Welcome to, Tamworth, Illinois, I mean, pardon to England. Thank you. To all of you here and those joining us via live webcast, thank you for participating in LKQ's 2018 Investor Day. As you'll see from the agenda, we have an unbelievably exciting day, and you're going to see a lot of familiar faces that many have met on the road and you're going to see a lot of new faces that we think you'll be quite impressed with and exemplify the LKQ culture here. And obviously, we're going to end with a site visit at T2, which again, I'm pretty confident that everyone will be impressed.
Always important before we start, I want to thank a few people, teammates that we call it behind the scenes that really played a critical role in today being what again is going to be a phenomenal event. Not to highlight a few people, but I will, in particular, Martin Gregg, our CEO of Euro Car Parts, who you'll see throughout the day as well as present here this morning. Lois Rothstein, who may have communicated with a few folks in this room, is the behind the scenes person. She's been with the company since 1999. So I think that's a testament to commitment to what LKQ again represents.
So I tell people that you literally and physically wouldn't probably be here if it wasn't for her efforts. So again, thanks, Lois, for everything. To the agenda,
well, of course, you got
to read the safe harbor as we talked about. Most of you can read it, most of you have seen it, most of you have heard it on our earnings call. So we won't go in grave detail. Pretty straightforward. Nick's going to be giving us a company overview.
Justin is going to jump into Wholesale North America, followed by Bill Rogers, who runs our Specialty Group, John Quinn, who many of you probably know along the path. And then we're going to open up for Q and A. And I just want to be clear that during the presentations, because we have a lot of exciting content to cover that if we can save the Q and A for those sessions, I'd appreciate that. Lunch, which will be served right out here. And then we're going to have a panel discussion with some presentations, which is with the leaders of each of our European businesses, followed by an overview of our financials and an overall update on our financial matters.
Another Q and A and then what I think will be again the highlight of the day, the tour at T2. When the tour is complete, the buses will begin boarding between 4 and 4 20. Safe to assume that a lot of people in this room don't want to miss their train back. So we'll just try to be prompt between those times. See if there's anything else we need to cover.
I think that's about the opening. One thing I'll request because we are live via webcast, if you have your phones or your computers or your volume turned up, if you could turn that down, that would be great. And I guess from there, we'll get the party started. And with that, I'd like to invite Nick Zarcone, our President and Chief Executive Officer, up here. Thank you.
Thank you, Joe. And again, I'd like to welcome everybody to our 2nd Analyst Day here in May of 2018. I certainly appreciate all of you in the room making the track to the rain soaked foggy fields of Central England. The weather is typical for the English countryside here. For those who may be participating on the phone back in the U.
S, we thank you for getting up bright and early to be part of our Analyst Day event. We've assembled what I think is a terrific cross section of our leadership team here at LKQ to really afford all of you the opportunity to peel back a couple of layers of the onion, if you will, and really see the folks who make it happen each and every day. As Joe indicated, on the agenda is a list of everybody who will be presenting during the day. In addition, we have some other colleagues here who will not be presenting, but I would like to point out. First and foremost, we have a couple of our directors, particularly our European directors in the room, including Robert Hanzer and Sukhpal Singh.
Robert, as many of you know, spent most of his career at Bosch and was the Global CEO for Bosch Aftermarket Parts. Sukhpal was the founder of ECP and really built the business from nothing as an individual entrepreneur to a large and vibrant business that we ended up acquiring in 2011. And again, both Su Paul and Robert serve on our Board of Directors. In addition, Michael Clark, our Corporate Controller is in the back of the room. Jack Brooks, who runs our treasury operations is also in the back of the room.
Chad Cohen, who is our Chief Information Officer for Europe is here with us as well. So again, a great opportunity for all of you to interact with a really broad cross section of the leadership team. Most everyone in the room has the opportunity on a regular basis to interface with Varun and Joe and myself on a pretty regular basis. So I'm going to keep my comments relatively short, so you all have the opportunity to hear from my colleagues because that's what today is all about. I'm going to start by providing some perspective.
