Jul 31, 2008
Executives
Joe Holsten – President and CEO Mark Spears – EVP and CFO
Analysts
Michael Cox – Piper Jaffray Tony Cristello – BB&T Capital Markets Sam Darkatsh – Raymond James Craig Kennison – Robert W. Baird Scot Ciccarelli – RBC Capital Markets
Operator
Good day, ladies and gentlemen, and welcome to the second quarter 2008 LKQ earnings conference call. My name is Ahmed and I will be your coordinator for today.
At this time, all participants are in listen-only mode. We would be facilitating a question-and-answer session toward the end of this conference.
(Operator instructions) I would now like to turn the presentation over to your host for today's call, Mr. Mark Spears.
You may proceed.
Mark Spears
Joe Holsten
Good morning and thanks for joining LKQ's second quarter 2008 earnings call. Obviously on call today are two members of management, Mark Spears, our CFO and myself, Joe Holsten, the CEO of the company.
I will begin by providing some high level overview of our performance as well as some qualitative views on the business, our industry and the markets that we serve and then Mark will provide a more detailed assessment of our financial results. We reported $484.4 million in revenue for the quarter which represents a 107.6% total revenue growth over the second quarter of 2007.
Our organic revenue growth for the quarter was 13.2% and was calculated assuming that we owned Keystone for the second quarter of 2007. Because we had already merged significant aspects of LKQ's pre-existing after-market business with Keystone's after-market business in the second quarter of 2008, we could not calculate organic revenue growth without making that assumption.
While we delivered an outstanding level of organic revenue growth during the second quarter, on a pro forma basis, our after-market new and refurbished parts grew close to 1% for the quarter and for the first six months of 2008, grew 3%. With no improvement in the economy for the average citizen and as fuel pricing continued to escalate in Q2 2008 over not only the first quarter of '08 but as well as all of 2007 levels, we know that miles driven have continued to declined and the larger insurance carriers we support have indicated claims frequency is down from 4% to 10% from Q2 2007 depending on the carrier.
We believe that the combination of higher fuel prices, reduced miles driven and the reduction in insured claims has certainly impacted our collision repair parts growth while demand for the mechanical parts has been impacted to a much lesser extent. Fortunately, due to the diversity of our business operating model, we have been able to sustain our track record of double-digit organic growth by processing a higher level of vehicles to support both our late model wholesale operations as well as our retail-oriented self-service businesses.
For the first six months of 2008, we processed approximately 130,000 lower-cost, self service and crush [ph] only cars compared to approximately 97,000 in the first six months of 2007. These volumes not only supported increased parts sales, but also allowed us to capitalize on higher commodity prices for the (inaudible) by products to these operations.
Our operating margin was 12.1% for the quarter compared to 11.4% in the second quarter of 2007. We continued to make excellent progress to leverage our infrastructure as we expanded our operating margin by 65 basis points, including restructuring cost, and by 130 basis points before considering restructuring cost.
I would remind you that this 130 basis point expansion is in comparison to LKQ's standalone in the same quarter of the prior year and that LKQ has historically enjoyed higher operating margins than Keystone. In particular, the second quarter is usually one of the weaker quarters for after-market parts from a seasonality standpoint.
And for comparison purposes, during the period April through June of 2007 on a standalone basis, Keystone reported operating income margins of only 6.4%. Our net income increased just over 121% to $31 million for the quarter and diluted earnings per share increased 83% to $0.22.
During the quarter, our primary focus areas included further facility consolidations and delivery route integrations, nearly all of which we expect to be completed by the end of this fiscal year. This past quarter, we continued our focus on the conversion of LKQ facilities onto Keystone's operating system Prelude.
These conversions range from simply training the LKQ staff on Prelude to write the orders into the new system to full warehouse relocations and conversions. Since the Keystone acquisition was completed on October 12th through July 30th, we have completed 55 Prelude conversions.
We have physically moved out of 23 warehouses and ten storefronts to date subsequent to completing the software conversions. In total, we expect to complete 63 Prelude conversions and 25 physical warehouse and ten storefront moves by the end of 2008.
Furthermore, over the next five years, we now anticipate physical combinations of our recycled parts and after-market parts operations in at least ten additional geographic markets, providing another opportunity for longer term synergies to be achieved. We're also continuing our review of volumes and capacities at our remaining 60 bumper, wheel and light refurbishing locations to determine the possibility of consolidating some of those locations in the future.
