Jul 31, 2010
Executives
Sarah Lewensohn - Director, Investor Relations Joe Holsten - President & CEO John Quinn - EVP & CFO
Analysts
John Lovallo - Bank of America Merill Lynch Craig Kennison - Robert W. Baird Nate Brochmann - William Blair Bill Armstrong - CL King & Associates
Operator
Greetings and welcome to the LKQ Corporation second quarter 2010 conference call. At this time, all participants are in a listen-only mode.
A 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, Sarah Lewensohn, Director of Investor Relations for LKQ Corporation.
Thank you, Ms. Lewensohn, you may begin.
Sarah Lewensohn
Thank you, Claudia. Good morning everyone and thank you for joining us today.
This morning we released our second quarter 2010 financial results. With me today, from LKQ Corporation are Joe Holsten, President and Chief Executive Officer; John Quinn, Executive Vice President and Chief Financial Officer and Rob Wagman, Senior VP of Operations, Wholesale Parts Division.
Both Joe and John will provide some prepared remarks on results and then we will open the call for questions. In addition, to those that are listening by telephone, we’re providing an audiocast via the LKQ website and both of those forms will have replays available for them 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 2009 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
Thank you Sarah and good morning, thanks for joining us today. As you can see from the results we recorded this morning, we delivered a very strong second quarter.
Diluted earnings per share from continuing operations were $0.26, an increase of 30% as compared to the $0.20 for the second quarter of 2009. And revenue for the second quarter reached $585 million benefiting from acquisitions, increased aftermarket part sales and higher commodity prices.
The organic revenue growth for the company as a whole was 12.2%. As segment driving trends led to relatively flat miles driven in April and May, we benefited from the continued increase in the demand for alternative parts.
The top line organic growth reflected in particular, an increasing acceptance of aftermarket and refurbished collision parts. Insurers continue to operate under significant cost pressures.
A recent survey by property-casualty.com of the top 100 carriers indicated that net premiums from personal auto line declined in 2009 for the third year in a row while the combined ratio, that’s the measure of underwriting profitability continues to deteriorate. The net impact was a second straight year of underwriting losses for personal auto coverage and this environment offers great opportunities for LKQ.
Demand for LKQ’s wholesale parts was quite strong during the quarter, our second quarter organic revenue from the sale of all parts and services increased 5.5%. The greatest beneficiary of the APU trend was our aftermarket and refurbished parts category.
Aftermarket and refurbished revenues increased 11.4% with an organic growth rate of 8.7%. When we acquired Keystone 2.5 years ago, one of the objectives was to accelerate the adoption of aftermarket collision parts.
And that is exactly what has occurred. For the past four quarters, organic revenue growth of aftermarket and refurbished parts is around 9% or better.
Aftermarket and refurbished parts revenue also benefited from the strong used car market which increases the likelihood that vehicles were repaired rather than categorized as total losses. Organic growth of recycled parts and services was up slightly during the second quarter as the quarter reflected some lingering consequences of the Cash for Clunkers program.
In the third and fourth quarters of last year we bought fewer auction cars and many of these vehicles we bought have lower parts values than was necessary to support our growth target. I believe we reached the inflection point during this quarter and the salvage auction trends have started to improve.
During the second quarter we repurchased almost 52,000 vehicles for dismantling at our wholesale operations which is a 41% increase over the second quarter of last year. The increase in vehicle purchases will clearly help expand our parts inventory.
On the past two calls, I’ve talked about the challenges we face in buying salvage parts. The supply of vehicles was good during the second quarter of the year, but the prices we had to pay were at the high end of what we have historically paid.
We have increased our bid prices to ensure we have adequate inventory to support demand. I know believe that at the current run rate we are acquiring enough cars to build a backlog of vehicles to dismantle during the third quarter in order to meet our targeted volumes.
Concurrently, we are doing what we can to improve parts pricing, to offset the downward pressure from high auction prices on gross margin. We have taken steps to reduce price deviations by our sales reps and are focused on maintaining gross margin dollars.
Turning to our self-service retail operations, during the quarter we purchased roughly 78,000 lower cost self service and crash-only cars. Current car repurchases, purchased prices are reflecting a little downward stickiness as we move to what we paid for self-service cars closer in line with what we’re realizing on the crushed car body.
By that I mean we will likely see a little margin compression in this line of business in Q3 until the cost of cars falls in line with recent scrap prices. Changing the focus to our heavy duty truck operations, we are moving forward with the expansion of our network.
