May 15, 2008
Executives
Joe Holsten – President and CEO Mark Spears – CFO
Analysts
Scott Stember – Sidoti & Co. Craig Kennison – Robert W.
Baird Tony Cristello – BB&T Capital Markets Rod Lache – Deutsche Bank Michael Cox – Piper Jaffray Scot Ciccarelli – RBC Capital Markets Jeff – Raymond James
Operator
Good day, ladies and gentlemen, and welcome to the first quarter 2008 LKQ Corporation earnings conference call. My name is Erica and I will be your coordinator for today.
(Operator instructions) I would now like to turn the presentation over to your host for today's call, CEO, Joe Holsten. Please proceed.
Joe Holsten
Before we get started, I need to talk about forward-looking statements. The statements in this press release and webcast include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our expectations, beliefs, hopes, intentions or strategies.
Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors.
These factors include the risk factors and other risks that are described in our Form 10-K filed February 29, 2008 and in other reports filed by us from time to time with the Securities and Exchange Commission. We assume no obligation to publicly update any forward-looking statements to reflect events or circumstances arising after the date on which it was made, except as required by law.
I also want to remind everyone that we declared a two-for-one stock split in December 2007. So, all earnings per share amounts and share counts discussed today reflect this split.
Okay. Good morning and thanks for joining LKQ Corporation's first quarter 2008 earnings call.
On the call today are two members of management, Mark Spears and myself. My name is Joe Holsten.
I'm the CEO of LKQ. I will begin by providing some high level overview of our performance as well as some qualitative views on the business, as well as our industry.
And then Mark will provide a more detailed assessment of the company's financial results for the quarter. We delivered record revenue and record earnings this quarter.
We reported $491.9 million in revenue for the quarter, which represents 109% total revenue growth over the first quarter of 2007. Our organic revenue growth for the quarter was 9% and was calculated assuming we had owned Keystone for the first quarter of 2007.
Because we had already merged significant aspects of our pre-existing aftermarket businesses and Keystone's aftermarket business in the first quarter of 2008, we could not calculate organic revenue growth without making this assumption. We continue to make excellent progress to leverage our infrastructure as we expanded our operating margin by 90 basis points, including restructuring costs.
Our operating margin was 12.5% for the quarter compared to 11.6% in the first quarter of 2007. Our net income increased just over 95% to $30.9 million for the quarter and diluted earnings per share increased by 57% to $0.22.
As we've previously reported, the Keystone acquisition closed on October the 12, so this is the first quarter in which we have fully included the financial results of both LKQ and Keystone. While there are a number of encouraging aspects of the Q1 financial results, I'm particularly pleased with the expansion in our operating margins, which increased by 110 basis points before considering restructuring costs.
I would remind you that this 110 basis point expansion is in comparison to LKQ's stand-alone in the same quarter of the prior year and that LKQ has historically enjoyed higher operating margins than Keystone, (inaudible) the growth is even greater than it may appear at first glance. Clearly, the improvement demonstrates the synergies that are being derived through this business combination and the resulting shareholder value.
We have mostly completed a number of areas where we had expected to attain cost synergies, including elimination of public company costs, reduction of corporate overhead expenses, elimination of duplicate marketing outlays, reducing Keystone's Taiwan trading costs, reducing various insurance expenses and terminating a number of Keystone's special projects and associated outlays. The remaining focus areas include further facility consolidations and delivery route integrations, all of which we expect to complete by the end of this fiscal year.
This past quarter, we continued our focus on the conversation of LKQ facilities onto Keystone's operating system, Prelude. These conversions range from simply training the LKQ sales staff on Prelude to write their orders into this new system, to the full warehouse relocations and conversions.
Since the Keystone acquisition was completed, we have completed 51 Prelude conversions. We have physically moved out of 12 warehouses to date, subsequent to completing the software conversions, and in total we expect to complete 63 Prelude conversions and 25 physical warehouse and 10 storefront moves by the end of 2008.
We are also currently reviewing volumes and capacities at our remaining 63 bumper, wheel, and light refurbishing locations to determine the possibility of consolidating some locations in the future. As part of these consolidation efforts, we will be standardizing our refurbishing processes to achieve consistent quality and increase volumes.
This effort, however, will take place later in 2008 and into 2009 and other than two-wheel warehouses, is not part of the 25 physical warehouse moves. We continue to believe costs savings will be close to the $20 million level in 2008 and will be annualizing at a minimum of $35 million by 2010.
We are also pleased with the gross margin achieved by the business in Q1, as some of our successes in reducing the purchase price of the products, as well as purchase discounts have begun to be realized in our financial statement. I would note, however, that some of our suppliers and ocean freight vendors have come under cost pressure from increasing steel and oil prices and are attempting to pass on their higher costs.
