Jul 28, 2011
Executives
John Quinn - Chief Financial Officer and Executive Vice President Joseph Holsten - Vice Chairman, Co-Chief Executive Officer, Member of Government Affairs Committee and Member of Executive Committee Joseph P. Boutross - Robert Wagman - Co-Chief Executive Officer and President
Analysts
John Lawrence - Morgan Keegan & Company, Inc. Scott Stember - Sidoti & Company, LLC Craig Kennison - Robert W.
Baird & Co. Incorporated John Lovallo - Bank of America-Merrill Lynch William Armstrong - CL King & Associates, Inc.
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 Second Quarter 2011 Earnings Conference Call. I would now like to turn the conference call over to your host, Mr.
Joe Boutross, LKQ's Director of Investor Relations. Thank you, sir.
You may begin.
Joseph P. Boutross
Thank you, Jackie. Good morning, everyone, and thank you for joining us today.
This morning, we released our second quarter 2011 financial results and provided our 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 John Quinn, our Executive Vice President and Chief Financial Officer.
Joe, Rob and John have some prepared remarks and then we will open the call for questions. In addition to the telephone access for today's call, we are providing an audiocast via the LKQ website.
A replay of the audiocast and conference call will be available shortly after the conclusion of this call. Before we begin with 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 potential risks. Hopefully, everyone has had a chance to look at our 8-K, which we filled with the SEC earlier today.
As normal, we're planning to file our 10-Q in the next few days. And with that, I'm happy to turn the call over to Mr.
Robert Wagman.
Robert Wagman
Thank you, Joe. Good morning and thank you for joining us on the call today.
We are pleased with the results we reported this morning. Diluted earnings per share from continuing operations in Q2 were $0.32, an increase of 23% as compared to $0.26 for the second quarter of 2010 and in line with our internal expectations for the quarter.
Revenue reached a record $760 million in the quarter, an increase of 30% as compared to Q2 2010. Our second quarter total organic revenue growth was 12.2%.
Organic revenue growth for parts and services for the quarter was 8.4%, which reflects increased part sales, primarily driven by improved inventory positions and the optimization of our regional distribution network as we continue to integrate newly acquired companies into the system. Turning to aftermarket.
Our aftermarket and refurbished revenue increased 23% for the quarter with an organic growth rate of 6.4%. Aftermarket and refurbished revenue from acquisitions grew 16.1%.
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, allowing us to reach the higher end of our traditional in-stock rates. The above growth rate was obtained despite a drop in miles driven, primarily the result of higher fuel prices.
Based on data from the U.S. Department of Transportation, miles driven in April and May were down year-over-year 2.4% and 1.9%, respectively.
Next to 2008, the reduction in miles driven for the first half of 2011 annualized is tracking to be the largest drop since 1983. Despite this headwind we face in the quarter, I'm quite pleased with the organic revenue growth we achieved across all segments of our business and our organization's ability to achieve targeted goals.
Although relief from high gas prices does not appear imminent, we continue to maintain our guidance to same-store sales growth of 6% to 8% for the balance of the year. To counteract the cost of increased fuel cost, we did initiate a fuel surcharge in our recycling operation starting in June.
We are also planning additional fees starting in August that will address each part that travels through our internal to salvage distribution networks. Both of these programs should help reduce the impact to our fuel budgeted variances.
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 11% for the quarter.
Recycled parts revenue growth from acquisitions was 14.5% which includes the impact of our acquired remanufactured engine businesses. Availability to salvage inventory has remained strong, and we continue to put more recycled inventory on our shelves to maintain a healthy backlog of undismantled product at this time.
Cost of salvage continues to remain at the high end of our historical averages. However, despite this fact, we've realized good sequential Q1 to Q2 2001 improvements in our recycled parts gross margin percentage, aided by our core recovery in fuel surcharge initiatives.
During the quarter, we purchased over 56,000 vehicles for dismantling by our wholesale operations, which is a 9% increase over Q2 2010. As anticipated in our Q1 call, a healthy volume of cars at auction was realized in Q2.
With on-hand product and maintenance of our existing rate of vehicle acquisition, we should have sufficient inventory to grow our recycled parts operation. Finally, I am also pleased to announce that we extended our exclusive licensing agreement with the Ford Motor Company.
While our agreement prohibits discussing the specific terms, the new agreement lasts for 42 months, an increase of 12 months from the prior agreement and the terms are generally comparable to our previous arrangement. With that, I'd like to turn the call over to Joe Holsten to talk about other aspects of our business and our most recent acquisitions.
Joseph Holsten
Okay. Thanks, Rob.
Turning to our self-service retail businesses. During the second quarter, we acquired 91,000 lower-cost, self-service and crush-only cars compared to 78,000 in the second quarter of 2010, which is a 17% increase.
We did see the cost of these cars increase by about 33% from one year ago levels, but some of that increase is simply due to the higher scrap prices. Overall, we are pleased with the way the self-service business is performing today.
During the quarter, we upgraded and standardized our point-of-sales system in the line of business, and that is giving us a better insight in the statistics, such as the average part sales, sales by part type, and recovery per vehicle. We also have the ability now to post additional fees to our invoices.
