May 1, 2009
Executives
Sarah Lewensohn – Director of Investor Relations Joseph M. Holsten – President & Chief Executive Officer Mark T.
Spears – Executive Vice President & Chief Financial Officer
Analysts
Anthony Cristello – BB&T Capital Markets Jeffrey Saut – Raymond James Craig Kennison – Robert W. Baird Tom Hayes – Piper Jaffray & Co.
William Armstrong – C.L. King & Associates
Operator
Greetings, and welcome to the LKQ Corporation first quarter 2009 financial results conference call. At this time, all participants are in listen-only mode.
A brief question-and-answer session will follow the formal presentation. (Operator Instructions).
As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host, Sarah Lewensohn, Director of Investor Relations for LKQ Corporation.
Thank you. You may begin.
Sarah Lewensohn
Thanks, Ryan. Good morning, everyone and thank you for joining us today.
We are hosting this conference call to discuss the first quarter 2009 financial results that we released this morning. And with me today from LKQ Corporation is, Joe Holsten, President and Chief Executive Officer; and Mark Spears, Executive Vice President and Chief Financial Officer.
Both Joe and Mark will share their thoughts on our results, and then open the call up for questions. And in addition to those that are listening by telephone, we are providing an audiocast via the LKQ website, both forms will have replays available shortly after the conclusion of the call.
Before we begin with our discussion, I would like to read the following. The statements made in 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. 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.
Please refer to our 2008 Form 10-K and other subsequent documents filed with the SEC and the press release we issued this morning for more information on the potential risks. And with that, I’d like to turn this over to Mr.
Joe Holsten.
Joseph M. Holsten
Hi, good morning, and thanks again for joining us today. I will begin with some general comments about the business and some recent events and talk about some of our various business activities.
Then I’ll turn the call over to Mark, so he can provide greater detail regarding the financial results that were provided in the earnings release that we issued this morning. As I reflect on the first quarter, I am quite pleased with the results, we were able to achieve, especially, given the current economic environment.
We achieved a number of milestones that I would like to point out. Most significantly, our sales of recycled parts grew 9.9% organically for the quarter.
Our aftermarket sales achieved organic growth of 2.4% halting the declines that we saw in the back half of 2008 and against a relatively tough comparison with the first quarter of 2008. Our self-service facilities ended the quarter with an operating profit, while the profit was modest when compared to prior year’s margins, the quarterly performance mark the substances turnaround from our Q4 loss of these facilities.
Ferrous prices, related commodity prices appear to hit bottom in December of 2008 and January 2009, and appear to have now stabilized. And finally, we reached a settlement with Ford Motor Company on the design patent litigation dispute and has entered into an exclusive agreement to distribute limited part types in the U.S.
Just to go onto the Ford settlement into a little bit more detail. As you know, we were in dispute with Ford over design patent and particular for collision repair parts for the Ford F-150 and the Ford Mustang.
The settlement we reached grants LKQ the right to be the exclusive distributor of non-original equipment aftermarket parts that correspond to all Ford collision repair parts that are covered by design patent and exchange for a royalty payment to Ford. Let me point out, the exclusive rights cover collision repair parts for all of Ford’s models for which there are design patents, and not just those applicable to the F-150 or the Mustang.
This agreement has the term through September 30, 2011 and applies only the sales in the United States. Related to this, we also entered into agreements with the manufacturers, who were part of the patent disputes to distribute U.S.
bound, non-OE collision repair aftermarket parts that correspond to Ford design patents only to LKQ. We are pleased with the resolution not only does it stop the related legal disputes that we had with Ford, but we believe it gives us the ability to grow our revenue overtime as we become the only license supplier of Ford design patented new non-OE aftermarket collision repair parts in the United States.
Mark will provide some additional numbers in details related with Ford agreement in just a few moment. In terms of industry trends, the metrics that most impact our revenue we believe remain mixed.
Unemployment levels remain on the rise and miles driven for the first two months of the year were down about 1.9% continuing the trend from last year at a more moderate pace. The average daily travel for February increased 2.7% over the prior year.
So drivers are traveling less than last year, when they do drive the trips are getting longer. Insurance collision claims continued to decline running at rates approximately 4% to 5% below last year, but the incidences of total losses are up 0.5% in part due to lower used car values, and obviously providing a more lucrative auction environment for our company.
While used car prices have trended downward for much of the last two quarters, we have recently seen this trend reverse. Other industry data suggests that the average age of vehicles on the road is now approaching 10 years, which we believe they are positive for the demand for our mechanical parts.
And our numerous discussions with our insurance partners, they remain concerned about the current environment. Auto dealership closures and the threat of bankruptcy from one or more of the auto companies based in Detroit are generating worries that some new OEM repair parts may not be available when they are needed.
