Jul 31, 2009
Executives
Sarah Lewensohn - Director, Investor Relations Joe Holsten - President and Chief Executive Officer Mark Spears - EVP and Chief Financial Officer Rob Wagman - VP of Operations, Wholesale Parts
Analysts
Tony Cristello - BB&T Capital Markets Sam Darkatsh - Raymond James & Associates Craig Kennison - Robert W. Baird Michael Cox - Piper Jaffray Scott Ciccarelli - RBC Capital Markets Nate Brochmann - William Blair & Company
Operator
Greetings and welcome to the LKQ Corporation Second Quarter 2009 Financial Results Conference Call. At this time, all participants are in a 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 is now my pleasure to introduce your host, Ms.
Sarah Lewensohn, Director of Investor Relations for LKQ Corporation. Thank you, Ms.
Lewensohn, you may begin.
Sarah Lewensohn
Thank you, Melissa. Good morning, everyone, and thank you for joining us today.
This morning, we released our second quarter 2009 financial results. With me today, from LKQ Corporation is; Joe Holsten, President and Chief Executive Officer; Mark Spears, EVP and Chief Financial Officer; and Rob Wagman, VP of Operations, Wholesale Parts.
In addition, to those that are listening by telephone, we’re providing an audiocast via the 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 potential risks.
And with that, I'm happy to turn the call over to Mr. Joe Holsten.
Joe Holsten
As Sarah said, in addition to Mark and myself on today's call, we also have Rob Wagman, our VP of Operations for Wholesale Parts. Both Mark and I have prepared remarks that we would like to share with you, and then afterwards, all three of us will be available to address your questions.
We delivered a good and solid second quarter. The quarter started out with a relatively weak April, revenue grew as the quarter progressed.
For the full quarter, we generated a net income of $29 million on revenue of $493 million. Excluding the other revenue category, LKQ reported revenue of $447 million, an 11.5% increase, as compared to the second quarter of 2008.
The organic growth rate, excluding the other revenue was 7.7%. Aftermarket and refurbished revenue was up 8.1% over the second quarter of 2008.
The organic aftermarket and refurbished revenue growth for the same period was 7.9%. Anticipating the potential for OEM replacement part shortages, we deliberately expanded our aftermarket inventory levels.
As a result, we were able to increase our sell through rate as compared to the first quarter, so it appears the strategy of higher inventories has paid off. Revenue from our recycled products and services business, both wholesale and retail combined, increased 16.6% over the prior year.
On a same-store basis, it was up 7.3%. The balance of the increase was attributable to acquisitions; the largest of which was the purchase of Pick-Your-Part.
Focusing on wholesale operations first, throughout much of the second quarter the availability of total lost vehicles was very good. We purchased just over 37,000 cars during the quarter, an increase of almost 15%, as compared to the second quarter of '08.
On a year-to-date basis, we acquired 10% more cars. The average cost per acquired car was down 16.5%, as compared to the first six months of 2008, reflecting significantly lower scrap values embedded into the actual prices paid.
Shipping to our self service retail and crush-only operations, during the quarter, we purchased 82,600 lower cost self service and crush-only cars, an increase of 11% over last year's second quarter purchases. Approximately 30,000 of the purchased cars were through Pick-Your-Part such that, in fact, same store volume was actually down quarter-on-quarter.
We are still working to achieve higher car volume, while also improving our gross margins. While the spreads between the average cost per self serviced car and the associated proceeds from the scrap narrowed slightly, it remains wider than we believe is sustainable in the long run.
The self service operations did do a good job of selling deeper into the car before crushing the vehicle for scrap, and were able to maintain on a same store basis, flat part sales revenue during the quarter over the same period in 2008 despite the decline in car buying. Miles driven for April and May were flat to slightly up, probably due to relatively stable fuel costs, yet we believe collision claims continue to be down for the quarter, even with flat miles driven.
We were able to confirm this with one of the larger carriers who indicated that claims were down 3.5% for the quarter, as compared to the same period a year ago, although we have also seen a report suggesting that claims experienced leveled-off in the month of June. The commodities market, including ferrous and non-ferrous metals and fuel were relatively flat throughout much of the quarter with modest increases occurring late in June.
Demand for scrap was primarily overseas, from overseas, and led to wide variations in crushed car body prices depending on the shredder's distance to a Port City. With the start of the third quarter, there appears to be some upward movement in demand and pricing for metals.
I'm not certain how sustainable the demand will be. Interestingly, scrap prices have still not recovered to even early 2007 levels.