In our heavy-duty truck operations. During the second quarter, we acquired roughly 1,600 units for resale of parts as compared to 900 in the second quarter of last year.
We continue to build out this business with our goal of establishing a national network over the next few years. I mentioned previously the initiatives of getting everyone on a single system and improving the coordination among our yards, and that too is progressing nicely.
Moving on to our development efforts. During the second quarter, our largest transaction was the previously announced acquisition of the North American, the U.S.
paint distribution business of AkzoNobel. With this deal, we acquired 40 locations across the United States.
The majority of the locations have or will be integrated into our existing businesses. Paint and related products represent about 14% of the typical collision repair bill, so we think there's a lot of upside to grow this market.
We've seen various estimates of the size of this market being somewhere from $2 billion to $2.5 billion, so we believe this will be an attractive space for us as we only have about a 10% market share today. One aspect to this market is that the gross margins do tend to be lower than our traditional parts business.
So we will have an unfavorable mix change at the gross margin line, but over time we believe we can lever our distribution and warehouse cost to get some, if not all of that difference back at the operating income margin line. We also added to our wheel refinishing business with a small acquisition in Ohio, and we also picked up a small aftermarket distribution business in Ohio as well during the quarter.
We have been busy since the end of the second quarter, having added 4 new deals for the last 4 weeks. Since June 30, we bought Specialized Parts Planet, which operates several wholesale recycled parts yards in Rancho, Cordova, and Fresno, California.
We have purchased 3 wholesale recycled parts yards operating in the greater Boise, Idaho, market. We've added a new wholesale self-service combination yard based in Austin, Texas.
And in North Carolina, we added to our automotive cooling parts distribution business with the acquisition of a specialty distributor in that market. With respect to our own internal development efforts, we currently have 4 brownfield self-service recycling facilities under development and 2 full-service facilities that have been identified for conversion to self-service recycling yards over the next year.
On our first quarter call, I mentioned the development of a wholesale salvage yard in Central Ohio. I'm happy to report that operation has opened ahead of schedule and is now fully operational.
We continue to be pleased with the robust pipeline of acquisition opportunities. And based on our working backlog, we expect the second half of the year to be fairly active.
I would expect that the back half will have at least a similar number of deals as the first half of the year. This time, I'd like to ask for John to provide some details on the financial results in the quarter.
John Quinn
Thanks, Joe. 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 Q2, our total organic revenue growth was 12.2% with an additional gross of 17.5% from acquisitions. Rob mentioned the Q2 2011 organic growth for parts and services was 8.4%.
Other revenue, which is where we record our scrap commodity sales, was up 67%. Approximately 37% of this was organic growth as commodity prices were higher on year-over-year basis and because we have higher volumes of scraps and cores.
30% of the increase was a result of acquisitions. In Q2 2011, revenue from our self-service business was $73.6 million or 9.7% of LKQ's total revenue.
Approximately 31% of this revenue was part sales included in recycled and related products and 69% scrapping core sales included in other revenue. Our acquisition revenue growth was driven by the 15 deals we did in the last half of 2010 and the 7 deals we've closed through Q2 this year.
The Q2 impact on revenue from acquisitions was approximately $102 million. Gross margin for the second quarter of 2011 was 42.4%, which was down 230 basis points from 44.7% in the same period of 2010.
In the last 3 quarters on our calls, we mentioned that this decline was primarily related to higher cost incurred acquiring salvaged cars at auction and in the self-service line of business. As we mentioned in the last call, we believe we hit the anniversary of those impacts and is becoming less of a factor.
The greatest impact on year-over-year margins is now related to the mix impact primarily associated with the incremental revenue from acquisitions. The largest drivers were the lower margin aluminum furnace operations we acquired in Q3 last year, the reman engine businesses and the AkzoNobel paint transaction.
I mentioned in the past the lower margin furnace business is a permanence change. We only have one month for the AkzoNobel business in Q2.
So next quarter, we'll see 2 more months of gross margin dollars from this business but also have a slightly negative impact on gross margin percentages. Finally, I'll remind you that as other revenue grows simply as a result of higher commodity prices, we don't maintain the same gross margin percentage on net revenue.
While we may make some additional gross margin dollars, we don't always make the same gross margin percentage. We also like to add a few comments on the sequential gross margins.
We saw sequential margins, that is Q1 2011 to Q2 2011, declined from 43.7% to 42.4%, a decline of 130 basis points. There are a few reasons for this.
Seasonally, we typically expect a decline in Q2 over Q1. Last year, we saw a sequential drop of 220 basis points in margin, so this year's sequential step down of 130 basis points is actually favorable compared to last year.
You may recall in Q1, I mentioned that the gross margin included a $0.02 benefit from rising commodity prices. We didn't have that kind of a gain this quarter as scrap prices were essentially flat quarter-over-quarter.
And finally, within the wholesale business, we are approximately one month to the lower gross margin AkzoNobel business. Although we expect this to continue to be a lower gross margin compared to part sales, we do believe that over time, we'll be gaining beginning operating leverage to the operating income should become more similar.