Part shortages could lead to a longer repair time, greater repair costs and providing the customer with a rental car is a meaningful portion of the total claim cost. If there are interruptions in the supply chain, there may be opportunities for LKQ.
So we are watching this closely. Let’s turn to our results and some various statistics for a moment.
Revenue for the quarter was $518 million, a 5.3% increase, as compared to the first quarter of 2008. And we generated diluted earnings per share after restructuring costs of $0.23 for the quarter, compared to $0.22 for the same period last year.
Reported total revenue, because of a large fluctuation in scrap and core prices from last year’s level, obscures the true performance of our primary business of distributing replacement parts. Organic revenue growth, excluding the other revenue category was 5.1%.
Excluding the other revenue category, our total revenue for our primary businesses, recycled parts and services and aftermarket related and refurbishing was $469 million, a 9.1% growth for the quarter as compared to $430 million in the first quarter of 2008. Other revenue declined 21.4%, primarily as a result of lower scrap metal and commodity prices.
With year-over-year revenue growth of 21.1% for the recycled parts and services category, and 2.4% for the aftermarket, other new and refurbished product category; our integrated model of the two businesses is taking hold. Our purchases of cars for the wholesale recycled parts operation totaled 41,700 units during the quarter, a 6.4% increase from a nearly 39,200 we acquired in the first quarter of last year.
The quantity of salvage cars we purchased varies from quarter-to-quarter and reflects our production backlog and inventory levels, which today are in good shape. Wholesale vehicles we acquired from the salvage auctions accounted for approximately 97% of the total incoming wholesale product flow.
The average acquisition costs was down 14% over the prior year’s first quarter, incorporating lower scrap values embedded into the actual prices paid. During the quarter, we purchased 81,700 lower cost self-service and crush only cars, as compared to 56,100 in the prior year.
The first quarter 2009 total includes approximately 31,700 vehicles that were purchased for the Pick-Your-Part acquisition that we completed in late August. There was a continued reluctance from some of the self-service car sellers to accept the lower prices set as a result of dramatically lower commodity prices.
Even with the large drop in the other revenue category. We were able to generate gross margins in the quarter that were close to those achieved in Q1 2008 and an operating income at very close to the amount generated in Q1 ‘08.
Net income for the quarter was up 4.6% to $32.3 million, 30.9 million for the prior year. I’d like to discuss some aspects of our progress and integration right now with the prelude system, which is the operating system that we use to support our aftermarket business, now available on the desktops of the LKQ salvage sales force.
We started to see the benefits of being the first call by a body shop when it begins the search for collision parts. The conversions of the remaining LKQ businesses are slated for later in 2009.
During the quarter, we consolidated or relocated three aftermarket locations in Pittsburgh, Charleston, and Hattiesburg. In addition, we shut down three bumper-refurbishing operations in Saranac and Grand Rapids, Michigan and Nashville, Tennessee.
As we head into the second quarter, we still have a large New Jersey aftermarket location to be converted to prelude. Once we completed we will close the nearby operation and move it into this facility as well.
The review of sales volume and production capacity of the remaining 55 bumper, wheel, and light refurbishing locations is continuing. And we believe we may have a opportunity to close several more bumper refurbishing operations.
Shuttle runs and other services are being consolidated to help both product lines. The reorganization of the regions that we announced on our last call and emerged the key selling in LKQ businesses under common management seems to be paying off by continuing to identify opportunities like shared delivery runs.
For example, in the more rural areas of Kansas, Southern Illinois and Ontario, we have combined routes to deliver both aftermarket and recycled parts from the same delivery trucks. We expect to continue the consolidation for a number of years.
Over time, as leases expire in approximately 20 key market areas, we hope to consolidate the aftermarket and salvage operations into common footprints. Currently, we have such projects underway in Detroit, Indianapolis, Houston and Montreal.
In terms of acquisitions, during the quarter we acquired a heavy-duty recycled truck parts business based in Tampa, Florida, and a wholesale salvage recycling business in Durham, North Carolina and one in Montreal, Quebec. These new locations generated approximately $18 million of combined historical annual revenue.
Our truck business, the heavy duty truck business, we believe that operations continue to gain traction. I continue to believe that the heavy-duty recycled trucks parts market provides a logical growth opportunity for LKQ.
The fragmentation of small privately owned companies has made it difficult for anyone in the industry to reach scale to develop and support the systems like those we use for our car parts that create a competitive advantage. We’re an industry with lots of owner operators.
We believe the use of recycled truck parts offers a strong value proposition to its cost-conscious customers. The five different locations are beginning to organize into one unit with common systems and common operating processes to further enhance the financial performance of these acquired businesses.
We have been cross-pollinating the business with LKQ salvage managers to get the benefit of the operating talent we developed on the car side of the salvage business. And during the quarter, we started our second significant Secure Disposal service for a large national fleet operator.