We currently believe that we will be able to fully mitigate these increases by obtaining postponement in the increases, through selective price increases and by allocating our purchasing dollars to those suppliers who are not currently seeking cost increases. We previously indicated in our 2008 financial guidance that our organic revenue growth would be approximately 10%.
If Keystone is included in our first quarter of 2007 operations, then the combined organic revenue growth of both companies together would have been about 9%. We believe that on an annual basis we will be close to 10% combined organic revenue growth as we improve the overall inventory in our warehouses, add additional SKUs of value line products and continue to make minor adjustments to our parts prices and customer discount levels.
Moving on to two business acquisitions that we completed so far in 2008, which totaled approximately $10.6 million in trailing annual revenue before we acquired them – the first one closed in February and was a retail-oriented recycled parts business located in Orlando, Florida that operates on 3.5 acres of property adjoining one of our existing retail businesses. We will merge these together and operate as one facility.
The second was completed in early March and is a heavy duty truck recycler located in Houston, which operates on an 18 acre facility and operates similar to the way our auto recycling yards operate except it handles large trucks such as cement or garbage trucks. We see this line of business having good growth opportunities for us in the future.
We also opened up the new retail-oriented recycled parts business located in Rockford, Illinois on approximately 11 acres of property. We lease the facility and opened it as a cold start in early March.
In terms of other cold-start developments, we have begun work on retail-oriented self service operations, one each in Indiana and South Carolina. At LKQ insurance relationships and programs have always been important to us and are even more so now with the investment in Keystone.
We have four insurance carriers, up one from the prior quarter in the Midwest to directly provide us low-end cars that will supply some parts to be sold into the professional repair market, with the remainder of each car being placed into retail-oriented locations. We expect these four programs to provide us over 450 cars per month and are looking at other geographical markets where we can introduce similar programs.
Our Right Choice Program with Advanced Auto Parts generated $2.2 million in revenue for the quarter, more than it has ever produced. Advanced stepped up its marketing with displays and signage during the quarter.
At the end of Q1, LKQ operated close to 260 daily transfer runs and close to 2,300 local delivery routes. Since Q4, we have taken 8 daily transfer runs and approximately 70 local delivery trucks off the road.
We acquired approximately 39,200 cars in our wholesale recycled parts business during the quarter, which is 23% more than we acquired in Q1 of 2007. The percentage of vehicles that we acquired from salvage auctions accounted for around 96% of our total incoming wholesale product flow.
We continue to increase our sales staff levels for the recycled part business and we have done so by an average of 71 people or 15% more in Q1 compared to 2007 levels, as we continue to invest in what we see to be the key to our business model, our sales and distributions systems. In summary, we are pleased with our results for the quarter and look forward to continued successes throughout the balance of 2008.
The combination of LKQ and Keystone provides a very attractive value proposition to a wide array of customers and the insurance industry that we can serve with our network of nearly 300 facilities. We are in a unique position to leverage our inventories of aftermarket collision replacement products, recycled OEM parts, and refurbished OEM products such as wheels, bumper covers, and lights, by having the ability to sell out of these combined inventories in response to customer requests.
At this point, I would like to ask Mark to provide a more detailed discussion on our financial results.
Mark Spears
Good morning, everyone. Let's take a look at the tables in our press release and note we have also included a table that reconciles net income to earnings before interest, taxes, depreciation and amortization, otherwise known as EBITDA.
We also added a supplementary data schedule related to our income statement. This shows growth and margin percentages.
Looking at our income statement and related tables, our first quarter revenue was up 109% to $491.9 million from $235.3 million in Q1 2007. Our organic revenue growth was 9% for the quarter but was calculated assuming we owned Keystone for the first quarter of 2007.
Our first quarter 2008 gross margin was 45.4% versus 45.5% in the first quarter of 2007. As Joe indicated earlier, we have been combining LKQ's pre-existing aftermarket operations into Keystone's operations.
Similar to the issue of calculating organic revenue growth, we cannot really attribute what amount of operating expense growth was organic. The majority of the operating expenses growth, however, would be due to the Keystone acquisition.
Our facility and warehouse expenses for Q1 grew $18.9 million or 73.8% over Q1 2007. Facility and warehouse expenses as a percentage of revenue decreased to 9% from 10.9% in 2007.
Our distribution expenses for Q1 grew $22.6 million or 101.9% over Q1 2007. Distribution expenses as a percentage of revenue decreased to 9.1% from 9.4% in Q1 2007.
Selling, general and administrative expenses grew $35.4 million or 123.1% over Q1 2007. SG&A expenses as a percentage of revenue increased to 13% from 12.2% for the same period in 2007.
For the quarter, we had approximately $1.2 million in restructuring expenses, all related to the Keystone acquisition. These costs include severance, facility closure, and relocation costs and other costs related to restructuring the two companies.
