Apr 29, 2011
Executives
John Quinn - Chief Financial Officer and Executive Vice President Joseph Boutross - Robert Wagman - Co-Chief Executive Officer and President
Analysts
Scott Stember - Sidoti & Company, LLC 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 Corporation's First Quarter 2011 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
Thank you, Christine. Good morning, everyone, and thank you for joining us today.
This morning, we released our first quarter 2011 financial results and provided updated guidance for 2011. In the room with me today are: Joe Holsten, LKQ's Vice Chairman and Co-Chief Executive Officer; Rob Wagman, President and Co-Chief Executive Officer; and Joe Boutross, our Director of Investor Relations.
Joe, Rob and I have some prepared remarks and then we'll open up the call for questions. In addition to the telephone access for today's call, we’re providing an audiocast via LKQ website.
Both will have replays available shortly after the conclusion of the call. Before we begin our discussion, I would 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 the 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 more information on the potential risks. Hopefully, everyone has had a chance to look at our 8-K, which we filled with the SEC earlier today.
And as normal, we're planning to file our 10-Q in the next few days. And with that, I'm very happy to turn 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. Diluted earnings per share from continuing operations in Q1 were $0.39, an increase of 8.3% as compared to $0.36 for the first quarter of 2010.
In our press release, we noted that 2011 diluted earnings per share results included a charge equal to $0.02 for the write-off of debt issuance costs in conjunction with the previously announced refinancing of our credit facility. When factoring out this amount, diluted EPS increased 13.9% compared to Q1 2010.
Revenue reached a record $787 million in the quarter, an increase of 30.3% as compared to Q1 2010. Our first quarter total organic revenue growth was 13.6%.
Organic revenue growth for parts and services for the quarter was 10.3%, which reflects increased part sales, primarily driven by improved inventory positions. Turning to aftermarket.
Aftermarket and Refurbished revenue increased 22% for the quarter with an organic growth rate of 10%. This healthy growth rate can be partially attributed to the availability of more certified parts entering the system, as well as the maintenance of generally robust inventory levels.
Despite the headlines surrounding increased fuel cost, the U.S. Department of Transportation reported that February 2011 miles driven were up 1% from February of 2010.
However, this was prior to the recent surge in fuel prices. In our Recycled Parts division, demand for LKQ's wholesale parts remained strong during the quarter.
Organic revenue growth of recycled parts and services was up 10.9% for the quarter. Recycled parts revenue growth from acquisitions grew 17% including the impact of our Remanufactured Engine business.
Availability of salvage inventory has remained strong, and we continue to put more recycled inventory on our shelves to sell, but the prices we have to pay continue to be above the historical average. During the first quarter, we purchased over 55,000 vehicles for dismantling via wholesale operations, which is a 19% increase over Q1 2010.
As anticipated in our Q4 call, a healthy volume of cars at auction was realized in Q1. With onhand products and maintenance of our existing rate of vehicle acquisition, we should have sufficient inventory to grow in recycled parts operation.
In an effort to offset margin pressure resulting from higher cost of goods, we continue to place a strong focus on lifting our sales yield. We are concentrating on improving the top line via strategic price increases and on minimizing the cost of sales line with tighter controls over customer discounts and price deviation.
We are developing enhanced analytical infrastructure to support price determination, and we continue to implement better disciplines for mechanical, part, floor charges and recovery. We are beginning to see the promising results from these various yield improvement initiatives.
But these are early days, and I look forward to updating you on our progress on future calls. And finally, touching on guidance.
Based on current conditions and excluding restructuring expenses in any gains or losses related to future acquisition or divestitures, we anticipate full year 2011 income from continuing operations will be in the range of $197 million to $211 million. And diluted earnings per share from continuing operations will be in the range of $1.33 to $1.42.
We are leaving the balance of our guidance unchanged for the year. With that, I'd like to turn the call over to Joe to talk about other aspects of our business and our most recent acquisitions.
Joseph Boutross
Thanks, Rob. Turning to our Self Service Retail businesses.
During the first quarter we've purchased roughly 81,000 lower cost self service and crush only cars as compared to 67,000 in Q1 of 2010, which is a 21% increase. The pricing dynamic within the Self Service business were generally favorable to the company throughout the quarter.
So although we saw prices rising, we also saw improved ferrous scrap metal pricing allowing us to maintain gross margin dollar. Shifting to our Heavy-Duty Truck operations.
We purchased about 1,000 units for resale or parts during the quarter. Here, we remain focused on expanding our network, as well as rounding out our marketing and sales training in this area.
In addition, I mentioned in the past that we're bringing all of our heavy truck operations under a single IT platform, along with the development of an interchange to facilitate parts identification between our operations. I'm happy to report that this work is progressing very nicely.