Currently, we have purchased approximately 900 units for resale of parts during the quarter and today we have 11 facilities. We are starting to see the locations benefit from being a part of the organization.
For example, we recently had several export buyers who were able to find what they needed by offering them our entire inventory across the country while they visited a single location. During the quarter, we purchased two heavy duty truck locations, one in West Monroe, Louisiana and the other in Jackson, Mississippi.
We also acquired a couple of wholesale recycled auto parts operations that provide important platforms for entry into strategic markets. The wholesale auto recycle businesses will allow us to serve the Winnipeg, Manitoba, and the Seattle-Washington metropolitan areas and beyond.
Winnipeg provides an important entry into Manitoba and Central Canada and the Seattle operation will allow us to create a stronger presence in that facility and its surrounding markets. Collectively the acquisitions we made in the second quarter, reported 2009 annual revenue of about $14 million.
As of today, we have made a number of acquisitions that will be recognized as third quarter transactions. These include an automotive paint distribution business in Boston-Massachusetts area, a wholesale recycling operation near the Tennessee border that will serve the Huntsville and Birmingham-Alabama and the National Tennessee markets and finally a wholesale recycling operation in one of our nation’s major markets Philadelphia-Pennsylvania.
Additionally, we have repurposed two of the properties we took on with the Greenleaf acquisition. A wholesale recycling operation in Monroe, Georgia was reopened with specialized, high-end European brand vehicles and the former Greenleaf facility in Wilson, North Carolina has opened as a heavy duty truck operation.
And finally, our marketing efforts increased our service levels and the comprehensiveness of our parts offerings to the insured repair community continue to pay dividends, as we now have four of the top 15 carriers signed to our parts program along with a number of smaller carriers with very modest market shares. We’ve also seen recent successes in our offering of parts supply programs to three national rental car companies and a half dozen fleet management companies.
And we recently appointed a small team of people that have responsibility to develop a government agency marketing effort. I’d like to turn our conversation over to John now, so he can provide more detail on our financial result.
John Quinn
Thanks Joe and good morning everybody. As Joe mentioned, we are very pleased with the way the business performed in Q2.
Hopefully, everybody has had a chance to look at our 8-K which we filed with the SEC earlier today and as normal we are planning to file our 10-Q in the next few days. Our revenue for the second quarter increased approximately $98 million to $585 million compared to $486 million for the same period last year, an increase of 20%.
For Q2, our organic growth was 12.2% and acquisitions accounted for 7.6% growth. We had a small favorable foreign exchange impact of 1.5 or 1%.
Organic growth of our parts and services revenue was 5.5% and organic growth of other revenue which was where we record our scrap commodity sales, was up 81% as commodity prices were higher on a year-over-year basis. For Q2 2010, our same-store sales growth and the aftermarket refurbished parts was 8.7% while our growth rate for recycled was 1%.
Our year-to-date growth rate for same-store sales for aftermarket and refurbished crash parts was 8.4% and recycled parts was 1.4%. The total same-store sales growth rate for parts overall were at 5.5% for the quarter and 5.6% year-to-date.
We spent a fair amount of time in the effort in analyzing the recycled revenue growth. We know that the expensive salvage auction market earlier this year resulted in lower purchases by us during the first month of the year and that led to recycled part sales being unfavorably impacted in Q2.
We also commented on call dating back to Q3 of last year that we are concerned that the Cash for Clunker Cars would also adversely impact overall recycled part revenues due to the substantially lower value of the parts on a Clunker Car as compared to a typical salvage auction car. Our review of detailed part sales by mechanical part type as well as the average selling price per unit has confirmed this belief.
During the quarter, due to the legal restrictions against selling the engines from a Clunker car, revenue from engine sales actually declined during the quarter compared to last year. Similarly, we were negatively impacted due to lesser value of Clunker car transmissions when compared to the value of a normal auction car transmission.
It’s our belief that our same-store sales for the quarter for recycled parts were negatively impacted by at least 2.2% due to these two factors alone, let alone the lower value of other Clunker car parts. As most of you realize, we operate our management structure in a way that a single management team has responsibility for the sale and distribution of recycled parts, aftermarket parts, paint and body supplies, remanufactured mechanical parts as well as refinished crash parts.
We view this business as a single segment for our SEC and GAAP reporting. Moreover we are consolidating warehouses and delivery routes to co-locate and co-deliver these products and we are encouraging and incenting our sales reps as well as our customers to view recycled, aftermarket refurbished as substitutes for each other.