As part of these consolidation efforts, we are standardizing our refurbishing processes to achieve consistent quality and increased volumes. This effort however will take place later in 2008 and into 2009, and only two wheel warehouses is not part of the 25 physical warehouse moves.
We now believe that net cost savings will be at least $20 million in 2008 and we'll be annualizing at a minimum of $35 million by 2010. As I noted on our last earnings call, some of our suppliers and ocean and ground freight vendors have come under cost pressure from increasing steel and oil prices and are attempting to pass on their higher cost.
While we have seen some cost increases come through in our sheet metal products and in ocean and ground freight, we still currently believe that we will be able to mitigate these increases by obtaining postponements in price increases, through selected price increases, through cost reductions on other park site [ph], and by allocating our purchasing dollars to those suppliers who are not currently seeking cost increases. We had indicated in our 2008 financial guidance that our organic revenue growth would be approximately 10%.
If Keystone is included in our second quarter '07 operations, then the combined organic growth of both companies together would have been approximately 13.2%. We believe that on an annual basis, we'll achieve low double-digit total organic revenue growth as we improve the overall inventory in our warehouses, add additional SKUs and value-line products, continue to make minor adjustments to our parts prices and customer discount levels, and continue to process higher volumes of both late model and lower value salvage and end-of-life vehicles.
As discussed on our last earnings call, we closed on two business acquisitions so far in 2008, which totaled approximately $10.6 million in trading annual revenue before we acquired them. The first one was closed in February, included 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 are merging these operations together and operating them as one facility. The second was completed in early March and is a heavy duty truck recycler in Houston, Texas which operates on an 18-acre facility and operates similar to the way our other recycling yards operate except it handles large trucks such as cement and garbage trucks.
We see this line of business as having good growth opportunities for us in the future and we have been pleased with the growth in profitability of this new product line. We also opened a new retail oriented recycled parts business in Rockford, Illinois on approximately 11 acres of property.
We leased the facility and opened it as a cold start in early March. In addition, we have leased a 20-acre facility in Massachusetts and plan to acquire that facility shortly.
We are operating that facility as a lower-cost vehicle dismantling and crushing operation. In terms of other cold start development projects, we continue to work to open retail-oriented, self-service operations in Northern Indiana and South Carolina, and we recently added a location in Georgia to our development list.
At LKQ, insurance relationships and programs have always been important to us, are even more so now with our investment in Keystone. We have four insurance carriers, up one from the prior quarter, in the Midwest who 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 at the retail-oriented locations.
We expect these programs to provide us over 450 to 500 cars per month and we continue to look at other geographical markets where we can introduce similar programs. Our Right Choice Program with Advanced Auto Parts generated $2.4 million in revenue this quarter, more than it has ever produced and a couple hundred thousand dollars more than Q1.
Advanced has stepped up its marketing (inaudible) and signage this quarter. We expect a relaunch of our program later in the year.
At the end of Q2, LKQ operated approximately 240 daily transfer runs and approximately 2300 local delivery routes. Since Q4, we have taken 28 daily transfer trucks off the road and 90 local delivery trucks have been parked.
We acquired approximately 71,700 cars in our whole sale recycle parts business during the first six months of 2008 which is 11% more than we acquired in the first half of 2007. The percentage of wholesale vehicles we acquired from salvage auctions accounted for about 96% of our total incoming wholesale product flow.
We continue to increase our sales staff level for our recycled parts business and we have done so by an average of 52 people or 7.5% more in Q2 2008 compared to the same quarter of last year because we continue to invest in what we see to be the key of our business model, our sales and distribution system. In summary, we are pleased with our results for the quarter and look forward to continued successes throughout the balance of 2008.
We believe the combination of LKQ and Keystone provides an attractive value proposition to a wide array of costumers and to the insurance industry that we can serve with our network of nearly 300 facilities. We believe we are in a unique position to leverage our inventory of after-market, pollution replacement products, recycled OEM products and refurbished OEM products such as wheels, bumper, covers and light by having the ability to sell out of these combined inventories in response to customer request.
Further, we believe the diversity of our operating model and customer base has allowed us to sustain attractive organic growth levels even during a period of time where demand for (inaudible) product line is soft. At this point, I would like to ask Mark to run through a more detailed discussion on our financial report.