Recently, we have been encouraged by a pickup in activity in this line of business including some improvement in the export market. I mentioned in the last call that during the quarter, that we had already acquired 4 businesses.
The first of which was ATK. ATK is an engine remanufacturer.
Their main distribution warehouse is located near Dallas, Texas. ATK remanufactures passenger auto and light-duty truck engines and cylinder heads, its primary production facility is in Mexico.
The second transaction was HEATEX RadPro located in Michigan. HEATEX is a distributor of automotive heating and cooling parts from 15 leased facilities located primarily in the Midwest, Michigan, Indiana, Minnesota, Wisconsin, Iowa and Ohio.
HEATEX's core customers are the cooling parts and towers. Third, Midway Systems and Any Core in Duncanville, Texas.
Midway sources trucks large from fleet operators, that’s a nice addition they are heavy-duty truck platform. The company also develops and distributes after-market parts for heavy-duty truck application.
And finally, Auto Paradise in Milwaukee, Wisconsin. Auto Paradise operated a wholesale salvage yard, which we are in the process of converting to a self-service facility.
As mentioned in Q4, these acquisitions will enable us to expand our market presence by supplementing our product line offering and expanding our geographic footprint. With respect to our own internal development efforts, we currently have 3 self-service recycling facilities under development in various markets.
As well as 1 wholesale salvage yard in Central Ohio, which we expect to open later this year. We continue to be pleased with our company's ability to integrate our acquisitions.
And given the company's recently announced new $1 billion credit facility, which John will cover in just a couple of minutes, coupled with the robust pipeline, acquisitions will continue to be a key driver in our growth strategy. At this time, I'd like to ask John to come back on and provide some details of the financials in the quarter.
John Quinn
Thanks, Joe. Before, I can give numbers in the quarter, I thought I'd take a minute or two to talk about the refinancing, the company and our banking partners completed in March.
On March 25th, we replaced our then existing $100 million revolver and approximately $600 million of outstanding term loans with a new five-year $1 billion facility consisting of a $250 million term loan and $750 million revolving credit facility. The facility includes a $300 million of multicurrency sublimit and an accordion features for an additional $400 million.
The new facility offers us a number of immediate and longer-term benefits. Our liquidity over the next few years has markedly improved as we have approximately $300 million of additional capacity, and we've reduced the mandatory term loan repayments that would have been required under the full facility.
Interest expense would be immediately lower as we reduced our drawing borrowing cost under the facility by 50 basis points to L plus 175. With the pricing grid, it allows us to move lower if our leverage continues to improve.
The larger revolver means we are able to eliminate some of the negative carry we had from holding cash on the balance sheet, and with the new five-year term in place, we've pushed our only meaningful debt maturity out to 2016. You will note that in the quarter, we wrote off $5.3 million of unamortized cost associated with the old facility equal to $0.02 per share.
This is a noncash charge that has not been contemplated in prior guidance. Moving forward to the quarter's results.
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 Q1, our total organic revenue growth was 13.6%, and we had an additional growth of 16.5% from acquisition.
Rob mentioned that the Q1 2011 organic growth for parts and services was 10.3%. Other revenue, which is where we recorded our scrap commodity sales was up 71%.
Approximately 37% of this was organic growth as commodity prices were higher on a year-over-year basis and because we had higher borrowings of scrap in the cores. And 34% was the result of acquisitions.
In Q1 2011, revenue for our Self Service business was $74.4 million or approximately 9.5% of LKQ's total revenue. Approximately 30% of this revenue was part sales included in the recycled and related products and 70% scrap and core sales included in other revenue.
Our acquisition revenue was driven by the 19 deals we did in the final 3 quarters of last year and the 4 deals we closed in Q1 this year. The Q1 impact on revenue from acquisition was approximately $100 million.
Gross margin for the first quarter of 2011 was 43.7%, which was down 320 basis points from 46.9% in the same period of 2010. In the last 2 quarters, we mentioned that this decline was primarily related to higher costs incurred acquiring salvage vehicles at auction and in Self Service line of business.
We continue to see these lines of business being the principal driver of the margin decline on the year-over-year basis. But I think the other thing to consider is that as our other revenue grows, simply as a result of higher commodity prices, we don't maintain the same gross margin percentage on the back revenue.
While we may make some additional gross margin dollars, we don't always make the same gross margin percentage. I'd also like to have a comment on sequential margins.
We saw our sequential margins, that is Q4 2010 to Q1 2011, improve about 100 basis points from 42.7% to 43.7%. We believe there are a number of things that are driving that improvement.
Scrap prices rose during the quarter on average about $47 a ton. There's a lag between the time we buy cars and remove the parts and in time we sell the hulks for scrap.
We estimate this lag added about $0.02 EPS benefit, which showed up in our gross margin. Rob mentioned the impact of our pricing programs.
