw was weak was Western Canada, the decimation of the fracking industry up there. Our claim volume is down, way down there as well, as well as our business. So, it's not just weather. It's some economic conditions as well..

Interesting. That's really helpful color. Thanks. And then shifting gears to the Andrew Page business, it looks like from some of the numbers that we've looked at, actually the sales productivity per store is pretty good, but it sounds like maybe operationally that they're underperforming and not particularly profitable stores.

Just curious as to what best practices you can bring there to that business to improve the profitability of the stores and then ultimately, what you think the contribution could be from that chunk of stores..

Sure. Unfortunately, under a whole separate world, we were not allowed to integrate the businesses. But we do believe purchasing will be the biggest benefit. We tend to buy a little bit better than they do. We are, under the whole separate world, allowed to sell to each other, so we are supporting the business today.

But until we can fully integrate the business -- when we do integrate the business, it will be logistics. We believe we have a much – with Tamworth 2 coming online, we're going to be able to much better support those businesses with inventory and deliveries, which we think will make a huge operational benefit for those stores that they have..

Yeah, just to be clear, Ben, that business was sold. It basically went into receivership, and we bought it basically through a prepackaged bankruptcy process to give you the U.S. analogy, if you will. So, obviously, the performance of the business was headed down by the time we got the assets.

We do think there is an ability, by adequately stocking their warehouses and their stores, to actually drive revenue back north to where it was pre their financial issues ..

And just one last update on the CMA. We are close to filing our submission to the CMA. They have up to two months to decide what the next steps are. So, when we get released, we'll be ready to start integrating the business hopefully by Q1..

Okay. Great. Thanks, guys..

Thanks, Ben..

Your next question comes from Craig Kennison with Baird. Your line is now open..

Good morning. Thanks for taking my questions as well. I wanted to probe the North American business a little further.

Could you explain how much of that business is tied to collision trends versus mechanical trends?.

So, the salvage business or the recycling business, Craig, is roughly a 50/50 split. The aftermarket business is almost wholly collision-focused. So, when you look at it in its entirety, out of our total revenue on a consolidated global basis, slightly less than 30% of our revenue is collision-based..

That's helpful. And then, Rob, you mentioned a statistic from CCC that claim volume is up only 2.4%. That sounds like a decent number.

Could you give some context to that? What was that figure in the full year of 2015, for example?.

We'll get that. We're looking for that right now, Craig. I just want to state that I know in 2012, we had very similar results to what we're seeing this year. In 2013, it did bounce back.

And we believe just some of those macro trends that we're seeing, new car sales are definitely a little bit of a headwind at first, as I mentioned in my prepared remarks. Those are starting to come out of warranty, so we do expect some help there. We did mention on the call the increase in total losses.

The good news there is that CCC is anticipating that those start to level off now because of the newer car part getting into the system. And then of course, the regional segmentation that we're seeing. As Nick mentioned, the Northeast and the Midwest, just really getting decimated by claim volume.

So, we are hoping for a normal winter, and we do expect it to obviously bounce right back..

And as you look for that number, if I could just slip in a quick question on Europe and the margin there. I know it's under pressure due to the mix of some of the new businesses you've acquired, but where do you think that margin can settle over time at the gross margin level as you extract purchasing synergies? And thank you..

Well, we were at 36.2% in the quarter. Last quarter, we're at 37.4%. Some of that is just seasonal differences, Craig. So, gross margins, you figure – with the addition of Rhiag, I think I mentioned in my comments, Rhiag was at around 33.5% gross margin, so that's what's pulling it down from historical levels.

We would hope to get a 1% or 2% from procurement over time. That's a hard process. The vendors are not anxious to just give us big discounts. But we're working at it very hard. John and his team over in London, they've got a dedicated group that's focused on nothing but trying to execute a pan-European procurement program..

Thank you..

And, Craig, on the number you're looking for, we'll circle back with you. We need to get in touch with CCC on that..

Thank you..

And your next question comes from James (sic) [Jamie] (41:09) Albertine with Consumer Edge. Your line is now open..

Great. Thank you and good morning, gentlemen..

Good morning..

Wanted to ask just as a point of reference, I know you are a few months, maybe a quarter or two out from the CMA process kind of fulfilling its duties, but if we were to look at prior integration of something like Unipart would that be a good proxy for us to think about with respect to dilution initially and then sort of the opportunity over time with Andrew Page?.

Yeah. Andrew Page, we've got actually earlier in the process by the time that Unipart kind of went out the stores or basically vacant. Andrew Page, its stores were ongoing. We have inventory, depleted inventory but inventory in the stores which we're rebuilding and the like.

So, we do think, however, that we will be able to get Andrew Page back to profitability. It's probably going to make us for $0.01 to $0.015 in the fourth quarter.