Mark Spears
Let's take a look at the tables in our press release. 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 that shows growth and margin percentages. In addition, we have added a comparison of our major revenue categories for the numbers that we report and also for the numbers on a pro forma basis as if we own Keystone for all of 2007.
Looking at our income statement and the related tables, our second quarter of 2008 revenue was up 107.6% to $484.4 million from $233.3 million in Q2 2007. Our first six months of revenue for 2008 grew 108.3% to $976.3 million compared with $468.6 million for the same period in 2007.
Our organic revenue growth was calculated on a pro forma basis assuming we owned Keystone for the entire of 2007 year and was 13.2% for the quarter and 11.2% for the six months. Our second quarter 2008 gross margin was 45.4% versus 45% in the second quarter of 2007.
For the six months of 2008, our gross margin was 45.4% versus 45.3% in the same period in 2007. As Joe indicated earlier, we have been combining LKQ's pre-existing after-market operations into Keystone's operations.
So moving 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 expense growth however would be due to the Keystone acquisition.
Our facility and warehouse expenses for Q2 grew $19.2 million or 77.8% over Q2 of 2007. Facility and warehouse expenses as a percentage of revenue decreased to 9% from 10.6% in 2007.
On a six-month basis, facility and warehouse expenses grew $38.1 million or 75.8% over 2007. For the first six months of 2008, these expenses as a percentage of revenue decreased to 9% from 10.7% for the same period in 2007.
Our distribution expenses for Q2 grew $23.1 million or 104.1% over Q2 2007. Distribution expenses as a percentage of revenue decreased to 9.4% from 9.5% in Q2 2007.
On a six-month basis, distribution expenses grew $45.7 million or 103% over 2007. For the first six months of 2008, these expenses as a percentage of revenue improved to 9.2% from 9.5% for the same period in 2007.
Selling, general and administrative expenses grew $33.6 million or 119.5% over Q2 2007. As SG&A expenses as a percentage of revenue increased to 12.7% from 12.1% for the same period in 2007.
On a six-month basis, selling, general and administrative expenses grew $69 million or 121.3% over 2007. For the first six months of 2008, these expenses as a percentage of revenue increase to 12.9% from 12.1% for the same period in 2007.
For the second quarter of 2008, we recorded $3.1 million and for the six months ended June 30, 2008, we recorded $4.3 million of restructuring expenses which were included in operating expenses and are all related to our Keystone acquisition that we did in October 2007. You should note that certain cost of Keystone related to their severances and certain of their facility closure costs, are considered purchase price allocations of the acquisition and are not charged to the income statement.
Our operating income for Q2 2008 grew 119.3% to $58.4 million from $26.6 million in Q2 2007. Operating income as a percentage of revenue was 12.1% in the quarter compared to 11.4% in Q2 2007.
On a six-month basis, operating income grew $66 million or 122.5% over 2007. For the first six months of 2008, operating income improved to 12.3% of revenue compared to 11.5% for the same period in 2007.
We improved operating margins 65 basis points in the quarter and by 80 basis points for the six months, with Keystone in our results and including the restructuring costs. An important point to remember however is the best margin quarters for Keystone in the after-market business in general is usually Q4 and Q1, with lower margins in Q2 and Q3.
We had net interest expense in Q2 2008 of $8.4 million compared to net interest expense of $2.1 million in Q2 2007. This was related to higher debt levels from the acquisitions (inaudible) to acquire Keystone.
Our Q2 2008 pre-tax income grew 105.3% to $50.5 million from $24.6 million in Q2 2007. For the first six months of 2008, pre-tax income increased 100.8% to $101.9 million from $50.8 million for the same period in 2007.
For the first six months of 2008, our effective tax rate was 39.3% compared to 41.3% in the same period of 2007. If you exclude the effect of certain adjustments to deferred taxes related to state income taxes, our effective tax rate for 2008 would have been 39.5%.
If you exclude certain non-taxable income offset by write-offs of certain differed taxes assets in 2007, our effective tax rate would have been 40.5% for 2007. The lower tax rate in 2008 is primarily due to lower taxes on our Canadian operations.
Net income for the quarter increased 121.1% to $31 million from $14 million in Q2 2007. For the first six months of 2008, net income increased 107.5% to $61.9 million from $29.8 million in the same period of 2007.