It's still early days, but we are starting to see some of the actions shown up in the numbers. I'd also like to mention that the heavy influx of acquisition revenue probably caused a bit of a drag on Q1 margins, and for new revenue can run below our company average for a few quarters.
The smelter operation we bought in Q3 will always run at lower margins. But the other businesses should see some margin improvement over time, as we continue to integrate them into our platforms.
We continue to pay improvements in each of our facility, warehouse, distribution and SG&A expenses. In total, these 3 items fell from 30.5% of revenue to 28.7%.
This improvement is partly a function of math because of the higher commodity prices drive higher revenue, without any corresponding increase in most of these costs. But it also reflects continued leverage in the business.
Also Parts revenue was up 24.5% year-over-year, whereas these costs were up 22% reflecting the leverage we are achieving. Our operating income was $107.4 million in Q1 2011 compared to $89.9 million in Q4 last year, an improvement of $17.4 million or 19.4%.
Net interest expense of $11.8 million was $4.5 million on favorable to Q1 last year. I mentioned earlier that 2011 included a noncash write-off and unamortized deferred cost associated with our prior credit facility of $5.3 million.
Without these costs, our interest expense would have been $6.4 million or about $900,000 favorable to last year. The year-over-year improvement in this number is a result of lower average borrowing levels and improved foreign costs.
Our effective borrowing rate was 4.6% in Q1 of 2011 compared to 5.1% in Q1 2010. Our tax rate for the quarter was 39.2%.
In Q1 2010, the rate was 37.2%. But you may recall that last year included some favorable discrete adjustments.
On a reported basis, diluted EPS from continuing operations was $0.39 in Q1 2011 compared to $0.36 in 2010. And as we mentioned earlier, there's a $0.02 expense associated with the refinancing of the credit resulting in that 2011 numbers.
Cash flow from operations was $77.3 million compared to $88.1 million in 2010. The main drivers of the change was an increase in working capital, mainly accounts receivable which ws the use of cash of $19 million compared to $3 million used last year.
And accounts payable, which was the use of cash of $10 million this year compared to a source of cash of $6 million last year. Capital expenditures for the quarter were $18 million.
And during the quarter, we spent $44 million in cash and on acquisitions. We also issued 407,000 shares of stock related to the exercise of stock options that resulted in a $5.1 million in cash, including tax-related benefits.
Debt at the end of the quarter was $559 million, including $547 million under our secured credit facility. Cash and equivalents were $65 million at the end of the quarter.
And at quarter end, we had a draw of $297 million in that revolving credit facility and approximately $26 million of letters of credit that are backstopped by the facility leaving $427 million of availability for future borrowings. Under the terms of our new credit agreement, we're required to make debt repayments on our term loans of a little over $3 million each quarter this year.
On April 14 of this year, our $200 million floating fixed hedge rolled off. And hedge we've put in place in Q4 where $100 million floating the fix became effective.
With these hedges, we have approximately 65% of our debt fixed at an average cash interest rate of 3.2%, and the balance is floating with the cash interest rate of about 2.2% at today's LIBOR rates and our current credit's spreads. Rob mentioned the increased guidance for the year, wherein we raised our EPS guidance to a range $1.33 to $1.42.
I want to point out that the revised guidance includes the $0.02 we incurred on the debt refinancings. To the sense the refinancing wasn't in our original guidance, conceptually, we are raising the operating performance of the business by more than the new EPS numbers would suggest.
Rob mentioned that the guidance excludes restructuring and integration costs based upon the acquisitions we've completed today, we expect to incur between $1 million and $2 million of these costs beginning in Q2 of this year. I will just take a moment to discuss some of the things that could have impact us for the rest of the year.
On the external front, there is the higher fuel costs. If gas stays at elevated levels, we could see miles driven decline and that could lower the number of accidents and hence our volume.
We continue to hear how higher commodity prices combined with the lower dollar is causing pressure on our aftermarket suppliers and shippers. And our guidance contemplates scrap prices and car prices where they are in the market today.
Obviously, scraps could go either way, up or down. We saw the Manheim used car index hit a new high in Q1, and we think that impacted the prices we paid at salvage yards.
We'd like to think that the index has peaked and may even start to come down overtime. But, obviously, that's just kind of out of our control.
We do feel pretty good about the things we can control, including our pricing efforts and cost control. And we also have a high degree of confidence in our acquisition and integration abilities.
To the extent we can avoid the negatives or get more out of these positives, we could see ourselves on the higher side of the new guidance range. With that, Christine, we'd like to open the phones for questions please.
Operator
[Operator Instructions] Our first question comes from the line of John Lovallo with Merrill Lynch.
John Lovallo - Bank of America-Merrill Lynch
First question is, in relationship to Japan, is there any chance that there will be increased demand for alternative parts? And along those lines, if the OE channels were unable to supply certain parts, is there an opportunity for you guys to supply that channel as well?