And so, we would look in 2017 once we are able to kind of fully work with their team, get their customer service levels where they need to be particularly the fulfillment levels and inventories back at the right levels. We can grow revenue and that will help the profitability as well.

We'll take some cost savings just related to procurement, some back-office stuff, maybe a little bit on the logistics, but we do think we can drive it back into profitability, which will, obviously, help the overall margins..

Yeah, Jamie, unfortunately, with the hold separate (42:54), we can't really dig into the locations at this point. So, initially, our focus will be on purchasing, logistics, and the back-office functions..

Okay. Great. That's helpful. Thank you for that. And then a quick question, if I may, on Pittsburgh Glass. Congratulations on the new customer you signed up on the aftermarket side.

I just want to understand sort of what that can do to your margin if we kind of look forward, just sort of maybe asking for reminder on the OE versus aftermarket contribution to gross margin. And then a point of clarification, we understand that PGW is your only business exposure to OEMs directly.

Is that true or is there another business channel or subchannel that we're missing with respect to OEs directly? Thanks..

I'll answer that question and let Nick take the margin question, Jamie. It is the one exposed to OE the most. We have a little bit of exposure on the KAO side, the accessories side, because we do see that as new car sales are up, we do well on the accessory side. But it's sort of a secondary issue there.

But the OE business is the only one that has true cyclicality to the OE production..

Yeah. Jamie, this is Nick. As you can imagine, the gross margin profiles of the aftermarket business and the OE business are very different. Operating costs are as well, since there's no real distribution and selling expense related to the OE business.

But order of magnitude, the ARG gross margins are well north of 30%, where the OE margins are in the mid-teens..

Okay. Great. So this sounds like it'll be a mixed benefit, based on the fact that you're adding that aftermarket customer if I heard you correctly..

Exactly..

Correct..

Great. Perfect. Thank you so much and best of luck..

Thanks, Jamie..

And your next question comes from Sam Darkatsh with Raymond James. Your line is now open..

Good morning, Rob. Good morning, Nick.

How are you?.

Good, Sam..

Nick, if you had this in your prepared remarks and I missed it, I apologize.

Within your North American parts and services organic growth, the 2.1%, can you parse out volumes versus price mix in that?.

Yeah, we got benefit from both. The pricing was slightly more than the volume impact. That doesn't mean we were necessarily increasing prices across the board, Sam. As I mentioned I think last quarter, a good portion of the price increase comes from just selling a newer part and the mix shift as to what parts we're selling.

And so it may come across and looking like we're taking prices up, but it just has to do with that we're selling a slightly more expensive part. But again slightly more than half of the growth was price related..

Two more quick questions. And I guess one of them is more critical than the other. The first would be, I mean with the increase in total losses – I recognize that it's a smaller percentage of the overall claims versus repairable claims.

But with the increase in total losses, does that have the threat of either overwhelming or offsetting the advantages you have with the SAAR sweet spot over the next few years?.

I don't think so, Sam. I don't think – we like total losses because that's where we get our inventory from as well. So there's still 82% of the cars that are in accidents are getting repaired. So I see that as a wash actually. Although fewer cars are being repaired, but they tend to be older cars is what CCC is telling us.

So they are totaling an older car, which makes sense because the average model year is up to 11.5 model years old. But the SAAR rate is much more important to us, getting new cars into the system, because the new car is going to be fully insured. And that's why I'm pretty bullish on 2017.

We're getting these 1- to 3-year cars out of warranty into our sweet spot. So we'd like to see a strong SAAR rate by far..

Last quick question. Obviously, Germany made some news with respect to the resolution, trying to ban combustion engine production over time.

I know it's a long-tailed item and it's far from even being industry standard, but how does that affect your business longer term, Rob, if it does become kind of the world we live in?.

If there's a shift to electric vehicles, that's a little bit more of a problem. If it's going to be more diesel, that's actually a positive. Diesel engines sell for far more than what we get for a gas engine actually, so depending on where it goes. I was actually in China last week, and they're having similar initiatives over there as well.

But nobody seemed concerned about it, the people we talked to. So it's a long tail as you said..

Thank you both, gentlemen. I appreciate it..

Thanks, Sam..

Your next question comes from Nate Brochmann with William Blair. Your line is now open..

Yes. Good morning, everyone..

Morning, Nate..

Hey, Nate..

So wanted to talk just – I hate to harp on the North American issues a little bit. But, one, just wondering if you had any thoughts in terms of the fact that the miles driven were up, but the claims were less in terms of being up.

I get the disparity across regions and what not, but usually, those have a little bit of a tighter correlation in terms of why those claims wouldn't follow directly with the miles driven.

And then second part of that in terms of going in next year, obviously, Rob, you've been very bullish in terms of, hey, assuming a normal winter, we have easy comps or easier comps. In theory we should be back to that 5% to 7% North American parts and service organic growth range.