All of which is to say as we’ve grown and expanded our profit offerings to a full array of alternative parts, the lines and distinctions we are reporting on these product types has become somewhat arbitrary and we are giving strong consideration to combining and reporting in these two lines, that is recycled and aftermarket at some time in the future, possibly by year-end. In Q2 2010, revenue from our self-serve business was $53 million or 9% of LKQ’s total revenue.
Approximately, 36% of this revenue is part sales included in recycled and related products and 64% scrap and car sales included in other revenue. Our acquisition revenue growth was driven primarily by the acquisition of Greenleaf which was completed in October 1, 2009.
This transaction accounted for roughly 5.5% of acquisition-related growth. Gross margin for the second quarter of 2010 was 44.7%, which was down 60 basis points from the 45.3 in the same period of 2009.
This decline is primarily related to the higher costs incurred for acquiring salvage cars at auctions, higher costs for self-service cars and a lower margin percentage on scrap aluminum sales. You may recall in the first quarter I indicated the higher price curves would be putting pressure on gross margin.
Our facility warehouse expense for the quarter increased $7.5 million or 15.7% as compared to the same quarter of 2009. Approximately $3.6 million of the growth was related to business acquisitions.
Facility warehouse expense as a percentage of revenue for the quarter showed an improvement to 9.5% from 9.8% last year. Distribution expenses for the quarter increased $8.4 million or 19.7% compared to 2009 with $2.3 million of the growth related to business acquisitions.
The remaining growth is primarily fuel of $2.4 million, labor of $1.2 million and $2.2 million of volume-related items such as freight and truck rentals. As a percentage of revenue, distribution costs were essentially flat year-over-year at 8.8%.
Selling, general and administration expenses grew $9.3 million or 13.9% over the second quarter 2009 with $2.1 million of the growth related to business acquisitions. We also had higher labor costs to support the increased business of about $5 million.
As a percentage of revenue, selling, general and administrative expenses were 12.9% in Q2, 2010 compared to 13.7% in 2009. Our operating income was $70 million in Q2 2010 compared to $55 million in Q2 last year, an improvement of $15 million or 27%.
Net interest expense of $7.2 million was slightly lower than the second quarter last year due to lower average debt balances and a slightly lower effective interest rate at 4.93%. We had a floating fixed hedge of $50 million which rolled off in April and has not been replaced at this time.
Income from continuing operations for Q2 was $37.9 million, a 33.2% increase compared to the $28.5 million in the prior year. And diluted earnings per share from continuing ops for the quarter was $0.26 in 2010 compared to $0.20 in 2009, an improvement of 30%.
Year-to-date through six months, we’ve experienced strong cash flow from operations of $101.2 million compared to $87 million in the same period last year. During this quarter, we built inventories by a little over $20 million.
I’d mentioned last quarter that we were exiting Q1 with our salvage inventory a little lighter than we would have liked and you can see that we have picked up the buying in that area. Capital expenditures for the quarter were $9.9 million excluding acquisitions which we spent about $10 million.
During the quarter, we issued 436,000 shares of stock related to the exercise of stock options and resulted in $4.4 million in cash including related tax benefit. Debt at the end of the quarter, $594.4 million including $587.8 million under our secured credit facility.
Cash and equivalents were a $190.5 million at the quarter end.
Combined with our cash balances and the fact we have prepaid the mandatory term loan payments for 2010, we believe we had adequate liquidity. Now I’ll turn to guidance which as always excludes restructuring charges or gains and losses related to acquisitions or divestitures.
As we know in our press release we are raising our guidance. We are increasing our previous EPS from continuing operations estimate of $1.6 to $1.12 to revise estimate of a $1.8 to $1.14.
And income from continuing operations, from a previous $154 million to $163 million to revised estimate of $158 million to $167 million. We have not revised the balance of our guidance.
Cash flow from operations are still expected to exceed $160 million. Capital expenditures still expect to be in the range of $85 million to 95 million and organic growth of 6% to 8% for products and services revenues.
Finally last quarter I laid out some potential headwinds and tailwinds that could impact us for the rest of the year and I thought I’d give you an update on where we see these items today. In Q1, we talked about scrap prices moving lower in Q2, what we ultimately saw was that they rose early in the quarter, but fell in the back half of Q2.
And today they stand, about as low as they have been all year, but we are seeing some indications that they may tick up a bid in Q3. So in this front, while we continue to see some risks, the bias is more favorable than when we exited Q1.