We continue to see improvements in our facility and warehouse [indiscernible] expenses. In total, these 2 items fell on a year-over-year quarterly basis from 22.4% of revenue to 21.1%.
This improvement is partially a function of the math because the higher commodity prices drive revenue without any corresponding increase in most of these costs, but also reflect the continued leverage in the business. Distribution cost saw an increase from 8.8% of revenue to 9.1%.
The primary driver of this increase was additional fuel and related shipping cost as we saw fuel prices hit recent highest during the quarter. The quarter also included $2.4 million of restructuring expenses, primarily associated with lease termination cost from the AkzoNobel transaction.
Our operating income was $78.5 million in Q2 2011 compared to $69.6 million in Q2 last year, an improvement of $8.9 million or 13%. Net interest expense of $4.7 million was favorable -- excuse me, was $2.5 million favorable to Q2 last year.
This is the first full quarter of operating under our new credit facility. During the quarter, our $200 million interest rate swap rolled off and is placed with $100 million fixed to floating hedge on which are currently paying 2.86% interest.
The year-over-year improvement in interest expense was a result of slightly lower average boring levels and improved boring cost. Our effective boring rate was 3.4% in Q2 2011 compared to 4.9% in Q2 2010.
Other income included a $1.6 million favorable adjustment related to a contingent purchase price adjustment from a prior acquisition. Our year-to-date tax rate was 38.9%, and in Q2 2010, our year-to-date rate was 38.2% but you may recall that last year included some favorable discrete adjustments.
On a reported basis, diluted EPS from continuing operations was $0.32 in Q2 2011 compared to $0.26 in 2010. Moving to the cash flow.
Cash flow from operations year-to-date was $101.1 million compared to $100.2 million in 2010. Although earnings were $13 million higher in 2011, we saw working capital changes, negatively impacting cash flow.
Our largest driver was accounts receivable which was a use of cash for $25 million compared to only $1 million used last year. During the quarter, we spent $52 million in cash on acquisitions, bringing our year-to-date total to $96 million.
We also issued 291,000 shares of stock related to the exercise of stock options and equity compensation, and that resulted in $4.1 million in cash including related tax benefits. Debt at the end of the quarter was $586 million, including $574 million under our secured credit facility.
Cash and equivalents were $42 million at quarter end. As we noted in the press release, we're very pleased that Standard & Poor's raised our credit rating to BB+ from BB, reflecting the company's increasingly improving credit ratios.
As at quarter end, we had a draw of $328 million in revolving credit facility and approximately $34 million of letters to credit that is backstop by the facility, leaving $389 million of availability for future borrowings. Under the terms of our new credit agreement, we were required to make debt repayments on a term loan of a little over $3 million each quarter this year.
Turning to guidance, you learned in the press release this morning that we raised the low end of our EPS and income guidance for the year. Our revised EPS guidance is a range of $1.36 to $1.42.
The new range for income from continuing operations is $201 million to $211 million. I want to point out that the revised guidance includes $0.02 we incurred on the debt refinancing in Q1.
The guidance also excludes restructuring and integration costs. Based on the acquisitions we've completed to date, we expect to incur approximately $2 million more of these costs in the second half of the year.
I'll just take a moment to discuss a few of the things that could impact us for the rest of the year. On the external front, fuel costs remain a bit of an unknown.
If gas stays at elevated levels, we could see miles driven, decline further, and that would lower the number of accidents and hence our volume. As I mentioned earlier, we saw higher fuel cost causing our distribution cost to increase faster than our revenue.
We've also seen our shipping rates increase, although these are largely built into our Q2 numbers. Scrap steel commodity prices were flat Q2 to Q1, and at this point we're not projecting any change.
We've seen the auction environment fairly stable as we paid approximately $1,870 per vehicle last quarter, which is very similar to the $1,850 we paid in Q2 2010 and the $1,880 we paid in Q3 2010. On internal front, Rob spoke to some of our pricing initiatives.
I think it's fair to say that those have helped stabilize and slightly improve the margins in the recycling line of business. Those programs are ongoing.
We are continuing our analytics around the aftermarket side of the wholesale business and we expect to have some initial programs in the aftermarket side ready to roll out this quarter. And with that, Jackie, we'd like to open the phones to questions, please.
Operator
[Operator Instructions] Our first question is coming from Tony Cristello of BB&T Capital Markets.
Anthony Cristello - BB&T Capital Markets
One question, I want to just, maybe a point of clarification. It sounds as if, if we go from the first quarter now into the second quarter and we've seen a bit more compression on the gross margin side.
I guess I came out of the first quarter thinking that we would see gross margin sort of flatten out. Now it sounds like we may be at the run rate that we had this quarter in sort of the 42-ish, 42.5 range for subsequent quarters at least until the paint and the various wheel smelter operations are fully incorporated.
Is that the correct way to be thinking about things now?
Robert Wagman
Yes. I think it is, Tony.