The autos industry went through significant changes during the quarter. GM and Chrysler both filed for bankruptcy protection, emerging as new companies in the same quarter.
Chrysler began shutting down dealerships, and GM began the process of notifying dealers whose dealerships would be extended. The challenges for the auto industry continue, while the OEMs and the Tier 1 suppliers have for the most part been able to obtain financing.
The Tier 2 and Tier 3 suppliers, however, have not benefited from government support. There is a concern that these suppliers, many of whom are private, so they do not file public financial statements, may have liquidity issues as production as the 2010 model year begins.
The last twelve months have been very lean for them, so they may not have much in the way of cash reserve. For the insurance industry, we’re continuing to meet with insurance companies to take about ways that LKQ can support their business objectives, help manage cost, and address the potential for parts shortages, which could lead to longer repair times and higher claims costs.
Most insurance carriers do write aftermarket parts to various degrees, but as we mentioned on our last call; a number are looking at ways that they can increase their usage rates. One of our solutions to this is a program we call, Assured Quality Replacement Parts or AQRP; that provides quality assurances for a much larger universe of parts than those certified under other programs.
Using AQRP has helped one of the top ten carriers reach an alternative part usage rate of 45%, the highest we are aware of in the industry. Over the last 90 days, we have made significant progress with a couple other top 10 carriers, and are hopeful that they will sign up with our AQRP program before the end of this year.
Keyless, our proprietary electronic lookup and ordering program, is increasing sales of our aftermarket parts. Under its use, we have found accuracies improve and the need for supplements is nearly eliminated.
It is moving out of the pilot stage with a major insurer, and it will be installed in all of their DRP locations, and on the computer systems of their staff adjusters. We are also seeing continued growth and usage by two rental car companies, both of whom also use Keyless.
We announced a couple of key changes into our organization during the quarter. First, Rob Wagman was appointed the Vice President of Operations, Wholesale Parts Division.
In this newly created role, Rob was oversight of our late model recycled parts operations, our aftermarket business, and our refurbished bumper cover and wheel operations. Rob has been with LKQ since its creation, coming aboard with the acquisition of Triplett in 1998.
Over the past 18 months, Rob worked diligently with me to integrate Keystone into LKQ's operations, and took on the role of Vice President of Aftermarket Operations. I believe that the next step, major step forward for LKQ will be marked by a change in the aggressiveness of the alternative parts usage programs of a number of insurance carriers.
Rob will lead the operations through the next phase of our evolution and growth as he brings forth a unique combination of systems marketing and operational knowledge that will be needed to take advantage of the changes that, I believe, are in the making. We also announced that Mark Spears has decided to resign at the end of this year for personal reasons, a request I accepted with great reluctance.
In his role as CFO, Mark led the development and implementation of the essential financial and accounting components for LKQ including our control and financial reporting systems, and helped to build a strong field financial management organization that we have in place today. Mark's successor will find a financial organization that is in excellent condition.
Mark will continue in his role until we have identified his successor, and then will remain involved in a more limited role as a consultant to LKQ. I believe we are well on the way to find a successor, and expect to have such person selected and onboard before our next earnings call.
With Rob in his new role and Mark's targeted departure, I will be committing more of my time in Investor Relations activities until we have a new CFO in place and firmly grounded in the fundamentals of our business, as well as LKQ's growth and development activities, particularly in heavy-duty trucks. In July, we acquired a small, but strategically located heavy-duty truck parts recycling business in Maryland, bringing the total number of truck facilities to six.
While this business had only $2 million of historical annual revenue, it provides a presence in the Mid-Atlantic region of the United States near a major Port City. The heavy-duty recycled truck parts market provides a logical growth opportunity for LKQ.
For an industry with lots of owner operators, the use of recycled truck parts, estimated at $1.5 billion annually offers a strong value proposition to cost conscious customers. We are also focused on providing secure disposal services for large, national fleet operators and have contracts with two sizable fleet operators.
Lastly, many of you have asked what the anticipated impact of the cars or cash for clunkers program will be. Since the final rules were issued just this past Friday, we have been fielding inquiries, and have begun to take delivery of trade-ins under the program.
From the number of inquiries we have received thus far, for the period, the program may actually reach its targeted trade-in of about 250,000 vehicles well within the three months allotted for the program. Our self service and full service vehicle recycling locations are working with participating auto dealers to comply with the requirements of the CARS Act and to secure salvage for our business operations.
At this point, I would like to ask Mark to walk through the financial results in more detail for the quarter.
Mark Spears
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 second-quarter revenue was up 1.7% to $498.2 million, from $484.4 million in Q2 2008.