Robert Wagman
John, this is Rob. To date, we can report there have been no real part shortages in the OEMs supply chain.
We certainly would expect just from the news stories we're hearing from Japan there's going to be some level of disruption at some point. But there's really no clear signals as to which parts and when that might occur.
One thing we can report on that that's positive there's been no impact to our Taiwan suppliers because they did receive some of their raw materials from Japan, which has gone unimpacted. One thing that definitely will happen is there's a strong prediction of a tighter new car availability market, which would likely put pressure on the used car market, as John mentioned.
But to be safe, we have increased our safety stock of parts once already. And we are contemplating another uplift of emergency stock just in case it does turn towards a shortage of parts.
We will be prepared if it, in fact, that does occur. But as I said, right now, we have nothing firm on that.
John Lovallo - Bank of America-Merrill Lynch
Okay. In terms of the Self Service business, how big of a part of the business can this become?
I mean, do you think it will remain around kind of the 10% of total revenue or is there an opportunity to grow this further?
Joseph Boutross
Yes. Well, as I indicated we have 3 development yards under construction right now.
We continue to look for acquisition opportunities. So it's an important piece of the business.
The insurance carriers increasingly are looking for more cost effective ways to deal with the lower end products that they have and the auction fees have become, quite frankly, so expensive that they lose money and those insurance carriers will lose money on some of the lowest cost products. And we believe that our self-service yards can take that product directly and be of benefit to our very important partners and insurance carriers.
But say it’s probably around 10% of the business right now, if you factor in the scrap. And I would guess if the business will probably outpace the Self Service business.
And probably each year you'll kind of see the overall mix, the decline just gradually, just positive. We are adding other product lines continually to the products that we want our sales people to sell and distribute.
So we'll be working to develop it. But my I guess as a few years from now, it won't be 10% ,as high.
John Lovallo - Bank of America-Merrill Lynch
Okay. That's very helpful.
And finally, just a quick housekeeping. In terms of the revolver, is the interest rate the same as on the term loan?
Robert Wagman
Yes.
Operator
Our next question comes from the line of Sam Darkatsh with Raymond James Financial.
Sam Darkatsh - Raymond James & Associates, Inc.
Couple of questions. There's a lot of moving parts with gross margin, with the acquisition impacts, the steel scrap prices, your pricing initiatives.
How should we look at gross margins over the next couple of quarters? And then I've got a couple of follow-ups too.
Robert Wagman
Certainly, let me talk about some of the initiatives we've taken. John mentioned that the Q1-to-Q1 comparison, cost of salvage vehicles has increased as well as a cost of self-service vehicles.
Seem to think that it's going to bottom out at some point, and we may be near that point. Of course the addition of the smelter impacted the Q1 results as well.
As what this year and, of course, we didn't have the scene foreseen this year that we had last year. And of course, the time to absorb new acquired businesses, we can get them on our systems pretty quick.
But to get them to the margins that we are consistently running can take upwards to a year. To the other part of your question on some of the initiatives we've taken, we'll talk a little bit about those in the pricing department, across the region pricers.
They are making regional decisions, but much more quickly and effectively. And that is starting to show as well.
We have locked down our refs. We talked about last quarter about bypassing core charges on certain part types.
We've now expanded that across all part types. So we should expect to see some margin protection there as well.
We've also engaged our IT department to make some deviation controls electronically rather than a manual process the refs will now tied down there as well. We mentioned about our pricing analyst in my presentation, but more intelligence-based decisions upon supply, demand and market conditions.
Of course, rising steel prices certainly helped the margins a little bit here. But the system, the system sharing network we're seeing as well has been very positive for us.
The communications between our aftermarket divisions and our salvage divisions is helping us adjust prices much more quickly. But finally, we are early in the game, but the initial numbers do look promising.
So we do expect the margin to -- with the initiatives that we have in place, over time, we'll continue to improve.
Sam Darkatsh - Raymond James & Associates, Inc.
So we should expect a slightly accretive gross margins on a go-forward basis from the $437 million that you reported in the first quarter?
Robert Wagman
We are getting away from the cash reflector comps, which were stronger. And we still had a Q2 impact last year.
So probably flat as we move forward a little bit, but these initiatives will start to have an impact.
Sam Darkatsh - Raymond James & Associates, Inc.
And what's your outlook on steel scrap prices near term? March, they came in a little.
Rob, what are your thoughts in the next few months or six months or so?
Joseph Boutross
We saw kind of a peak in February, and March came off just a little bit. April had stayed really flat with where our margin performance was.
We have not seen any May quotes yet prior the -- actually, probably be tomorrow, when we start to get our first May quotes. But we're assuming that May probably comes off at $10 to $20 a ton.