Our diluted earnings per share increased 83.3% to $0.22 in the quarter from $0.12 in Q2 2007. For the first six months of 2008, diluted earnings per share increased 63% to $0.44 from $0.27 for the same period in 2007.
Our diluted earnings per share for the first six months of 2008 would have been $0.02 higher had we not had the $4.3 million of restructuring expenses. Our diluted weighted average common shares outstanding used per EPS purposes was follows; Q2 2008, 140.4 million shares; Q2 2007 was 112.5 million shares.
For the six months '08, it was 140 million shares; whereas the six months of 2007, 112.2 million shares. The number of weighted averaged diluted share of common stock in 2008 increased from 2007 due to the issuance of 23.6 million new shares in our September 2007 follow-on public offering, also the issuance of 838,073 new shares related to the acquisition of a business on March 4, 2008, also exercise of stock options and an increase in our stock price.
Let's take a look at our cash flow table. We generated $67.4 million in cash from operations during the first six months of 2008 which included the effect of investing $11 million in additional inventory.
CapEx in the first half of 2008, excluding business acquisitions, was $26.2 million. Cash paid for business acquisitions in the first half was $4.4 million.
During the first six months of 2008, we also issued stock related to the exercise of stock options that resulted in a total of approximately 334,000 shares issued for $3.4 million in proceeds which includes related tax benefits. Taking a look at our 2008 balance sheet, you will note we have $647.4 million in debt that included $644.2 million under our secured credit facility.
We also had $104.1 million in cash and equivalents. Note that we obtained a senior security debt financing facility on October 12 to fund a portion of the Keystone acquisition.
As of July 30, 2008, our outstanding debt under our bank facility was approximately the same as that at quarter end, while our cash and equivalents were around $100 million. Let's look at our 2008 financial estimate.
We expect that 2008 organic revenue will be in the low double-digits with the balance of the growth being the full-year impact of our 2007 business acquisitions and the business acquisition that we have completed to date in 2008. Excluding the effect of any 2008 restructuring expenses related to the Keystone acquisition, we expect full-year 2008 net income to be within a range of $120 million to $124 million and diluted earnings per share to be between $0.85 and $0.88.
So the EPS guidance excludes the $0.02 EPS effect of the restructuring expenses incurred in the first half of 2008. We anticipate that net cash provided by operating activities for 2008 will be over $100 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 $68 million and $78 million. This includes approximately $10 million related to capital expenditures that were originally planned for late 2007 on projects that became delayed and approximately $4.8 million related to restructuring our after-market business as a result of the Keystone acquisition.
We estimate that 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 open up for Q&A at this time.
Operator
(Operator instructions) Your first question comes from the line of Michael Cox from Piper Jaffray. You may proceed.
Michael Cox – Piper Jaffray
Good morning. Congratulations on a very nice quarter.
Mark Spears
Thanks, Mike.
Michael Cox – Piper Jaffray
My first question is, I was hoping you could provide a little bit colors as to what experienced such strong growth within the other category and if you expect that to be sustainable through the balance of the year?
Mark Spears
Yes. I mean that category is basically a combination of our core, Sunbelt cores, [ph] scrap, aluminum smelter revenue and that's the combination of our volume.
We talked about our volumes being up along with some commodity pricing going up as well on a combined basis there. And so in our estimates, we have assumed it will continue to grow year-over-year of course.
So, yes, we are assuming continued growth in those areas.
Michael Cox – Piper Jaffray
Is there any way to quantify the commodity inflation impact to the sales growth in the quarter?
Joe Holsten
I don’t think we can really do that. There are so many different commodities involved.
We are looking at copper, steel, various non-ferrous items. I don’t think we can really dig through the mix to give you too much color on that.
Michael Cox – Piper Jaffray
That's okay, but I do appreciate that the breakout. I think that's helpful.
And then on – in terms of the bumper facility in Mexico, you talked about evaluating what you're going to do with the various sort of satellite facilities around the United States, could you just comment on where that is in terms of profitability or running relative to your expectations?
Mark Spears
Yes, maybe a couple of comments. One, as we've been digging into the profitability and the resultant contributions of Mexico's bumper refurbishing facility and we've realized kind of in the second – late in the first quarter that we really weren’t able to track the return rate on these bumper covers.
When they get into the US, they get into the same mix with the bumper covers that are refurbished in the US. So we think in order for us to make really intelligent decision on the contributions of Mexico, we're going to have to introduce new parts numbers for the Mexico bumper covers and that will help us understand the real quality of the product coming out of Mexico and returns on the product line.