For the first six months of 2009, revenue grew 3.5% to $1 billion, compared to $976.3 million in the first half of 2008. For the second quarter, organic revenue declined 3.3%, and was primarily related to the effect on our other revenue category caused by the low level of 2009 commodity prices, compared to the same period in 2008, and lower volumes of self service and crush-only vehicles.
However, excluding this other revenue category in our income statement, organic revenue growth was 7.7% for the quarter. For the first six months of 2009, organic revenue declined 1.9%.
However, excluding the other revenue category in our income statement, organic revenue growth was 6.3%. Gross margin for the second quarter of 2009 was 45.4%, which was consistent with the same period in 2008.
On a six month year-to-date basis the gross margin for 2009 was 45.2%, compared to 45.4% for the same period in 2008. Our facility and warehouse expense for the quarter increased 12.8%, or $5.6 million as compared to 2008.
Facility and warehouse expense as a percentage of revenue for the quarter was 10% versus 9% in 2008. On a six month basis, facility and warehouse expense grew $11.8 million or 13.3% over 2008, and as a percentage of revenue it was 9.9%, compared to 9% in 2008.
The percentage deterioration for these expenses in the quarter and for the six months was related to our self service operations as they run at a higher percentage of revenue for these type of costs. In particular, it was primarily due to our acquisition of Pick-Your-Part on August 25, 2008.
Distribution expenses for the quarter declined by $2.4 million from Q2 2008. As a percentage of revenue, distribution costs decreased to 8.7% in the quarter from 9.4% in the second quarter of 2008.
On a six month basis, distribution expense declined by $2.6 million, or 2.9% from 2008, and as a percentage of revenue it was 8.7%, compared to 9.2% in 2008. The improvement in percentages of revenue is primarily related to lower fuel pricing in 2009.
Selling, general, and administrative expenses grew $5.3 million or 8.6% over the second quarter of 2008. As a percentage of revenue, it was 13.6% in 2009, compared to 12.7% in 2008.
Expense growth here was primarily related to business acquisitions. On a six month basis, SG&A expense grew by $8.3 million or 6.6% from 2008, and as a percentage of revenue it was 13.3%, compared to 12.9% in 2008.
Again, most of this expense growth was related to business acquisitions. During the quarter, we had restructuring expenses of $255,000 as part of operating expenses, all of which are related to the Keystone acquisition.
This is primarily related to our consolidation of warehouses in the Northeast, and is the expected to be the last of our restructuring expenses related to the Keystone acquisition. Our operating income was $55.4 million in the quarter, compared to $58.4 million in 2008.
On a six month basis, operating income was $116.8 million in 2009, compared to $119.9 million in 2008. The 2009 operating income decline was primarily attributable to our self service facilities caused by the large commodity price declines in 2009 and lower volumes of self service and crush-only vehicles.
In Q2 2009, our self service facilities did generate operating income at slightly over the level achieved in Q1 2009, but significantly lower than the profit level in Q2 2008. Historically, the self service facilities have operated at higher operating margins than our other facilities.
However, with the low commodity prices we have seen in 2009 and the lower car volumes, their operating margins have been below that of our other facilities. In Q2 2009, total revenue for our self service operations was $41.2 million or 8.4% of LKQ’s total revenue.
Approximately 50% of this revenue was included in recycled and related products and services, reflecting part-related sales, and 50% was included in other revenue, comprising core and scrap sales. Back in Q2 2008, our self service operation had revenue of $50.8 million.
Approximately 26% of this was included in recycled and related products and services, reflecting part-related sales, and 74% was included in other revenue, and remember that the Pick-Your-Part business, or PYP, was not owned by LKQ in the second quarter of 2008. We generated the following statistics when comparing Q2 2009 to Q2 2008 for our self service business, excluding the PYP business we acquired late in August 2008.
Self service cars procured in the second quarter of 2009 on average cost 37% less than those procured in Q2 2008. Average scrap prices received per ton dropped 58% from that received in Q2 2008.
We procured 25% fewer self service cars in Q2 2009 compared to Q2 2008. PYP would have had similar-type trends, but we did not own them in the second quarter of 2008.
Our acquisition of PYP increased the size of our self service operations. For 2009, PYP now represents close to 41% of our self service operations and accordingly, they magnified the negative impact of the trends.
We very much like the self service business. Historically, it has performed well and we expect it to return to more normal trends later in the year.
Looking further down the income statement, we showed net interest expense in Q2 2009 of $7.7 million as compared to $8.4 million in the second quarter of 2008. This decrease is primarily the result of lower interest rates.
