Feb 24, 2011
Executives
John Quinn - Chief Financial Officer and Executive Vice President Joseph Holsten - Vice Chairman, Co-Chief Executive Officer and Member of Executive Committee Robert Wagman - Co-Chief Executive Officer and President
Analysts
John Lawrence - Morgan Keegan & Company, Inc. Craig Kennison - Robert W.
Baird & Co. Incorporated John Lovallo - Bank of America-Merrill Lynch Anthony Cristello - BB&T Capital Markets Sam Darkatsh - Raymond James & Associates, Inc.
Nathan Brochmann - William Blair & Company L.L.C. Scot Ciccarelli - RBC Capital Markets, LLC
Operator
Good morning, everyone and welcome to LKQ Corp.' s Fourth Quarter 2010 Earnings Conference Call.
I would now like to turn the conference over to your host, Mr. John Quinn, Executive Vice President and CFO.
John Quinn
Good morning, everyone. And thank you for joining us today.
This morning, we released our fourth quarter 2010 financial results and provided our guidance for 2011. Before we get into the call details, I'll just take a moment to reiterate a few of the major changes here at the company.
In December, we announced that Joe Holsten has been elected Vice Chairman of our Board of Directors and was appointed Co-Chief Executive Officer. Joe, who has led the company since 1998, has indicated his intention to resign as an officer of the company at year end.
However, we will be a fortunate to have him as a consultant for a further five years, and he intends to continue his role on our Board of Directors. We also announced that Robert Wagman has been promoted to a position of President and Co-Chief Executive Officer.
Rob has been with the company since 1998 in a number of increasingly responsible roles, most recently as our Senior VP of Operations running the Wholesale division. In additions to the announcements regarding Joe and Rob, in June last year we disclosed that Frank Erlain, our Vice President and Controller will be retiring this quarter.
On behalf of the company, as well as personally, I wanted to thank Frank for his efforts over the past 13 years, and I am also pleased to announce that Michael Clarke will be appointed as Frank's successor. Michael is currently our Assistant Controller and has been with the company since 2008, so he's a natural fit for the position.
Both Joe and Rob are here today and each of us has prepared remarks and then we will open up the call for questions. In addition to the telephone access for today's call, we're providing an audio cast via the LKQ website.
Both forms will have replays available shortly after conclusion of the call. Before we begin with our discussion, I'd like to remind everyone that 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 statements to reflect events or circumstances arising after the date on which it was made, except as required by law.
Please refer to our Form 10-K and other subsequent documents filed with the SEC and the press release we issued this morning for information on potential risks. And with that, I'm happy to return the call over to Mr.
Robert Wagman.
Robert Wagman
Thank you, John. Good morning, and thank you for joining us on the call today.
We are very pleased with the results we reported this morning with both a strong fourth quarter and full year. Diluted earnings per share from continuing operations in Q4 was $0.28, an increase of 12% as compared to $0.25 for the fourth quarter of 2009.
However, excluding a gain on bargain purchase and restructuring expenses, Q4 2009 earnings would have been $0.23 resulting in an adjusted year-over-year increase of 22%. Revenue reached a record of $674 million in the quarter, an increase of 21% as compared to Q4 last year.
Organic revenue growth for the quarter was 10.4%, which reflects increased part sales and higher commodity prices. For the full year, our EPS from continuing operations was $1.15, up significantly from $0.88 in 2009 or $0.86 when adjusted for the items I just mentioned.
This morning, we also issued our guidance for the full year of 2011. We expect that revenue from parts and services will grow organically in 2011 at a rate of 6% to 8%, which is in line with 2010 actuals.
Based on current conditions and excluding restructuring expenses and any gains or losses related to acquisitions or the divestitures, we anticipate full year 2011 income from continuing operations will be in the range of $194 million to $208 million. And diluted earnings per share from continuing operations will be in the range of $1.31 to $1.39.
Net cash provided by operating activities for 2011 is projected to be approximately $195 million. We estimate capital expenditures related to property and equipment will be between $85 million to $95 million.
The latest data available to us indicates that collision repair shops continue to increase their use of alternative parts when repairing vehicles and that the alternative part usage rate increased to 37% in 2010. This indicates a continued commitment by insurers and their DRP networks to work at holding down claims cost with the use of alternative quality replacement parts.
As mentioned in past quarters, NSF, the administrator of our AQRP program, and a nationally recognized standards and certification firm, previously announced a new automotive aftermarket collision parts certification program. NSF's efforts should expand the universe of certified aftermarket parts and part types, and reinforce the use of aftermarket parts in the collision repair industry.
To date, NSF has certified over 300 unique parts. Alternative part availability should increase as these newly certified parts eventually work their way through the manufacturing process and ultimately, into the estimating systems and our inventories.
Furthermore, the U.S. Department of Transportation reported that November 2010 miles driven were up 1.1% from November of 2009, which should lead to increased demand for our range of products.