With just some more general comments on margins, what we've got, what we've done so far and where I see it going forward, what might be helpful. We certainly continue to see the impact of the acquired businesses that we have.
The integration period takes time and we continue to work through those integrations. This all a [indiscernible] correct will true up in Q4 but currently the act of creating a year-over-year drag.
As Joe mentioned in his remarks, the paint and then the cooling business as well do tend to have lower margins because they're much more competitive in nature in the marketplace so it will be a little bit of a drag. However, we do believe that over time, we'll pick that back up on the operating side.
We have the last quarter of the C for C, Cash for Clunkers comps impacts, and next quarter we'll return to normal comps with parts cars we generally purchase. So that's going away.
Just some of the things we have in the works that we also talked about. The additional deviation controls that are launching in August.
We expect to have healthy aftermarket side of the business where the rest will be locked down similar to the yard in the salvage side of our business. And we're also putting a new enhancement there, where basically unlimited stock deviation lockdown will happen as well.
So that's happening in August. We continue to watch the OE pricing.
Of course, as they raise their prices, we're going to still follow suit and aggressively pursue that. They tend to be in the 1.5% to 2% range increases as we speak.
John mentioned the cost of salvage still a little bit of an issue but hopefully, post tsunami, with the saw [ph] rate coming up now, we can get a little bit of relief in the used car market. Q2 is also a seasonally downturn for us in the aftermarket business particularly.
But both sides of the business are impacted as we slow down into the slower collision period. Just talking about going forward now.
As Joe mentioned and I mentioned, historically some of these businesses that we purchased now, the cooling and the heating and the paint, have been a little bit historically lower margins but we think we'll get the operational margin improvements as we bring them into our system. The initiatives in place that we have, I feel pretty confident that the salvage margins have bottomed.
And likely, with some of the initiatives we have in place, with the fuel charges and the other initiatives we have going with deviations, I'd like to see some kind of an uptick here in the upcoming quarters. As far as aftermarket goes when it comes to margins, we have to adjust for some seasonality as I mentioned in Q2 but with some of the things we have in place here with the deviations coming as well as the pricing that were marking closely with the OEs.
I expect to see that has bottomed down as well and some modest uptick here in the next couple of quarters. As this, I'll let John add anything else as you...
John Quinn
The only other thing I pointed out in my prepared remarks, Tony was the -- obviously as Rob mentioned there was the seasonality. And also, Q1 did have a couple of benefit in there from the commodity, sequential Q4 to Q1 commodity rise.
And so, that wasn’t repeated, commodity price were essentially flat in the quarter. So you lose that benefit.
Anthony Cristello - BB&T Capital Markets
When you look at sort of the paint business, the engine and cooling, from these newer businesses you've acquired, the paint, I guess you've already had some exposure with. But I'm just wondering, is the maturation phase for these businesses a bit longer than what you would normally have if you were just acquiring a traditional yard?
And so maybe the revenue on the upfront side is slower to develop but then it has a longer tail? And how should we think about sort of the timing on sort of the incremental benefit from these newer acquisitions from different verticals?
Robert Wagman
Sure. I'll just hit a couple on maybe on the paint front, Tony.
Typically, the paints, people shop, so spray a particular brand of paint. The selling cycle tends to be very long.
They're switching costs associated with the equipment and so forth. And so the sale cycle tends to be much longer, but there's a lot of stickiness around the customer base because they typically stick with the brand for several years at a time.
So precisely, the longer sales cycle and the gross margin on that business is likely to stay lower but we think that typically paints distributed in, sort of one liter-sized containers, as we start to be able to integrate that onto our trucks and leverage that into our warehouses, we mentioned the charge for warehousing pyramids, if you will. We're actually in leases in terms of the, some of the facilities that we're closing, in the AkzoNobel deal.
Now as we start to get those into our warehouses, we should be able to leverage some of the distribution and facility costs. We're considering and hopefully create a customer stickiness.
We're already into an awful lot of the shops. Anyway, we're selling our parts and services in there, just about everyone of those shops uses paint so we'd like to think that we can start to leverage those relationships.
And although the operating -- excuse me, the gross margins are lower, you get it back on the operating line over time. That will take a little bit of time.
And does that answer the question?
Anthony Cristello - BB&T Capital Markets
Yes. I think so.
I just want to make sure from a timing standpoint, I'm thinking correctly about the added benefits of the revenue versus the incremental upfront cost of the acquisition. And it seems like you got more of an upfront headwind but then you get a much bigger benefit once you have the infrastructure in place.
Robert Wagman
I just wanted quote you, Tony. Many of these paint customers are under contract.
As John mentioned, with the equipment that they have, they have to sign contracts. So there is a little bit of a headwind on getting the revenue there as they come out of contracts.
So you're right, there will be a little bit of a delay but the benefits will come at the end. I think Joe mentioned the market size of being -- we've seen various estimates between 2 billion and 2.5 billion, and we're probably about 10% today.
If we think we can get them over the years, over a number of years, get our market share closer to where we are in the alternative parts market, we could easily improve that dramatically.