The 2009 pre-tax income was $47.8 million for the quarter, compared to $50.5 million for the same quarter in 2008. The six month pre-tax income was $101.6 million in 2009, compared to $101.9 million in 2008.
Our effective tax rate was 39.8% for the first six months of 2009, and 39.3% for the first six months of 2008. The 2009 net income was $28.9 million for the quarter, compared to $31 million for the same quarter in 2008.
The six month net income was $61.2 million in 2009, compared to $61.9 million in 2008. Our diluted earnings per share was $0.20 for the quarter, compared to $0.22 in the same period of 2008.
For the six months of 2009, our EPS was $0.43, compared to $0.44 in 2008. Our diluted weighted common shares outstanding used for calculating EPS were as follows; Q2 2009 at 143.5 million shares versus Q2 2008 at 140.3 million.
For the first six months of 2009, we were at 143.3 million shares versus 140 million in 2008. Shifting our focus to the cash flow table, we generated $87 million in cash from operations in the first six months of 2009.
We grew our inventory in the first six months by close to $17 million, with this growth being related to aftermarket and refurbished products. 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 six months, excluding business acquisitions, were $18.6 million. Cash used to acquire businesses for the first six months was $16 million.
During the first six months we issued approximately 654,000 shares of stock related to the exercise of stock options that resulted in $5.4 million in cash, which includes related tax benefits. Take a look at our balance sheet as of June 30.
You will see we have debt of $636.6 million that included $632.7 million under our secured credit facility. Cash and equivalents were $129.5 million at the end of June.
As of the close of business on July 28, we had approximately $122 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 $8.2 million of borrowing under this line, and there are approximately $26.5 million of letters of credit that are backstopped by this facility, reducing the availability for future borrowings to approximately $80.3 million. As we previously reported in an 8-K filing with the SEC, Lehman Commercial Paper Inc., which accounts for $15 million of revolver funding commitment filed for Chapter 11, in 2008.
Accordingly, we no longer believe this $15 million commitment is available, [so and in fact] our availability has been reduced to $65 million. However, we do not feel this $15 million is significant to our liquidity needs.
Let's move on to 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 on our financial tables, to grow at a rate of 6% to 8%.
LKQ anticipates full year 2009 net income, excluding the effect of restructuring charges, will be in the range of $116.5 million to $124 million, and earnings per share will be in the range of $0.81 to $0.86. We delivered very good first half results.
Consistent with our experience in prior years, we believe the third quarter in 2009 will show lower net income and lower earnings per share than we just reported for the second quarter of 2009. Historically, the third quarter is usually the lowest earnings quarter of the year, due to summer months having less rainfall and fewer commuters on the road due to vacation season.
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 the expenses of acquiring businesses, will be in between $71 million to $77 million.
Maintenance or replacement capital expenditures are expected to be under $15 million. Weighted average diluted shares outstanding are anticipated to be approximately $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 will now turn back to Joe for some closing comments.
Joe Holsten
Before we take your questions, I wanted to summarize our thoughts on the status of the business and the industry. I was pleased with the performance of our business this quarter, as the aftermarket and refurbished businesses realized good growth attributable in part to strong inventories, a cohesive selling structure, and I suspect some essences of out-of-stock OEM parts.
Secondly, the wholesale salvage operations also delivered good results. Wholesale salvage had good organic growth and maintained strong gross margins, aided by a good supply of total loss vehicles available at the auctions and effective cost management.
Third, the environment is improving for the self service operations. Our margins remain below long-term historical levels, they have improved since the start of the year.
With time, I believe the spread between car costs and scrap values will adjust, and volume will increase to a point where it can return to historic profit margins. Finally, we began LKQ with a belief that the market for alternative auto parts would become a larger and a more important source of collision parts.
The network and systems we have developed have made us the leading source for recycled and aftermarket collision parts. Having combined Keystone with LKQ we are operating as one integrated organization with deep aftermarket and recycled parts inventories, sophisticated systems, and a network of facilities that gives us a clear competitive advantage.
Insurance carriers, operating in an environment of increasing costs and concerns over parts availability issues are looking to grow their use of alternative parts as a way to manage these changes and LKQ is poised to benefit once they commit to this growth in their APU rate. Melissa, at this point we would like to open the lines for questions.
Questions-and-Answers
Operator
Thank you. We will now be conducting a question and answer session.
(Operator Instructions). Our first question is from the line of Tony Cristello with BB&T Capital Markets.
Please state your question.