Demand for LKQ's wholesale parts remained strong during the quarter. Our fourth quarter organic revenue from the sale of all parts and services increased 7%.
For the full year, we finished at an organic growth rate of 6.6% which was in the target range we set at the beginning of the year. Turning now to aftermarket refurbished revenue.
Aftermarket refurbished revenue increased 16.8% for the quarter, with an organic growth rate of 7.7%. This healthy growth rate can be partially attributed to be the availability of more certified parts entering the system, as well as the maintenance of a generally robust inventory levels.
In our wholesale recycled division, organic revenue growth of recycled parts and services was up 6.1% for the quarter. Availability of salvage inventory has been good and we continued to put more recycled inventory on our shelves to sell, but the prices we had to pay continue to be above the historical average.
During the fourth quarter, we purchased over 49,000 vehicles for dismantling by our wholesale operations, which is a 22% increase over Q4 2009. However, the 2009 total includes about 5,500 Cash for Clunker cars, which yielded a lower revenue per car than our typical late model salvage vehicle.
As for volumes at the auctions, the outlook for supply remains good, starting out in 2011. With inventory already on hand, and a continuation of our current run rate for acquiring cars, we should have sufficient inventory to grow our recycled parts operations.
We continue to be focused on the improvement of parts pricing to offset the downward pressure from high auction prices on our gross margin. We are moving towards managing our pricing on a national basis, as well as creating pricing specialist for our different product types.
In addition, we are implementing better disciplines for mechanical, part, core charges and recovery. We are seeing some initial promising results from both of these initiatives.
I'd like to turn the call over to Joe to talk about other aspect of our business and our most recent acquisitions.
Joseph Holsten
Thanks, Rob. Turning to our Self Service retail operations, during the fourth quarter, we purchased roughly 77,000 lower cost self-service and crush only cars.
The pricing dynamics within the Self Service business were generally favorable to the company throughout the fourth quarter. However, we've recently seen car costs rise above the Q4 levels and at a faster pace than ferrous scrap metal pricing.
Similar to our late model business, we continued to see car opportunities that are self-serve operations to increase our price points. Shifting to our Heavy Duty Truck operations.
We purchased roughly 1,200 units for resale or parts during the quarter. We remain focused on expanding our network, as well as rounding out our marketing and sales training in this area.
In addition, we're bringing all of our heavy truck operations under a single IT platform, along with the development of another change to facilitate parts identification between operations. Recently, we have been encouraged by a pickup in activity in our export markets.
We enjoyed another robust quarter for acquisitions with a total of eight deals. These included a Wholesale Recycled Product business in Arkansas, and a Self Service business with two facilities in Southern California.
These are in addition to the previously announced acquisitions of Cross Canada, a leading Canadian aftermarket price distributor, and PROFormance Power Train, an engine remanufacturing business in addition to four other APU businesses. 2011 has also started off on a strong note, with the acquisition of four additional companies, including ATK Vege, an engine remanufacturing business headquartered in Texas.
Additionally, an aftermarket distributor of heating and cooling products located in the Midwest, a heavy duty truck Recycling business located in Texas, and a Recycled Parts business in Milwaukee, Wisconsin. Combined, the acquisitions of ATK and PROFormance provide LKQ with a significant foothold in the engine remanufacturing market.
And we believe provides some key competitive advantages in regards to the pull of cores from our recycled parts facilities, as well as our ability to predict future demand to build the right products to meet that demand. The trailing annual revenue for the eight Q4 acquisitions and the four acquisitions already closed in 2011, comes to just under $240 million, and is included in our 2011 guidance.
Through our own internal development efforts, we opened a new tire recycling facility in Tampa, Florida, during the quarter. This is part of a continued expansion strategy.
This product offering resulting from our 2010 acquisition of a Tire Recycling business. In addition, we currently have several self-service recycling facilities under development, which we expect to open later this year.
And at this time, I'd like to ask John Quinn to provide some more detail on the financial results of the quarter.
John Quinn
Thanks, Joe. Hopefully, everyone has had a chance to look at our 8-K, which we filed with the SEC earlier today.
And as normal, we're planning to file our 10-K in the next few days. Rob has already given you a breakdown of the year-over-year revenue changes, so I'll just supplement what he said with a few other data points.
For Q4, our total organic revenue growth was 10.4% and we had an additional growth of 10.7% from acquisitions. Rob mentioned that the fourth quarter organic growth for parts and services was 7%.
Other revenue, which is where we recorded our scrap and commodity sales, was up 64.2%. Approximately 37% of this was organic growth as commodity prices were higher on a year-over-year basis and because we had higher volumes of scrap and cores, and 27% of the increase was a result of acquisitions.
In Q4 2010 revenue for our Self Service business was $56 million or 8.3% of LKQ's total revenue. Approximately 32% of this revenue is part sales and included in the recycled and related products, and 68% was scrap and core sales included in other revenue.