You should note that certain costs of Keystone related to severance and certain facility closure costs are considered purchase allocations of the acquisition and are not charged to the income statement. Our operating income for Q1 2008 grew 125.6% to $61.5 million from $27.3 million in Q1 2007.
Operating income as a percentage of revenue was 12.5% in the quarter, compared to 11.6% in Q1 2007. We improved operating margins 90 basis points with Keystone in our results for the full quarter.
An important point to remember, however, is the best margin quarters for Keystone and the after-market business, in general, is Q4 and Q1, with lower margins in Q2 and Q3. We had net interest expense in Q1 2008 of $10.3 million compared to net interest expense of $1.7 million in Q1 2007.
This was related to higher debt levels from the acquisition debt incurred to acquire Keystone on October 12. Our Q1 2008 pretax income grew 96.6% to $51.5 million from $26.2 million in Q1 2007.
For Q1 2008, our effective tax rate was 40% compared to 39.7% in the same period of 2007. If you exclude the $562,000 of non-taxable income related to life insurance policies that we had back in Q1 2007, our effective tax rate would have been 40.5% in Q1 '07.
Net income for the quarter increased 95.5% to $30.9 million from $15.8 million in Q1 2007. Our diluted earnings per share increased 57.1% to $0.22 in the quarter from $0.14 in Q1 2007.
Our diluted weighted average common shares outstanding used for EPS purposes were as follows: Q1 2008 had 139.7 million shares versus Q1 2007 at 112 million shares. The number of weighted average diluted shares of common stock in 2008 increased from Q1 2007 due to the issuance of 23.6 million new shares in our September 2007 follow-on public offering.
Also the issuance of 838,000 new shares related to the acquisition of a business on March 4, 2008, along with exercises of stock options and the increase in our stock price. Let's take a look at our cash flow table now.
We generated $32.4 million in cash from operations during the first quarter, which included the effect of investing $8.8 million in additional inventory. All the growth was salvage inventory as Q1 is our prime buying season at the salvage auctions.
Net CapEx in the quarter, excluding business acquisitions, was $13.2 million. Cash paid for business acquisitions in the quarter was $4.2 million.
In addition, we issued 838,000 shares of our common stock to finance a portion of a business acquisition. During the first quarter of 2008 we also issued stock related to the exercise of stock options that resulted in a total of approximately 203,000 shares issued for $2 million in proceeds, which includes related tax benefits for the company.
In looking at our 2008 balance sheet, you will note we had $651.6 million in debt that included $646.5 million under our secured credit facility. We also had $85.4 million in cash and equivalents as a result of our public offering completed the last week of September, 2007.
Note that we attained a senior secured debt financing facility on October 12 to fund a portion of the Keystone acquisition. As of April 30, 2008 our outstanding debt under our bank facility was approximately the same as that at the quarter end, while our cash and equivalents was around $60 million.
Let's take a look at our 2008 financial estimates. We expect that 2008 organic revenue growth will be around 10% with the balance of the growth being the full year impact of 2007 and 2008 business acquisitions.
Excluding the effect of any 2008 restructuring expenses we may have related to the Keystone acquisition, we expect full year 2008 net income to be within a range of $106 million to $111 million and diluted earnings per share to be between $0.75 and $0.79. We anticipate that net cash provided by operating activities for 2008 will be over $85 million.
We estimate our full-year 2008 capital expenditures related to property and equipment, excluding the expenditures of LKQ to acquire businesses, will be between $65 million and $75 million. This does include approximately $10 million related to capital expenditures planned for in late 2007 on projects that became delayed, and approximately $4.8 million related to restructuring our aftermarket business as a result of the Keystone acquisition.
We estimate the weighted average diluted shares outstanding for the full-year 2008 will be approximately 141 million. These share numbers are estimates and will be affected by factors such as any future stock issuances, the number of our options exercised in subsequent periods, and changes in our stock price.
I would like to turn it back to Joe for any further comments and to open up the Q&A.
Joe Holsten
Thanks, Mark. Erica, why don't we open up the lines for questions now, please?
Operator
(Operator instructions) Our first question comes from the line of Scott Stember from Sidoti. Please proceed.
Scott Stember – Sidoti & Co.
Good morning. Could you guys talk about trends by quarter, what you saw and how we're trending so far in the second quarter?
Mark Spears
Trends through the quarter?
Scott Stember – Sidoti & Co.
Yes. As far as sales go; I'm sorry.
Mark Spears
You've got to mean like April -- how is April looking?
Joe Holsten
Yes. Certainly we are probably hitting our peak revenue per day in February and early March, where we saw just a modest amount of softening as we got into the last couple weeks of March.
As we've seen historically, April sales will take a pretty good reduction from the mid-February, early-March revenue levels, which we have seen. So, sales in April are certainly soft but that's kind of a historical trend that we have seen, particularly in the crash parts business.
Scott Stember – Sidoti & Co.