Tony Cristello - BB&T Capital Markets
I guess the question, Joe, when you look at June and you look at September on a seasonal basis, they're typically weaker for the aftermarket business. This quarter, you did put up what would be a sort of implied near 8% organic growth on that side of the business, even though it sounds like industry claims are still running somewhat negative.
There's a disparity there, and is it simply LKQ, because of the scale gaining market share, or are there some other industry dynamics at work, or maybe you've got some color you can provide on sort of that disparity for us?
Joe Holsten
I think, maybe, a couple observations. The first would be that it might be said for the quarter overall that the accident rates may have been off a few percent.
The other trend we see that is going on within the industry is the increase in alternative part utilization. We generally like to see a couple of reports from the leading data providers, CCC and Mitchell, we like to see a couple of reports from them before we really claim that there's a kind of permanent change there, but the more recent reports we saw would suggest, there has been about a 200 basis point improvement or gain in alternative part utilization.
So, just getting our fair share of that is important. I guess, secondly, I would probably say that I suspect that we're getting a little bit more than our fair share, being a public company, operating against exclusively in the aftermarket world, against strictly private companies, our access to the capital markets is certainly and the strength of our balance sheet has allowed us to put on a broader and stronger inventory in place, we believe, to address potential out-of-stock positions.
The interesting thing about the quarter is that we saw aftermarket sales gains build throughout the quarter. And I think on our last call, we indicated April was not a very robust month, and we saw sales momentum gain throughout the quarter.
Our average daily sales in June were much stronger than what we saw in April. But, again, the momentum kind of built throughout the quarter.
Tony Cristello - BB&T Capital Markets
Maybe this is a question for Rob, but have you seen any change yet in the cycle times due to any part's supply disruption yet, or is that something that really won't come about until some time in the second half of this year?
Rob Wagman
Yes, I think until the dealer network starts dwindling down, which of course is on the plans of all the OEs, of eliminating some of the dealer networks, we really haven't seen any really major supply-chain destruction at this point. However, what we are hearing anecdotally, at least, is that some of the dealers are carrying less inventory, which would cause potentially a day delay in cycle time, but as far as availability, it seems to be pretty steady right now, but it likely to change when the dealerships start dwindling down.
Tony Cristello - BB&T Capital Markets
One other question as it relates to sort of the aftermarket side of the business, and Joe, you noted a more intensified approach, if you will, on, I think your Assured Parts program. Can you talk a little bit about what the program has done for you with the insurer that say that 45% of alternative parts versus an insurer who may be at 10% or 15% levels.
Is there a noticeable difference in your returns or your margins for that customer, and should you see a greater adoption by other insurers, what would that imply, then for your business?
Rob Wagman
Certainly, the availability of parts, as Joe stated, is greater than other certified programs, in our programs. So, just the availability of more product to be able to be used on their estimates certainly is having an impact on the greater alternative parts usage.
I can tell you that over the last quarter, we've had more conversations with insurance companies than we've had in a long time. I think, mainly because of the fear of the OEs, and what may happen there.
So there's a great interest level that is growing on their side to look at alternatives. As far as Joe mentioned, as well that we have two carriers that we are talking to at this point.
We are in contract negotiations with them, so we are getting a lot more interest, and I think we are in discussions with several others as well. So I think that everyone is getting the idea that there are more parts available in our program that will allow them to reach those higher levels of alternative parts.
Tony Cristello - BB&T Capital Markets
I guess, what I was trying to get at, though, is, does a customer that has 45% parts utilization, aside from just the volume benefit, is there a higher return or a higher margin to you because of that level of parts utilization? And then, if you then sign another one or two insurers who ultimately get to that level, what could that imply?
Joe Holsten
I think we can quantify that, but a common sense would dictate that the more market share you have with the DRPs and the shops, the more profitable those accounts are going to be. I personally think dealers keyless will probably also drive improvement in margins.
We're seeing our return rates on parts drop, where we have customers using the keyless proprietary system, and our returns dropped, and unfortunately that's a larger cost to the business than we would like to see.
Tony Cristello - BB&T Capital Markets
Just one final question for Mark. Mark, you talked about SG&A being up a little bit because of the acquisition at the end of the quarter, but it seemed like the SG&A margin as a percentage of sales at 13.6% was higher than I've seen it in some time.
Is there anything you can attribute to that and is that sort of on a SG&A basis, something we should look at following rate?
Mark Spears
Like I said, most of that is all due to acquisition. In fact, most of the acquisition number, quite frankly, is PYP.
Okay, it was a large company we bought in August. You'll start seeing more stability there as we move into the future quarters when we own PYP during the period.
