Oct 30, 2008
Executives
Sarah Lewensohn – Director of Investor Relations Joe Holsten – Chief Executive Officer, President Mark T. Spears – Chief Financial Officer
Analysts
Michael Cox – Piper Jaffray Scot Ciccarelli – RBC Capital Markets Anthony Cristello – BB&T Capital Markets Craig Kennison – Robert W. Baird & Co., Inc Sam Darkatsh – Raymond James [David Feinberg] – Goldman Sachs
Operator
Welcome to the third quarter 2008 LKQ Corporations earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host Ms.
Sarah Lewensohn Director of Investor Relations.
Sarah Lewensohn
Good morning and thank you for joining us on our call this morning. I’m Sarah Lewensohn Director of Investor Relations and with me to discuss the results of LKQ Corporation's third quarter 2008 results are Joe Holsten, President and Chief Executive Officer, and Mark Spears, Executive Vice President and Chief Financial Officer.
This call is being webcast this morning and will be archived on the LKQ Corporation website for approximately one month. Before we get started I’m going to read the following statement.
The statements on this call that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include 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 that Keystone’s business will not be integrated successfully or that LKQ will incur unanticipated costs of integration, the ability to maintain Keystone’s vendor relationships and retain key employees, the availability and cost of inventory, pricing of new OEM replacement parts, variations in vehicle accident rate, changes in State or Federal laws or regulations affecting our business, fluctuations in fuel and other commodity prices, changes in the demand of our products and the supply of our inventory due to the severity of weather and seasonality of weather patterns, changes in the types of replacement parts that insurance carriers will accept in the repair process. The amount and timing of operating costs and capital expenditures relating to the maintenance and expansion of our business operations or infrastructure, declines in asset values, uncertainty as to changes in U.S.
general economic activity and the impact of these changes on the demand for our products, uncertainty as to our future profitability, increasing competition in the automotive parts industry, our ability to increase or maintain revenue and profitability at our facilities, uncertainty as to the impact on our industry of any terrorist attacks or responses to terrorists attacks, our ability to operate within the limitations imposed by financing arrangements, our ability to obtain financing on acceptable terms to finance our growth, our ability to integrate and successfully operate recently acquired companies and any companies acquired in the future and the risks associated with these companies. Our ability to develop and implement the operational and financial systems needed to manage our growing operation, decreases in the supply of end of life and crush only vehicles that we process and sell, claims by OEMs and potential pending litigation limiting our ability to sell aftermarket products and other risks that are described in our Form 10-K filed February 29, 2008 and other reports filed by us from time to time with the Securities and Exchange Commission.
You should not place undue reliance on the forward-looking statements we assume no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made except as required by law, and with that I would like to turn this over to Joe Holsten, Chief Executive Officer of LKQ Corporation.
Joe Holsten
Thanks for joining LKQ’s third quarter earnings call. Let me begin by providing some high level comments about our performance as well as a perspective on the business or industry in the markets that we serve.
We issued our results this morning and hopefully you’ve had a few minutes to look them over. We reported $490.7 million in revenue for the quarter representing a 102% total revenue growth over the third quarter of 2007.
Recall that we did close on the acquisition of Keystone Automotive early in the fourth quarter of last year. Our diluted earnings per share excluding Keystone integration restructuring expenses were $0.19, an increase of 46%.
In spite of some significant declines in commodity pricing in September, these results are consistent with our expectations. Unfortunately those declines in commodity values have accelerated end of the month of October.
From my perspective the business demonstrated strong resiliency in what was a very challenging quarter for consumers and businesses in nearly all industries. [Inaudible] the quarter was 12.4% and was calculated as if we owned Keystone for the third quarter of 2007.
We have provided a table comparing pro forma revenue by significant revenue categories and those categories are first recycled and related products and services, which is what we commonly refer to as the wholesale and self service retail recycled parts operations. Second category, aftermarket other new and refurbished products, which is comprised of aftermarket new products and refurbished items such as bumpers and wheels, and the third category is other, which broadly includes scrap, [inaudible] and aluminum sales.
On a pro forma basis, revenue grew approximately 17% for the quarter as compared to 2007 referring to the table driven by increases in recycled parts and services as well as the other category. Aftermarket and refurbished revenue was essentially flat and not surprising given the slowdown that we saw in the first half of 2008.
As I will explain in a few minutes, we believe that we have grown our market share in the aftermarket business. Gasoline prices peaked in July and remained high throughout the quarter.
As a result miles driven for August using the latest month available were down 5.6% as compared to the prior year. Year-to-date miles driven were down approximately 3.3%.
Obviously heading into the fourth quarter and the end of October there has been substantial relief in gas prices. A New York Times article this morning dwelled on the subject in detail and the likely impact on American’s driving habits.
In recent conversations we’ve had with some of the larger insurance companies, their managements have indicated auto claims continue to trend downward with one thing as high as an 11% reduction over the prior year, although the average carrier has discussed reductions more in the range of 4% to 6%. Contrasting the growth we are realizing with the decline in auto claims and fewer imported containers of aftermarket parts implies we may be wanting a greater share of the collision repair parts business in both recycled and aftermarket new product sales.
The continuation of high fuel prices, lower miles driven and a reduction in insurance claims limited the growth of our collision repair parts during the third quarter while demand for our mechanical parts appeared to be impacted by a much lesser extent. Purchase of cars to our wholesale recycled parts totaled 35,000 units during the quarter.
A 21% increase from the 29,000 acquired in the third quarter of last year. Wholesale vehicles we acquired from the salvage auctions accounted for approximately 96% of the total income in wholesale products as well.
During the quarter we processed more than 88,000 lowered costs self serve and crushed cars as compared to 48,000 in the prior year. The third quarter of 2008 total includes approximately 11,000 cars processed from the Pick Your Part acquisition that we completed in late August.