Our acquisition revenue growth was driven by the 20 deals we did last year, with Q4 being particularly impacted by the previously announced acquisitions of Cross Canada, a cooling products company called SPI and Heartland Aluminum. You'll recall that the Greenleaf transaction rolled off at the end of Q3 as this was completed in October 2009.
Joe mentioned that the trailing revenue of the acquisitions completed in Q4 2010 and thus far in 2011 was $240 million. A little over $20 million of that revenue is already in the 2010 numbers and some of that will end up being eliminated on consolidation.
So I'd expect the impact for 2011 from these acquisitions will be in the $200 million to $220 million range. Gross margin for the fourth quarter 2010 was 42.7%, which was down 280 basis points from 45.5% in the same period of 2009.
Similar to last quarter, this decline was primarily related to the higher costs incurred acquiring salvage vehicles at auction and in the self-service line of business. One comment on the sequential margins.
When we announced some of the Q3 acquisitions last September, we mentioned that the margins in the scrap aluminum sales associated with the Heartland Aluminum acquisition would be at the lower than normal margin. We've seen that impact in Q4.
Our margin declined sequentially from 43% in Q3 2010 to the 42.7% we saw in Q4. The main driver of that decline was the impact of the Heartland revenue, and without that deal, we would've had comparable sequential margins.
While our gross margin percentage is down year-over-year, we did see some offsetting improvements in each of our facility and warehouse, distribution and SG&A expenses. In total, these three items fell from 33% of revenue to 30.3%, more than offsetting the gross margin decline.
Our facility and warehouse expense for the quarter increased $7.9 million or 14.1%, as compared to the same quarter of 2009. Approximately $6 million of the growth was related to business acquisitions.
Facility and warehouse expenses as a percent of revenue for the quarter showed an improvement to 9.5% from 10.1% last year. Distribution expenses for the quarter increased $9.3 million or 18.8% from Q4 2009, with $4 million of that growth related to business acquisitions.
The remaining growths, primarily: Fuel of $1.4 million; labor of $1.1 million; $2.3 million of volume-related items such as freight and truck rentals. As a percent of revenue, distribution cost showed 20 basis point improvement to 8.7%.
Selling, general and administrative expenses grew $3.8 million or 4.8% over the fourth quarter of 2009, with $5 million of the growth related to business acquisitions. We also had higher labor costs to support the increased business of about $1.7 million, offset by lower legal and claims costs of $1.5 million and other expenses of $1.4 million.
As a percent of revenue, SG&A expenses were 12.1% in Q4 2010 compared to 14% in the same period of 2009. Our operating income was $73.1 million in Q4 2010 compared to $59.7 million in Q4 last year, an improvement of $13.4 million or 22%.
Net interest expense is $6.7 million with $1.1 million better than the fourth quarter of last year, primarily due to lower borrowing cost. Our effective borrowing rate was 4.53% in Q4 2010 compared to 5.02% in Q4 2009.
I think Rob has gone over these numbers. Last year, in Q4, our income from continuing operations included a $4.3 million or $0.02 per share pre- and after-tax gain on bargain purchase price.
Excluding the $4.3 million gain, last year's Q4 income from continuing operations was $32.2 million. In Q4 2010, our income from continuing operations was $41.3 million, an improvement of 28% excluding the gain on bargain purchase last year.
On a reported basis, diluted EPS from continuing operations for the quarter was $0.28 in 2010 compared to $0.25 in 2009, an improvement of 12%. Excluding the $0.02 gain in last year's numbers for the bargain purchase price, improvement was $0.05 or 22%.
Cash flow from operations for the year was $159 million compared to $164 million in 2009. Although we beat our original guidance for the year for net income, we ended up with higher investments in inventory than we had anticipated, particularly in Q4.
Excluding inventory from acquired businesses, during 2010 we increased inventories by $68 million including the $24 million investment in Q4. Last quarter, we mentioned that we intended to accelerate our normal seasonal build, which we did.
In fact, we built a little higher than we had planned at that time and hence the inventory increase. This inventory build combined with the inventories acquired from the acquisitions, left us in good shape as we entered our busy winter season.
Capital expenditures for the quarter were $24.5 million, bringing our year-to-date total to $61 million. We underspent our Q3 guidance by a few million mainly due to the timing of some of the bigger projects.
Rob mentioned our CapEx guidance of $85 million to $95 million for 2011 capital expenditures. This figure includes some carryover from 2010 but we're also budgeting for the additional Greenfield projects that Joe mentioned.
Approximately 25% of this capital spending is for replacement items, with the balance being used to support our growth. During the quarter, we spent $73 million in cash on acquisitions, bringing the full year total to $144 million.
In addition, we issued 690,000 shares valued at $14.9 million in conjunction with acquisitions. Total acquisition considerations for the year was $170 million.
During the quarter, we issued 985,000 shares of stock related to the exercise of stock options that resulted in $10.9 million of cash including related tax benefits. Debt at the end of the quarter was $601 million, including $590 million under our secured credit facility.