The G&A in particular, and facility and warehouse expenses in particular, the self-serve businesses run at that higher level. Obviously, in distribution expenses, they don't have anything, because they don't deliver parts.
It was our acquisitions that caused that and in particular, PYP, we're down in revenue because the self-serve on top of that, so that's causing that percentage.
Operator
Our next question is from the line of Sam Darkatsh with Raymond James. Please state your question.
Sam Darkatsh - Raymond James & Associates
A couple questions here. First off, you raised your net income guidance slightly from the last guidance period.
Is that due to a slightly better-than-expected result versus your internal expectations in Q2, and specifically, where did you come in a little bit better than you thought, or where are you coming in better than you thought internally speaking?
Mark Spears
We have been coming in on the higher end of our range. As you know, we gave guidance for Q1, we didn't do it for Q2.
I mean, six months has already gone, and when we put guidance out, we were kind of like two months into the first quarter, as well, so that's why the bottom's in there. We still have a pretty decent spread there, I realize, but as you and everybody knows, Q3 is kind of the lowest quarter for both aftermarket and recycled.
And I think we'll be able to get tighter after we get through Q3, because year after year, Q3's always little different, and that's really why we raise the bottom end, because we got through two quarters here, and then we're hitting on the higher part.
Joe Holsten
If there was a mild upside surprise in the quarter, it would have been from the aftermarket parts business, more strength than we might have anticipated 90 days ago.
Sam Darkatsh - Raymond James & Associates
Second question would be, you mentioned your guidance for '09 is 6% to 8% organic sales, excluding other. What should we be pegging for overall sales expectations, all in?
Mark Spears
I'm not going to put out new revenue guidance. We have not ever put revenue guidance out.
We're just telling you what the part revenues are. I think you are asking what is the guidance for the other, which is scrap and commodities, and we don't feel like we can put that kind of guidance out.
Sam Darkatsh - Raymond James & Associates
Let me ask that question in another way, then. You mentioned that your commodity costs were down about 58%, if my notes hold, year-on-year.
Had they been flat or what was the impact of that on sales in the quarter? And then we can come up with our own expectations?
Mark Spears
What all I can say on that is, we said they are pretty similar to Q1. Keep in mind that other is not just impacted by price changes, but it's volume changes as well, and the volumes are down in that category as well, the car volumes.
Sam Darkatsh - Raymond James & Associates
Last question, I suppose, you mentioned the auction prices, down 16% year-on-year. What was that sequentially?
Are you seeing pressure sequentially on that, or not as-of-yet?
Joe Holsten
Sequentially, relatively flat. It was up maybe a couple points, Sam, but certainly we've been really pleased with the buying environment so far this year, and quite frankly, Cash for Clunkers may provide more of an opportunity than we had initially expected on the buying front as well.
Sam Darkatsh - Raymond James & Associates
Do you anticipate your purchase cars that were up 15% this quarter, do you anticipate that percentage holding the rest of the year, year-on-year?
Joe Holsten
I would think that will back off just a little bit.
Operator
Our next question is from the line of Craig Kennison, with Robert W. Baird.
Please state your question.
Craig Kennison - Robert W. Baird
Mark, I just wanted to let you know that I know you haven't left yet, but you certainly will be missed. Joe, question on OEM part pricing, any sense of any movement in prices on a year-over-year basis from the competitive OEM parts?
Joe Holsten
Yes, we do monitor that fairly carefully, as you know we price our parts in relationship. I think that a lot of our increases we've seen have been fairly modest, and generally, when we're seeing increases there are kind of marked down being taken elsewhere on the ledger, so to speak.
So, I can't say that we're enjoying any revenue growth right now, because of price increase activity.
Craig Kennison - Robert W. Baird
Following up on Cash for Clunkers, is there a margin profile or a difference in those vehicles given that there may be limitations in terms of the parts you're able to sell?
Joe Holsten
Yes, I'm glad you brought that up, because I've probably been pretty negative on the impact of the program, and while we're only about three or four days into it, I've been a lot more optimistic about what the program may mean for LKQ than I was a couple of weeks ago. First of all, I guess it's an observation that the dealers are moving fast on this.
I think that they've created through their TV advertising, almost a scarcity fear that the billion dollars is going to be gone by next Friday, so people need to get moving on this real quickly. So it is moving fast.
We probably in the first three days, I'm sure we've had contacts to make offers or bids on several thousand cars just in two or three days into the program. Kind of the ultimate legislation, or the act that came out, because there's only really one restriction on parts sales, and that's that the motor has to have a sodium-nitrate acid poured into it that renders the motor inoperable.