We would remind you the third quarter is generally our weakest seasonal quarter during the year, especially for aftermarket new and refurbished products as collision repairs tend to dip during the summer months. Gross margin for the 2008 third quarter was 44% a 50 basis point decline from the third quarter of 2007, which was largely due to an increase percentage of aftermarket sales as a component of our total revenue.
I am particularly pleased with the operating income margin achieved by our company. In the same quarter of 2007 standalone Keystone achieved only a 4.2% operating income margin while LKQ was at 10.5%, and one year later and combined our margin stands at 10.7% before restructuring charges.
Net income grew 72% to $25.1 million for the quarter and diluted earnings per share increased by 38.5%. We continue to focus on the integration of Keystone and are well on our way to realizing anticipated savings of $35 million or more by 2010.
To date we have completed nearly all of the planned conversions to the prelude point of sale inventory management system and have eliminated 33 operating sites by consolidating warehouses and closing store fronts. The review of sales volume and production capacity in the remaining 57 bumper, wheel and light refurbishing locations is continuing so we can determine the future plant consolidation opportunities in those areas.
We are in the process of combining the regional management of Keystone together with the regional management of LKQ’s business by consolidating the management oversight as both the aftermarket and the recycling businesses in a given geography. We hope to realize greater revenue growth, achieve improved cost controls and improve the customers experience by providing one stop shopping for their collision parts.
During the quarter we launched our first automated parts estimate review program which we had named key list. This innovative process takes any estimate reviews written by either an insurance estimator or a repair shop and within 30 seconds notifies the user of any recycled or aftermarket parts that can be used to repair the vehicle.
Key list also provides LKQ with a list of parts that could not be located within our inventory to allow us to take a last look for additional sales opportunities. We’ve already signed up one of the top 10 insurance carriers to use this product and expect to get other carriers and shops involved in the future.
If the customer desires to do so, the aftermarket portion of the estimate can be converted into an online order increasing accuracy and moving more of our sales into a [inaudible] arena. Our hopes for this unique industry tool are quite high.
During the quarter we announced the acquisition of Pick Your Part Auto Wrecking. This is a large self service operation with nine sites in California.
Locations will also provide a footprint to support growth of our wholesale recycling parts business in Southern California. Pick Your Part's annual 2007 revenue was approximately $114 million.
Just recently we announced the acquisition of two recycled truck parts operation, one in the Chicago area and the other in Toledo, Ohio with combined annual revenue of approximately $20 million. These operations along with those we had previously acquired in Quebec City and Houston, Texas form our entry into the recycled truck parts business and make us one of the very few multiple location operators in heavy duty truck recycling.
There are characteristics of the heavy duty recycled truck market that we find similar to what we first saw when we began to acquire other recycling businesses. It is an industry that is very fragmented.
There are numerous small mom and pop companies operating with little benefit of scale who lack the necessary capital to finance inventory and growth. Frequently operators even lack systems to easily locate their inventory.
The industry dynamics are also favorable. The trucking industry is under considerable stress and facing significant cost pressures from changing fuel and emission standards.
Many trucking companies have moved to an asset light economic model that has shifted more of the financial burden on the owner operators. The use of recycled truck parts offers a strong value proposition to very low cost conscious to very cost conscious customers.
Additionally we believe we can leverage some of our existing systems and capabilities, such as our yard management system and our procurement discipline to further enhance the financial performance of these acquired businesses in the heavy duty truck recycling business. Our research indicates there are about nine million trucks on the road and we believe the heavy duty trucks recycled part market is in excess of $1 billion.
Our organic growth performance of 12.4% for the quarter was supported by continued growth of late model, secure disposable crush only and self service vehicles and the associated increases in part sales and scrap volume. Organic growth also benefited from increases in scrap and commodity values.
Toward the end of the quarter scarp and commodity prices went into a steep decline and will likely have an adverse impact on Q4 organic growth. We have a number of green field expansion projects underway that will support our organic growth.
We opened a new self service operation in South Bend, Indiana and have others in development stages in South Carolina, Georgia and upstate New York. We’re also in the process of negotiating terms to open a green field wholesale recycling operation in Southern California.
We have fielded numerous questions about scrap metal revenue and its impact on LKQ’s results. For the most part as scrap prices increase our acquisition costs with cars rose as well.
Gross margins contracted slightly in the third quarter of 2008. With average inventory times of approximately three to four times for wholesale cars and six to seven times for self service recycled cars, the sharp drop in scrap prices over the last two months means we will likely see gross margins contract into the fourth quarter.
As scrap prices return to a more typical rate I expect our gross margins will return to normalized levels. Scrap prices have fallen so too have prices for most commodities, such as steel and fuel.
We anticipate the drop in these basic costs could very well lead to better aftermarket cost of goods sold and lower freight costs in Taiwan potentially supporting the expansion of gross margins. Before turning over to Mark, I would like to note that we have lowered guidance for the fourth quarter and for fiscal year 2008.
I want to be clear that the change in guidance is a function of the deterioration we have seen in the economy and more specifically the rapid decline in scrap metal and commodity pricing. During a 90-day window from July to October of this year, our company witnessed what we believe to be a decade long peak and a decade long low in values for scrap metal, but clearly over 80% of our revenue is driven by the sale of parts, our business model does depend on efficient markets to sell scrap.
We have made rapid adjustments to the purchase price of our salvage vehicles and believe that we will be able to restore the gross margin dollars that we have historically averaged. During Q4, however, the vehicles we will be scrapping were purchased obviously when scrap metal prices were materially higher than what we see in today’s market.
Mark.