So, we're in the process of developing a system wherein we can track the Mexico bumpers in particular and understand the performance that they generate on a better basis. I will say that, over the last couple of months, we've been impressed with the increase in throughput from the Mexico plant that's running a little ahead of our financial goals we had set for the year and up a good 10% over what we saw in the first quarter and we are also very encouraged that the supply cost has begun to come down maybe by as much as a couple of dollars a bumper cover.
So good signs we think, but we will need to dig a little deeper on that to slowly understand the contributions of the plant.
Michael Cox – Piper Jaffray
Okay, that's very helpful. My last question is a housekeeping item on the interest expense.
It looks like on a percentage rate basis dropped in the quarter versus the first quarter, anything that we should incorporate going forward in that front?
Mark Spears
No, I mean our main debt of course is secured financing. We are at LIBOR plus 225.
We did about $250 million that we locked in just before the second quarter I believe, and at the time, that was pretty much fixing it right at the LIBOR was at the time.
Michael Cox – Piper Jaffray
Okay great, thank you.
Mark Spears
Thanks, Michael.
Operator
Your next question comes from the line of Tony Cristello of BB&T Capital Markets. You may proceed.
Tony Cristello – BB&T Capital Markets
Thank you. Good morning gentleman.
Mark Spears
Good morning.
Tony Cristello – BB&T Capital Markets
Joe, your recycled side of the business was very strong this quarter and certainly it looks like it was best in several quarters from what we can tell. Why do you think the demand in the recycled side of the business is so strong even with insurance claims, being somewhat soft, is it purely inventory and fill rate driven or is there something else contributing to that?
Joe Holsten
Yes, there are – as LKQ pointed out, even in our parts, there are a number of factors that are facilitating overall growth in that area. And I certainly don’t want to mislead you but that's all part of sales, because there is a certain amount of this volume driven coming to that line.
But let's start with the buying environment. We do believe that the buying market for late model salvage is as good as we've seen.
As a result of that, the fill rates that we track for our recycled side of the business, as you try to recall, we track those in terms of not in the stock, and the not in stocks that average LKQ plant has been reporting in the second quarter has dropped about 2 points from what I would have been looking at in the first quarter and probably dropped even a little more than that compared to all of last year. The second mitigating factor, if you try to recall, is in the sale of recycled products.
A little less than 50% our recycling part sale revenue is from the sale of mechanical parts as opposed to crashed parts and it does appear to us that the mechanical parts side of the business may not – had been impacted quite as severely as the crash part side of the business here in the second quarter. But probably the bigger driver in that category is the volume of product that we are moving through, not only moving more product to the whole sale yards to increase our inventory levels, but we have stepped up considerably the volume that goes to our end of life or self service facilities.
In fact we opened a yard in Massachusetts solely to just process end of life vehicles, crushed basically, they kind of decontaminate them and crush vehicles. In a couple other facilities and markets where the buying has been heavy, we've added kind of a partial second shift in order to process more volumes.
Tony Cristello – BB&T Capital Markets
And I guess in part on the volume side of the strength you are seeing, if the actual claims at the insurance company are down somewhat, it does not seem to be having as much of an impact on the recycle side as it would on the after market side. So, I am assuming there is still an adequate demand of accidents.
It is just that the demand for the lower cost replacement parts is higher right now and maybe a more cosmetic in nature aftermarket part. People aren't willing to spend the deductible to have that fixed.
Is there any rationale behind that or something that you could support that, does that make sense?
Joe Holsten
Well, we do not have any data in hand that we can take you to CCC or Mitchel Source [ph] to give you a specific answer to that. But I'll also say [ph] anecdotal discussions with major insurance companies and with collision repair shops that definitely have focused us on their view that a lot of insured car owners are taking solvent [ph] checks and they are using the funds to make their mortgage payments and pay their bills as opposed to (inaudible) effecting modest cosmetic repairs to vehicles when they are still drivable.
We do believe that had some impact on the crash part side of the business. And those would be the exact parts that typically would be – the orders would be filled by the aftermarket industry because we are fenders and bump recovers and grill pieces, pretty modestly priced parts that generally the LKQ side of the business might be in an out of stock position, but certainly would have pretty good availability from the aftermarket side.