At this point, I’d like to turn the call over to Mark to give you more details on the financial results for the quarter.
Mark T. Spears
Good morning, everyone. As we did last quarter, we included a few additional tables that we believe are helpful as you evaluate our results.
Looking at our income statement and the related tables, our first quarter revenue was up 5.3% to $518 million from $491.9 million in Q1, 2008. Our organic revenue growth for all revenue was a negative 0.5% for the quarter.
Excluding the other revenue category in our statement, however, organic revenue growth was 5.1%. Joe mentioned that we settled the patent litigation with Ford.
To put this in perspective, in 2008, we generated approximately $135 million in parts revenue on approximately 5,700 SKUs of new non-OE collision repair aftermarket parts covering all Ford brands. Approximately $10 million of this was over some 200 SKUs and was related to parts that Ford indicated are covered by valid patent designs.
So as you can see today, there is not a material amount of revenue that comes under this agreement. Overtime, we expect this revenue to grow, as we are the only license provider of these parts in the U.S.
The effective royalty payments at the 2008 revenue level is immaterial. We are bound by a confidentiality agreement with Ford, so we’re not able to give any really further detail of this agreement.
Moving on to our statements of income. Gross margin for the first quarter of 2009 was 45% and fairly close to the 45.4% in the first quarter of 2008.
Our self-service facilities were primarily responsible for the small decline in 2009. Our facility and warehouse expense for the quarter increased 13.8% or $6.2 million, as compared to Q1 2008.
Facility and warehouse expense as a percentage of revenue for the quarter was 9.8% versus 9% in Q1 2008. The percentage deterioration in the quarter was related to our self-service operations, as they run at a higher percentage of revenue for these types of costs.
And in particular, it was all primarily due to our acquisition of Pick-Your-Part on August 25, 2008. Distribution expenses for Q1 2009 declined by $227,000 from Q1 2008, as a percentage of revenue distribution costs decreased to 8.6% in Q1 2009 from 9.1% in Q1 2008.
Selling, general and administrative expenses grew $3 million, or 4.7% over Q1 2008 and this growth was entirely related to business acquisitions. SG&A as a percentage of revenue was 13% in Q1 2009, which was comparable to Q1 2008.
During the quarter, we had restructuring expenses of $803,000 as part of our operating expenses, all of which are related to the Keystone acquisition. Over 50% of this was related to severance of Keystone personnel with the balance primarily related to consolidating three aftermarket operations and closing out three bumper remanufacturing locations.
Our operating income was fairly comparable to the prior year with $61.4 million in Q1 2009, compared to $61.5 million in Q1 2008, despite a significant drop in operating income related to our self-service facilities. In Q1 2009, our self-service facilities did generate operating income, which was certainly a turnaround from the operating loss of $11.8 million in the fourth quarter of 2008, but significantly lower than the profit level in Q1 2008.
Historically, the self-service facilities have operated at a higher operating margin than our other facilities. In Q1 2009, total revenue for our self-service operations was $45.1 million, or 8.7% of LKQ’s total revenue.
Approximately, 48% of this revenue was included in recycled and related products and services, reflecting part related sales and 52% was included in other revenue, comprising core and scrap sales. Revenue for the first quarter of 2008 was $40.9 million or 8.3% of total revenue, approximately 30% of this was included in recycled and related product and services, reflecting part related sales, and 70% was included in other revenue.
And remember that the Pick-Your-Part business or PYP as we call it was not owned by LKQ in Q1 of 2008. We generated the following statistics when comparing Q1 2009 to Q1 2008 for our self-service businesses, excluding the PYP business that we acquired in late August 2008.
Self-service cars procured in Q1 2009 on average cost 19% less than those procured in Q1 2008. Average scrap prices received per ton dropped 44% from that received in Q1 2008.
We procured 20% fewer self-service cars in Q1 2009, compared to Q1 2008. PYP would have had similar type trends, but we do not own them in Q1 2008.
Our acquisition of PYP increased the size of our self-service operations. Today PYP now represents close to 42% of our self-service operations and accordingly they magnify the negative impact of the trends.
Well, our volumes are still not where they need to be, we are moving in the right direction. We very much like the self-service business, historically it has performed well and we expect that the returns in more normal trends later in the year.
We had net interest expense in Q1 2009 of $7.6 million as compared to $10.3 million in Q1 2008. This decrease is primarily a result of lower interest rates.
The Q1 2009 pre-tax income increased 4.6% to $53.8 million from $51.5 million in Q1 2008. Our effective tax rate was 40% for the first quarter of 2009 and 2008.
Net income for the quarter increased 4.6% to $32.3 million from $30.9 million in Q1 2008. Our diluted earnings per share increased to $0.23 for Q1 2009 from $0.22 in Q1 2008 despite the lower operating income of our self-service operations.