Mark T. Spears
As we did last quarter, we included a few additional financial tables that we believe will make it easier to understand our results. One of the schedules is also a comparison of our major revenue categories on a pro forma basis as if we owned Keystone for all of 2007.
You can recall that Keystone was acquired in mid-October 2007 so our 2008 nine-month financial of course include Keystone but the 2007s do not at this point. Looking at our income statement and related tables, our third quarter revenue was up 102% to $490.7 million from $243.5 million in Q3 2007.
Year-to-date revenue for 2008 grew 106% to $1.5 billion compared with $712.1 million for the same period in 2007. As Joe mentioned earlier, our organic revenue growth calculated on a pro forma basis that assumes we owned Keystone for all of 2007 was 12.4% for the third quarter and 11.6% for the nine months.
Gross margin for the third quarter was 44% versus 44.5% in the prior year the small margin decline was largely due to the seasonal weakening of aftermarket products. Remember in 2007 aftermarket was a much smaller compliment of our business as Keystone was not yet acquired.
On a year-to-date basis the 2008 gross margin was relatively flat at 44.9% versus 45% in 2007. During 2008 we combined a vast majority of LKQ's preexisting aftermarket operations into Keystone's operations.
The majority of our operating expense growth in 2008 over 2007 was attributable to the Keystone acquisition. Our facility and warehouse expense for Q3 2008 increased 85.1% or $22.3 million as compared to Q3 2007.
Facility and warehouse expense as a percent of revenue for the third quarter was 9.9% versus 10.8% in 2007. On a year-to-date basis facility and warehouse expenses grew $60.4 million or 79% over 2007 and as a percentage of revenue were 9.3%.
Sequentially from Q2 to Q3 of 2008 facility and warehouse expense grew $4.7 million. The majority of this increase was due to our acquisition of pick your parts in the third quarter.
Distribution expenses for Q3 2008 grew $22.8 million or 95.9% over Q3 2007. As a percentage of revenue, distribution costs decreased to 9.5% in Q3 2008 from 9.8% in 2007.
For the 2008 nine-month period distribution expenses grew 68.5 million or 101% over 2007, and as a percentage of revenue improved to 9.3% from 9.6% for the same period in 2007. Selling general and administrative expenses grew $31.8 million or 109% over Q3 2007.
SG&A as a percentage of revenue increased to 12.4% in Q3 2008 from 12% for the same period in 2007. For the 2008 nine-month period SG&A expenses grew $100.8 million or 117% over 2007.
For the same period these expenses as a percentage of revenue increased to 12.7% in 2008 from 12.1% in 2007. During the third quarter, we had restructuring expenses of $2.4 million as part of our operating expenses.
All of which are related to the Keystone acquisition. You should note that certain costs of the Keystone acquisition related to severance and certain facility closure costs are considered purchase price allocations and are not charged to the income statement.
Our operating income grew 95.2% to $50 million in Q3 2008 from $25.6 million in Q3 2007. Our operating margin was 10.2% a reduction of 30 basis points from Q3 2007.
If I back out restructuring expenses, however, operating income grew 105% to $52.4 million and our operating margin 20 basis points to 10.7%. Looking at 2008 year-to-date before restructuring expenses, operating income grew 122% to $176.6 million and operating margin increased 80 basis points to 12%.
As I mentioned in earlier calls, Q3 tends to be the weaker quarter for aftermarket sales. For the aftermarket business Q1 and Q4 are generally the quarters with the highest margins as seasonal demand increases.
We had net interest expense in Q3 2008 of $8.2 million as compared to $2.2 million in Q3 2007. This increase is primarily a result of the debt we issued in conjunction with the Keystone acquisition.
The Q3 2008 pretax income grew 75.4% to $41.8 million from $23.8 million in Q3 2007. For the nine-month period of 2008 pretax income increased 92.7% to $143.7 million from $74.6 million for the same period of 2007.
For the first nine months of 2008, our effective tax rate was 39.5% compared to 40.5% in the same period of 2007. The lower 2008 tax rate is primarily related to lower taxes in our Canadian operations.
Net income from the quarter increased 72.2% to $25.1 million from $14.6 million in Q3 2007. For the nine months year-to-date 2008 net income increased [inaudible] to $86.9 million from $44.4 million for the same period of 2007.
Our diluted earnings per share increased 38.5% to $0.18 for the third quarter from $0.13 for the same period in 2007. Without restructuring expenses, earnings per share for Q3 2008 would have been $0.19 or a 46.2% improvement over 2007.
For the first nine months of 2008, diluted earnings per share increased 59% to $0.62 from $0.39 for the same period in 2007. Without restructuring expenses, earnings per share for the first nine months of 2008 would have been $0.65 or 66.7% improvement over 2007.
Our diluted weighted common shares outstanding used for EPS purposes were as follows, Q3 2008 at 141.2 million shares versus Q3 2007 at 115.1 million shares, nine months 2008 at 140.5 million shares versus nine months 2007 at 113.2 million shares. Shifting our focus to the cash flow table, we generated $105.3 million in cash from operations for the nine months of 2008.
Capital expenditures to date for 2008 excluding business acquisitions were $42.2 million. Cash used to acquire businesses the first nine months of 2008 was $40.3 million.
During the first nine months of 2008, we issued 1.4 million shares of stock related to the exercise of stock options that resulted in $12.9 million in cash which includes related tax benefits. Taking a look at the balance sheet as of September 30, 2008, you will see we had debt of $642.5 million that included $640.1 million under our secured credit facility.
Cash and equivalences were $97.7 million at the end of the quarter. As of October 29 we had approximately $50 million in cash.
As many of you know, we have a revolving credit facility of $115 million provided by a group of banks. Currently we have no borrowings under this revolving line but there are approximately $22 million of letters of credit that are backstopped by this facility, thereby reducing the availability for borrowings to $93 million.