Anthony Cristello - BB&T Capital Markets
Okay. And maybe just quick follow-up for Joe.
When you think about the acquisition opportunities that you foresee, are they going to be consistent with existing runs of operation or do we still anticipate new verticals that you may be able to add and I'll leave it at that?
Joseph Holsten
I think right now, Tony, we're not looking at what I would consider new verticals at the moment in the U.S. market.
We certainly in the late-model salvage, we are focused predominantly on geographical expansions right now. As you saw during the quarter, the Boise, Idaho, markets, total new market entry for us and our presence in the Fresno, Sacramento, markets was somewhat limited.
So we're very happy with the addition of the geographical expansions there. And aftermarket products be able to continue to look at moving faster on the paint transactions than probably aftermarket parts.
Aftermarket products, parts anyway, we will probably consider cold starting markets at this point. And on the U-Pull-It business, again that would be more focused on geographical expansion.
The brownfields I mentioned, 3 of those are for new geographical markets and one helps solidify a very important market in East Texas for us.
Operator
Our next question is coming from Craig Kennison of RW Baird.
Craig Kennison - Robert W. Baird & Co. Incorporated
Organic growth, you're guiding to 68%. The first half of was closer to 9%.
Maybe just discuss what you see as the factors behind the slowdown or if that's just a function of being conservative?
Robert Wagman
The organic growth, there's a good backlog in the salvage, certainly the C for C comps going away, new comps get a lot more tougher going forward. Q4 initially has one less day that we have to contend with, but it really is the miles driven decrease that we saw.
We did see some stats from MasterCard on July 4 that the driving was down as well. Really, just with the tougher comps coming with the C for C gone, as well as it's just the headwinds in the economy just tend to be more conservative, that 68% is probably going to be the guidance and more likely towards the higher end of that guidance, I suspect.
But right now, we're just concerned about with the economy.
Craig Kennison - Robert W. Baird & Co. Incorporated
And as a reminder, I think in the first half, you had one additional day in the first quarter?
Robert Wagman
That's correct.
Craig Kennison - Robert W. Baird & Co. Incorporated
And then, John, you mentioned, you thought your share was maybe 10% in the paint business with an opportunity to get to your corporate average share in another categories. Would you mind giving us a reminder of what you think your share is in a couple of these other major categories whether it's aftermarket or the whole sale recycling business?
John Quinn
I don't know -- I won't go there on this call, Craig. But I think to put it into perspective, the thing we see in other companies of -- in competitors in the paint business that are doing circa $400 million.
We are probably the #2 today, obviously, our goal is to be the #1 in every market.
Craig Kennison - Robert W. Baird & Co. Incorporated
And I noted that NSF recently decided to start reading distributors. Would you be participating in that and do you see that as a material event for you?
Robert Wagman
We are part of that, Craig. We are in the committee to help establish distributors.
We actually view it as a good thing. As we look at our quality of vendors, we'll bring more credibility to the industry so we are a part of that as we are actively supporting their role and their certification programs.
We actively buy their products. So we view that as a good thing for the industry.
Operator
Our next question is coming from John Lovallo of Merrill Lynch.
John Lovallo - Bank of America-Merrill Lynch
Can you talk a little bit about the dynamics in the paint manufacturing business? I mean, are there a few big players with sizable market share?
I mean, how does that kind of lineup?
Robert Wagman
There are a few -- one big -- real big company is Finish Master, they are owned by a publicly traded company out of Canada Uni-Select. After that, there is a lot of small regional players in the marketplace that tend to be one state, couple of states, maybe, but for the most part, it's small, independent distributors in the paint industry.
John Quinn
But John, is your question about the distributors or the manufacturers?
John Lovallo - Bank of America-Merrill Lynch
It's the manufacturers, actually.
John Quinn
I'm sorry. Yes.
Well, most of the paint is produced by a couple of large PPG, AkzoNobel, Sherwin-Williams, DuPont, and these are sort of household names and they operate a model where typically they will distribute through distributorships like ourselves. So just make it clear, we're not manufacturing any paint.
We're the distributor, we distribute for all of those companies I just mentioned, except maybe Sherwin-Williams.
Robert Wagman
Sherwin-Williams is only the one, John, that has direct distribution. They have their own company stores.
All the other locations, and Akzo did, until they sold it to us. So all the other 3 big players that John mentioned are either in distribution -- distributor markets.
John Lovallo - Bank of America-Merrill Lynch
That's helpful. I've noticed on -- being on the past few presentations that there's been a little bit more talk about the potential for international expansion.
Is there any update on that front?
Joseph Holsten
Yes, we continue to meet periodically with players from other markets. Just us, say, increasing our knowledge and kind of to get the pulse on what momentum may exist in terms of market interest and driving higher alternate part utilization rates.
We have an increasing flow of people from China who are looking for partners to -- I'd say looking for people with the know-how to operate on the ground, and of course they're offering their varying -- their significant political relationships in most cases. As I'd guess there's probably someone to our office about once a quarter now to have discussions with us about the Chinese market and other than that, kind of where we focus building our knowledge basis in the European arena.