Cash and equivalents were $96 million at quarter end. Today, we have no draw on our $100 million revolving credit facility and approximately $27 million of letters of credit that are backstopped by the facility leaving $73 million availability for future borrowings.
As Rob mentioned, we believe the business performed very much in line with our expectations in Q4. But before I turn the call back to Joe, I think it's worthwhile just to summarize a few of the financial highlights for the year.
We saw revenue up 21%, approaching $2.5 billion revenue mark after hitting the $2 billion milestone only a year earlier. Our EBITDA grew from $274 million to $340 million, a 24% increase.
And we saw operating income margins improve 80 basis points to 12.1%. And our operating income increased from $231 million to $298 million, a 29% improvement.
We've exited 2010 with our inventories in good shape. Almost $100 million of available cash and our leverage ratio is continuing to show meaningful improvement.
Leaving us with the flexibility to continue our growth in 2011. And with that, I'll turn it back to Joe.
Joseph Holsten
Okay. Thank you.
Let me share some closing thoughts before we go to Q&A. Like John and Rob, I am also pleased with the progress that we've made in Q4 as well as in all of 2010.
And I believe the company is well-positioned to continue our growth in 2011. Similar to the way I closed this call one year ago, I've continued to believe that the current U.S.
economic recovery will be slow with weak to moderate economic growth for the near future. Our results this quarter continue to demonstrate that LKQ is able to realize strong revenue and earnings growth even in the current overall economic environment of low growth and high unemployment.
We delivered good organic growth in all of our product areas by building strategic partnerships with the collision repair industry, and offering quality alternative parts. We also realized growth from the successful integration of previous acquisitions.
A pipeline of acquisition candidates remain strong, and completing additional transactions will help support our future growth by increasing our presence in both new geographical and underserved markets and by broadening the product lines we sell. Our recycled parts inventory is currently deep.
We were able to generate strong results last quarter despite continuing higher procurement costs. I expect car costs will remain at higher levels and the overall fleet page will likely increase again in 2011 as a result of only a modest improvement in new car sales.
Our company remains well-positioned with good product lines that provides value to our customers in a difficult economic environment. And our strong balance sheet should allow us to capitalize on the many growth opportunities that we anticipate for LKQ.
That concludes our prepared remarks, we'd like to go to Q&A at this time.
Operator
[Operator Instructions] Our first question comes from the line of John Lovallo with Bank of America Merrill Lynch.
John Lovallo - Bank of America-Merrill Lynch
First one, what are the primary drivers would you say of the higher pricing at the auctions? I mean, is it supply or is it just used vehicle pricing?
How would you characterize that?
Joseph Holsten
I think I would characterize that predominantly from used car pricing. The Manheim Index continues to hit new all-time highs right up to last month.
And John has kind of done some correlation work himself, and probably the strongest predictor that we can lay out in terms of salvage auction pool prices is purely what we've seen in used car pricing. The quantity and volume of product is pretty robust.
John Quinn
It's on the self-service side, John. The prices there also correlated with scrap pricing because those vehicles are being bought mainly for the scrap.
And so they tend to go up higher correlation on the lower-priced vehicles with the scrap. But at the auctions, we believe it’s mostly the used car purchases.
John Lovallo - Bank of America-Merrill Lynch
And in terms of your acquisition priorities in 2011, are you guys still looking for four more truck facilities?
Joseph Holsten
Yes, I think a good pace for us is kind of one every other quarter. And then just to be opportunistic, I assume, there will be another one dropped down.
In fact, I would expect that we'll probably close three heavy truck transactions in 2011.
John Lovallo - Bank of America-Merrill Lynch
And the final question, in the latest Mitchell report, they kind of rehashed the Ford statement about the inferiority of non-OEM structural parts, but they're also kind of made mentioned that Ford was indicating that recycled OEM parts in general are inferior. Is this issue starting to heat up again?
Or is this just kind of old news being rehashed?
Robert Wagman
John, this is Rob. I think its old news being rehashed here.
We take it very seriously, of course, their allegations. We've done multiple crash testing on our parts.
We continue to put new certified parts into the system, which we think is a benefit for everybody. And we will continue to test our products.
As far as the used parts go, I think that's a little bit of a stretch because we're taking parts off of cars that were on the road. So if -- I don't think you can get a better tested product than the one that's been on the road before.
So I just think it's an attack that they're going to use to protect their market share.
Operator
Our next question comes from the line of Tony Cristello with BB&T Capital Markets.
Anthony Cristello - BB&T Capital Markets
First, when you look at the acquisitions and you've made a bunch of them here in the last, let's call it, four, five months, how should we think about the assimilation? One, the cost associated or dragged upfront with those?
And then two, when we look out, what's your ability to then grow off of the base of these acquisitions? It's not just adding this as incremental revenue, but using it as a vertical to expand your business and touch points.
John Quinn
Sure. It's John speaking, Tony.
There's a couple of dynamics with respect to the acquisitions. The Heartland Aluminum, I think we indicated that’s going to be our lower margin business.