As we previously reported in an 8-K filing with the SEC, Lehman Commercial Paper Inc, which accounts for approximately $15 million of revolver funding commitment, filed for Chapter 11 bankruptcy protection earlier in October. Accordingly, we no longer believe the $15 million commitment is available so in effect our availability has been reduced to $78 million.
However, we do not feel this $15 million is significant to our liquidity needs. Let's move to our 2008 financial estimates.
As Joe mentioned earlier, we are revising our 2008 financial estimates. We continue to believe that 2008 organic growth for the full year will be in the low double digits with the balance of the growth being a full year impact of our 2007 acquisitions and the business acquisitions we've completed thus far in 2008.
Excluding the effect of any 2008 restructuring expenses associated with the Keystone acquisitions, we expect full year 2008 net income to range from $107 million to $114 million, and diluted earnings per share to be between $0.76 and $0.81 per share. So, the EPS guidance excludes the $0.03 EPS affects of the restructuring expenses incurred year-to-date 2008 and any future restructuring expenses we may occur in the fourth quarter 2008.
Our updated guidance is higher than our original EPS guidance of $0.73 to $0.76 per share that we provided in February 2008. We anticipate our cash from operations for 2008 will be over $100 million.
Our estimates in capital expenditures excluding the expenditures of LKQ to acquire businesses will be between $65 to $70 million for 2008. Weighted average diluted shares outstanding are anticipated to be approximately 143 million shares for the fourth quarter of 2008 and approximately 141 million for the full year of 2008.
Share numbers are estimates and will be affected by factors such as future stock issuances, the number of options exercised in subsequent periods, and changes in our stock price. I would like to turn back to Joe for some closing comments.
Joe Holsten
Before you go to the Q&A I'd like to wrap up by discussing the strength of our business model or company and what I see is a firm belief by our management team at LKQ that during times of adversity the strong should get stronger at the expense of the weak, and we see a bright side to the current financial conditions and believe that there will be benefits that accrue to the shareholders of LKQ. A continuation of the economic downturn is likely to encourage consumers to own their cars longer and deter new car purchases.
We believe this may enhance demand for alternative parts both collision and mechanical as a result of the nation driving an older fleet of cars and as consumers look to minimize repair costs. Also, recent shifts in the value of used vehicles may positively influence the price of automobiles we purchase at salvage auctions and lower our costly goods.
Let me close with a few comments about why I believe LKQ's potential as a long-term investment are attractive. First, I'd remind you that there is strong demand for our parts as we provide essential products in a good economy or a bad economy to the owners of approximately 250 million vehicles on the road today.
Secondly, the value proposition of our product lines is attractive to insurance carriers and individual consumers even in good times. In a tough economy consumers are more cost focused and insurance companies facing low investment returns become more conscious of their claims costs.
Third, I focus on our market leadership position as LKQ is the leader in its primary product lines nationally and in the individual geographic markets where we compete. I will add that the ability to replicate our asset base is highly limited.
Fourth, I would note that our company enjoys a number of advantages it should provide for above average industry returns to our shareholders including the diversity of our product line, the company's geographical diversity, the success of our procurement management systems, and finally a note that we enjoy a strong working capital base which will allow us to take advantage of buying opportunities. Finally, I'd emphasize our belief that a difficult economy could result in long-term gains for the company that come from items such as the increased aging of cars which may translate to higher demand for our parts, lower investment returns for insurance companies translating to the need for better cost containment, lower used car prices translating to more salvage being available at more competitive prices, lower commodity prices meaning reduced metals, plastics and transportation costs for aftermarket parts and the potential to expand our gross margins, and finally credit difficulties may put more pressure on our undercapitalized competitors who lack the working capital to finance a strong inventory.
Our company enjoys a strong balance sheet is well capitalized to take advantage of many opportunities we believe that will likely continue to come under the horizons over the next several years. I'd like to open up for Q&A.
Operator
(Operator Instructions) Your first question comes from Michael Cox – Piper Jaffray.
Michael Cox – Piper Jaffray
My first question as it relates to scrap metal and the other category that you breakout, I was wondering if you could provide a little bit more detail around the profit contribution from that category considering the expectations that will fall off in the fourth quarter to give us a sense for where that was trending in a higher commodity price environment?
Joe Holsten
I will start out with a stab at that and then Mark may have some follow-up comments. If we're kind of looking at our Q2 of 2008 levels of gross margins to the Q3 levels we would have seen deterioration between those two quarters and there's a bit of a lag affect particularly in the self service side of the business.
Keep in mind that, for example the cars or the car bodies that we were selling in September with depressed commodity prices would have been the car that we bought in late July and early August when commodity prices were peaking. In an ordinary market where commodity prices are making modest moves month to month we are able to adjust our buying pretty quickly to keep our gross margin dollars the same.
The markets that we saw in September and into October are anything but normal with prices moving significantly week to week, and accordingly ineffective with our purchasing we’ve been chasing the scrap metals market down. It’s our belief that during the fourth quarter we’re hopeful that that gross margin dollar relationship should bottom as the scrap prices reach bottom we continue to pull our purchase prices down and we would be hopeful moving into 2009 that we’ll be able to restore a normal gross margin dollar relationship to that line of business.
Michael Cox – Piper Jaffray
Would it be possible to maybe rank order then the profit contributions from the three different segments you break out just so we can get a better sense for how much was coming from this other category relative to the other segments?
Joe Holsten
I’ll say one thing we don’t go out and just buy large quantities of scrap, hold it and then sell it. We’re buying automobiles that have parts on them.
So if you’re trying to get a feel for the margin for that line it’s about the same as the margins for everything else. We buy the car, we allocate the cost between the component so you can’t have higher margins in one of these line items like other where you've got the scrap then the recycled per say in most cases, so it’s not a margin change here that we’re talking about.