So, yes, we continue to learn, listen and look for opportunities that may be a good entry vehicles for us.
John Lovallo - Bank of America-Merrill Lynch
Great, and if I could sneak one last in here. I know claims frequency came down in April.
You guys have any more recent read on that?
Robert Wagman
We do not -- we do talk to body shop's that are saying, it's been a little soft, but other than that, John, it's basically just anecdotal but with the miles driven, we suspect that claim's behind us, probably being hindered a little bit as well.
Operator
Our next question is coming from Sam Darkatsh of Raymond James.
Sam Darkatsh - Raymond James & Associates, Inc.
Two, 3 questions here. First off, just trying to make sure my math reconciles, that on the gross margin line, it was sequentially down 130 basis points.
And John, you called out that the absence of the gain in scraps sequentially, and then you had one month of the AkzoNobel business. Any way you could help quantify that?
I think you might have mentioned a couple of cents impact from the scrap gain, if my math holds, maybe that's 60 basis points or so of 130 basis points dropped? I'm just trying to get a sense of?
John Quinn
Sure. I estimated between 70 and 80.
Sam Darkatsh - Raymond James & Associates, Inc.
70 and 80? And so the -- how much of the remainder is the deal mix -- deal-related mix and versus the seasonal drop?
John Quinn
I'd say the seasonal drops a majority of it.
Sam Darkatsh - Raymond James & Associates, Inc.
Next question, based on the acquisitions that you have consummated to date, what do you peg the 2011 total sales from acquisitions and then total in 2012 also, based on again, the deals you've already announced?
John Quinn
I may have to get back to you on that one, Sam, we had $100 million this quarter of acquisition revenue. I just had to ask them to check for the lapse in schedule because Q3 last year we had the smelter acquisition and that's going to drop off.
I mean it did cross Canada in Q4, that's going to drop off in Q4, most probably about in Q4 that it mostly drops off. So…
Sam Darkatsh - Raymond James & Associates, Inc.
I'll circle back with you on that one. That's fine.
And then I guess, the last question, Rob, you don't give quarterly guidance. So if you could help us a little bit with where the primary variances were in the quarter versus your internal plan?
How the quarter shook out versus what your original expectations were? That would be helpful.
Robert Wagman
Yes. As I mentioned, Sam, we were pretty much on our internal number.
Top line was good. Bottom line was right where we expected.
Again, John mentioned a little bit of the headwind that we received under the distribution cost. But overall, it was pretty much right on target where we had with the quarter.
Where we thought we were going to come in.
Operator
Our next question is coming from Scott Stember of Sidoti & Co.
Scott Stember - Sidoti & Company, LLC
Could you just possibly talk about how things are shaping up so far in the current quarter in July?
Robert Wagman
July is traditionally, a slower month as I suspect. Many of our customers choose to take some vacation time.
This year, no different. A little bit slower than usual but again, impacted by seasonality, I suspect.
But we did anticipate and budget appropriately for the month. The 4th of July was an interesting timing.
It fell on a Friday, and caused a long weekend there. So it's low, slow period.
And ramped up over the course of the month.
Scott Stember - Sidoti & Company, LLC
And circling back to the aftermarket side of the business, you guys have given some statistics about utilization rates and at least through March, it seems as if the numbers went up dramatically, year-over-year? Have you seen anything industry-wide more current than that?
Robert Wagman
No. We'll be generally getting APU figures annually from the estimating companies CCC, Mitchell and Auto Techs [ph].
But we certainly see as robust activity with the insurance industry on promoting alternate parts and quite frankly, the direct repair facility networks continue to gain strength and they are the biggest proponents of alternative parts. So while we haven't seen any new numbers, we suspect it's been strong and they will continue that way for the balance of the year.
Scott Stember - Sidoti & Company, LLC
Last question on some of the non-insurance collision pieces of your business with fleet car rental companies and now with the government, could you talk about how those are shaping up?
Robert Wagman
Yes. We continue to market the government.
It's a slow process. I think as we're all witnessing from the debt debate.
Saving a little bit of time but we're actually working with the government, our government affairs division to help open some doors for our government marketing departments, so those continue to march along but it's a slow process. We think it's a marathon not a sprint and making some progress.
Scott Stember - Sidoti & Company, LLC
And as far as some of the other items like fleet car rental companies, I know you guys are working on that, can you talk about that?
Robert Wagman
We have a team, they’re based out of Houston, Texas. That is marketing to the fleet with our reman, in particular, we're going after those fleet companies now.
Making a little bit of headway, a lot more road ahead of us, though, but I think we'll continue to knock those doors and then we'll see some good progress there over the coming quarters.
Scott Stember - Sidoti & Company, LLC
And just a clarification. You did say that the restructuring charges for this quarter of 2.4 was related to acquisitions?
John Quinn
Correct. It is primarily associated with the termination of leases around the AkzoNobel transaction.
There's a little bit up in Canada as well.
Operator
Our next question is coming from Bill Armstrong of CL King and Associates.
William Armstrong - CL King & Associates, Inc.