But nothing out of the ordinary?
Joe Holsten
I would not say anything out of the ordinary at this point.
Scott Stember – Sidoti & Co.
Okay. Could you talk about this truck recycler acquisition, maybe just talk about how the process works, where you acquire your stock from and just talk about maybe some of the opportunities to expand this?
Joe Holsten
We are pretty excited about the industry overall. In some respects it's a little reminiscent when we started to look at the auto parts industry.
There is not huge amounts of crisp data on how big the industry is. But, we are very confident.
We have got easily a billion-dollar-plus industry, and maybe one other slight difference here is that I tend to look at the heavy duty truck industry to be more of an end-of-life or late truck life cycle business as opposed to salvage. Certainly, we acquire salvage, but we also acquire vehicles, fleet vehicles that are coming out of companies with large truck fleets.
So there is an aspect of the business that can be more like secure disposal, if you will. So, what attracted us to the business, one of course, the size of the market.
It's very encouraging; what we've seen in margins, at least so far and we've only looked at a few businesses here. The margins would appear to be attractive.
I think it brings some diversity to the overall company. Some of the things that LKQ brings to the table that has optimized our profitability in the auto salvage business would be true here, as well.
Certainly scale would bring value to operating the heavy duty truck recycling business. And a strong balance sheet would certainly create a significant differential advantage over the smaller competitors.
The competitive landscape is kind of similar to what we've seen in the auto side with a lot of mom and pop businesses. The other thing, obviously I think our skill set and the ability to consolidate businesses into cohesive units that work effectively together will be a good value here.
Our knowledge of interchange, which really has not been developed in the industry, I think will create shareholder value. And then finally I think there is somewhat of an untapped play in the insurance industry.
It isn't clear to me that the insurance industry is actively looking at used parts as a cost savings advantage in the heavy duty truck world. So there is some potential going down that path, as well.
Scott Stember – Sidoti & Co.
All right. And the last couple questions on housekeeping.
Could you just talk about the latest status of the Ford case and anything that you are hearing on State Farm?
Joe Holsten
The status on the Ford ITC case is really unchanged since our last call. Both companies have filed appeals.
The Federal Circuit Court that's dedicated to these intellectual property claims has decided that they want to hear the Egyptian goddess case prior to – I'm sorry – proceeding to hear the appeals at this point. I don't think we are still looking for any sort of decision on this before the end of the year.
So, at least the kind of timeframe involved is unchanged. As for State Farm, again, no change in the positioning of State Farm.
Scott Stember – Sidoti & Co.
Okay. That's all I have.
Thank you.
Operator
Our next question comes from the line of Craig Kennison from Robert W. Baird.
Please proceed
Craig Kennison – Robert W. Baird
Good morning, Joe and Mark. The first question just has to do with the price of gasoline.
Have you seen that impact either your top line in terms of vehicle miles traveled or your bottom line in terms of fuel expense?
Mark Spears
Yes. On the bottom line, our fuel expense – and you are right if you look at the Q1 to Q1 the price of fuel has gone up per gallon like 38%, looking at the government statistics.
Only about 7.5% if you look Q4 to Q1. So, I looked at it.
Still, in our distribution cost, about 2% of our revenue is fuel. And that's been pretty consistent; that we have seen to have kept that percentage there for quite a few quarters, despite fuel going up.
The other part of your question was talking about the impact of gas on people driving cars?
Craig Kennison – Robert W. Baird
Correct.
Mark Spears
I can't say we have really seen – and it's really hard for us to figure that in our revenue, to be honest with you. I think we still feel like a lot more of the more expensive accidents are the driving around near your home.
And I don't think we have seen enough time of that right now to evaluate that.
Craig Kennison – Robert W. Baird
Okay. And then shifting gears, there has been a California bill in the news related to aftermarket parts.
Can we get your perspective on that?
Joe Holsten
Yes. The bill, I think it's Senate Bill 1059 which has moved through a couple of committees.
I think it's going into its third committee now, which basically says it would be unlawful for an insurance company to require the installation of an aftermarket part on a vehicle, if the part being replaced is under existing OE warranty. And then there's a provision that unless the aftermarket parts are required to be used under the terms of the claimant's insurance contract.
The bill only applies to vehicles during the first three years after the date the vehicle is sold as new. And there are some other restrictions that – it only applies to certain specified parts, in terms of aftermarket parts.
I think the implication of the bill is that it would apply just to sheet metal parts; it would not apply to plastics and bumper covers and so forth. But the bill also allows insurance companies to override the law by having the appropriate language in their policies.
First of all, the insurance lobby has not really weighed in on this legislation at his point. We would expect them to do so at this point since it has made it out of a couple of committees.
We would expect it to be a pretty powerful lobby in any state and in particular in California. So, we are pretty optimistic that the power of that lobby will ultimately prevail to either achieve some very significant changes in the verbiage of this legislation, which has already happened two or three times, or just an out and out kill of the bill.