Michael Cox – Piper Jaffray
That’s helpful and then my last question is just on fill rates. I was wondering if you could comment on that in the third quarter.
I know you have flexed that in the past to boost your volumes in the recycled sense.
Joe Holsten
Yes, try to address both product lines, Mike, in the recycled product as you may recall we effectively report our sale rates in the form of not in stock reminding you that most of our competitor not in stock is probably up in the 60% and 70% range. Our not in stocks continue to drop during the quarter and we’ve seen them continue to drop in the first few months of October and I think that number in our last weekly report was sitting right around about 31.
That's the lowest level that we’ve seen in years and we’re very proud of the progress the company has made in that relationship. I think in your response to your specific questions on former calls I also indicated that we were working to revise the prelude system that came with the Keystone acquisition to be able to report what we though would be a more meaningful sell rate and we are in a position to do that on this call as well and we believe that number to be right at about 90% in stock.
Operator
Your next question comes from Scot Ciccarelli – RBC Capital Markets.
Scot Ciccarelli – RBC Capital Markets
First question is on the aftermarket business obviously that’s been a little bit softer pretty much all year it’s lagged the other two segments of your business. Joe, can you help us understand from your advantage point what is fewer accidents or fewer accident claims going on, and what is the customer integration issues with Keystone?
Do you have any better feel for that at this point?
Joe Holsten
Yes, I think our most relevant benchmark there was to look at the reported claims that we’re getting and the trends that we get back from the insurance carriers, and as I indicated kind of the typical number we’re getting back from insurance carriers is that number is in the 4%, 5%, 6% range although one of the larger carriers last week in their earnings release I think noted as much as an 11% decline. The somewhat of an anecdotal discussion with the same carriers it is their view that there is a sharp increase in the number of their customers insured who are taking insurance settlement checks but not actually moving forward to even have their vehicles repaired and typically when people aren’t repairing their vehicles those are cosmetic sorts of damage to the car because it’s still drivable and it’s exactly those types of damages or parts where the aftermarket industry would normally be consummating it’s sales.
The aftermarket parts don’t include the safety mechanical parts. They are basically the skin around the outside of the car.
We're encouraged actually as we look at our numbers because we’re seeing the company pretty flat year-on-year as we look into October we’re actually starting to see some acceleration in our aftermarket parts performance which we’re in encouraged by but it is our belief that the company LKQ has been increasing it’s market shares this year and we look at that for two reasons we’ve come to that conclusion. The first being the fact that the industry overall would appear to be in a negative position in terms of demand for repair parts while we’re up slightly year-to-date or as neutral, and the other would be information that we garner from the Taiwanese manufacturers who are telling us that the number of containers being shipped in the United States is down by at least 10% and sometimes as much as 15%.
So, again we take some comfort that our operating model is working to the extent that we are gaining market share in an off year.
Scot Ciccarelli - RBC Capital Markets
That’s very helpful and then the last question is when you guys look at your updated expectations the biggest impact is where, is it at the sales line or is it the gross margin line because you keep referring to the margins and the impact of scrap.
Joe Holsten
I look at the fact that we’ve adjusted guidance for the year to be virtually solely a function of the deterioration of scrap metal markets and we need the fourth quarter to correct the, what I’ll call the imbalance and what we have been paying for vehicles and what we’re able to drive for the scrap and commodity values for the proper catalytic converters and aluminum in those cars. Really two things to look at there, first, is in our wholesale cars, our late model cars, vehicles that are going in to a scrap status in the fourth quarter are cars that we purchased back in March of this year or April this year when scrap metal prices were significantly higher than what they are today.
In our self service operations, the same is true but a narrower window because what we're sending off to have crushed and have shredded today in late October these are products typically that we acquired some time in the month of August when scrap metal was just coming off it’s high peak. Really we’re looking at the fourth quarter as a time period that we need to kind of bring those two back in balance and bring our, we’ve been lowering our purchases prices aggressively.
We started to lower what we paid for vehicles during the month of September and we’ve brought it down significantly in the first three weeks of October. As I indicated I think when scrap bottoms we’ll be able to have our purchase prices at a level that we can start to move back toward more historical gross margin dollars that we expect our cars to perform at.
Operator
Your next question comes from Tony Cristello - with BB&T Capital Markets.
Anthony Cristello - BB&T Capital Markets
Joe, I believe in prior calls you noted that weakness in aftermarket was maybe 60% macro, 40% internal as a result of the integration and the conversions. As we head into Q4 coming out of Q3 where it looked like the aftermarket revenue was down a little bit year-over-year I think you noted that you’re seeing some positive improvement in aftermarket, does that imply that your aftermarket business is actually starting to show up year-over-year comparisons?
Joe Holsten
Yes, for the last couple of weeks I would say that’s true and I am encouraged by what we’re seeing in our aftermarket performance. We’ve had about a year with Keystone's operations under our belt right now.
The disruptions of a lot of the dislocations, relocations of warehouses are behind us. Keep in mind over the last 12 months we’ve relocated 30 some warehouse facilities and the commotion and the inability to move, locate product that happens with those sorts of moves.
We’ve discussed the training of over 500 people in the new IT sales systems over the past year and the efforts by the company to retrain those people. There’s been a lot of activity in the company to bring these two operations under a common umbrella and I’d say the dividends may be starting to pay off and if there was weakness in 40% of that was attributable to kind of internal issues I think we’ve come well off that 40% figure at this level.
We’re pleased that our inventory levels are coming up. We’ve introduced a value line product into the system, which is going to allow us to compete with some of the more aggressive low-end parts competitors we face in the marketplace.