The reason we bought that was we really wanted the core to support the wheel growth business. We saw a lot of remanufactured or refurbished aluminum wheels.
That's going to just grow organically with the business. I don't see it having a huge improvement in terms of synergies other than we were able to get the additional volume growth coming through that.
The other acquisitions, they're going to take some time, honestly, to get -- in terms of executing the synergies. So they're going to come in probably with a little bit lower margin initially, but then we should be able to grow them organically, at the same rate as the rest of the business, frankly.
That is the intention. Does that answer your question?
Anthony Cristello - BB&T Capital Markets
It does. I guess I just wanted to sort of touch on, then, when you look at sort of some of the newer verticals, engine remanufacturing, for one.
It seems like you made a couple of acquisitions that give you a nice footprint. And maybe, can you talk a little bit about the nuances of that business?
And sort of what that brings to the table from a growth perspective down the road?
John Quinn
Yes, on the reman side, Tony, just to give you a little bit of background on the size of the markets. We believe the market size is about $1 billion, from reports we've seen, with about $750 million of that being in the non-OE, $250 million being with the OEs and under warranty.
We have an additional capacity in our reman division for reman engine heads that is about a $400 million business. For us, we combined the two acquisitions we've done, plus what we sold in the year through our own network of brokering and huge selling that product, sold about 65,000 units in 2010 combined.
We have the capacity to grow to 92,000 units, with additional shifts and no additional building. So we could ramp up capacity pretty quick.
On the reman head side, we have capacity to 31,000 reman heads and we only produced half that much. So we are well-positioned to move quickly.
And I want to stress those figures do not include the used part market. That is strictly the reman.
As for the market opportunity, I mentioned a little bit about the $1 billion opportunity. 35% of that industry is controlled by the mom-and-pop machine shops and the other 40% is in the aftermarket, in the market we're playing in right now.
So with the other 25% being the OE. But the biggest bang for the buck I think we get from this is with the production of all of our units and our full-serve locations, when we sell a unit, which is almost one for one, we sell as many engines as cars we dismantle, we're getting a core back and be able to feed that reman operation.
So it's pretty powerful not only do we have the stock feed but we're taking cores out of the marketplace. And then secondly, because of our demand -- we're getting so many calls on this stuff -- we tend to notice pockets of problems well before other people may have that opportunity when we get a jumpstart on the reman opportunity.
So it's allowed us to be very proactive in our base business.
Joseph Holsten
Just to add one other comment, Tony. A lot of the transactions here over the last five or six months in addition to the product line expansion, continue to represent geographical diversity for the company, which I always think is one of the strengths of our company is how diverse we are in terms of our business presence.
Over the last five to six months, a number of our deals have really been oriented toward just new geographical expansion. The Norfolk, Virginia, transaction a couple of quarters back was a totally new market for us.
The Cross Canada transaction got us somewhere around probably eight Canadian markets that we were not serving at all. And, of course, the Little Rock transaction recently is a market that we were serving but we were serving that market from about a four-hour distance.
So it was not really very robust or responsive service. The geographical expansions have always been really nice deals for us, really into the sweet spot of the company because it helps us leverage our inventory and our distribution systems quite effectively and frequently working with the same insurance partners who we've been enjoying working relationships with for the last decade.
Operator
Our next question comes from the line of Sam Darkatsh with Raymond James.
Sam Darkatsh - Raymond James & Associates, Inc.
First off, could you talk a little bit more about your pricing initiatives? I know you've been beginning to disclose some of these thoughts the last quarter or two, the national standardization, the pricing specialists.
At what point do we begin to see -- or is it measurable from a holistic standpoint -- what you're doing from a pricing standpoint? And how should we look at gross margins over the next few quarters?
Robert Wagman
Let me talk first, Sam, about what we're doing and I think it will be helpful if John can answer the other half of your question. But as far as the national pricing, this has really been facilitated by our operating system that now allows us to see across multiple regions instantly.
So it's allowed us to go from regional pricing, where we had a regional pricing, multiple product lines across a computer screen in just a region. The new ability we have now with a product line specialist.
So for example, a compressor, one person can change prices across the whole country, just making it much more effective and allowing us to get these price changes in much more quickly. The other thing that's important as we continue to grow our IT resources is the cross information going from our Aftermarket business to our Salvage business.
They're sharing data readily that is also allowing us to make quicker moves. But I think the most important thing we've done is make a dedicated pricing department that is going to push through these changes much quicker – they’re looking at algorithms and different trends that allow us to make the pricing changes quicker.
And the last thing I would mention to what we're doing on pricing that I think is pretty important, is our deviation progress. We monitor our sales reps from one [indiscernible] (00:55:36) off the reservation, so to speak, and getting too aggressive with the pricing thing, and we've been able to lock them down to that new computer system and have much more controls.
John Quinn
Obviously, I think Rob is primarily talking about the salvage operations. In the aftermarket, we tend to be more of a price taker there, with referencing the OE prices.