The other aspect here of the bill – and certainly we are concerned about anything like this, but it certainly is our view that the bill can be interpreted such that the insurance companies' policies today allow them to use aftermarket products in the repair of vehicles. It's very clear in the language and that as such the insurance companies may just simply take the view that since they have the right to do that then they are requiring it.
So, we will continue to monitor the bill carefully and weigh in to work with the insurance industry to try to defeat the bill.
Craig Kennison – Robert W. Baird
Thanks. And then with respect to the heavy weight or heavy duty truck market, is this an idea where you could roll this strategy out across the country and theoretically own dozens of facilities over time?
Joe Holsten
Well, we are kind of keeping our options open right now as we get a little deeper understanding of the market and the business opportunities available. But to answer your question, yes, we would envision there should be a good opportunity to link heavy duty truck recycling yards the same way that we link the auto and light duty truck yards together.
There just wouldn't be a need for nearly as many facilities.
Craig Kennison – Robert W. Baird
And lastly, just with respect to auctions, the availability of cars, could you give us an update there?
Joe Holsten
Yes. The first quarter – I'll answer that in two ways.
One, the late model wholesale vehicle, first quarter was a very robust buying environment for us. The actual cars bought were up pretty significantly over 2007 levels.
We were up 22%, 23%, I think it was. So the auction environment was really pretty robust.
And then on the end-of-life vehicles there's probably been more of an increase in competition for those vehicles than for the late model cars and that's being driven obviously by the fact that scrap prices have moved up quite a bit. But we were able to achieve our budgeted and targeted level of product for the self service yards during the quarter.
Although the price per car did increase percentage-wise quite significantly from year-ago levels.
Craig Kennison – Robert W. Baird
And auctions in April?
Joe Holsten
To date, I guess we are just getting our third week's numbers in, I guess yesterday. And yes, it's a pretty robust environment.
We have built a pretty good backlog going into May. I'm sure it's the strongest backlog we have ever had as a company.
We did see price increases from Copart and (inaudible) very late March we saw increases from Copart come through the auctions. We have responded to those the way we normally do and that's to advise our bidders to begin to lower their bids by the amount of the increase.
It takes some number of weeks for the markets to settle out. So, it would be my expectation when the dust settles we will have successfully lowered our bids by whatever price increase came through.
Craig Kennison – Robert W. Baird
Okay. Thank you.
Congratulations.
Joe Holsten
Thanks, Craig.
Operator
Our next question comes from the line of Tony Cristello from BB &T Capital Markets. Please proceed.
Tony Cristello – BB&T Capital Markets
Thank you. Good morning, gentlemen.
A couple of questions. One, very impressive on the margin improvement side of things and particularly if you look at the way the integration is flowing out.
I know in the past you've talked about the core LKQ business maybe improving 50 or 70 basis points a year. But to then get over 110 basis points year over year, before restructuring, when you combined the two, especially with Keystone being at a much lower level, how much of that is synergy-related versus how much is it of overall improvement at the core business?
And I know it's probably hard to quantify. But is it equal?
Is it more synergy or is it still seeing that sort of average plus the synergy on top?
Mark Spears
Yes, maybe talk about the synergies for a minute. We haven't really publicly said each quarter what the synergy is.
We have said $20 million for the year and if you kind of divide by 4 you get $5 million and obviously we haven't got them all in yet. So it's a little more back-end lowered as we continue to convert and merge together.
So, you can probably take a guess. It is south of $5 million in the actual quarter.
Also keep in mind, though, Q1 and Q4 are always the higher margins in the aftermarket business. And that's why I kind of warn people a little bit.
When you get into Q2 and then especially Q3, you are not going to see quite the same impact. Because it is a slower season and the aftermarket businesses, they can't let anybody go.
They can't lever quite as well when, that comes down, but they are pretty good when it comes up, the volume. When it comes down it's a little harder to lever down.
So I'm just saying that Q1 is the best quarter for both of us. And we can usually make a little more margin improvement than that.
And you saw Q4 as well had that in it.
Tony Cristello – BB&T Capital Markets
You got pretty good leverage off of what was a 9% comp below sort of the 10% that you are targeting. So I mean it was – obviously your core business is performing quite well.
I guess maybe that's the take-away.
Joe Holsten
Yes.
Tony Cristello – BB&T Capital Markets
And Joe, you alluded to some of the eliminations of overhead and trading and insurance. And then you talked about some special projects and outlays that you've eliminated out of Keystone.
Can you give a little bit more detail as far as what those might have entailed?
Joe Holsten
Yes. They had engaged consultants in some systems projects that we decided to cancel.
We really didn't see the long-term value that would have been coming out of that. There was a group that was destined to, I think, open up an office in China, probably development of new vendor relationships.