We’ve been actively training all of our aftermarket sales reps on how to identify whether a sales opportunity is a CapEx sales opportunity or whether it’s a value line sales opportunity and again I think those are starting to show up in the numbers. Obviously seasonally this is a good time in the year for us when we generally start to see some acceleration in our aftermarket parts sales as we move into this time of year and we have indeed.
If I look back over a trailing 13-week average our aftermarket parts sales last week were showing about a 5% uptick over where we’d been over this trailing 13 weeks.
Anthony Cristello - BB&T Capital Markets
If you then look at the comps then essentially in the first couple quarters of the year even the first three quarters then that’s a noticeable improvement from where you had been running and that is more of a function of you finally getting some of these conversions and integrations behind you and now you can kind of run the business on a much smoother basis, is that?
Joe Holsten
I guess that's a fair statement, I should have checked this out for you but I guess the last time we had a weekly level of sales that we’ve seen the last couple of weeks is probably back in April. It's been a good I’d say six months since we’ve been at this level and I'm quite encouraged by another thing I mentioned in the script was just good efforts that we have ongoing right now to start to push our senior field management into positions that they have management control over both product lines and we’ve accomplished that in all of our geographical regions with the exception of one and one to go.
The benefit of that is that in the geographical market I can see very quickly it’s bringing our management team together much more closely at the individual municipal market level and bringing our managers together to look for opportunities of how to sell more effectively, how to leverage our marketing resources more effectively, how to leverage our distribution assets and capabilities more effectively and I think we’ll see kind of increased levels of cost reductions out of that effort as we move to kind of the second wave of integration, if you will.
Anthony Cristello - BB&T Capital Markets
When you look at you didn't have any real commentary about next year in the cost savings, but I'm assuming that sort of $15 million range is still something that's achievable even in light of what's going on in the macro side of things. Is that correct?
Joe Holsten
Yes, you're correct. One, we've made a decision really not to discuss 2009 at this point because we're just at the infant stages of our budgeting process.
We do prepare ground level, ground up budgets and Mark and I actually start our review process of those Monday of next week, but in terms of the cost energies to be achieved in the Keystone integration, we're in very good shape there.
Anthony Cristello – BB&T Capital Markets
I guess maybe two questions, one being you talked about some pilot testing in terms of trying to cross-sell recycle with aftermarket. One, I wanted to maybe find out how that's going and then to you Mark, this is sort of a very broad range of guidance for Q4.
I guess it implies sort of a $0.14 to $0.19 range and you spoke to scrap being sort of the wild card and sort of what's bringing the guidance down. What's the sort of behind the wide range though?
Is that dependent on how weather plays out? Is that dependent on how aftermarket finishes the quarter?
Just maybe some color on those two things?
Joe Holsten
In terms of the cross-selling, Tony, we are extremely pleased with the improvement that is being made by the reps who have typically focused on recycled part sales and their ability to effectively sell aftermarket parts. Many of them were experienced in that prior to the Keystone transaction and systems-wise were able to bring onto their screens in a much more fluid fashion than we have during the last year to bring the Keystone screens and inventory onto the LKQ reps' screens.
Our next step there, which we should have completed before the end of the year, will be the ability for the LKQ sales reps to invoice right into the prelude system off their traditional recycled parts screen. That's really going to make the ordering process pretty seamless and make those 525 reps pretty effective in terms of their ability to sell aftermarket parts.
In terms of the reps who have traditionally, meaning the Keystone reps, who have traditionally focused strictly on aftermarket parts, we have more work to do in our systems in order to really make them more effective than they are today. So we have more work to do there.
Anthony Cristello – BB&T Capital Markets
Maybe, Mark, if you just have any commentary at all in terms of the range of sort of the guidance you provided and what sort of assumptions go into that?
Mark T. Spears
Yes, usually as we close the year out our range may be a couple of pennies, if you go back. This one's like a $0.04 range.
It sounds like a lot, but quite frankly between not just the commodities issue, but also driving has increased. I did see an article in the New York Times Business Day today that also talks about people driving a lot again.
This just came out and we didn't call them to put this in there, but it was kind of an interesting article that came out today, where they're seeing some activities and looking at MasterCard receipts, whatever. So, I mean we just felt like we needed a little more range there, due to the whole economic situation, the driving issues, we needed that.
I mean things start coming back here on the miles driven whatever, we're kind of back up to that higher end of our range.
Operator
Your next question comes from Craig Kennison – Robert W. Baird
Craig Kennison – Robert W. Baird
First question here, do you have a way of calculating organic growth excluding commodities or excluding steel in the quarter?
Joe Holsten
No, we don't.
Craig Kennison – Robert W. Baird
Joe, based on your comments, it sounds as though you might not have adjusted guidance had it not been for the steep decline in steel scrap prices. In other words, you may not have had to adjust guidance on the miles driven issue alone, is that true?
Joe Holsten
I think that's a fair observation and the reason I think that's true is that in spite of impact of kind of mileage-driven and the impact it may be having on demand for parts, we've been able to compensate for that throughout the year, at least to date by increased volumes of product, especially to our self service operations. We talked about that a little bit last time and we continued that during the third quarter, and so we have been able to compensate for some weaknesses in the parts area by just pushing more volume to the system.
I think you're right, if we had not been looking at the free fall in commodity prices and the scrap metal prices in particular, and this all started probably about mid-August we saw the first leg down in scrap metal pricing and then coming into early October, we saw another pretty substantial leg down.
Craig Kennison – Robert W. Baird
In the past, you've talked about near 10% organic growth as a target, obviously this year you've been well ahead of that partly benefiting, no doubt, from steel and other commodities. Has your long-term outlook changed at all if you want to take out the noise in commodities?