Our diluted weighted common shares outstanding used for calculating EPS were as follows: Q1 2009 at a $142.8 million shares versus Q1 2008 at a $139.7 million. Shifting our focus to the cash flow table, we generated $39.5 million in cash from operations in Q1 2009.
We grow our inventory in Q1 by close to $25 million with this growth being related to aftermarket and refurbished product. This growth is attributable to inventory levels we feel we need in order to take advantage of pressure on the insurance carriers to use more alternative parts, along with the increased usage we expect to see from fleet and rental car companies.
Capital expenditures for the first quarter, excluding business acquisitions were $6.9 million. Cash used to acquire businesses for the quarter was $15.8 million.
Taking a look at the balance sheet as of March 31, 2009, you will see we had debt of $638.6 million that included $634.5 million under our secured credit facility. Cash and equivalents were $92.8 million at the end of March 2009.
As of April 28, we had approximately $74 million in cash and equivalents. As many of you know, we have a revolving credit facility of $115 million provided under our secured credit facility.
Today, we have borrowed $7.9 million under this line and they are approximately $25.3 million of letters of credit that are backstopped by this line, reducing the availability for future borrowings to approximately $81.8 million. As we previously reported in an 8-K filing with the SEC, Lehman Commercial Paper Inc., which accounts for $15 million of the revolver funding commitment, filed for Chapter 11 bankruptcy protection in 2008.
Accordingly, we no longer believe this $15 million commitment is available. So in effect, our availability has been reduced to $66.8 million.
However, we do not feel this $15 million is significant to our liquidity needs. Let’s move into our 2009 financial guidance.
As Joe indicated earlier, in light of the current economic environment and its impact on collision repair trends, we anticipate our annual organic revenue growth for 2009, excluding the other revenue category that we show in our financial tables, to grow at a rate of 6% to 8%. LKQ anticipates full year 2009 net income will be in the range of $114.5 million to $123.5 million and earnings per share will be in the range of $0.80 to $0.86.
We delivered very good first quarter results and normal historical trends show this is usually our strongest quarter in the year. Consistent with our experience in prior years in this industry and consistent with the revenue trend that we have witnessed so far in April compared to the Q1 levels, we believe that second quarter of 2009 would show lower net income and diluted earnings per share than what we reported to the first quarter of 2009.
Net cash provided by operating activities for 2009 is projected to be approximately $145 million. The company estimates 2009 capital expenditures related to property and equipment, excluding expenditures of acquiring businesses will be between $75 million to $80 million.
Maintenance or replacement capital expenditures, which are included in this are expected to be under $15 million. Weighted average diluted shares outstanding are anticipated to be within in a range of approximately $143 million to $144 million for 2009.
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 stock price. I’d like to turn back to Joe for some closing comments.
Joseph M. Holsten
Okay. Thanks, Mark.
Before we go to questions, I’d like to make just a few more comments and share our outlook for the businesses and the industries in which they operate. In particular, as to focus on the strength of our business model, while we remain at a macro level in a period of economic uncertainty, our business, the sale and distribution of alternative collision and mechanical parts for both cars and light and heavy-duty trucks.
We believe demonstrated during the quarter, its ability to resist recessionary trends in several ways. First, insurance carriers are looking to expand their riding of alternative parts as a way to contain increasing costs.
With little ability to increase premium rates to offset increasing vehicle repair costs and the impact of lower investment income, the insurance carriers are looking at all options to continue to lower cost. They continue to seek more alternative parts usage in order to lower repair costs and improve cycle time both critical to their performance.
Further, they are concerned about the potential interruption of parts deliveries from OEM as a result of dealership closings, potential bankruptcies and instances about the stock inventory. Second, we believe our ever expanding product offerings, such as, value line aftermarket products and paint and body supplies along with our rolling revenue to all such as key lists and other connectivity and coordination between our recycled sales team and the aftermarket sales team will expand our revenue growth opportunity.
Third, despite some increases in new used car pricing. We still see a good supply of reasonably priced parts cars to purchase of the salvage pools and that is reflected in the prices, we are actually paying for these parts cars.
And fourth, while mainly consumers appear to be choosing to repair only the necessary parts to make our cars roadworthy, I do believe that there are repairs that are being deferred and will ultimately be completed to fix the cosmetic sections of these damaged cars. And finally, our balance sheet remains strong and provides us with the flexibility to grow our operations.
Our leverage is less than 2.8 times EBITDA. We have liquidity at the quarter end in excess of $150 million.
Maintenance capital spending is roughly only $15 million per year, and we have sufficient cash flow to fund our organic growth. While the current economic environment is posing challenges for many, we are very well capitalized to take advantage of the opportunities that we believe are likely to come on the horizon, over the next several years.
And with that, Ryan, I think we would like to open for questions.
Question-and-Answer-Section
Operator
Thank you. (Operator Instructions).