Secondly in Q1 we described the difficult buying environment for salvage vehicles. During the quarter, we saw prices of the auctions stabilize and actually come down a bit and we’ve had some of the best buying weeks ever in terms of volume over the past month.
To characterize that I would say we saw the downside risk of higher prices of the auctions abate. But we haven’t seen the upside case of materially lower auction prices manifests itself.
Obviously, we are doing what we can improve prices to offset the increased costs, it will take a little time to see those efforts. Finally we talked about some potential pressure on aftermarket margins, as a result of freight increases, we continue to face this pressure and are seeing some increases, but again we are doing what we can to improve our pricing.
And with that, I’ll turn back to Joe.
Joe Holsten
Thanks John. I’m going to share a few closing thoughts.
Well more than a year ago, in our first quarter 2009 conference call, I shared with you some thoughts about our opportunities that might arise for LKQ as a result of the economic conditions we saw at the time and then my reflection of those opportunities are coming true today.
As we commented on our first quarter 2009 call, the strength of our balance sheet has provided us with the capital to finance our organic growth, make strategic acquisitions on our competitors, are shrinking their businesses. Results of the last six quarters has demonstrated the benefits of LKQ’s position as a leading distributor to the collision and mechanical autorepair industry.
We believe our unique competitive position and the actions we’ve taken in response to the economic environment have translated into consistent sustainable earnings growth. During what is likely to be a slow economic recovery, by maintaining our focus we will continue to deliver solid growth in 2010 and beyond.
And Claudia, at this point I think we’d like to open up for questions please.
As we commented on our first quarter 2009 call, the strength of our balance sheet has provided us with the capital to finance our organic growth, make strategic acquisitions on our competitors, are shrinking their businesses. Results of the last six quarters has demonstrated the benefits of LKQ’s position as a leading distributor to the collision and mechanical autorepair industry.
We believe our unique competitive position and the actions we’ve taken in response to the economic environment have translated into consistent sustainable earnings growth. During what is likely to be a slow economic recovery, by maintaining our focus we will continue to deliver solid growth in 2010 and beyond.
And Claudia, at this point I think we’d like to open up for questions please.
Operator
Thank you. Ladies and gentlemen, we will now be conducting the question-and-answer session.
(Operator Instructions). Our first question is coming from the line of John Lovallo with Bank of America Merrill Lynch.
John Lovallo - Bank of America Merrill Lynch
The first question is on the recycled business. And I know you spoke of an inflection point, Joe.
Is that largely attributable to the clunkers effect kind of running off and some supply improving? Is there anything else going on there?
Joe Holsten
No, I think we nailed the two issues that will drive a better result than the second half of the year. As we indicated on like the last couple of calls, the impact of the clunkers, surprised us to an extent and I think we have estimated that the average loss of revenue on our clunker car compared to a normal salvage auction car is about $2,500 and just to confirm that we did a little bit deeper dig on that over the last 90 days and as we had indicated in some of our comments, we were able to very noticeably see the impact in our engine and transmission sales and those are our two leading part revenue generators for the whole company.
So the clunker car, I’d say at this point they are pretty much bled through the system as we are headed into the Q3. The other item I think you put your finger on the real kind of tightest times we have seen in the buying markets on salvage auction vehicles, we’ve seen that in March to May timeframe.
So the volumes are very healthy right now, in terms of the incoming product growth and a little bit more than we have historically, but we accept that and we think we are good enough in terms of our management skills. We get the right pricing and dig little deeper in the cars that will sustain or come very close to sustaining the gross margin dollars we have enjoyed over the years.
So we think the back half of the year will show a lot better picture in terms of the same-store sales and the recycled product line.
John Lovallo - Bank of America-Merrill Lynch
Second question is, we've had some pretty hot weather, particularly in July. Are you guys seen any increased demand for mechanical parts?
Joe Holsten
Yes somewhat seasonal, the things we see generally at this time of the year is of the mechanical part request come and I would say that this year is atypical by any stretch of the imagination. The other thing we typically see at this time of the year is the competitors on the aftermarket part sales comes up a little bit as the volume, the work and the shops decreases.
The shops will negotiate a little harder and on their parts pricing. So, we are seeing that predominantly on the aftermarket part side of the business, but once again nothing out of the norm either way.
John Lovallo - Bank of America-Merrill Lynch
Okay, great. And last and final question here, the acquisition market, is that continuing to gain steam here heading into the tax law change?