Out further than that, we certainly our forecasts assume that we're staying relatively close to current levels for the balance of the year.
Sam Darkatsh - Raymond James & Associates, Inc.
Last question before I give the floor to others. Your acquisition pipeline last April and March, there weren't acquisitions best I can tell.
Can you give a color around what you're seeing? Which areas -- perhaps, what you're targeting for sales for the year for acquisitions?
A little bit more meat on the bone if you could, please?
Joseph Boutross
Sure. Let me start by saying the pipeline is as robust as it's ever been.
Walter Hanley and Bob Dietsch , lead our kind of central efforts, we're augmenting them with additional resources in the field, as well as additional headcount here in Chicago. With Rob having taken on some much extra responsibility and the day-to-day operations, a lot more of my personal time is being channeled towards acquisition and development work as well.
My broad estimate over the next 24 months would remain that we should put a minimum of $400 million of acquired revenue on the books over the next 2 years. And I think there are plenty of good-quality opportunities to work for that number.
And, obviously, the company is well financed to take advantage of the opportunities. We're pretty much sticking to our historic multiples of what we paid for businesses.
We see no reason to become more aggressive or try to take anything off the table. In the late model area, kind of our traditional LKQ salvage business, I would say our focus area there is really on geographical expansion just looking for good quality yards, good management with good capacity that will extend our current markets and allow us to build more capacity in our distribution systems.
The other thing that we will look for in late model would be what I consider distress opportunities, and these are businesses, who the owners are essentially looking for an expedient way to liquidate their business. And in those cases, we are buying inventory at cost, paying a token amount for a phone number and we'll close the facility, sell the parts, pick up a few salespeople and, essentially, have an organized liquidation of the business over a couple of year period.
In our aftermarket business, most of our focus is really on -- continues to be on warehouse upgrades and warehouse expansions. Look for the nods when Rob, but my guess we probably in the last 2 ½ years, we probably be increased the size, reracked keystone warehouses, probably 60% of them just sometimes increasing the capacity of the existing warehouse that, in most cases, they are adding cubic feet into the warehouse.
Obviously, the other focus area in aftermarket recently has been on product line expansion. We've talked about a couple of cooling transactions.
Cooling is one of our faster growing product lines right now. And another fast growing product line for us is coating for paint.
And those continued to be the focus areas in our deal team. In aftermarket, we're also looking to what I term the distress opportunities as well.
On the self-service, these are really all geographical expansion to new markets. And I've mentioned, we have 3 greenfields under development.
And we have a couple of convergence plans over the next couple of years where we know that through expanding our late model yards, we're going to be able to add enough real estate that we'll be able to put a side-by-side self-service yard next to our late model yard. In the heavy-duty truck area, we completed one deal in the quarter.
And so our focus here is strictly is on geographical expansion to build out the footprint. And then finally, in our remaining operations, between the 2010 deals on wheels and pro formas in ATK, I would suggest that for this business line, we really need to be in digestion mode for the balance of this year before we start to seriously look at adding more capacity.
Sam Darkatsh - Raymond James & Associates, Inc.
That was a terrific color. Thank you, Joe.
Sales in the second quarter from acquisitions, it was $100 million in the first quarter or something similar to that in the second quarter, would you guess?
John Quinn
Based on what is in the book today, you're going to see Q2 being a little bit less because of our Q2 acquisitions from last year drop off, and so some of it is going to taper down, I think it tapers down to probably around $30 million for Q4 from that acquisition book that we have today.
Joseph Boutross
Our Q2 deals are going to be late-quarter events.
Sam Darkatsh - Raymond James & Associates, Inc.
Got you.
Operator
Our next question comes from the line of Tony Cristello with BB&T Capital Markets.
Anthony Cristello - BB&T Capital Markets
First question I had, can you talk a little bit about sort of how you feel about current inventories, your backlog, your fill rates and what you're seeing today with respect to salvage auctions in terms of your ability to procure and get the cars you want?
John Quinn
Yes, the fill rate, I'll start with that, Tony, very strong. Obviously, we came out of a strong quarter in revenue and our fill rates are pretty much flat in both of our segments, aftermarket and salvage.
But we have really healthy fill rates in the high range that, historically, where we've been. So we're very pleased with the fill rates.
As far as the backlog, our backlog is very good in our salvage facilities. The buying is very strong, as we mentioned in our Q1, with our increase of 17%.
In the auctions, as we also predicted coming out of Q4, our Q4 call, with the heavy weather that we've sustained in Q1, the auctions are very full with product. And as you know, it takes 60 days before those hit the auctions.
So the auctions are remaining at higher levels of vehicles for purchase.
Anthony Cristello - BB&T Capital Markets
And has that indirectly helped a little bit on the pricing side as well?