Our first question comes from the line of Tony Cristello with BB&T.
Anthony Cristello – BB&T Capital Markets
Thanks. Good morning, gentlemen.
Joseph M. Holsten
Hi, good morning, Tony.
Mark T. Spears
Good morning.
Anthony Cristello – BB&T Capital Markets
First question I had was, when you look at what’s going on in the aftermarket side of the business, and you went from sort of a down almost negative to in the fourth quarter and it looks like organic growth almost is up 2.4% this quarter, so a nice sequential improvement there. And I’m assuming this.
One, this was the toughest comparison year-over-year. Joe, can you sort of give us some color on, was this a sequential acceleration as the quarter progressed.
Did you start-off at a level of aftermarket business and that was sort of at this run rate and maintained and, as we moved forward and you sort of anniversary some easing comparisons as the year progresses and then along with, and then I guess what you talked about your, going to a single screen for recycled and aftermarket. Should we expect continued positive growth in the aftermarket in spite along the macro backdrop?
Joseph M. Holsten
Maybe just I, looking maybe what’s happened in the industry in the quarter. I’d say, we started out the quarter fairly strong and January was, and early February was stronger than the back half of the quarter.
I would say that we probably had some weather assist, especially in some of the great legs, traditional rustbelt, New England market. Coming on a more macro level, one thing I would point out, I think it help the business and the industry overall is the fact that the latest data that have come out of both estimating companies Mitchell and CCC, both of those put out reports within the last thirty days that would suggest alternative part usage gained another point to two points of market share on the collision crash parts.
So, in terms of going into the balance of the year, obviously, we’ve put out same-store sales growth guidance of 6% to 8%. We’re a little short of that for the first quarter.
So I think somewhat implied in those numbers would be a belief that as we get into the second half of the year and as you pointed out maybe the comparisons get slightly easier on our aftermarket parts, that we might see a little more acceleration from the first quarter.
Anthony Cristello – BB&T Capital Markets
Has April in general been as good as the last quarter or maybe a little bit better, given what you just commented about Mitchell and CCC and some of the other trends that might be going on?
Joseph M. Holsten
No. April has been one of our tougher months.
And starting 2009, no different than as kind of prior years, the April revenues are off from both March and Q1 levels. And like I have said, that’s something we’ve seen pretty much every year we have been in the business and then we get kind of a steadying effect and the low acceleration later in the quarter.
Anthony Cristello – BB&T Capital Markets
When you made the comments about, in some locations going to the view or the screen view of recycled and aftermarket parts on the same screen. What percentage would you say of your locations now have that ability and is there a delta or a noticeable difference between those that have been converted versus non-converted in what you are seeing from a sales perspective?
Joseph M. Holsten
Well, 100% of the LKQ operations would now have that capability. I think, the issue is really more of a continued training and familiarity with the systems, because of the fluidness of moving between screens and invoicing.
Sales people will take the path of least resistance unfortunately. I think we’ve got pretty good metrics in place now that we can identify the sales people who are not effective in converting sales opportunities and to aftermarket part sales.
And it’s just kind of that tedious part of management of identifying people who aren’t performing, counseling, coaching, training and ultimately making termination decisions for people who can’t get with the program.
Anthony Cristello – BB&T Capital Markets
Okay, great. All right, thanks, guys.
I’ll let someone else take it.
Joseph M. Holsten
Okay, Tony. Thanks.
Sarah Lewensohn
Tony.
Operator
Our next question comes from the line of Sam Darkatsh with Raymond James Financial.
Jeffrey Saut – Raymond James
Thank you. This is actually Jeff calling in for Sam.
Good morning.
Joseph M. Holsten
Hi, Jeff.
Jeffrey Saut – Raymond James
My first question, well, first of all, can you remind us at what point last year did you really start to see improvements in fill rates on the recycled side?
Joseph M. Holsten
I would say the improvements on our fill rates on the recycled side were very gradual throughout the year. And I think I had indicated on our last call that if we just looked at kind of the typical LKQ recycled plant as we got to end of the year, seeing not in stocks down at the 30% level was getting to be pretty normal.
Jeffrey Saut – Raymond James
And prior to last year, what was normal, maybe 40%?
Joseph M. Holsten
No, no. We were in the 30s for sure, but probably more in a 30%, 33% to 35% range.
Jeffrey Saut – Raymond James
Okay. The data we’ve gotten from Adesa has made it look like used vehicle prices were significantly higher in Q1 sequentially, but it sounds from what you’ve given us like you did a good job, actually buying cheaper in Q1?
Can you talk a little bit about what you think allowed you to do that and what the trends are going forward?
Joseph M. Holsten
Yeah. The number, we mentioned the 14% out of a quarter one 2008 to quarter one 2009 comparison.
So, we should keep that in mind as a starting point. And I would say that the majority of that reduction, quite frankly, is just a pass-through of the reduction in scrap metal prices.