Joe Holsten
The acquisition environment is absolutely the strongest deal market we have seen, probably hasn’t been as good since 1998, when we first started in the business. And I would say overhearing two things in terms of seller motivation, one is certainly the lack of clarity of what capital gains rates are going to be in that sphere, I think, most people we have talked to think of that sense, but they move to 28% and there is a lot of fear in the market right now that for some tax payers that rate will be even more than 28%.
But I think the other thing we are starting to hear John, in terms of why people are at the table, and it really goes back to the comment I made in terms of LKQ’s balance sheet and our unique position in our industry as fully being the only publicly traded company in the market in our space.
,
So these people for probably the first time in the last decade as regarding to grow their business, there is only one way to do it and that’s to write personal check and thus their investor personal funds enter the business. And I think that’s the other driving factor of why we are seeing a lot more people at the table.
The other really encouraging thing and what I think is so stimulating about this, the deal flow right now, it’s really in every sector that we touch what we are seeing, owners of the late-model recycling yards the table, some of the aftermarket businesses are at the table as well as other things, people on remanufacturing or refinishing businesses, interested in selling I think our more vocal interest in paint business has drawn people into being interested in selling those businesses as well. So it’s a very and of course the truck and the self-service yard, but it is really kind of on all fronts.
Our deal team is stretched thin right now, we are trying to add resources to that because I don’t see this just as a 2010 phenomenon, I think this will continue for a couple of years.
Operator
Our next question is coming from the line of Craig Kennison with Robert W. Baird.
Craig Kennison - Robert W. Baird
How do you see the mix of recycled and/or aftermarket growth trending in the balance of the year?
Joe Holsten
Certainly, based on the comments I just made to John, it’s our view that recycle product same-store sales growth in the mix there has kind of gained some steam. I guess you know the seasonality of third quarter is generally not one of our strongest quarters, the demand especially for crash parts tends to ebb a little bit.
But, I guess I would see aftermarket staying pretty steady in terms of our usual trends we are seeing from year-to-year, but a little more robust environment for the recycled products.
Craig Kennison - Robert W. Baird
And then, as you face a little gross margin pressure on the cost side, could you address just what pricing opportunities you think you may have, and put that into the context of how OEM prices have trended recently?
Rob Wagman
Sure, as John mentioned we are still seeing above historical costs for salvage, but we do see a little bit of reduction here in late Q2. We have taken various steps Craig, to address them.
One Joe mentioned was monitoring of deviations. We have the ability to look at our reps reducing prices.
We are at the point now where we have the ability to walk down our price for a high demand, the product that may be low in quantity. So we are watching our reps a lot closer than we ever have.
And as you mentioned correctly, we do price in relation to the OE part, we do track that daily watching for any kind of trends that may go one way or the other and in recent months we have seen a slight increase in the OEs, a little bit more than a point of price increase. So, we do watch that very closely and react to that when we can.
One of the other things that we are doing is locking down some of the rep’s ability to bypass certain core charges for example, where se sell a used engine and we expect the old one back to sellthrough remanufacturer. So, we are in a process of tightening that to make sure we get the proper price for the proper parts.
One last thing I will comment is that we do have pricing teams in each of our divisions, we have a separate price team for aftermarket and a separate price team for salvage that monitoring certainly trends with the OEs as well as our competition. We expect our competition to have to address the same concerns.
We are at the auction so, we contantly monitor their activity as well.
Craig Kennison - Robert W. Baird
And then lastly, Joe, just on the acquisition front, you added I think $14 million in revenue, which would annualize to about a $56 million run rate. Do you see that trend accelerating as you conclude the year, given prior comments that you'd hoped to maybe add as much as 10% to organic growth through acquisitions?
Joe Holsten
We should probably correct the runrate of the deals that were closed during the quarter, the $14 million was the annual revenue. Those are the very small deals, the ones that were closed during the quarter and the ones that have been closed subsequent to that slightly larger.
But I think we have said that we believe in the deal flow will typically be monthly in the company and are kind of the ones, you can’t really forecast are the ones, the more significant deals are going to hit. I think the guidance we have provided over the last several years I would say remains unchanged in terms of our view that the same-store sales growth in the business should fall somewhere in the range of 6% to 8% and on a three to five-year trajectory there will be enough deal flow that will move the overall revenue growth of the company right up to the high teens, 20% which ironically is exactly when we hit in the current quarter that we are reporting in.
So I continue to feel very confident in that amount of deal flow over the next few years, certainly plenty on the table. There’s a chance we could outperform that a little bit next year, but we look at this more on a three to four year basis.
I would continue to think we are looking at little over 10% growth from acquisitions.