We decided to not go forward with that. And there were some consultants being used in their distribution systems that we've decided to terminate that relationship, as well.
Tony Cristello – BB&T Capital Markets
Okay. But nothing related to further cross dock evaluation or anything going on in Mexico?
Or are those projects still under review?
Joe Holsten
Those projects are still under review. Keystone had hired a new individual, kind of a senior operating person overseeing those markets.
We felt we had an individual in our Transwheel organization that had the appropriate skills to oversee that. So, we eliminated that cost.
And Mexico, we are keeping a close eye on that. The facility's production levels are up, I think about 10% over the prior year.
And I think we will be happy if we keep that at about a 10% improvement for this year. A lot more effort, as I discussed last time, to make sure that we are sending the right product to Mexico.
They should only be receiving product that we really have demand for and need back in the domestic market. Cross docks, I think the last time I mentioned that we didn't tinkering with that during the busy season was really a smart thing to do.
What we have done so far is that we are putting less volume through the cross docks and we have instructed our procurement team to do more container-direct shipments into the warehouses. So, certainly we would expect that now the volume going through the cross docks to come down.
The original business case of the cross docks, I think was predicated on fuel prices at about 50% of where they are today. So, now that we have got the winter storm season behind us, I think it gives us the opportunity to take a second look, a fresh look at the costs associated with the cross dock operation.
Tony Cristello – BB&T Capital Markets
Okay. And it sounds like that could ultimately just be phased out at some point, if I'm hearing you correctly?
Joe Holsten
We are open-minded to this, Tony. There are certainly some advantages to the cross dock.
It's certainly clear, even if only anecdotally, that revenue can be enhanced through the cross-dock concept. It's an incredibly complex revenue/cost trade-off analysis to work through.
Tony Cristello – BB&T Capital Markets
And I think in you, in your commentary referred to some wheel and lighting analysis or testing that you are looking to see if Keystone was having these up to sort of the standards of LKQ. Did I hear that correctly?
Or did I misinterpret what you were saying there?
Joe Holsten
Yes. I may have not expressed that real clearly.
What we are doing in the wheel facilities, the Keystone wheel facility was by and large operated pretty independently. They did not use even the same paint or powder coatings.
Their internal processes were generally fairly different. And I think it's fair to say the same thing about the bumper refinishing facilities.
It's our intent to standardize all of the LKQ wheel refinishing facilities under common standard practices and processes, using the same paint and powder coatings and the same quality standards. And primarily that's to drive more consistency in the quality of the product, as opposed to being cost driven.
Tony Cristello – BB&T Capital Markets
And are these all inclusive in the sort of $35 million in savings? Or could this potentially be something that could be incremental?
Joe Holsten
There could be some incremental value there. I think it would be pretty modest.
I think the incremental value would probably come through increased wheel sales. Could be some power purchasing on some consumable supplies in the process.
Again, we are really more focused on the consistency of quality more than anything else. And then, as a part of that same process, we think there are probably a couple more wheel facility closures that can be achieved without sacrificing any top line.
That's kind of a late 2008 assessment though.
Tony Cristello – BB&T Capital Markets
Okay. And then just one last quick question.
Mark, when you talk about – I think if you look at your total debt, long-term and current, of March 31 versus what you had in December, it's down like $6.8 million. But the cash flow statement shows down $5.5 million.
I'm just wondering what the difference might be from that difference?
Mark Spears
How much the debt is down? Are you talking about the –
Tony Cristello – BB&T Capital Markets
Yes. I'm talking about the difference between what you show on the balance sheet and then how much the cash flow statement showed.
Mark Spears
I know there's a little difference, just coming through because we got a plug [ph] of Canadian debt and Canadian dollars. We've got a little bit flying through there that's exchange rate.
Tony Cristello – BB&T Capital Markets
Okay. Okay.
Not a huge difference.
Mark Spears
And I don't think we've made any payments – we did make a payment, by the way, in March. But I think you are trying to match the payments back to the debt?
Tony Cristello – BB&T Capital Markets
Yes. Back to the debt.
Yes.
Mark Spears
We did make some debt payments of the other debt. It went from like $8 million to $5 million or something.
And this is when we buy a smaller company, we try to instead of putting money in escrow for warranty claims, we try to do a seller debt where we have the guy, you know, we owe the money to that guy. That's part of it, as well.
Tony Cristello – BB&T Capital Markets
Okay. That's perfect.
Okay. I'll let someone have it.
Thank you.
Operator
Our next question comes from the line of Rod Lache for Deutsche Bank. Please proceed.
Rod Lache – Deutsche Bank
Good morning. The inventory turns just look a little high relative to history.
If I look at last year LKQ's turns were about 4 times, Keystone at about 3.25 times. And this year it's 3.3 times.