I can’t sit here and tell you that our gross margins have improved dramatically in the recycled side of the business. So I think this is more a reflection of the scrap metals market than anything else.
We’re quite happy with our buying discipline as evidenced in the improvement in the not in stocks and certainly with the ability, I think, of our buyers and scouts to continue to bring down what we are paying for vehicles. Yet, maintain our revenues and maintain our gross margins.
Jeffrey Saut – Raymond James
Are you comfortable that you can keep those fill rates up in the mid to high 30s or do you think we’ll see a reversal to kind of historical levels?
Joseph M. Holsten
No, I think the not in stocks. I cannot see any reason we should not be able to maintain the levels we’re at right now.
Jeffrey Saut – Raymond James
Okay. Next question, I just had one question on the Ford settlement.
Is there any material legal expense that goes away, given the settlement?
Joseph M. Holsten
Well, what goes away is certainly the uncertainty of exactly what those legal costs might have been had we continued with the trial and the appeals, which certainly would have followed on both the F-150 and the Mustang cases. I think it was clear that there was at least one court case and one to two additional appeals that we would have been financing and expensing over the next couple of years.
I think that, in addition to curbing legal expenses and eliminating kind of the uncertainty of the outcome of litigation. There are kind of intangible benefits that come with the settlement.
We believe that CAPA should begin the process of re-certifying the parts that have patents. CAPA has been decertifying parts when they became aware of it.
There was a patent on a part. So over time, that’s going to increase the number of parts that we and our industry will be able to sell.
Another intangible, I think, is that the manufacturers will regain confidence in the United States as a good market. They had grown concern about the litigation on patents; one of the manufacturers actually had two attorneys on staff.
And all they did was review parts part-by-part to form a decision as to whether or not they should manufacture those parts. We are hopeful that this is a good step in the right direction toward forging a healthier working relationship with Ford.
We have we think strong working relationships with a number of OE’s, and we would hope that this positions us to improve our working relationship with Ford. And finally, there are those insurance carriers who do not use aftermarket parts or have restrictions on the aftermarket parts that they use.
And although speculative on our behalf, we believe that this settlement of the suite should remove at least one of what could be several barriers, but it certainly removes one of the barriers of insurance carriers using more aftermarket products.
Jeffrey Saut – Raymond James
Okay. And just one more question from me in sticking with the aftermarket parts.
Now that we are a couple of quarters into the big drop in commodity prices, have you started to see any benefit from lower procurement cost of aftermarket parts, especially, given lower freight and tool costs.
Joseph M. Holsten
Yeah. I would say that those came into our pricing negotiations right around the year-end, maybe early into the first quarter.
So, certainly those benefits would be embedded in the product that’s been moving into inventory during the first quarter. The steel cost change was really pretty nominal, because most of the manufacturers had been absorbing the run up in steel prices in 2008, the majority of them eight, I’d say a significant amount of that run up were they had purchase contracts in place that protected them against the increases.
And then certainly there has been a reduction in the cost for the shipping lines. I’d say, probably more of a Q4 event than 2009 event.
Mark T. Spears
Yes. And obviously, nothing happened in the last 60 days.
So that would be placed in our guidance as that comes through, anything we negotiated.
Jeffrey Saut – Raymond James
Okay. Thank you.
Operator
Our next question comes from the line of Craig Kennison with Robert W. Baird.
Craig Kennison – Robert W. Baird
Good morning, everybody.
Mark T. Spears
Good morning.
Joseph M. Holsten
Hey, good morning Craig.
Craig Kennison – Robert W. Baird
Congratulations on a really nice quarter on several fronts. I want to just follow-up on the Ford issue with respect to State Farm.
We asked this question a lot, but any progress with respect to State Farm?
Joseph M. Holsten
No, I’ll just say, Craig, we’ve mapped during the quarter, either map personally or a number of phone discussions with the majority of the leading insurance carriers, meaning anyone with a market share of 4% or 5% or better. And the focus from them, quite frankly was not so much on the Ford settlement.
They were all pleased to see that, that had been accomplished, but far more focused on their behalf on concerns about supply disruptions and what sort of safety stock we had in place? How long it took us to gear up?
And how long it would take for the manufacturers to gear up if there were a marked improvement from one of the major carriers who has restrictions on an aftermarket part utilization to relax those and that could come in any form, obviously State Farms is the one that seems most apparent to all of us, but there are other carriers who use only CAPA parts today. And there are possibilities that those carriers would consider removing our CAPA only restriction, should there be material disruptions in the supply chain.
Craig Kennison – Robert W. Baird
Do you see a need to commit additional working capital to inventory in preparation for that?
Joseph M. Holsten
Actually, we carried a stronger inventory in the first quarter than would have been normal preparing for, I’ll say the possibility.