John Quinn
Pricing is still strong, again, because of the pressure we believe on the used car markets and I think that Japan, prices will continue to put pressure there. But we are buying, again, at a historical high levels, but consistent with previous quarters.
Anthony Cristello - BB&T Capital Markets
This was the first quarter, I would say, since 2007 where you saw a double-digit same-store sales growth in sort of the recycle and the aftermarket. So, obviously, weather is playing a role, but you've got to be executing and you've got to be getting traction from your insurance carriers, or are there any of these programs and initiatives, can you list any of these things that you believe are adding incrementally right now for what you're seeing from these strong results?
John Quinn
Certainly, insurance companies demand as strong as ever. We did see a 2% increase in AP usage from '09 to '10, as we reported last year.
So insurance companies are definitely driving more and more demand. Some of the other reasons for the organic growth certainly in Q1, we did see miles driven increase.
I believe our inventories both strong on both sides of our business are contributing to that. The certified product on our aftermarket division continues to grow.
NSF, as we've mentioned in previous call, is really taking capital on and adding many, many more parts into the system. We certainly did have a great Q1 weather event for the insurance companies.
They did report increased claim frequency. And 1 last thing, we did have 1 extra business day this Q1 as compared to Q1 of last year.
So we did have a little bit of push there as well. But finally, I do suspect, as Joe mentioned, during the acquisition time, we are seeing some distress business out there.
So I think we're taking the market share as well, Tony.
Anthony Cristello - BB&T Capital Markets
And maybe one last question. When you look at sort of the pilot, that State Farm has in place for electronic ordering, the 1 difference between now and what I think was in 2007 or 2008, is they're inclusive of salvage parts, recycled parts where they’d say weren’t before, it was only a lead -- is that signal, at least, to the extent that they're giving a little bit latitude to the collision shops to sort of find ways to repair at lower price points or if they prefer alternative parts to the extent that they can use them?
John Quinn
Yes, absolutely, Tony. I believe it's a clear signal that State Farm needs to, obviously, be more competitive in the alternative parts arena, and we are thrilled to be have the recycled parts as a part of that process.
So we are actively engaged with State Farm talking about programs, and they continue to show interest. So and that's not just related to State Farm, many carriers are still approaching us.
We have a whole team dedicated to insurance marketing, and that they continue to report great conversations with the carriers.
Operator
Our next question comes from the line of Nate Brochmann with William Blair and Company.
Nathan Brochmann - William Blair & Company L.L.C.
I wanted to talk just a little bit extrapolating on the last question. I mean, obviously, great organic growth quarter for parts and services in the first.
And I know you kept the guidance the same at 6% to 8% for the year. But is there anything, I mean, other than, obviously, the number of accidents that occurred in the first quarter that would, any of these positive things, that would necessarily dissipate throughout the year in terms of the higher APU and NSF and certain type products, market share, et cetera?
It seems like there's a lot of momentum behind those various drivers.
John Quinn
Yes. Well, certainly we do expect more certified part center program during the year.
But the risk that we see, the major risk are oil prices and they return to 2008 driving habits of miles driven. We did get a report on fuel purchases by gallons.
But it actually did show a decline in April. So that's the first sign of a -- or equally would likely be a drop in miles driven for April, that's not reported yet, but certainly gallons purchased down.
We don't see, obviously, the comps of the cash reflectors going forward past Q2. Where we would reap the benefits of the strong same-store sales growth.
And I did mention, of course, the extra day that we do know and do we not get in future quarters we're actually losing Q4. And just one final anecdotal story, I did talk to one carrier just yesterday, the top-five carrier did say their frequency has dropped in April a bit.
But they did know if it was because of miles driven or because we're seeing a return to '08 of people increasing their deductibles or dropping insurance coverage. But they did notice a small dip in frequency already.
So there are some headwinds here. Certainly, but the challenges you have met, you mentioned, though, Nate, I think are important, the price initiatives that we're doing.
The alternative parts increasing. We don't give guidance on that until the end of the year when we get that from the estimating companies, but we think we're well prepared to -- certainly, any of those headwinds we have enough tailwinds behind us with the insurance company demand and the robust inventories.
Nathan Brochmann - William Blair & Company L.L.C.
Fair enough. So you alluded earlier when you were talking about kind of the acquisition pipeline and building out some areas, building out the amount of square footage, particularly, for the aftermarket space, et cetera.
I also know, obviously, you guys have been in a little bit of a consolidation mode and were trying to co-locate some of the facilities. Just kind of wondering where you stand in terms of, obviously, as you build out, you need more space, kind of where you feel with that from a capital expenditure plan?
Joseph Boutross
Sure. Our CapEx is running higher this year than it has, historically.
I can't say that a huge amount of that is related to warehouse expansions and new facilities. They are oriented toward combining operations.