The most of my questions are answered, but the 36% scrap, our other category comp, is it possible to break that out by volume versus price on a year-over-year basis?
John Quinn
Generally, if you could just kind of go off the car volumes, Bill, it's about as close as we can get. We don't have a precise tonnage number because of the way that it works.
But it's generally speaking, to the extent that you see organic growth with respect to car volumes on the scrap, will follow. Does that make any sense?
William Armstrong - CL King & Associates, Inc.
Yes, yes, it does. I had a feeling that might be a little difficult to put your finger on.
You also mentioned exploring alternative salvage solutions outside the auction environment. I was wondering if you could just expand on that a little bit?
Robert Wagman
Yes. I'd be glad to, Bill.
There's been some recent interest by insurance companies to, in particular, look at low-end salvage alternatives to try and save some cost at the auctions. We're participating in a few of those programs where we have self-service.
So it's great the access to some salvage. It just seems that the interest levels been peaked a little bit lately by some major carriers, actually.
These aren't the smaller Tier 2 or Tier 3. These are on the Tier 1s.
Just looking for alternatives outside the auction market, and again, particularly on the lower-end salvage. But again, we need access to those cars for our self-service.
So we actively engage with them in those communications and we want a few of those deals.
John Quinn
Bill, just to follow up, we estimate it's around 2/3 is price and 1/3 volume.
William Armstrong - CL King & Associates, Inc.
2/3 price, 1/3 volume.
Operator
Our next question is coming from John Lawrence of Morgan Keegan.
John Lawrence - Morgan Keegan & Company, Inc.
Just real quick, would you talk a little bit about -- Rob, you've talked about over the last couple of quarters about some things initiatives at the auction process as you look around the country and some things that you can do to help that spread a little bit. Anything going on there?
Obviously, you're showing some improvement and as saw [ph] comes back up, what do you think that positions you on sort of the auction prices?
John Quinn
Yes, well, we're hoping and anticipating as it starts to come up, it will get pressure off the used car market and you can get some of those guys that we believe that are coming to our sector of the business to try and get cars to put on their lots. We're encouraged by the Japanese turnaround in terms of production, it's coming up rapidly.
And we're anticipating that should give us some relief and we don't expect looking at the Manheim Used Car Index. It's at a high but it does have seemed to peak, at least appears, that it's not going any higher.
So hopefully, we'll get some pressure potentially on the cost of goods.
John Lawrence - Morgan Keegan & Company, Inc.
Yes, and secondly, you talk about field rates better, et cetera, and more parts, obviously the tales of the amount of inventory just continue to grow, is that correct? As far as the breadth of inventory?
Robert Wagman
Are you talking pipelines?
John Lawrence - Morgan Keegan & Company, Inc.
Yes.
Robert Wagman
Absolutely. Yes.
As the cooling acquisition got us into some new products that we didn't have. Of course, the reman engines put us in some new products.
So, yes, and of course, the paint. We were already in but we've certainly much more in depth there.
I just want to touch on a few things on the paint as well. We have a lot of greenfield opportunities with those -- with the Akzo deal.
So we'll be putting in a lot of greenfields. The amount of certified parts, interestingly enough, that a lot of insurance companies demand.
I think in some stats from last quarter, there were 600 new parts entries into the certified parts market. Through CAPA and NSF.
And as I mentioned on the last call, John, the -- we are pushing NSF to certify different type parts than CAPA. So we're not getting much duplication.
So it's providing a big upside on the certified parts market as well.
John Lawrence - Morgan Keegan & Company, Inc.
And last question, truck business. I mean, volumes are up, anything there we should take away?
And how should we think about that over the next, say, few quarters?
Joseph Holsten
Yes. We're in the deal market there and carefully evaluating a few acquisition candidates.
And I'm hopeful that in the second half the year we'll make another couple of additions of new markets to -- and the importance of the additional markets from my perspective is to allow us more versatility to go after fleets, especially on the fleet disposal. And that's why I'm interested in the footprint predominantly, is a, kind of, more of the marketing for fleet disposal from fleet managers.
I think -- we saw a nice improvement year-over-year in the operating margins of the truck business. It's still relatively minor piece of the LKQ puzzle.
But the margins are certainly getting to the levels that we had anticipated when we made the decision a few years ago to enter this line of business.
Operator
Our next question is coming from Nathan Brochmann of William Blair & Company.
Nathan Brochmann - William Blair & Company L.L.C.
I just wanted to talk a little bit about some of the earlier questions going back to, looking at margins and integration and talking about how on the gross side we take a little bit of a near-term hit but longer term, we can get those operating margins kind of back up to par. And I kind of was wondering in terms of the timeline in the process to give us a little bit of a better framework for how that works and what your plans are there?
John Quinn
I'll just start, maybe, and Rob can chime in. The -- I think what we said was that with respect to a couple of the businesses, there's a mix change that we view as probably a little bit permanent.
So we took a step down with the smelter business that we bought last year. That, as you know, we bought that to support our wheel refinishing business.