Craig Kennison – Robert W. Baird
Thank you. And then you’ve had some success on the value price non-CAPA certified aftermarket parts.
Can you just discuss how that has progressed?
Joseph M. Holsten
Well, we’ve been very happy with this. That’s probably about $40 million product line for us at the moment.
You’ll have to see what the seasonality is as the part sales really have a better triangulation on what that figure is, but certainly it’s a product line that gets us back in, I think in sales mode with some of the rebuilders they would be kind of one of the larger clients and, maybe one of the difference between LKQ’s action, operations and the Keystone operations. If you’d go back a couple of years, Keystone has really focused on the A accounts, they were not that focus on what we would call the C&D accounts the kind of the incidental short purchase and action was a little bit more focused on that group.
And certainly, I think the value line product gives us an entry to those C&D shops.
Craig Kennison – Robert W. Baird
Thank you. And then with respect to the acquisition pipeline, could you just discuss what’s available today whether prices have comedown meaningfully.
And what your capital needs would be if you wanted to pursue those?
Joseph M. Holsten
We are increasing our activity level in the acquisition front as we speak. Coming off the heels of $800 million Keystone integration, we thought it prudent to see somewhat on the sidelines and with some of the gyrations in the scrap market over the last three to four quarters was probably not a great market to be buying businesses anyway.
I’ll say, reengaging at a higher level. Our focus will be on acquisitions and the late-model salvage business.
Probably, we like to see a couple of more heavy-duty truck deals come our way during the balance of the year. And our focus will be on new geographical market entries.
We will continue with probably a couple of additional Greenfield developments over the next 12 months. We will be targeting lower multiples, I think, a year, year and a half ago we were probably talking about multiples that range from five times EBITDA to seven times EBITDA.
Certainly, we’d like to bring those down a couple points and that remains to be seeing whether the market will be accommodating offers at those levels, but we think, there is not a lot of buyers out there. So it will be our intent to negotiate parts and I think the company is well positioned.
We, essentially with the direction of our Board, we’ve come to this time with a view of keeping our powder dry, and anticipating the possibility that there could be opportunities that we really didn’t think of. So we’re looking forward to the next few quarters to get back in deeper discussions with people.
Operator
Our next question comes from the line of Tom Hayes with Piper Jaffray & Co.
Tom Hayes – Piper Jaffray & Co.
Great, thank you. Joe, I was wondering if you could just provide some commentary regarding the heavy-duty truck acquisitions kind of versus your expectations.
And then I guess just kind of a second one on that line of thought is, when do you think that that segment will become significant enough to provide some separate breakout as far as revenue numbers?
Joseph M. Holsten
I’ll let Mark answer the back half of that question. The impact on the economy, on the heavy-duty truck has probably been a little tougher than I would have expected and part of that, I think, is probably coming with the strength of the dollar, compared to our entry point into heavy-duty truck.
So the total revenues of the acquired businesses, probably a little short, not significantly short, but a little short of what our pro forma modeling would have been at the outset. I think we make up for that over time.
I don’t see any kind of flaws in our strategic logic for moving into the business. I’ve done probably, mostly, the ability to sustain the gross margins that we had expected, and I think a lot of that’s coming out of the fact that the acquisition market, but the salvage acquisition market has been pretty good.
The number of fleet operators, due to the soft economy, who were making decisions to take trucks out of service, has done a pretty surprising level. I’m very convinced that our models provide a national secure disposal service is going to be very attractive to large fleet operators.
And as I commented in my canned remarks upfront, we just saw our second national deal come on board during the first quarter to capture a significant volume of a national fleet operator. Our network’s not that complete, we’ve got a nice strength through the central corridor of the United States.
So our next focus will be something on the right, and the left coast and that will make a significant impact in our ability to reduce freight costs, where we are successful in getting national secure salvage disposal deals.
Tom Hayes – Piper Jaffray & Co.
Okay.
Joseph M. Holsten
Mark.
Mark T. Spears
You were asking what percentage of our revenue was heavy-trucks and how long before it gets significant. I mean, we are a $2 billion company and we kind of talked about the deals we’ve done.
Obviously, it’s still a pretty small insignificant percentage. It kind of probably depends as we continue to grow them.
I guess, what I’m saying, the next 24 months, it’s not going to be a major percentage of our $2 billion revenue, there’s just no way, the math just doesn’t work.
Tom Hayes – Piper Jaffray & Co.
All right. And then just one quick follow-up, Mark, I think you had mentioned that as far as April trends you expected, I think you said net income and EPS to be lower versus 1Q.
Does that imply that total revenue would below 1Q and is that total sales or organic sales?
Mark T. Spears
That would really be total. I mean, the thing that messes those trends up, if you go back historically as we do acquisitions.
Tom Hayes – Piper Jaffray & Co.
Right.