Mathematically wouldn't it be closer to the average of the two? Could you just kind of talk to us a little bit about what our expectations should be?
Mark Spears
One of the problems is the salvage business is always kind of turn 3 times. If you take cost of sales and you take inventory, we are selling stuff that's not in inventory because we broker parts.
So the true turn is more 3 or so on an annual basis. Now, one of the things we are kind of looking at is if you go and try to calculate turns in a Q4 and a Q1, you are going to get some pretty high turns, just because that's our busier season.
But I think both of them are pretty consistent, on the same turn if you pull out your broker-type parts.
Rod Lache – Deutsche Bank
Okay. So, on a year-over-year basis there's not much to read into this?
Mark Spears
Other than we've better turns in Q4 and Q1. So, I don't know how you are trying to annualize this thing.
If you pick Q1 turns it's going to show too high of a turn probably on an annual basis.
Rod Lache – Deutsche Bank
Okay. We can follow up on that.
And then in terms of the corporate synergies on the SG&A, can you just give us a little bit of color on just thinking about SG&A as a percentage of sales? How you are thinking that should flow on a year-over-year basis?
Obviously percentage of sales year-over-year is higher largely because of the acquisition.
Mark Spears
Well, yes. The raw numbers are higher because of the acquisition.
And you probably noticed that Keystone operated a little higher G&A than we did. You kind of saw the percent of revenues in our G&A.
And actually it's selling and G&A combined. We don't break out G&A separately.
They used to break out G&A and combine selling and distribution. So, it's a little hard to go back to the prior financials to do that analysis for you.
But, our selling costs are pretty variable and they can go up with revenue, on the LKQ side, on the recycled business where there's not as much commission on the other side. So, there is going to be a piece that's variable.
But if you added selling and general together, it's not going to grow the same level going forward as organic. And you ought to start seeing some, as we get a full year under our belt with Keystone, you will see some ability to not grow that anywhere near what the organic revenue growth is.
Rod Lache – Deutsche Bank
Okay. Thank you.
Operator
Our next question comes from the line of Michael Cox from Piper Jaffray. Please proceed.
Michael Cox – Piper Jaffray
Good morning and congratulations on a very nice quarter. My first question is now that we are six months into the combination of the Keystone business here with your own, I was wondering if there are any high level comments or opportunities or maybe challenges that you've picked up on that weren't immediately clear at the time of the acquisition?
Joe Holsten
Yes. I would say I think it's both a challenge and an opportunity probably in the procurement system and kind of the ordering logic that was in use in the Keystone operation.
Kind of our assessment of the – as Mark said, a large team of people, pretty busy looking for excess inventory issues or obsolescence in the inventory. So, we've beaten the inventory up pretty good over the last five to six months.
And probably the one thing that's been the largest surprise is the amount of inventory that we believe is in the wrong position. It's good quality inventory that we will sell.
But it's not in the right location to sell, or there's too much of it in specific locations. So we've a pretty significant rebalancing process to work through over the next several months.
And quite frankly that cross dock system will come in somewhat handy to cost effectively rebalance the inventory. But, the challenge and then the opportunity, we believe, is kind of introducing a better ordering logic and inventory balancing market by market, which in theory I think should give us possibly some revenue growth opportunities as that process unfolds and we get into the later part of the year.
Michael Cox – Piper Jaffray
Okay. That's very helpful.
I was also hoping you could comment on the Canadian operations acquired last year? And any plans to further expand the push into Canada?
Joe Holsten
Yes. We like the Canadian market.
It feels a lot like the domestic U.S. market there.
Alternate part utilization certainly is pretty consistent with what we see in North America and there are a couple of provinces where the APU is actually higher than the U.S. So, yes, the Canadian market continues to be of significant interest and when we do re-engage on a more active basis in the acquisition market, certainly Canada will be a high-profile market for us.
Michael Cox – Piper Jaffray
Okay. Thanks.
And then my last question pertains to the heavy duty truck business that you acquired. Are there any large players in that market already that you will be competing with?
Or is it very fragmented just like as you entered into the auto parts market?
Joe Holsten
To the best of our knowledge it's a pretty fragmented market.
Michael Cox – Piper Jaffray
All right, Great. Thank you very much.
Operator
Our next question comes from the line of Scot Ciccarelli from RBC Capital Markets. Please proceed.
Scot Ciccarelli – RBC Capital Markets
Hi, guys. Scott Ciccarelli.
How are you guys? A couple of questions.
Joe, you had mentioned I think during the last conference call you had had at least a few customer defections when you combined with Keystone. And I'm sure that's just a natural part of the process.
But now that you guys have kind of had them under your wing for a little bit longer, have you seen any more of that? Or conversely, have any of those customers started to come back once they see the whole operation and how it's currently operating?
Joe Holsten
Well a good question, and we are working through that as we speak. The defections that we saw I think really came from two general reasons.