We're seeing the OEs raising prices on our mix of products about probably 2.5% to 3% over the last year. In terms of margins, how we should think about margins, going forward, I'd start off by maybe just reminding everybody that in Q1 last year, we did have a little bit of a benefit from a rising commodity price environment.
I think we talked about $0.02 a share that did come through. We're not going to be able repeat that, obviously, in Q1.
Other things also, if you think about gross margin, the things that are driving that typically are changes in scrap prices. We're assuming on our guidance that scrap prices remain basically where they were in Q4.
Since that time, we've seen a little uptick and a little downtick. We're probably back to roughly where we were.
We don't really see much movement with respect to that and for the balance of this year, at least at this juncture. And salvage costs is the other thing than can drive margins.
Right now, prices have been pretty stable, maybe a little bit of an uptick from Q4. But again, the guidance was built sort of on -- from the state of the auction prices that we saw in Q4.
There's a little bit of a -- we talked a little bit about a mixed change because of the additional scrap revenue coming through and the acquisitions may be coming in a little bit later. And the pricing things that Rob is talking about, those things -- building that test and how the pricing can be impacted.
It takes time, just to test it, and you see if it works, and go back and forth. So those kinds of improvements I wouldn't expect to see starting to come through until later in the year.
But I was talking about gross margin in terms of operating income margin. You saw almost a 300 basis point improvement in our SG&A facility and distribution and warehousing costs year-over-year.
Some of that is becoming about -- simply because of the same things that are driving our gross margin compression. The additional commodity sales has actually helped those margins because you don't really need a lot of extra warehousing or SG&A to run those sorts of things.
So I think some of those things are also going to continue to improve to the extent that some of -- to the extent that we see higher commodity prices were going to see improvements in those margins. So net-net, hopefully, the operating income margin, it pans out favorably.
Sam Darkatsh - Raymond James & Associates, Inc.
With respect to aftermarket, the segment, in particular, you're going to have somewhat easier comparisons in 2011. And I'm guessing, also, the higher used car values are going to ultimately help out demand in that business.
Should we factor in double-digit organic growth in aftermarket in 2011?
John Quinn
I don't know if we're going to get that granular with our guidance. Last year, our total organic growth came in a little bit under 7% for the combined.
I think we saw our guidance this year at 68% organic growth. How much of that will come out, I guess if I had to bet I would say a little bit -- it's probably more on the aftermarket side than the salvage side.
Hopefully, we kind of anniversaried the price increases that we saw at the auctions with respect to the salvage side.
Sam Darkatsh - Raymond James & Associates, Inc.
Typically, you directionally talked about the early quarter cadence of demand and we've seen some pretty hellacious storms at least in January. What are you looking like from a demand standpoint early in '11?
Robert Wagman
You did nail the weather. We had quite a bit of closures from Texas to Boston.
And it was in both January and February, actually. January we had closures from Atlanta up the East Coast.
But in January, the numbers are in, the month was pretty much in line with our expectations despite those closings. So we're pretty pleased with January.
As far as February goes, we have the Texas and up through the Midwest. A lot of closures there, as well.
But while the numbers aren't in the books yet, we're trending well towards the later part of the month. So demand has been good and we've been able to meet that demand.
Operator
Our next question comes from the line of and Craig Kennison with Robert W. Baird.
Craig Kennison - Robert W. Baird & Co. Incorporated
First question really has to do with the broader collision repair market. Do you have a sense for where that market was and where it is today?
And how much it's contracted? We know that APU was up and that you're taking share so some of those trends maybe masking a broader decline in the collision repair market.
So I guess I'm wondering, is there some cyclicality that your success is masking?
Robert Wagman
Well, there's certainly a lot of -- the business's acquisitions in that industry. The DRPs are getting stronger and stronger.
Craig, I just saw a report that the percentage of collision repair is going through DRP networks, the top 35%, which doesn't include GEICO or Progressive, so it's much higher than that, actually. I think we're seeing some of the mom-and-pops go away.
But as far as actual collision activity, we do watch an annual report, and it’s been pretty steady. And certainly, the weather this year in January and February should provide them good opportunities into the spring.
So a little bit more of a consolidation in history, but the industry begin seems to be holding its own, not too much of a decline.
Craig Kennison - Robert W. Baird & Co. Incorporated
And then John, you made a point about G&A having some benefit from rising other revenue, which is not necessarily recurring because there's really no G&A associated with those revenue dollars. You still made a lot of progress on that line, is that something you think is more sustainable as you scale?
John Quinn
Yes, we are obviously, I think I've spoken in the past about nothing being revolutionary but more incremental in terms of some of the things we are trying to do. We are trying to consolidate our accounting into a shared services facility in Nashville, those sorts of things.
Some of the technology that we're doing allowing cross-selling, those sorts of things. We would like to see some additional leverage coming out.
I think in terms of the numbers in Q4 that we saw, in Q4 last year, we had a few unusual things, there's nothing really unusual in Q4 2010. So I think that's kind of a good jumping off point.