Operator
Our next question is coming from the line of Tony Cristello with BB&T Capital Markets.
Tony Cristello - BB&T Capital Markets
When you look at sort of the organic growth and you kept your 6% to 8% range, the first half of this year you were sub-6% in both the first two quarters. I'm just wondering, is there something in July?
I mean, you talked about the inventory. You talked about some of the sort of headwinds that you had in the first half of the year.
But is there anything else in terms of your visibility into the second half that gives you confidence that the 6% to 8% is a very achievable range? Or are there some things that have to go your way to sort of move meaningfully into that?
And then, maybe can you just comment on how July has looked relative to where that range is currently?
Joe Holsten
I think we have covered the factors of what we think will impact the second half of the year, we discussed the fact that we think the recycled parts inventory is certainly looking stronger than it has for almost a year at this point and the buying continues to come in week after week, at pretty impressive levels. As I said, are we paying a little more than we have liked.
Yes, in fact we are, but the volumes are there and we’ve always said that the constraint on growth in the company is supplying our demand and I remain comfortable at that comment. On the aftermarket side of the business, I think our inventories are in very good shape.
As a matter of fact, it’s our intent to probably inventory up a little earlier than normal, in 2010 just to try to avoid any shipping lane congestion, we are starting to see some reports of container shortages and looks like a lot of shipping capacity has been dry-docked and so we are moving to get ahead of that in terms of bringing volume on a little sooner than we normally would. So I think it's probably more salient things that I comment on regarding the second half of the year.
Tony Cristello - BB&T Capital Markets
And when you look at the activity in terms of fill rate, is that sort of still on that 65% level? Or are you starting to see that pick up here now that you've added some inventory?
Joe Holsten
Tony Cristello - BB&T Capital Markets
And on the gross margin, then, should we think that the run rate you experienced this quarter is probably a normalized rate, at least until the pricing at auction gets a little bit more favorable and/or the pricing in general from a price increase passthrough, you get more benefit from that? How should we think about what is impacting the ability to improve gross margin versus what could be a headwind?
John Quinn
Obviously we are working on the pricing side as Rob mentioned, the inventory the way it works as we paid higher amounts of the car and bleed through the next couple of months and as Joe mentioned that, we are seeing auction prices coming down a little bit. We probably won’t start to turn those cars through the inventory going through Q4.
So, although I don’t want to get too granular here, because it’s a little bit depending on what happens with the combination of scrap prices and auction prices, but as we see it today, probably Q3 will be a little bit soft and then Q4 will bounce back as the way I would anticipate it.
Tony Cristello - BB&T Capital Markets
And there's again been some noise out of Ford, and I know you've in the past had some issues, but have settled and some things went your way. Is that just again more noise?
Or is there a bigger issue going on in the industry today with the regulation of aftermarket parts? And how do you see that sort of evolving as the increase in alternative parts continues to act as sort of a tailwind for you?
Rob Wagman
We certainly do view it as noise right now, it’s just an extension test with the Sawzall blade. As we mentioned last quarter Tony, we did do the crash test on late-model vehicles with the law passing.
We have been were asked by some about why we tested 35 miles an hour and we made it clear that we tested because of the safety requirements, the [SMBS] laws for occupant safety. So what we did, we didn’t set out to take 16 rebars and 5 absorbers and test it at 5 miles per hour and everyone of those pass.
We certainly tale this very seriously, the activity that’s going on and that’s really a part of what of our car insurance program that addresses that stuff. We are at over 8,000 parts in the program, where traceability is available in everyone of those products and that is one of the concern so, I think we have taken all the necessary steps to take it to where we have comfortability in the fact that our parts are, our quality and meet the standards of our government.
At the end of the day, I think one of the best outcomes of this, all this activity is the fact that we have two certification bodies that are now going to start certifying each types of products. So we are actively supporting them and we continue to buy those products and put them on our shelves to make sure we have the right products.
Operator
And the next question is coming from the line of Rod Lache with Deutsche Bank.
Unidentified Analyst
I know you've covered this in pretty good detail so far. But I was just wondering if there was any way to gauge if there's any difference in actual demand for recycled parts versus aftermarket parts?
And it would seem that aftermarket growth be higher than recycled for about a year now. But you've also talked about your inventory being kind of down for a year.
Is there any way to tell in terms of fill rates or inquiries like where demand stands between the two segments?