It’s like more the CapEx this year is really, quite frankly, it's just outgrown some of our LKQ salvage operations where we really not put a lot of money into them over the last 10 or 12 years, and several ERs in Florida we've invested no capital in the decade. And so we are encouraged with pretty significant capital outlays in those markets.
There's no tsunami in capital, honestly, because of putting the facilities together. It will probably kind of 3 to 4 years where we will be looking for opportunities to merge our operations and, certainly, well within the capital costs that you're seeing this year and a half.
Operator
Our next question comes from the line of Craig Kennison with Robert W. Baird.
Craig Kennison - Robert W. Baird & Co. Incorporated
Thanks for taking my questions as well, most of them have been asked. But I wanted to ask about APU and the impact of CAPA and NSF as they compete.
Is there any way to quantify the number of SKUs that are now available versus, let's say, a year ago?
John Quinn
NSF is really all new throughout the year and they've got about 350 parts certified.
Robert Wagman
They have 350 parts certified, correct, John, with about 500 in the pipeline.
John Quinn
CAPA has been relatively stable I think. It started off we had some parts have dropped off as model years age and it's just not worth pursuing them for certification.
So it's been more or less constant. Although, they have indicated that they are going to expand to include at some additional rebars and some other parts that they've previously have not included in their agreements.
Robert Wagman
We certainly believe, Craig, that the spirit of competition is starting to kick in between those 2 organizations. One other thing I do want to add is that our part count AQRP is up as well, our quality assurance program, rapidly approaching 9,000 separate SKUs.
So combined, when you look at all 3 together, as John mentioned, NSF is 100% new, AQRP is up 10% in the range of 10% and in capital we'll start to see some increasing as well.
Craig Kennison - Robert W. Baird & Co. Incorporated
Just to follow up on that, what really matters right is the incremental growth in the whole pie. I mean if NSF is only certifying parts that other organizations have already certified, that wouldn't necessarily provide an incremental benefit, isn't that fair to say?
Robert Wagman
It's very fair to say. And we work closely with NSF, guiding them, giving them suggested parts to certify.
So there isn't duplicative efforts.
John Quinn
All of those NSF parts are new and this much CAPA has not previously done any of those.
Robert Wagman
100% brand new SKUs in the system.
Craig Kennison - Robert W. Baird & Co. Incorporated
Finally, what was the basis with CAPA number? How many parts a day roughly certifying today?
Robert Wagman
3,800 and as John mentioned, some dropped off and they add some. In the last couple of years, it's gone up.
It was in the 3,200 range couple of years ago. So they are increasing.
Craig Kennison - Robert W. Baird & Co. Incorporated
And second question has to do with just the cyclicality, if there's any in the business. If you look back to 1991, there was a recession then.
And looking at data we've seen, the number of repair hours dropped at that time, maybe as consumers got a little concerned about any discretionary spending on repairs. Do you see any cyclicality this time around?
And if we see an economic recovery might you benefit?
John Quinn
I think what you're seeing to some extent, is the -- if miles driven continue to expand, then you're going to see the number of accidents absolute number increase or accident frequency increase. I think in terms of age, we're still seeing the age of the fleet in the country increasing slightly, which helps us in one respect in so much is that it drives people to use alternative products more to repair those vehicles, and it improves mechanical sales.
It does mean though more cars totaled when they do get an accident.
Craig Kennison - Robert W. Baird & Co. Incorporated
And then last question is just regarding margin and maybe the long-term opportunity there. Joe, you guys have made a number of significant acquisitions recently.
And I'm wondering whether that changes your longer-term outlook for margin given maybe a different profile in some of those businesses. Where do you think margin can be, 3 or 4 years' time?
Joseph Boutross
I have to answer that in the context of just the existing business. I don't think we have enough clarity as exactly what deals we'll be adding into the business.
And we've said for a number of years that we feel something around 50, 60 basis point expansion of the operating income margin line is achievable. I think we have averaged that over the last 5 years, which even included absorbing $800 million of keystone work that was several hundred basis points under the traditional LKQ.
Craig, I'd stick with number. I think there's enough room in our operations.
We continue to add more product into the warehouses, put more product on the trucks. There's a very significant improvement in our, what we call our S dog.
But if you look at our operating expenses and how much margin we've picked up between the gross margin and the operating income margin line in the quarter, it's powerful. And I don't see any change from that.
Operator
Our next question comes from the line of Scott Ciccarelli with RBC Capital Markets.
Scot Ciccarelli - RBC Capital Markets, LLC
First, just a point of clarification. John, you referenced on your EPS guidance, the $1.33 to $1.42, that's assuming $0.39 for the first quarter?
John Quinn
Yes.
Scot Ciccarelli - RBC Capital Markets, LLC
Okay. Got it.
And, obviously, organic growth was very strong in both recycled and the aftermarket segment. It also sounds like pricing is up.