Craig Kennison - Robert W. Baird & Co. Incorporated
Are there additional, as you sort of layer in some of these costs for example, your pricing teams, that you talk about on the national scale, is there a cost to that that we need to factor in? Or is there just fundamentally in that asset?
John Quinn
I think it's relatively de minimis. Given the kind of revenue growth that we are forecasting with these acquisitions, I think the pricing teams are going to be around there, frankly.
Craig Kennison - Robert W. Baird & Co. Incorporated
And then lastly, just at the gross margin level, obviously, you're seeing some pressure due to higher auction prices. But that tends to be a cyclical number as well.
If we saw a drop in, let's say, the Manheim Index, would you expect that to start to flow through the gross margin?
John Quinn
Yes. I would think it would take some time -- it would take a few quarters to flow through the system.
But I think we would see some improvement.
Operator
Our next question comes from the line of Scot Ciccarelli with RBC Capital Markets.
Scot Ciccarelli - RBC Capital Markets, LLC
I guess, my first question is -- I guess I'm trying to figure out a little bit better about the main benefit of national pricing. It's interesting to look at a lot of retailers, for example, a lot of those companies are trying to get more granular or localized in their pricing because it enables them to capture more margin in certain markets while potentially avoiding being less competitive in certain other markets.
So I guess I understand that the desire to support your margins with -- call it, higher pricing, national pricing, whatever you want to call it, but could this actually work against you from a market share perspective?
Robert Wagman
I don't think so, Scot. The benefit here is -- you remember, we're just not selling a compressor, for example.
There's multiple compressors depending on the make and model. And by getting product specialists, I think, we believe, that they'll be able to act much more quickly to trends in the industry as opposed to try and price across multiples spectrums, they can concentrate and drill down a lot easier to get to the right price.
So I don't see any downside to doing this. I think it will be much more effective and it will allow us to monitor our pricing much more quickly and react quicker to any kind of change in the OE marketplace.
Joseph Holsten
Just a fine point, Scott, the work is going to be done nationally but that does not mean that regional pricing decisions would still not be encouraged in the company. So it's just bringing far more discipline to the process than what we've accomplished over the last number of years.
Scot Ciccarelli - RBC Capital Markets, LLC
My second question is really on the acquisition side. And just the simple law of larger numbers says that it gets harder and harder for acquisitive type companies to keep growing at the same rate as they had been if acquisitions have been a major source of their revenue growth, the way I think it has been with your company.
So you've obviously been very aggressive over the last, let's call it, 12 months plus. At what point do you think it really starts to get more difficult to kind of maintain that acquisition pipeline to keep the same type of percentage growth, I guess, kind of coming in the door?
Joseph Holsten
I think we've got to continue to have significant amounts of blue sky and open runway. I think last year, we talked about having a couple of years we'd string together $200 million in transactions.
Generally, I don't think the market thought that we would get that done and we're easily surpassing those numbers. And I'm convinced that we will quite comfortably put a couple of hundred million dollars of transactions on the board this year.
In 2012, the issues of the capital gains taxes are going to be right back on everybody's face about a year from now. So I continue to think we have several years of open road with a good acquisition environment and things that create a lot of volume not just for our shareholders but quite frankly, for our customers.
Operator
Our next question comes from the line of Nate Brochmann with William Blair & Company.
Nathan Brochmann - William Blair & Company L.L.C.
I wanted to do a follow-up, just a little bit more specific on -- Joe, in your opening comments you talked about how you're seeing the higher steel prices come through in terms of the other category. But that hasn't been quite enough to offset the higher prices that you were seeing at auctions that we saw through that profit margin compression that we already talked about a little bit.
But could you talk about the spread a little bit more between those two? Was it truly that you didn't quite get the entire increase back on kind of the total net number?
Joseph Holsten
Yes. The fourth quarter of 2010, those is about as good as life gets to be in this business.
Because as you've identified, managing the spread is really the critical factor. And throughout the fourth quarter of 2010, we were always in a situation where we were selling scrap for more money than we had anticipated, two to three months earlier when we actually bought the car, and I'm referring strictly to our U-PULL-IT, our Self Service business at this point.
So that's about as good as life gets. As we moved into the first quarter, that relationship has evened out quite a bit.
As a matter of fact, as we've moved into the February time frame, we've seen the actual cost for salvage for end-of-life vehicles is at the highest level that we've seen this year and right up through last week. At the same time, scrap pricing at least for now, appears to have peaked, probably in the first couple of weeks of January and has traded back down, I'll say, close to 10% for the numbers that we're looking at for March.
So this is obviously nothing like the situation we confronted in 2008, when scrap prices were in free fall. This is a very manageable situation and business will do fine.
But in terms of any sort of windfall, like we saw in the first quarter of 2010 or even a little bit in the fourth quarter, I wouldn’t expect that to reoccur in Q1 of this year.
Nathan Brochmann - William Blair & Company L.L.C.
But the dramatic benefit, there wasn't much of a "dramatic benefit" than in the fourth quarter in terms of expecting the wild swing in gross margins just from that issue alone?