Tony Cristello – BB&T Capital Markets
Has the combination of the two companies, are you getting any synergy yet on Keystone being able to sell a recycle part, is that some of what we are saying also?
Joe Holsten
No. Actually, we will be starting our first two pilots on that during the third quarter, where we are going to have the checkmate screens brought right on to the same screens that the aftermarket sales people are using.
And we have two markets selected and we will have some feedback for you by the end of the quarter on our next earnings call and the success of that.
Tony Cristello – BB&T Capital Markets
Okay. And housekeeping, Mark, and then I'll let someone else have it.
Is the inventory mix right now equal basically with the sales segment mix, or is something's skewed just based on the strength in some of the other categories you are saying?
Mark Spears
Our growth and inventory, as you see, it was primarily recycled. And again we try to build up our inventory as good as we can on recycled parts in the first half of the year to be a little cheaper.
That is the only kind of change there when the aftermarket comes down.
Tony Cristello – BB&T Capital Markets
Okay.
Mark Spears
Year ending in the summer. Why we hike it when the price is good, you buy aftermarket before you get into the busier seasons.
Tony Cristello – BB&T Capital Markets
Okay. Perfect, thank you guys.
Operator
Your next question comes from the line of Sam Darkatsh from Raymond James. You may proceed.
Sam Darkatsh – Raymond James
Good morning Joe. Good morning Mark.
How are you?
Mark Spears
Hi, Sam.
Sam Darkatsh – Raymond James
A couple of housekeeping questions and then I guess more probing, I suppose. Restructuring costs rest of the year, Mark, what are you budgeting for that?
Mark Spears
We're not, I mean. Whether it's restructuring expenses or it goes to the balance sheet, really depends on the people we lay out as we get going on that.
So, we really have not given any guidance on future restructuring.
Sam Darkatsh – Raymond James
Okay. And then –
Mark Spears
That's why our estimates assumed no restructuring in the past or future, when we did the EPSF [ph].
Sam Darkatsh – Raymond James
Got you. Joe, you were talking about the initiative to raise selling prices where needed.
Was there an impact in the quarter from pricing actions or were you talking prospectively?
Joe Holsten
We have ongoing efforts kind of reviewing pricing for both price increases and price cuts. We really have not seen much activity out of the OEs on pricing and we believe a couple of Japanese manufacturers have probably nudged their prices off, and if they did, we would have moved with them.
But all in all, I would have to characterize the pricing environment right now is relatively flat and pretty competitive.
Sam Darkatsh – Raymond James
And then getting back to that other segment, and first off Mark, I do appreciate – I'm hoping speaking for other folks too, I do appreciate the extra level of detail that is included in this release, it is much appreciated. The other segment is that entirely the scrap or is there some refurbed bumpers and wheels and other sorts of remanufactured items in there?
Mark Spears
No, it is just scrap off the recycled. It is really all recycled stuff.
It's scrap, core and the smelter is in there as well.
Sam Darkatsh – Raymond James
The gross margin on that other line, is that significantly less than the gross margin in the other two more, I'll call them, core segments.
Joe Holsten
We do not really break those out.
Sam Darkatsh – Raymond James
But generally speaking, the answer to that would be because the smelters in there and the –
Mark Spears
Keep in mind the smelters are lower margin we talked about in the past. So, I mean it is lower.
Scrap, you are getting off your cars. It tends to be built into the margin of your scrap of the car you bought.
Sam Darkatsh – Raymond James
Okay. My final question, I am going to take the risk of repeating one of the prior questions, because I am still – at least, I am not sure about it, the answer to it.
I understand, Joe, why the after market demand, it will be softer with the lower fuel prices, perhaps used car values coming down. People being more cognizant of their own budgets, but the recycled demand being up in the 20% range seems real outsized growth versus its historical trends.
And I am just still curious as to why the recycled business as a whole is growing faster that its historical trends within this sort of end market environment.
Mark Spears
There is couple of things in there. One, of the low end cars and we do sell parts related revenue too, not just scrap.
So the parts related to those lower end cars are up in the recycled. As Joe mentioned, quarter to quarter, we have like 41% increase in the low end car volumes.
And so, that is not all scrap. That has parts of above as well.
Two, in the wholesale side of the business, don't forget, on the wholesale recycled business as an industry, 65% of the time when a shop asks for that recycled part and that's what the insurance companies are pushing, it's not available. To the extent we have better fill rate and we get more cars, that helps drive the wholesale recycled parts business as well.