Joe Holsten
Yes, I think if we took out the noise in commodities for 2009 coming off [inaudible] I would characterize it as a fairly weak year in our aftermarket performance. I've gone on record here today saying I think we're getting our act together and I think in spite of what may increasingly be becoming the law of large numbers, I think we'll be pretty close to double digit same-store sales growth on parts sales in 2009.
Craig Kennison – Robert W. Baird
You made the comment, I mean steel works against you in the other revenue category, but could work for you in the aftermarket business. To what extent do you think you can hang on to any price increases that have been in place if your cost to goods sold starts to drop?
Joe Holsten
I think we'd hang on to a substantial amount of them. We price our products in relationship to OEM and the real battlefront will be in discount levels with our competitors.
I may be overly optimistic. I hope not, but I think that during a tough economy that we're going to have a nice competitive advantage during these upcoming winter months against our undercapitalized competitors.
We are ordering inventory at levels that we think we need to meet customer demand during a good hard winter with high demand for products and it's our belief that with the difficult economy that our competitors may not be stocking up quite to the level that we are. We've got the balance sheet and the working capital to do it, and we're preparing for it.
The other thing that we monitor pretty closely it's kind of an irritant to us, is that our Taiwanese suppliers seem to enjoy financing some startup companies to compete against us, by granting, I would say, generous working capital arrangements or generous terms to pay for their inventory, and as are suppliers in Taiwan has come under balance sheet pressures of their own. I think they're going to be far less eager to let their smaller buyers and customers to stretch them out the way they have historically.
I think we're well-positioned to continue to increase our market share in this environment.
Craig Kennison – Robert W. Baird
How quickly could prices come down on the aftermarket side?
Joe Holsten
Craig, I'm sorry, I would be speculating on that. I wouldn't look for anything in free fall here by any stretch of the imagination, but we have seen in Taiwan, two to three weeks ago, we expressed our expectations that we would start to see lower pricing for products to reflect the fact that steel prices should be coming down.
Craig Kennison – Robert W. Baird
Quickly then, any impact on the acquisition pipeline as maybe some of your maybe potential targets are more willing to sell in this type of environment.
Joe Holsten
I would say that, Walter has probably gotten more incoming contacts in the last few months than anytime we've seen in the last five years. So, the interest in doing something with this is accelerated.
That's not only from the United States but we're also getting a good influx of interest from Canadian companies. And we're even getting European businesses that are starting to contact us.
We are staying away from further acquisitions in the self service business at this point. Although we will progress a few greenfield developments that we think can be done pretty economically.
We're continuing to look at some modest size players in the heavy duty truck business. I'm encouraged, I think we have a good chance between now and January to put a couple of small acquisitions on the boards of companies that are in the wholesale, the late model recycling business that we started out in, kind of where roots are.
So, I think we'll put a couple of those on the boards in the next 90 days, as well.
Craig Kennison – Robert W. Baird
Last two questions, I missed the 88,000 figure, is that wholesale, retail or both?
Joe Holsten
Those were the self service, crush only cars.
Craig Kennison – Robert W. Baird
What was the wholesale number?
Joe Holsten
It was 35,000.
Craig Kennison – Robert W. Baird
Lastly, could you just comment on auction volume trends?
Joe Holsten
Craig Kennison – Robert W. Baird
Maybe Joe, could you explain why we would see high auction volumes, if we're seeing fewer accidents?
Joe Holsten
You may be seeing slightly fewer accidents but I think you're seeing more total losses and that's putting more volume into the salvage pools. The other thing that I think is increasing the amount, and related to the same issues, is used car and truck values.
As those have been depressed that leads to the insurance carriers totaling out more product. One thing we could see at the self serves here is with the decline in what we're offering to pay for the lower end self service vehicles.
But, we'll probably see some of that volume start to dry up. When people were paying $350 and $400 for and end of life car cars and things were coming out of Grandma's garage and coming out of the bean fields and any place you could imagine vehicles being.
And with companies offering 50 bucks or less to buy those cars today, those volumes are likely to diminish a little bit.
Operator
Your next question comes from Sam Darkatsh – Raymond James.
Sam Darkatsh - Raymond James
Most of my questions have been asked and answered. I just have a couple of housekeeping items.
You mentioned, Joe, in your prepared remarks that you thought that the steel scrap effects would be diluted on organic growth in the fourth quarter. Does that suggest that the entire other segment is going to go negative in the fourth quarter on a year-on-year basis?
Joe Holsten
Yes, I don't think I can answer that. And the reason for that is I don't have a good handle on where the volumes are going to go.
And we had been lowering what we paid for these vehicles as rapidly as we can force the market down. The wild card is where the volumes are going to land.
The bottom line is I can't answer your question. I just don't feel comfortable trying to do so here this morning.
Sam Darkatsh – Raymond James
Outside of volumes the other segment might be down but then yet we just might have to come up with our own conclusion for what volumes might do? Is that how we should look at it?
Joe Holsten
I can't give you guidance on volume. Sorry.
Sam Darkatsh – Raymond James
Next question, do you anticipate any inventory write downs due to the deflation in steel scrap?
Mark T. Spears
No, not at this time.
Joe Holsten
We looked at that closely in the quarter and I'd say we're moving what we paid for. Vehicles adjusting the purchase price for the cars and trucks very rapidly.
Don't forget people need cars for parts too so we're not just buying a ton of stuff just to scrap.
Sam Darkatsh – Raymond James
Understood, Joe I might have missed this in your prepared remarks. What were your recycled vehicle purchases up on a year-on-year basis in the third quarter?
As I recall they were flat in the second quarter. I was trying to get a sense of the trend
Joe Holsten
Yes, they were about somewhere around 21%, quarter-to-quarter on the wholesale cars.
Sam Darkatsh – Raymond James
That's Q3 over Q2?
Joe Holsten
No I'm sorry, that's Q3 to Q3.