Joe Holsten
We do measure the request activity on our recycled products. That’s easy to do because when we have request for parts of systems, automatically kind of allow you to look up and yes, that’s something I monitor weekly personally, looking at request activity quotes issued and inbound phone traffic.
And that is stronger than it was a year ago; so it remain stronger and strong year-over-year. The aftermarket, the way our systems work, we really don’t have that insight into the demand activity, a lot of the demand is coming in over websites and our IT and that piece of our business doesn’t really, isn’t recording public demand.
I don’t know how we could really reflect on demand on the aftermarket parts short of the fact that we continue to see the 8% 9% year-on-year growth. And some of that is obviously coming from I think a stronger inventory, but I think it’s also safe to say that with the number of carriers who are expanding their interest in programs like our AQRP program and are broadening the kind of the slope of aftermarket products that we are willing to consider in the repair process.
Yes, we know the demand was up, but I can’t say that we could quantify.
John Quinn
Just to maybe a supplement on what Joe said, if you think about the aftermarket where we have 90 plus percent fill rates, we are essentially filling most of the calls when somebody comes in and asks for it. On the salvage side, where the fill rates are probably short of 70, obviously there is a lot of demand that we are not able to fill in.
Some of that manifested as an example in the engines that we talked about in Q2. I have no doubt in my mind had we had those engines, we would have sold them in Q2.
So the demand was there, we just can’t fill it, we don’t have the recycled parts and so in Q1 we talked about we were going into Q2 with a little bit lighter inventory, Joe mentioned that last quarter we bought over 50,000 cars which was up 41% year-over-year. So regardless of what happens with demand, I think the availability of the supply will increase, the sale which has giving us some of the confidence in the prior question with respect to the back half growth rate.
Rob Wagman
If you think about our headlight, we sell our recycled headlight, we also sell a comparable aftermarket headlight, we also sell comparable refurbished headlight. And those three products when we talked about them today, we bifurcate where they came from, but from a customer point of view, they are been sold to the same customer, they are filling exactly the same function, they’re priced incomparable So as we're somewhat agnostic between the two product lines in terms of the source, we are really looking at the demand side, and that was some of the comments that we talked about whenever you said we are considering amalgamating these two things because we view it as a single statement and we think our customers would like them to be indifferent among these parts.
Unidentified Analyst
I was interested to hear the comments on signing deals with rental companies and fleet management companies. Can you give us a little more color on how these types of companies generally acquire their parts?
And is this an opportunity for you to raise your penetration of their purchases significantly here? If you could put any kind of a range of the market out there?
Joe Holsten
Historically, these have been buyers of new OEM parts pure and simple. The rental car companies over most of the last decade were repurchasing agreements with the manufacturers and it is my understanding that a part of those repurchasing agreements were that the cars would be repaired with new OEM parts.
Now the rental car companies are in positions that they actually own more of their own fleet that the replacement parts decision has just more flexibility and we believe, and especially as the rental car companies are keeping their fleets closer to a three-year turnover now as opposed to 12 to 15 months. That’s like also putting those maintenance managers at a position of questioning to whether or not all their part replacements should be with new OEM parts.
So that’s a very rich market for us, it’s not as huge market, but certainly we wouldn’t be cannibalizing any part sales that we already have today. It was a really new part sales opportunities for us.
I would venture to say that the same is basically true of the fleet managers that were experiencing gains with typically those repairers have been made almost exclusively with new OEM product historically.
Rob Wagman
And to answer the other half of your question Dan, it’s how they order the parts. It is coming through our e-commerce.
They’re not picking up the phone and calling us, there are using our keyless strategy where they write an estimate and it scrubs up against our inventory. So it’s a B2B function that has worked out really well for us
Unidentified Analyst
The Philadelphia market, is that a new market for you guys? Are there any kinds of revenue synergies you can point to between that and other facilities in the area?
Joe Holsten
That certainly will be. We do service the Philadelphian market today, but our market share there is insignificant.
I don’t think we probably have even more than $2.5 million recycled parts business in the Philadelphia market today. We’re servicing the market essentially out of the Hunts Point business in the Bronx and quite clearly, the product that we have in the Bronx needs to stay in the Bronx because it’s another market where we really need more capacity..
But we’ve been chasing this market for a decade. I personally have been chasing this market for a decade.
So we’re really happy to have production and distribution capacity right in the heart of the Philly market now.
Operator
Your next question is coming from the line of Nate Brochmann with William Blair.