So, it is a little bit granular, as you need to buy the cars at the auction and inventory the good, having to write parts will help that grow a little better than you would on the aftermarket where you just buy the products.
Sam Darkatsh – Raymond James
Okay. So, what you are saying is that because your purchased volumes were up, perhaps because you are seeing more totaled vehicles and some more available at the auctions, your fill rates on the recycled side is up, so your sales growth is going to be up.
Mark Spears
Yes. And Joe had mentioned we were up like 2 percentage points, 200 basis points, in our fill rates on the wholesale in Q2.
Sam Darkatsh – Raymond James
Any sense on what the industry is doing?
Mark Spears
The recycled industry?
Sam Darkatsh – Raymond James
Yes, the recycled industry. I mean, I know you represent a large percentage, but outside of you, anyway to tell.
Mark Spears
To sell all of our privately owned, it is very again, because they don't know what they are doing.
Sam Darkatsh – Raymond James
Okay. Thank you gentleman.
Operator
Your next question comes from the line of Craig Kennison from Robert W. Baird.
You may proceed.
Craig Kennison – Robert W. Baird
Thanks and congratulations from me as well. Just to follow on the prior questions related to recycled revenue, is there any of scrap value in that line?
In other words, if you sell this steel hulk, does any of that revenue get captured in the recycled line?
Mark Spears
That is in Other.
Craig Kennison – Robert W. Baird
That is in Other. So, there is no really no commodity inflation impact in that particular number?
Mark Spears
Correct.
Craig Kennison – Robert W. Baird
Thank you. And last quarter co-part [ph] and others appear to have raised fees, and you indicated that your plan was to offset that with lower bids.
Has that been successful for you?
Joe Holsten
We've significantly accomplished what we normally do there. The overall cost of our salvage is up a little bit this year, but quite frankly, I would say the increase in (inaudible) to salvage probably tracked pretty closely to the increase in (inaudible).
So, basically I think the auction cost has probably gone up by about the increase in value of the scrap metal.
Craig Kennison – Robert W. Baird
Thank you. And then, over the last quarter, there has been some conversation about a decay in revenue as you combined Keystone with LKQ and that some of your customers my want to keep other vendors alive.
Are you seeing that impact you at all and how are you dealing with it?
Mark Spears
Yes. I get started to say that there has been some customer dislocation with the amount of change that we have drawn it, not only our own people, but our customer base is probably to the expected.
I'll probably ask you to keep in mind, we walked into this kind of looking at 2.5 year period of time to integrate and merge these business. We are going to be pretty much done with that in 12 months or less.
And probably the aspect to the integration may have been a little rougher that we thought has been in systems training. When we go back and we looked at when Keystone converted (inaudible), their same store sales dipped by about 50% as I recall.
As we discussed on prior calls, we've moved customer discounts, customers' parts being delivered on different routes and maybe having different schedules and delivery times of the day. There is a lot of small moving pieces out there and with a lot of the integration work and the warehouse moves behind us, now management and our sales organization I think is in a position to go back and tackle those small issues kind of one by one.
So, we are making tons of outbound calls, we have our driver reps and they have requirements to how many kind of cold calls or sales calls they need to make per week, making a lot of customer contacts, and addressed these small issues one by one. This is a good management team.
I am entirely confident that, given time, we will kind of cut back through a lot of small issues here and regain some customers who made us second on their call list.
Craig Kennison – Robert W. Baird
Thank you. And then final question is a macro question, but there are some big trends affecting vehicles and operations today, one being a shift towards smaller cars and hybrids, the other being a shift away from leasing towards more ownership.
How will those two trends if at all impact your business?
Mark Spears
I think there probably a number of them to talk about. And of course, you could even add gas prices on to that list as well.
In terms of leasing, we believe that reduced leasing from the manufacturers probably is good for the alternative part business and it's probably good for aftermarket product sales in particular. They are viewed at, most vehicles are on lease from the manufacturer probably all the repairs are going to be made with new OEM parts.
And if those leases are held by someone else, we would assume that there might more interest in the consumer in seeking out lower cost repairs on those vehicles, especially when they come out from underneath warranty, but are still on lease. The hybrids, we are already getting hybrids into our yards.
We believe in the long run that the hybrids are probably a plus to the business as well. They appear to have more parts and some of those parts especially in the electrical system and the batteries, it’s kind of an added value to create for the company.