I mean I'm sure there are a lot more than two, but the two primary ones that I would identify would be first of all where we lost jobber business. And if there's any business you want to lose, that would probably be the best to lose.
The bad news they tend to be pretty big accounts. The good news is that they are lower margin accounts.
Some jobbers stopped doing business with us. Some objected to the Keystone labeling and boxing and that's understandable.
They didn't want to take parts to their customers in a Keystone box. So, that resulted in some customer defections.
The other I think broad area where we would have seen some account erosion during the first quarter would have been as a result of some of our changes in customer discounts as we merged the two businesses. So, we are currently working back to our customer list, identifying accounts and these are typically smaller accounts.
But, I've always thought the small accounts are the bread and butter of this industry. That's the work you really want.
And where we have seen ourselves lose market share with those, we are going back account by account, either driver rep BDR or an inside sales person to have one-on-one discussions with customers and just slugging through this account by account. In some cases maybe we got too aggressive in the changes in our discounts and we will try to negotiate a better position with the customer to become number one on their call list again.
So, that's in process and, quite frankly, that will probably take most of the second quarter to work through that process.
Scot Ciccarelli – RBC Capital Markets
Okay. That's helpful.
And now that you have Keystone again under the wing, is there any way to kind of reclassify your in-stock positions? Because that's always been kind of an Achilles heel for this industry; you just don't have the right inventory in the right spots.
But obviously Keystone fills in a pretty big gap in your existing inventory availability.
Joe Holsten
Yes, exactly. And part of this reprogramming work we are doing and the ordering logic and so forth, getting the system to come up with, if you will, better definitions of fill rates as part of that reprogramming effort.
Scot Ciccarelli – RBC Capital Markets
Okay. And then the last question is can you talk a little bit more about the program where you are directly acquiring vehicles from the insurance carriers?
Maybe just a few more details in terms of how the economics might differ on a vehicle by vehicle basis? Or are you focused on certain types of vehicles or concentrating in certain areas?
Any other color might be helpful.
Mark Spears
Yes. Right now most of the programs we are doing, from the insurance companies anyway, what's been growing is these lower end cars.
And it's cars the insurance companies pretty much take a bath on at the auctions. They may be $400 cars, for example, where our average wholesale car is like up there in the $1,700s or so.
So to the extent we have wholesale yards and sell-through yards close together, we are taking those and the main market we have done that in is the Chicago market. And then Joe talked a little bit about that program earlier on the script.
So, most of those cars are going to a retail-type yard but we are finding some cars that have some ability to sell the wholesale parts off of, as well, as part of that. We do have some other direct programs with some of the OEMs and those are different kind of cars.
They weren't in wrecks. They had some type of lemon law problem or damaged in transportation and things like that.
The only thing about that is to kind of keep in mind on the wholesale side, all of that is only about 4% of our volume. So it's not a big part yet, even though I think the lower end cars will be growing.
Scot Ciccarelli – RBC Capital Markets
Right. Okay.
Thanks a lot, guys.
Joe Holsten
Thanks, Scott. I think we'll do one more question and then I think our time is up.
Operator
Our last question comes from the line of Sam Darkatsh from Raymond James. Please proceed.
Jeff – Raymond James
This is actually Jeff calling in for Sam. Thanks a lot for taking my questions, guys.
I just have two questions for you. Number one, I was hoping you could expand on a question earlier about how business progressed through the quarter.
I understand seasonally your business is going to be stronger in February than it is in March and than as it is in April. But on a year-over-year growth basis, I was wondering if you could compare and contrast the monthly organic sales as the quarter progressed?
Joe Holsten
No, Jeff, I'll just say, I can't imagine that there was any material swing of same-store sales growth being materially different in January, February or March.
Jeff – Raymond James
Okay. Great.
And then my other question was it looks like, based on what you put in the release, that your aftermarket business was up, maybe only somewhere around 4%, maybe right under 5%. And I was wondering if you had seen any slowdowns specifically on the aftermarket side?
Or maybe my math is just wrong. But I was hoping you could help me there?
Mark Spears
You should keep in mind we combined – we put Keystone's revenue into Q1 and they had very little. We did have some acquisition revenue that we then pulled out.
But if that's true and – I don't think your math is right. There is no way we could have done 9% and have all the aftermarket only is 4%.
Jeff – Raymond James
Okay. So maybe it was –
Mark Spears
Yes. I think you'll have to look at what you did.
That can't be right.
Jeff – Raymond James
Okay. Well thanks a lot for taking my questions.
Great quarter, guys.
Joe Holsten
Our pleasure. Thanks for calling in.
We appreciate everybody's interest in the company and the quarter, and we look forward to talking to you in 90 days to give you an update on the second quarter results.
Operator
Thank you for your participation in today's conference. This concludes the presentation.
You may now disconnect. Everyone have a great day.