So that's really the only restriction on parts selling. There are pretty tight restrictions on certificates of destruction, which I think is a plus for us, as a company.
What we've seen so far in the cars, the quality is better than what I would have expected. The shot group I looked at before I came in for the call this morning ranged from pretty much a '94 to there's even a 2007 model year vehicle on the list.
I'm not sure why it was on there, but the average right now is probably a '97, '98 model year vehicle. So we're talking 10, 11-year-old cars with about 120,000 miles on them, but the surprise here is the quality of the cars and the quality of the sheet metal and the salvage is really pretty attractive.
The other thing we're finding was that a lot of the dealerships, they just want to get rid of these cars. They're not that I'm not saying all of them, but many of them are just focused on finding a quality service provider, because the fines are quite steep for not following the CARS Act rules.
Their focus is on finding a quality and reliable service provider who is going to do what they're supposed to do with the vehicles. It is early in the game, but I am very optimistic that this is going to provide some very attractive salvage into LKQ during the next couple of months.
Craig Kennison - Robert W. Baird
Would it be fair to say that your procurement cost and those vehicles is lower on average?
Joe Holsten
Significantly.
Craig Kennison - Robert W. Baird
With respect to the 20 million share shelf registration, what's the goal of that?
Mark Spears
To be honest with you, we've always had a shelf out there. One of them maybe three years it expires, so we just put it back out there.
Since '07 we've always had a shelf. So we just want to have the share counts out there if we find somebody to buy.
If we refresh the numbers, it's actually two of them, an S3 and an S4, and both of them were just refreshing the ones that we've had out there.
Craig Kennison - Robert W. Baird
Finally, Joe, I know you're still in growth mode on the recycled heavy-duty truck opportunity, but is there also an opportunity to layer in aftermarket parts in that category as well?
Joe Holsten
Yes, there is.
Craig Kennison - Robert W. Baird
Would you move on that right away or wait until you build out the recycled bits like you did on the automotive side?
Joe Holsten
I think your focus right now is to get a good-quality sales and production operation in place to develop kind of national capabilities in terms of linking our inventories, getting our heavy-duty truck inventory on a common platform. I think we're probably developing our own interchange, so I think that will be our focus, initially, before we would turn toward the aftermarket opportunities.
I've never say but, as you know, we've always been opportunistic of things that present themselves when you least expect it, but there isn't anything that we're actively investigating on our own.
Operator
Our next question is from the line of Michael Cox with Piper Jaffray. Please state your question.
Michael Cox - Piper Jaffray
My first question is on the Pick-Your-Part business and the SG&A run-rate of that business. Is there any effort being made to reduce that SG&A run-rate, or should we expect that to continue, and I think, initially there was some talk of converting some other yards to more of a wholesale business, any update on that?
Joe Holsten
Yes, I think most SG&A rationalization has probably been accomplished. There may be some modest additional amounts to accomplish.
In terms of yard conversions, we've been fortunate to increase our volumes and velocity of products through our kind of anchor wholesale yards in the state of California, such that at least for the moment we're pretty happy to keep the Pick-Your-Part yards where they are, and we've brought volumes up pretty significantly and, like I said, the anchor LKQ wholesale plant.
Michael Cox - Piper Jaffray
I'm understanding this correctly, we should expect the SG&A run-rate to remain relatively stable to what we've seen in the first couple of quarters, and then to see leverage, we would really need to see better margin performance out of the Pick-Your-Part or self-serve business overall?
Joe Holsten
Yes, I think that's fair, yes. Yes, the self-service business, the historical operating margins that I would expect are probably about three times what we would have posted up in the second quarter.
If we were to resume operating margins, I would say it would be more representative, throughout 2008 and 2009, of what we've seen kind of on a four or five-year basis. The contributions of the business would have been probably $0.02 to $0.03 per share higher just for the quarter than what we reported.
Michael Cox - Piper Jaffray
That's helpful. I was hoping you could talk a little bit about Canada.
This was a geographic area that you made a couple of acquisitions and we haven't heard a lot about that since you moved more into the heavy-duty truck, did Canada not pan out like you had hoped it would, or should we expect more activity there?
Joe Holsten
We expect more activity in Canada. We've plugged some holes over the last couple of quarters in terms of the Montreal market and Toronto, we're in pretty good shape.
We've had a facility about midway between Toronto and Windsor now. And we've moved into the Ottawa market, so in terms of what I would consider the breadbasket of Canada, we're in pretty good shape.
We're starting to take a look at some of the Central and Western markets. In the aftermarket operations, we're under-warehoused in our Canadian operations.