Sam Darkatsh –
Q3 to Q3 was up 21% in the third quarter?
Raymond James
Q3 to Q3 was up 21% in the third quarter?
Mark T. Spears
Yes and they were up over if you wanted to look at it sequentially I think they were like 32.5 to 35,000, up about 7% sequentially.
Sam Darkatsh – Raymond James
Do you anticipate on a year-on-year basis that the recycled vehicle purchases will continue to rise? Or does that start to flatten out with a more difficult year ago comparisons?
Joe Holsten
No, we're going to take that off.
Sam Darkatsh – Raymond James
And then last question. What was the organic growth rate in the recycled segment?
I'm coming up with around 10% but my math might be off.
Mark T. Spears
The organic growth for just the recycled line? We don't really break it out that way.
I mean, obviously, we didn't have a lot of acquisitions in recycles, but we don't look at that.
Sam Darkatsh – Raymond James
All right, I thought the acquisitions that you had were primarily recycled.
Mark T. Spears
We just did a PYP for that.
Sam Darkatsh – Raymond James
Right so outside of PYP the others would have been in the, which segment then?
Mark T. Spears
Trucks, the truck deals, we did a few truck deals in October.
Operator
Your next question comes from [David Feinberg] – Goldman Sachs.
[David Feinberg] - Goldman Sachs
I know you've discussed a lot of this already. I'm just trying to understand a little bit further, the gross margin, the outlook.
If I understand your comments and some of the answers to questions, it seems like the light gross margin here somewhere in the fourth quarter was a function of mix. The outlook for the fourth quarter is a function of scrap steel.
And with the outlook for '09 returning to some normal basis, what I'm trying to understand is that new normal basis for '09 the 44% we saw in the third quarter due to the new mix of aftermarket versus recycle? Or is it back at the 45 level that you were trending at the first half of the year?
Joe Holsten
I'll just clarify one thing David, then Mark probably have something to add to it. When I made that comment my focus was really on the gross margin dollar spread of the vehicles that we purchased specifically for the self service yards and the crush only vehicles.
My comment was not really meant that to address gross margin percentages for the company overall, just with that clarification. Yes, I need to ask Mark to follow up.
Mark T. Spears
The major thing that if you look at Q3 to Q3 on our margins, percentages, okay, is it was mostly aftermarket. If you go back, if you would look into Keystone's old financials, you'll see that the margin starts coming down in Q2 and then Q3 is kind of their lower margin business.
So our mix right now has higher aftermarket because we didn't have that many '07 numbers. So that’s part of that what your seeing right now.
Over a long term the commodity prices go up or down. Over a longer period of time, it doesn't really affect the margin percentage as much just because it's adjusting your car price.
You get in a squeeze in a month or so if it's highly volatile. But I don't think seeing what you've got know necessarily means our margins are coming down, percentage wise.
[David Feinberg] - Goldman Sachs
And to that point about adjusting the prices, you talked about cutting the price you pay for cars in September and then in October as well. At what point do you feel like your caught up in terms of cutting the prices fast enough to keep up with the scrap?
Or were you still chasing that number coming into October?
Joe Holsten
I think actually coming into November now, I think the wholesale operations we're in pretty good shape because, in addition to what we've cut during the third quarter, we probably, it looks like we're down another 5% of what we're paying for vehicles, during the last week of October. That moves around a little bit.
The primary thing we're doing on the crush only cars or the self service cars, as Mark indicated, we do buy a lot of those cars because they have useable parts on them. So we are not in the scrap business.
We are buying many of those cars because of the parts that they still have on them. There is some segment of vehicles that come in from tow companies that are truly crush only cars.
Those vehicles we've taken our purchase price down to almost nothing. In fact our direction to our managers this past week has been, unless you have contracts or verbal agreements with the shredder in hand at a very firm price, we shouldn't even buy any of those vehicles.
[David Feinberg] - Goldman Sachs
Last question, you talked about there being about a six month lag time between when a wholesale car stays on your lot to when it goes to be scrapped versus a scrap only. Getting a sense of what the mix is in terms of your inventory.
Trying to get a sense of how long margins might come under pressure from the volatility we saw in scrap prices this year in September and October.
Mark T. Spears
Yes, we hold those cars a little longer if there's certain parts we want to sell off that hulk over a period of time that you wouldn't inventory. But also keep in mind from a margin perspective, we buy those cars where a huge percentage of the revenue stream is just flat out parts.
So we're buying them for parts. And when we scrap them out they're much lighter.
We've cored out a lot of product, to sell to re-manufacturers of what we didn't sell. It's really not the same animal there.
I think that's what you're talking about is that if we got a bunch of stuff at a high cost in a year on a wholesale side I'd say no. There's lower volume of cars we push through and they're lighter as well on top of that when we scrap them out.
[David Feinberg] - Goldman Sachs
Last question, any update on State Farm or pending litigation?
Joe Holsten
No change in the State Farm status. In terms of litigation we would expect the Mustang case to be taking – we're in discovery mode right now in the Mustang case.
And on the F150 those appeals have been submitted and we're waiting for the court to tell us when they want to schedule oral arguments. So I suspect we're looking at mid '09 before we get any sort of ruling on the appeals court.
And obviously the case on the Ford Mustang will be going well into 2009.
Mark T. Spears
One thing to point out the Mustang case is really – it's appealed to an administrative branch or executive branch in government; it’s not really in court.
Operator
That concludes the question and answer session. I would like to turn the call back over to Sarah Lewensohn and the closing remarks.
Sarah Lewensohn
Well, thank you everyone for calling. Of course Mark will be, and I will be available later for questions and we appreciate you listening and look forward to answering your questions.
Thank you.
Operator
Thank you for participating in today's conference.