The SUVs, it appears as though it's probably going to be less buying of the SUVs. That's probably a modest takeaway because they are fairly expensive parts, plus the same time, the SUVs have typically been pretty tough for us to buy.
Those are probably among the more typical vehicles that are going to rebuilders and that's always our toughest competitor at an auction is someone who rebuilds vehicles. I think in terms of discussion about reduced buying on pickup trucks, I think a lot has to still shake out in that area.
It would be our view that the pickup truck is actually, it comes as a work vehicle for a lot of people and a lot of consumers. So we’re not all that convinced that pickup truck buying is going to die in the line here.
I guess the final comment I would make would probably be, if there is a shift towards smaller vehicles, it depends on how small, small goes. The bread and butter of our company, quite frankly over the years, has been the Camrys, the Hyundais, and KIAs.
I can guarantee, you call any of our managers and you ask them what would be their favorite cars to get out of the salvage auction, they will tell you it’s a Honda Accord. I bet that’s 100% and at times that’s the answer and Honda Civic.
So that’s where the vehicle population shifts, I think that’s a good thing for us. If there is a more drastic shift toward the smart cars and vehicles that almost appear to be disposable vehicles, that’s probably neutral to small minus for us.
The repairs for those vehicles probably a good chance they will be effective with aftermarket parts because they have to seek a very little cost solution to repair those vehicles or they’re going to total out.
Craig Kennison – Robert W. Baird
Great. Thank you.
Joe Holsten
Thanks Craig. I think we have time for one more question.
Operator
Your last question comes from the line of Scot Ciccarelli from RBC Capital Markets. Please proceed.
Scot Ciccarelli – RBC Capital Markets
Hey guys, it's Scot Ciccarelli.
Joe Holsten
Hi Scott.
Scot Ciccarelli – RBC Capital Markets
I guess I had two kinds of follow-up questions here. The first is, people are trying to figure out the impact of commodity prices, so maybe a different way to tackle that would be, is it fair to assume the volume growth in the other category is comparable to the volume growth in the recycle category?
Mark Spears
No. We mentioned in the lower end cars, Joe read out some volume numbers there, and it was like 41% for the quarter on the car volume in the low end cars and 34%.
So that’s the volume and have more scrap and those types of things in there, so there a lot of volume that is probably affecting that more than the ones above.
Joe Holstein
One thing I would add to that Scot for everybody to keep – maybe an additional factor in here is that we have been investing additional capital into our self service yards that are helping with better extraction of both cars [ph] and particularly non-car items in the vehicles and that is helping our yield per car. Just as an example, in 2007 probably the powertrains where we didn’t sell those, they where remaining in those end of life vehicles.
Now, quite a few of our retail yards are pulling those (inaudible) equipment that allows us to do that pretty economically, and we get paid more per ton on that metal when we’ve pulled it out of the vehicles. Similarly, our operations are getting better, segregating aluminum in particular.
We’re far better at that today than we were a year ago. So, there’s some operating benefits that are being driven by more capital investments and just being a little smarter about how we run the business.
It’s helping that number out too.
Scot Ciccarelli – RBC Capital Markets
Okay. And that’s helpful.
And then the other question is that obviously the aftermarket is being impacted by, it sounds like two factors, number one, just the fewer insurance claims. Number two, let’s call it, the customer dislocations.
Is there any way to kind of gauge how much of an impact each one has been on the business?
Joe Holsten
Yes. I thought about that quite a bit because I assumed one of you would ask.
It's tough to say probably, I guess, would be that I’m going to say maybe 60% is coming out of the softness of the market and 30% to 40% may be coming out of customer losses which would be – some of our customer losses are probably permanent. For example, I think I mentioned in former calls, some of the losses are jobbers or wholesalers.
These are our competitors. They’re probably not coming back and we probably don’t want them back.
They’re low margin work and certainly would be questionable why we should allow our competitors to leverage our buying prowess to compete with us. So some of that work is gone and isn’t coming back.
Scot Ciccarelli – RBC Capital Markets
Okay, great. Thanks a lot guys.
Joe Holsten
All right, Scot. Thank you.
We appreciate everyone for calling in and look forward updating about 90 days on our third quarter. Thanks again.
Operator
Thank you for your participation in today’s conference. This concludes the presentation.
You may now disconnect. Have a great day.