Mark T. Spears
But, and we’ve done some acquisitions as we mentioned this quarter, but they were kind of weighted in the first part of the quarter. So you’re not going to see a big up and down unless we do another deal in Q2.
I think Q2 is always seasonally down if you strip out acquisition effect. And so, yes, it would be the organic on a sequential basis now, we are not saying Q2 to Q2.
Tom Hayes – Piper Jaffray & Co.
Okay. Organic sequential is down a little bit?
Mark T. Spears
Sequentially it’s going to be a lower quarter, it always did is unless we go buy a big company in Q2 which we’ve done before. So it’s more of a sequential, is what we’re talking about here.
As Joe indicated, April is little slower than we would have liked, but it’s kind of hard, we only got three weeks done here out of a 13-week quarter.
Tom Hayes – Piper Jaffray & Co.
All right. Thank you.
Joseph M. Holsten
We’re coming up on 11:30. I think we can probably get one more call in.
And then to be respectful of your time, we’ll close it out.
Operator
Our next question comes from the line of Bill Armstrong with C.L. King & Associates.
William Armstrong – C.L. King & Associates
Thank you. I guess the first question, just a point of clarification.
The 14% reduction in the cost per car, is that, are we’re talking about just wholesale?
Joseph M. Holsten
Yes. Sure.
That’s just for the late model wholesale vehicles.
William Armstrong – C.L. King & Associates
Okay. March and April, I guess we’ve seen the miles driven through February.
I think you guys may get some data that maybe most other people don’t, that might be more recent. Have you seen anything after February for either March or April for total miles driven?
Joseph M. Holsten
No, February is the last data point we have anything official on.
Mark T. Spears
That comes out of the Department of Transportation.
Sarah Lewensohn
Yes. We see the same thing you do.
William Armstrong – C.L. King & Associates
Okay, okay. I thought maybe you had some other sources that that just from within.
Sarah Lewensohn
We haven’t found one yet.
William Armstrong – C.L. King & Associates
Okay. Could you discuss what kind of volumes you’re seeing these days at the auctions?
Joseph M. Holsten
During the quarter very healthy. The auctions we attended most weeks we were seeing 54 or 55,000 vehicles.
One of the trends we noticed during the quarter was the salvage pools were running the same vehicles through the auctions two, three, four or five times. We have a very standard rule that’s punishable by death if you violate it.
We don’t bump bid on vehicles that go through the auction the second time. If anything, we take our bids down.
But volumes were very strong in the quarter, the last couple of weeks, say, it eased up a little bit.
William Armstrong – C.L. King & Associates
Okay. And then, my last question has to do, getting back to the heavy-duty truck business.
You said fleet operators are taking a lot of trucks out of service. Are they cannibalizing these trucks for parts or are they just sending them straight to the auctions to dispose of them?
Joseph M. Holsten
Well, they’re really during an assortment of things. Yes there is cannibalization going on, in some cases, fairly significant.
So, most of these trucks, it’s kind of the industry whether they’re garbage trucks or cement trucks, you can probably always run one of those about one more year and that’s what a lot of companies are doing. They’ve extended their fleet life by one to two years.
We think that should bode well for demand for our used parts along the way. But there’s, cannibalization is going on, the interactions with companies like us for just kind of negotiated sales, I think are much higher than what we would have been seeing a year ago.
And I really don’t know that, I could make a comment on the auction, how it is on heavy-duty trucks? What their volumes have been?
Whether they are up or down?
William Armstrong – C.L. King & Associates
Okay. With the overall freight tonnage weigh down?
How does that play into your thinking about doing more acquisitions in this space?
Joseph M. Holsten
Well, I think we’re kind of a long-term players, I think our desire to have a national capability here remains unchanged. The space that you go into, any store you go into, almost anything you buy got there on a truck.
And it’s hard to imagine that changing in the next decade or a couple of decades. So we are committed for the short-term, freight tonnage is down or miles down, hopefully, that just helps us get into markets at a lower cost for the entry.
William Armstrong – C.L. King & Associates
Is your truck business focus mostly on your basic straight hauling tractors, the class A type trucks or some of the specialty vocational type trucks like garbage trucks and MAN Mixer and things like that?
Joseph M. Holsten
It’s really both. I would say right now we weighted a little heavier towards the more specialty type A truck.
William Armstrong – C.L. King & Associates
I see. Okay.
Thank you.
Joseph M. Holsten
All right. Thanks, Bill.
Sarah Lewensohn
Thanks, Bill.
Joseph M. Holsten
I’d like to call it a call. We’ve kept you a few minutes past and look forward to talking to you.
My guess is that we’ll probably start our next earnings call to be the last Thursday of July. So I will talk to you then.
Thanks for joining.
Sarah Lewensohn
Thank you.
Operator
Ladies and gentlemen, this concludes today’s teleconference. Thank you for your participation.