Can you guys give us some idea how much of your organic growth was kind of units versus what was the pricing impact even if its in kind of general terms?
John Quinn
I don't know if we can give specific comments with respect to pricing. I think on the aftermarket side, we're looking at somewhere between 1.5% to 2% OE increases in pricing.
And we generally follow their -- they become a benchmark for us, so to speak. But it's much very difficult to measure price per se on the recycle side.
I don't think we can give you an accurate number there. What we can say is, that we do see things like prices that we're charging per cores and that sort of thing.
We're starting to see some of those numbers coming through the income statement, which is why we're feeling a little bit more confident in terms of talking about some of those initiatives.
Scot Ciccarelli - RBC Capital Markets, LLC
Okay. But the bulk of the organic growth then was unit-related rather than pricing-related?
John Quinn
I think that's fair.
Scot Ciccarelli - RBC Capital Markets, LLC
And then, I guess my last question is and this is just kind of a what if scenario. You guys in 2008, a couple of times on this call, and we went from an environment where we had very high commodity prices, rising scrap steel, as well as kind of price vehicles.
And then we had demand destruction, obviously, towards the late '08 everything kind of collapsed on itself. If we were to go through a similar scenario whether it's this year or next year, et cetera, as what we saw in '08, would your playbook be any different?
Or are there significant differences between your business today in '08? Or is it we're just kind of subject to the whims of the market if we were to have a similar scenario?
Joseph Boutross
Well, I guess I would offer the 2008 being really was our kind of a tsunami sort of the event. And within -- I've looked at it for a while.
I think it was within about a 75-day period, we saw a century-high level on scrap and a century-low level in scrap. Around Thanksgiving, one of our managers in Texas called and we were having discussions on scrap prices.
And he said, "Joe, you don't understand. They won't take it for free.
They just don't want it." And the markets where frozen and it was locked up.
No one was buying scrap at any price. Now I guess the answer is, if we had an event where the scrap markets froze up, and there was 0 demand for crush car bodies, yes, we would be in exactly the same position we were in 2008.
We have no hedge in place for any events like that, none of our competitors do. So if we saw a repeat of that event, yes, we would have rotten quarter.
There's no doubt about it. You pull up business which compared to 2008 vehicle business is probably, I don't know, 15% to 20% of our business.
And it's arguably turned a lot. We have a significantly diversified our business space since 2008 with additional product lines and our aftermarket business, the addition of the remand building up our real business.
So I think that is probably the protection that I would offer out to our shareholders, it would be a kind of 60-day events and impact. A pretty modest portion of the business at this point.
John Quinn
I think the other thing, I’ll just add, even through the entire recession, we grew and reported pretty increasing every, year increasing numbers and top line right through the recession. And at the end of – when some of the other people in the midst of it were shirking, we double down on our inventory a little bit, and said this is an opportunity for us.
So I don't know that we would change our playbook, particularly. As Joe says, we have got some steel that we have sitting on the ground that we turn every 60 to 90 days.
So if the price is rise, like they did this quarter and we get a little bit of benefit, and if they call, they fall, we take it for a quarter. But that it doesn't really change the fundamentals of business from our perspective.
Joseph Boutross
Good point. When we came out of that, you're right, we did.
And that's probably our inventory. We've moved to build out our infrastructure more and, quite frankly, took advantage of the strong balance sheet that the company had, and we will do that again, absolutely.
Scot Ciccarelli - RBC Capital Markets, LLC
That's helpful.
Operator
Our final question comes from the line of Scott Stember with Sidoti & Company.
Scott Stember - Sidoti & Company, LLC
Could you guys just maybe touch on your recently announced government sales program and how you envision that evolving in 2011 and beyond?
Robert Wagman
Yes, Scott. We formed the team that is now going after municipalities at the local, state and federal level.
It's in its infancy stage, for sure. But we've made some nice progress landing some deals.
They are, obviously, under extreme pressure to cut costs out of their budgets. And we would expect to really expand this program in the coming quarters.
And so far, we're off to something seeing very initial positive meetings. They are very receptive to speaking to us.
And we're pushing all of our lines, not only to salvage and aftermarket but also our remand because they do use a lot of engines in the repair process. So it's a great opportunity before us and we will drive that hard in the coming quarters.
Scott Stember - Sidoti & Company, LLC
And as far as impact, we shouldn't expect much of anything?
Robert Wagman
No. I certainly wouldn't model anything for the upcoming quarters.
As this gets momentum, we'll certainly report on it. But for now, it's still in its infancy stages.
Joseph Boutross
Well, thank you for joining us. And in fairness to other companies I know that a lot you have a busy calendar today.
So we're going to call it a call. Thanks for your continued interest in LKQ, and we look forward to reporting to you on our second quarter operations, most likely the last Thursday in July.
Thanks, everybody.
Operator
This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.