We really -- all the furnace does were to essentially densify the aluminum into thousand ingots for resale and for easier shipping. So to the extent that ends up as a bigger component of scrap and other -- it's a very low-margin business.
And that's sort of a permanent step down. And that was actually the number one driver when I talked about the mix change, accounting for the majority of year-over-year variants now.
That's more or less permanent. With respect to the paint business, the paint business is a lower gross margin business.
As we continue to expand that, we're going to continue to see that be a slighlty unfavorable mix at the gross margin line. I think Joe mentioned that over time, and we think that as we rationalize the warehouse, as we rationalize the distribution that the operating income line should come up on that business to something comparable to where we're at.
On the engine business, that is initially has been a little bit lower, isn't it? There's some bookkeeping issues associated when you buy a company that, if you got inventory gains, you’re not allowed to recognized all those.
So there’ll be a little bit of impact in that but not really all that big. But over time, this strategy with respect to that business really is to get the product into our shops and it'll end up showing up in the salvage side of the business.
So in terms of some of the margin improvements that we see coming, I think a lot of that's going to come out through the facility, the selling, the distribution, the cost, as opposed to gross margin per se. Then with respect to some of the other initiatives that we're taking, though, on the pricing front, I think that we've seen some early success with respect to, for example, the core charge program that we mentioned a couple of quarters ago.
We just got the fuel surcharge in June, that seems to be going well. Both those programs are on the salvage side.
After-market, we're just starting, it’s early days there, we've been doing some analytics and trying to figure out what you can do there. Rob mentioned I think, that you were starting some programs around that in Q3.
And so, those things would help margins on those fronts.
Robert Wagman
I think just one thing, Nate, on the Akzo transaction which was the latest one we did. Just to give you, just what we're looking at first, timeline of integration.
We had 40 locations purchased and over 30 of them will be relocated over time. So in some of these -- the storage of paint requires basically paint bunkers to protect the -- any kind of explosion that could possibly occur.
So it takes time to get these things done. We did get them as John has mentioned previously, with some of you, that the conversions in the system has already been done.
So it'll take time to get everyone integrated but as it happens, we'll start seeing on the operating line.
Nathan Brochmann - William Blair & Company L.L.C.
And then just kind of a little bit in terms of that “over time” as we get the distribution network kind of more combined then we leverage that, and we leverage the facilities. Are we talking one to 2 years, or 3 to 5 years to kind of really see the real benefit on the operating margin side?
John Quinn
I think generally speaking, it's a shorter period, a couple of years. I don't think anybody has a 5-year plan.
If we hadn’t see those certain things we don't build them in that pro forma, if they're not, much quicker than that.
Operator
We'll take our last question coming from Scot Ciccarelli of RBC Capital Markets.
Scot Ciccarelli - RBC Capital Markets, LLC
I guess one of my questions is, you guys have been acquiring businesses at a very rapid rate. I guess what I'm trying to figure out is, you've talked a little bit about the margin impact.
But what about the growth impact? Meaning, once you own it for, what was it, 12 months?
Once it gets factored into the organic growth. Does it grow at some kind of exponential rate for a couple of years at that point?
And how much of an impact does that have on your reported organic growth rate?
John Quinn
I think to some extent, it depends on the type of acquisition. And to the extent when we buy a salvage yard in California, for example, you tend to see a little bit of growth there because we can lever our footprint in our distribution and inventory.
But that generally happens within the first year. So it's really caught up in the acquisition growth.
Thing is, like paint, where we think we can leverage that into our existing customer base, I would think that, that would probably grow at a slightly higher rates than the average over time.
Scot Ciccarelli - RBC Capital Markets, LLC
And something like how you track your -- at least on the acquisition side, it was up from 75%, right? So I guess, again, is there any way to kind of ballpark the organic growth from businesses acquired over the last, I don't know, 24 months or something?
Impacted by 2 points, or 3 points on the organic side?
Robert Wagman
I think some of these get integrated into the business -- it's hard to say what the contribution is after 24 months. What often happens is that the customers will migrate over to one of our business lines and it does get modeled pretty quick.
Scot Ciccarelli - RBC Capital Markets, LLC
And then my last question is, it looks like the after-market slowed a bit, at least versus what you've seen for over the last 8 quarters, but the recycle side actually accelerated? Is anything that kind of impacted the mix there?
Was something more attractive whether it was in pricing or something else that happened or was it just kind of inventory levels?
Robert Wagman
No. I think the inventory levels have remained very strong.
I think that the aftermarket is more of a pure collision type sale, Scot, and where the in-salvage has other opportunities with mechanical and other components. I think we're seeing a little bit of the headwind of the fuel prices there and people can delay or repair if their fender is damaged for example, but they can't delay or repair if your engine blows.
So I think we got a little bit of more of a headwind on the after-market than the salvage side of the business.
Operator
I'll hand the floor back over to management for any closing comments.
Robert Wagman
I want to thank everyone, for joining us on the call today. We look forward to talking to you in about 90 days.
Thanks, everybody.
Operator
Thank you. This concludes today's teleconference.
You may disconnect your lines at this time. Thank you all for your participation.