Joseph Holsten
Absolutely not.
Nathan Brochmann - William Blair & Company L.L.C.
And then talking a little bit more from a higher strategic position, Joe. You talked about the acquisition pipeline remaining strong.
And clearly, you guys have done a great job in 2010 and on the acquisition front. And they’ve been across a wide variety of different services.
I was wondering if you could talk a little more specifically in terms of a little bit more refining in terms of these specific areas, in terms of whether it’s geographical coverage and the core business or whether it's more of the ancillary acquisitions surrounding that in terms of where the targets are?
Joseph Holsten
Well, the most interesting transaction for us has been and will continue to be an acquisition that's in our -- kind of our bread-and-butter, late-model, automotive parts. And that would represent either a geographical expansion of totally new markets for us or an extension into the market that we may serve.
But I always use the word, underserved. A great example of that was the Denver market and we've built about a $3 million business in Denver.
We were servicing the accounts from Topeka, Kansas. And we opened a facility in Denver in the middle of last year and what we'll see kind of a hyper growth in our Denver operations and probably, for a good five-year period.
Same thing in Seattle, small acquisitions in Seattle. A market leader certainly from Portland, Oregon, but now with real estate -- we're investing in the facilities there in the first half of 2011.
And again, we would expect to see hyper growth in our greater Seattle market. So that's the sweet spot of our transaction focus and it will continue to be because there are a significant number of markets that were underrepresented there or don't have a presence at all.
Robert Wagman
If I could just add one thing to Joe's comments, one of the things that allowed us to really survive the storms and all the shutdowns were the fact that we are so diverse, not in product lines but also in geographic locations. When some locations close, we were still able to just keep running in neighboring markets.
So we'll continue to fill out the North American platform.
Nathan Brochmann - William Blair & Company L.L.C.
And I think the summary point there, is that there's still long way to go in terms of building out your underserved markets and still establishing some new beachheads in a few areas that you're still not there.
Joseph Holsten
We think so, too. Yes.
Operator
Our final question comes from the line of John Lawrence with Morgan Keegan.
John Lawrence - Morgan Keegan & Company, Inc.
Just real quick, Joe. Would you follow up a little bit with the auction price comment, and talk a little bit about -- obviously, the alternative channel has grown, I guess, to 37%, it’s just the largest increase we've seen in some time.
Is a lot of that -- how much does that have to do with the breadth of product versus the number of players that are buying the product? Can you sort of separate that?
And then a little bit about how has the mix changed with the fleet getting older to the types of parts you are buying? And back to that pricing question, is the tail or those incremental parts, do you still have the same spread that you had, say five years ago?
Joseph Holsten
I'll start with the auction environment question and then I'll ask Rob to respond to the balance of your question, John. Throughout 2010, each quarter, we were tending to see kind of year-over-year significant increases in the cost of salvage for our late model wholesale businesses.
It would appear that into the fourth quarter of this year, when those year-on-year comparisons has evened out. As a matter of fact, if you look at the fourth quarter of 2010, our average cost of salvages for the wholesale operations actually dropped about three percentage points from where we were in Q3.
So we'll see how Q1 unfolds, but at least at the moment we feel that we probably kind of topped out on the cost of salvage for cars. We have reoriented our thinking there a little bit to, I think, keep our focus more on the gross margin dollars, maybe as opposed to the gross margin percentages.
Because at the end of the day, the real key to the business and the profitability for the company and our shareholders is really the gross margin dollars that we produce from each car that runs through our dismantling phase. And said differently, we'd rather deliver a $1,000 door than a 1,000 $100 doors.
Robert Wagman
As for the APU trends, John, you're right that we had a 200 basis point increase from '09 to '10. I think there's a couple of factors that's causing that.
You're right, there are more aftermarket-certified programs that's certainly not hurting the availability of product and therefore, the use. There's still tremendous insurance company pressure to keep cost down.
They're fighting for the same policyholder. There aren't more policyholders necessarily becoming available so it's getting quite competitive.
Even though we are paying more for salvage, as we mentioned before, the auctions are robust and there is plenty of inventory available. One thing we don't talk a lot about, which is probably a good time to talk about and the effect of APU usage -- our reman division, when it comes to collision parts, head lamps, bumpers and wheels, our fill rates are up in that product as we buy more companies and have more access to products, we are filling more and more of those product lines.
So that is also contributing to the APU increases that we're seeing. As for the age of the vehicle and the impact that you asked about, certainly as cars get older, the mechanical components become much more desirable.
And to tie it into your pricing question, obviously, if demand gets stronger, we can obviously address that with pricing as necessary. As cars get older, less likely to sell sheet metal on those vehicles.
People might be less likely to carry full coverage, but certainly the mechanical components offer a great opportunity for us.
Joseph Holsten
We'll call it a call and look forward to talking to all of you about 60 days from today to update you on our progress in the first quarter. Thanks again.
Operator
This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.