And look, we all understand that in the world in which we operate, you're only as good as your last quarter, okay? And Q1 was a rough quarter for us and we understand that. But perspective is important. And so I'm going to take a little bit of time to give you an overview of the company going back to our roots and then we'll talk about what the future holds for LKQ. I begin every presentation with our mission statement and whether I'm talking to folks in the investment community, whether I'm talking to potential customers or whether I'm talking internally with our employees.
Because at the end of the day, make no mistake, everything we do at LKQ around the globe ultimately comes back to the words on this page. Okay. This is our mission. This is where we're headed. This is the guidepost for LKQ for the years ahead.
And quite simply, it's pretty bold and ambitious. We want to be the leading global value added distributor of vehicle parts. That's a big ambition. That's a big ambition. I think we're pretty well on our way of getting there, but we have a lot of work to do.
Absolutely, we have a lot of work to do. And there's 3 core constituencies that we need to serve each and every day. Obviously, 1st and foremost, our customers, the folks who depend on us to deliver the parts they need to either repair or accessorize vehicles. Need to either repair or accessorize vehicles.
And we need to provide
them with good value, good solutions and be a great partner with our customers. We have a second set of customers and that's the 49,000 people who come to work each and every day at LKQ, our employees. I tell our folks all the time that while we may have 9.5 $1,000,000,000 of assets on the balance sheet, the only true asset we have folks is our people. And we think we've got the best people in the We need to serve our employees as if they were a customer as well. And then, obviously, we need to be great partners in the communities in which we operate.
Recently, over the last kind of 5 to 6 weeks, I've actually gotten some questions of people saying, do we plan on changing the direction of LKQ? And let me be clear, the answer is absolutely and unequivocally no. You don't change the forward mission of a company because of 1 soft quarter. We don't. And while we are very cognizant, make no mistake, we're very cognizant that we need to make some near term adjustments, okay.
The words on this page are the direction of where we're headed for the next several years.
Okay.
We've got a technical glitch with the slide, but I'll talk you through it. The reality is 2018 represents the 20th anniversary of LKQ. We were founded in 1998 and the original goal was to consolidate the auto salvage business in the United States. Over the past 20 years, the company has continued to grow and evolve quite significantly and truly what started out as a very small pure play in the U. S.
Salvage industry has developed into an incredibly complex, large, global diversified parts distributor, okay? And if you walk through the history of the company, we were when we went public in 2,003, we were 5 years old at the time, 100% auto salvage. In the United States, we had roughly 30 locations, 3,000 employees $300,000,000 of revenue. We very quickly changed the game and in 2007, added aftermarket collision parts when we bought Keystone Automotive Industries, okay? And that's really changed the game forever in the North American collision marketplace, because LKQ became the only company of size and scale on a national basis that could deliver recycled parts, refurbished parts and aftermarket parts.
It was a clear game changer in the North American collision industry. Along the way, in North America, we added a variety of other things, automotive paint, why? Because every body shop needs paint and accessories to run their business. Automotive glass, remanufactured engines, transmissions and wheels. We added a heavy duty truck segment and division.
And obviously, as you know, we have some self-service operations. So really built out the North American footprint. The next big move obviously came in 2011 when we entered the European theater and we did that with Souqpal when we bought Eurocar Parts here in the UK in October of 2011. The next move came when we bought Sator located in Rotterdam, outside of Rotterdam, really servicing the Benelux region. That was in 2013.
2016, we came back and we bought Reag, again, headquartered in Milan with operations in Italy and Switzerland in the West and 8 countries in the Eastern Bloc, if you will. And then, obviously, we announced the acquisition of STAHLGRUBER back in December. The other big change obviously is in 2014, we added the specialty segment. We bought a business called Keystone Automotive Operations. We refer to it as KAO.
You'll hear that a bit today. And then tucked in 4 additional acquisitions around that to create a market leader. And so today, what we have is a business that on an annualized basis will be running at about just shy of 12 $1,000,000,000 of revenue, up from $300,000,000 15 years ago when we went public, over 1700 locations around the globe compared to the 30 back 15 years ago and 49,000 employees compared to the 3,000 again back at the time that we went public. Importantly, as you can see from the pie chart here on a pro form a basis, which includes STAHLGRUBER, we will have about half, actually 49% of our global revenue will come actually from Europe, about 41% will come from the North American segment and about 11% will be coming from the Specialty segment in total. As I mentioned, STAHLGRUBER is a major addition to the LKQ family of companies and I'd like to show a brief video introducing this business to you.