Is there anything underlying the surface? Assuming again a normal winter and things kind of go back like they did in 2013, anything underlying the surface that you would think would be such a substantial headwind where we wouldn't get there?.

Nate, when I look at some of the normal weather conditions, as I said, we're getting cars starting to come into that sweet spot. There's a lot of macro good tailwinds for us in terms of miles driven. The late model car park for our KAO business, normal winter will certainly spur our glass business as well.

I don't see any major headwinds that could impact that other than another mild winter. And on top of easy comps, as you said. It just feels like there's enough positive tailwinds behind us that are going to make 2017 look like 2013..

Okay.

And I haven't heard of anything, but no underlying shifts or anything that we might not be seeing that your customers are saying in terms of something going on that we wouldn't be thinking of?.

The only thing that we've heard from our customers interestingly enough is that they're having a hard time hiring technicians. And just getting the work out the door has been a little bit of a challenge for that side of the business, but that they will fix. They will find people to fix the cars. I'm absolutely convinced of that.

So, no, nothing underlying that we're hearing from our customer base whatsoever..

Okay. Great. And then, two, you talked about obviously controlling what you can on the margin side, and kudos for delivering that. And it still feels that we're kind of in the relative early innings in terms of seeing the results as you pointed out mix sequentially, so that continues to go well.

Anything else on the top line though that you can do to help your cause in terms of whether it's trying to buy more cars or we talked before about getting into the transmission remanufacturing business or anything on the incremental side of trying to just push incrementally on the sales effort?.

Absolutely. We did mention that we've been trying to buy a better car in anticipation of these newer cars coming into the sweet spot. So, we will be pushing more cars through the system, absolutely. That is our goal.

We're in the process of acquiring more property wherever we can to process more vehicles, so that is absolutely a focus as well as introducing new product types. We talked about the number of certified parts continue to go up. We're carrying a much stronger level of those parts as well.

So, I think our inventory is going to be well positioned to meet the organic growth needs that we have..

Okay. And then just last question, Rob, just because you brought it up in terms of hiring technicians.

Is there anything going on in the surface, underlying again in the surface where the cars are becoming so complex and the diagnostics so complex that any worry even past the warranty period that more cars, whether it's a collision or a mechanical repair would be going back to the dealer for some reason?.

We don't think so. I've talked to honestly the MSOs quite regularly on their thoughts on that, and they don't believe that technology is not insurmountable for a technician not trained in a dealership environment. So, they are confident, as you can see, by their acquisitions. They continue to acquire companies.

They think they're well positioned to be able to handle those repairs. More importantly, I think, is our manufacturers' ability to replicate those parts over in Taiwan, and they're seeing no issues whatsoever acquiring the correct aluminum or the high-strength steel. So, no issues on either side..

Okay..

And, Nate, one other thing is even if there were more cars headed into dealer collision repair shops, that doesn't mean that there is more OE parts because the insurance companies are still mandating which parts are going to be used.

Just the week before last, I was – spent the day with customers out in the field, including dealers, and they basically have said that they don't have the ability to select the parts being used. The insurance companies are driving it all. So, it doesn't make a difference where the repair is being held and done.

The choice of parts selection is still being driven by the insurance companies..

Outstanding point. Thank you very much for the time. Appreciate it..

Thanks, Nate..

And your next question comes from Bret Jordan with Jefferies. Your line is now open..

Hey. Good morning, guys..

Hey, Bret..

Question. I guess you've given the CCC number on repairable claims growth year-to-date of 2.4%. What's the total claim so we can factor in the losses? Because obviously, some of the salvage auction guys are seeing more volume flowing through theirs.

Insurance companies opt not to repair, but what's the total crash rate?.

It's about 6%, which includes comp, which are flood losses, tornadoes. So, yeah, the auctions are getting that benefit. Those are cars that don't get repaired because of the floods and hail damage, severe hail damage that totals a car..

Okay. And then I guess on Andrew Page, 102 stores, assuming it's finally approved.

How many of those you think you need to close? Is there a lot of duplicate real estate there with ECP?.

No. There is, however, they've got a unique customer base. So, we're going to look at that on an individual basis, but as it stands right now, we plan at keeping the vast majority open because they have service to different customer to a certain extent, and the brand is so strong. We'll look at that post CMA clearance..

Okay. And then one last question on Specialty. I think you said you were pretty happy with the 3.7% growth. Where do you see that being? And I guess, when you acquired the original Keystone, it was sort of seen as growing in line with the core North American business at the time.

I guess, now that we've owned it for a couple of years, is it something that you think is a lower single-digit grower or is it the change in the mix as you've bought Stag and Coast that has brought the growth down into the low to mid single as opposed to mid to upper single?.