Nate Brochmann - William Blair
I wanted to see if you could put a little bit of extra color on the buying environment, John you kind of mentioned that, it’s starting to improve a little bit, but Joe you are talking about still paying the higher above the average price for the cars. Could you just talk about kind of little bit more color in terms of what you’re seeing there?
Joe Holsten
Certainly. The main measurements that we look at are just the overall volume of product at the auction.
We're not sophisticated really enough to quantify kind of the value or the quality of what’s there at the salvage auctions. I monitor pretty closely kind of our activity levels and how much product we actually revaluate and I consider any week when we see more than 50,000 vehicles at the auctions proves to be relatively healthy, particularly when you consider the number that I gave you a few months ago and still we’ve been buying a little over 200,000 per week.
So we’ve infact consistently right upto last week, we’re still seeing the auction volumes in the low 50,000 range. So we consider that to be a very healthy level and I’ve been very impressed with our field activity.
A lot of our agents have brought additional scouts and additional buyers into the process realizing that we need to evaluate more products. So for example, last week, we evaluated about 45% to 46% of the products at the auction, that’s up a year ago, this time we were probably evaluating around 33% to 35% of the vehicles of the auction.
So you can see that that it seems they are digging a lot deeper, looking, evaluating significantly more products at the auction pools and based on that our win rates have come up quite a bit over the last two to three months. So that’s kind of the only negative here.
Decomprising as I would see it within that in the March through May timeframe as it would appear to me at this point, today that pricing probably peaked during that three month timeframe, came down in June and the pricing, it seems so far in July is showing a few more percentage points reduction over where we were in the June timeframe. I do think that the correction is going to be gradual.
There’s no snap back sort of adjustment coming in terms of auction prices. So it continues to be our belief that largely the used car market that’s driving the high salvage prices.
I think everything that we have seen relative to the used car market, it remains to be a very strong market and probably going to be a market that adjusts very gradually over the next one to two years.
Nate Brochmann - William Blair
Rob, maybe this is a question back for you. But you talk about pushing some pricing through and doing a little bit better job eliminating some of the discounts with some of your sales reps.
How is the market acceptance of that kind of progressing?
Rob Wagman
I think the insurance industry is aware of the fact that we’re paying more for the salvage and certainly expect that to be passed on. We believe we’re still competitive and again pricing to OE, we’re still a price alternative to that number.
So we always keep in mind the pricing of the OEs in the aftermarket world as well. So we’re still a price alternative to the OE in the aftermarket and salvage.
So I think we’re maintaining a nice comfortable margin for the carriers to make it worthwhile to run our parts.
Joe Holsten
I think we will do more question, we’ve come up on the hour and certainly we want to be very respectful of everybody’s time, I know a lot of companies are releasing today. So let’s do one question please, Claudia.
Operator
Our last question is coming from the line of Bill Armstrong with CL King & Associates
Bill Armstrong - CL King & Associates
You had obviously, a big increase in your other revenue category. Would you be able to break out how much of that was volume versus the higher scrap metal prices?
John Quinn
I don’t have a good breakup of that, Bill. Pricing was up about 77% though and you can see that the organic growth was 81 if I recall.
A little bit more volume.
Bill Armstrong - CL King & Associates
Your distribution expenses were essentially flat as a percentage of revenue despite higher freight and fuel. Does that just kind of offset by more volume efficiencies?
John Quinn
Yes.
Bill Armstrong - CL King & Associates
Okay and on the auction side, prices are still kind of high. Does that, I think, in your last call three months ago, you mentioned it was really more an issue of maybe more buyers in the auctions rather than a lack of supply.
Would you still characterize the auction conditions like that or are you seeing anything changing in the supply demand equation there?
Joe Holsten
I think you’ve summarized that very accurately. The volumes, the products are in very good shape and it’s our belief that the high used-car price market has brought more buyer, people who’ve been normally buying at the wholesale auctions are also buying at the salvage auctions right now and it’s hard to believe that when used car pricing, is it, gradually adjusting the volumes of used cars come back up, those buyers will revert to buying in the wholesale auctions again.
Bill Armstrong - CL King & Associates
The organic growth, I know you've addressed this already on the call. Organic growth for recycled has been pretty slow and it sounds like it's your belief that as supply starts to ease up, you don't have the clunker vehicles, you're getting more parts revenue per vehicle.
Is that what we should expect to see starting to happen in the third quarter and the fourth quarter?
Joe Holsten
That’s our belief absolutely.
Joe Holsten
I appreciate everybody joining the call today. We look forward to getting back to you in 90 days to report on our third quarter progress.
Thanks again.
Operator
Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.