I believe we'll have that fully addressed and remedied before the snow flies, at least, that's the target to, quite frankly, we need more inventory and more capacity than what Keystone management was running the business with.
Michael Cox - Piper Jaffray
My last question is just more of a housekeeping. Mark, I was wondering if you could provide the dollar contribution to sales from acquisition in the quarter?
Mark Spears
I don't have that. We don't break that out.
How much revenue we generated in Q2 from acquisitions? Well, wait a minute, you've got organic revenue - you've got it for the part side of the business, organic revenue versus our total revenue.
So for the part side, yes, you've got that. I think we said, for the quarter, we were up 11.5%, revenue for the quarter, year-over-year on the part side of the business, and organic was 7.7, so that's your growth from acquisitions.
Michael Cox - Piper Jaffray
On the other category, it's just--
Mark Spears
I don't have that broken out.
Operator
Our next question from the line of Scott Ciccarelli with RBC Capital Markets. Please state your question.
Scott Ciccarelli - RBC Capital Markets
First question is, the salvage acquisition costs were, obviously, significantly lower. Did that help your gross margins?
Are you able to hold onto that or do you just kind of flex the pricing to your customers?
Joe Holsten
I think what ends up happening is that a lot of that decrease was in scrap, so from that perspective, I wouldn't say that during this quarter, our margins were really impacted by the lower salvage acquisition cost. Obviously, ferrous prices had been steady quarter-to-quarter, that should have resulted in an improvement in our gross margins, but I'd have to attribute most of the change to just pure change in ferrous pricing.
Scott Ciccarelli - RBC Capital Markets
You guys mentioned that you're in contract negotiations with two insurance carriers on the aftermarket side. Can you explain exactly how that would work?
If you were able to finalize a deal, and what kind of impact we might be able to see on the business if you were able to close one of those deals, just kind of structurally how it would be put together?
Rob Wagman
Well it certainly open up a wider universal parts for them to write. The process would work, basically, once we have a contract on, we would then go through a training of their direct prepared networks, as well as their appraisal staff, as well.
It's a long process where we roll out training and what's involved in the process. Part of the AQRP program is electronic-based tracking of the parts, sort of a soup-to-nuts, following it from the manufacturer right to the end-user.
So there's a little bit of training involved, but once that training is done, the shops are up to speed, the estimating databases receive the inventory that they can use, the process moves pretty quickly.
Scott Ciccarelli - RBC Capital Markets
Would two carriers be enough to kind of materially move the needle on that business?
Rob Wagman
These carriers are top ten carriers. They already write some amount of aftermarket now, so that's not completely newfound business, but it would certainly increase it.
We'll have to wait to see just how robust they are on the rollouts.
Scott Ciccarelli - RBC Capital Markets
The last question, have you seen any impact from the agreement with Ford that you guys previously announced?
Joe Holsten
Yes, actually. The sales of the related parts, keep in mind that this just really started in second quarter, so we're just now starting to see some of the parts come into our inventory as well as our competitors to run out of those products, but in June alone, we saw about 35% increase in the sales of those parts, and in July, we have a few more hours here in the month, but it looks like they'll be up another 10% in July over the June levels on a per-day basis.
Operator
We have time for one more question. This question is from the line of Nate Brochmann with William Blair.
Please state your question.
Nate Brochmann - William Blair & Company
Just to follow up on that last question, have you seen any of the other OEMs kind of more willing to set up agreements like you have with Ford?
Joe Holsten
We have not engaged in any discussions with other OEMs on that subject.
Nate Brochmann - William Blair & Company
The other thing, talking about going back to your comments, Joe, about maybe a little bit of a surprise on the aftermarket side, do you think you're getting some benefit on the tailwind now from having the sales forces more integrated with Keystone, and maybe give us an update on exactly where that is, and if there's anything left to go there?
Rob Wagman
I think that's a fair assumption, Nate that we are fully through integration of the operations, now. We converted our last conversion last two months ago, and we are starting to see some more pull-through with the sales reps.
The sales reps on part of our systems do have the ability to sell right out of the salvage system as well, making it, therefore, a lot easier. So there is now doubt that some of the tailwind that we've received has been from the result of the integration being finally completed.
Inventories up higher, distribution networks flowing a lot more smoother and now that the integration is done.
Joe Holsten
Thanks for the question. I thank everyone for calling in and joining the call.
We want to be respectful of your time to get on the next call. A lot of earnings coming up today, so we appreciate your interest in LKQ, and we'll talk to you in about 90 days.
Thanks.
Operator
This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.