True to the three quarters, we're actually above the North American growth, and I think that's going to continue, Bret. I think that the volume continues to be strong. The RV sales are up year-over-year. So, as long as that continues, we do expect decent organic growth in that line of business..

Yeah, for the first nine months, the organic growth in Specialty was 7.3%..

Right..

Okay. And I guess, from the competitive landscape in Specialty, do you see anything changing? Obviously, Amazon is talking about auto parts these days, our favorite topic recently. And Specialty and performance is a category they are focusing on.

Do you see any change? Are they making inroads or is it pretty much status quo from your customer base?.

Yeah, status quo. Amazon, these are big bulky parts, as you know. They have not shown any desire at this point to stock a lot of that product. So, at this point, our customer base is still very strong, coming direct to us..

All right. Thank you..

Thanks, Bret..

And your next question comes from Bill Armstrong with C.L. King. Your line is now open..

Good morning, gentlemen.

On the North American 2.1% growth, are you seeing any disparity or divergence between mechanical versus collision repair?.

As Nick mentioned in his prepared remarks, our core parts business did well. Where we saw a little bit of softness, Bill, was in the wheel business and the collision cooling business and obviously, a little bit of paint that's tied to the collision itself. Soothe mechanical side of the business did okay and the salvage side of the business..

Okay. And then your Q4 guidance or the implied Q4 guidance, you mentioned your foreign exchange assumptions of $1.22.

What would be the cents per share impact of that lower foreign exchange?.

Yeah, Bill. Thanks for asking the question. The FX is likely going to hit us for $0.01, maybe slightly more than $0.01. We think that scrap is going to hit us for at least $0.005, maybe a little bit more. As I mentioned, Andrew Page will likely hit us for close to a $0.015, and that's really the sum and substance of the slight tweaks to the guidance..

Got it. Okay. Thank you..

Thanks, Bill..

And your last question comes from Jason Rodgers with Great Lakes Review. Your line is now open..

Thanks for squeezing me in. Just a question again on North America.

Have you seen any change for OEM price matching or any other change in the competitive landscape?.

No, not at all, Jason. The OEs are still doing the same things they've done and haven't increased their price matching programs whatsoever. It's interesting on the – you can talk about competition. We are obviously active acquirers in the business, and we obviously get to see financials, and we're seeing the industry struggle.

They don't seem to be taking market share from anybody, our competition, so from the financials we've seen..

You mentioned weather.

I mean, is this more of a function of the economy, just customers not repairing their cars, as you say, drivable collisions?.

That's definitely a part of it. There is certainly some economic uncertainty out there with the elections going on. That's for sure. Yes, when the car is drivable, the consumer can elect to pocket that check that they get from their insurance company. It is interesting when we've done our channel checks on that, Jason.

The insurance companies never know if the car actually got repaired. It's pretty interesting. When they write a check to a third party, that customer can repair the car or obviously take the money. They would not know unless there was a supplement.

In other words, they wrote an estimate for $1,000, ship said they need $1,200, then they would know obviously because they have to write an additional check, but the vast majority of the time, the insurance company doesn't even know if the car got repaired..

Okay. And then finally, just looking at the collision revenue number in the U.K., up 13%, which is still strong but maybe off a little from historical growth rates.

Just wondered if you could talk about that business and your efforts to increase benefits there?.

Yeah, still very pleased with our collision growth there, double digits. They too had a mild winter, and it's also been similar to the United States, an influx of new car. Registrations are up dramatically in the UK, so they're getting a little bit of headwind from the new car, again, that it tends to get new parts.

They are also coming out of that in the next year, so we do expect the tailwind to start to emerge with the car part getting a little more in the sweet spot.

So, same number of insurance companies in our program, very consistently happy with the results we've been delivering, and no one has been turning their backs on us in terms of stopping the program. So, we are starting our initial – just an update on the continent. We've talked about bringing the collision parts to the continent.

We are just starting our initial talks with some of the Netherlands insurance companies to start bringing collision parts into that market as well. So, we anticipate 2017 being a launching of that program as well..

And before we wrap up the call, I just want to make one thing clear because there was some analyst who put out notes this morning before the call with the implication that the change on the accounting standard, the benefit of lower tax rates got rolled into our adjusted EPS. That's incorrect.

Adjusted EPS of $0.45 excludes the benefit, excludes the benefit of the adoption of the new accounting standard. So, if we had let it just roll through, we would have reported $0.47. Likewise, our guidance for the year excludes the benefit of the new accounting standard..

And there are no further questions at this time. I turn the conference back to Rob Wagman for closing remarks..

Thanks, everyone, for joining us on the call today. We look forward to updating you on our Q4 results and the 2017 guidance on our next call in February. Have a good day, everybody. Thank you..

And this concludes today's conference. You may now disconnect..