Our actions are based on a promise. A promise our customers have been relying on for almost a century. In times when everything seems to be changing radically, reliability appears to be the decisive factor within the business world. To meet growing demand from our customers, we have constructed 1 of the largest and most modern logistics centers in Europe. We guarantee availability Starrooba uses the most up to date technology and customized software solutions.
We know what's in every package. We know every single spare part, every screw, and every single delivery deadline. We commission around 100,000 items from over 5,000,000 storage compartments every single day. Because we at Staubhrooba will do everything we can to keep our promise even in the future. The fastest delivery
STAHLGRUBER is clearly a very exciting company and I'm very pleased to announce that about 10 o'clock this morning, as you folks were sitting down here for this session, we issued a press release indicating that late last night, we closed on the acquisition of STAHLGRUBER, save for the operations in the Czech Republic. Those activities have been carved out separately and will temporarily be left under the ownership of the seller. We will ultimately look to acquire the check operations, but we need to complete the antitrust review by the Czech authorities. But we are thrilled, absolutely thrilled to have the acquisition of Stahlgruber complete and closed. Varun is going to walk through the anticipated impact on our Q2 and our annual adjusted EPS in his presentation.
And I think Joe is going to distribute a copy hard copy of the press release, so you have it here today. But again, we are really excited that we've got the STAHLGRUBER closed. We have a broad group of businesses around the globe and people ask from time to time, what do these things have in common? Why are they all owned by LKQ? And actually, we have they all have quite a bit in common.
1st and foremost, all of our businesses are wholesale distributors of vehicle parts that really sell into the what we call the do it for me marketplace or the professional repair and installation marketplace. They all participate in a very large and highly fragmented marketplace. And that's important because large fragmented marketplaces provide us an ability to create very, very strong competitive positions and that's true with each and every one of our businesses. They all create an opportunity where the depth and breadth of inventory really can create a competitive advantage for LKQ. That's a real important concept.
We talk about fulfillment rates in each of our business and nobody has the depth and breadth of inventory and the ability to fulfill parts quickly like LKQ. They all afford us an opportunity to use scale to create operating leverage and to ultimately enhance our margins. They all have attractive adjacent markets. And as I think you're going to see today, they all have industry leading management teams who are guiding them on behalf of our customers and obviously our shareholders. In short, the common element of all these businesses is a very consistent business model that spans across the entire enterprise.
What may not be so evident is these different businesses actually draw off of a lot of the same support. This is a picture of what's going to be our new support center in Nashville, Tennessee. We have more than 500 people in Nashville that support the North American and the specialty business in terms of finance, IT, human resources, supply chain and the like. Importantly, many of the global IT activities are also headquartered in Nashville. That's where things like our ERP planning and implementation team, our cybersecurity folks, our data privacy team, servicing our operations on a global basis, they are all located down in Nashville.
In addition, you may not know that we have an offshore center in Bangalore, India, where we have 580 people that support all of our businesses. We actually acquired this operation when we bought KAO back in 2014. And at the time, they had approximately 70 people supporting the specialty business. And again today, 580 people supporting most 300 supporting the North American wholesale business. But they also support PGW, obviously KAO and well over 75 people supporting ECP here in the UK.
As we move to run our European operations a bit more like a single business as opposed to the multiple or perhaps a new center in the Eastern Bloc to gain further economies of scale. So both Nashville and Bangalore are really great examples of how we can leverage the global platform of LKQ across all of our various businesses. So much for the past, I want to spend a few minutes talking about the future. We indeed have created a large and complex company with many individual operating units. That said, there are some common strategic underpinnings, 4 key strategic underpinnings that are important for all of us at LKQ to address in the next 5 to 10 years.
This slide that I'm about to show you is an exact replica of information I shared with my Board in August of 2017, talking about where we are headed as a company. And I've used this slide several times with the Board, but I've also used it many times internally to reinforce the future direction of the company. 1st, we need to grow our customer offering, really important. Today, we're largely a parts distributor, okay? That needs to change a bit.
We're going to continue to expand the global footprint. Obviously, we've done a lot of that here in Europe. I'll talk about that in just a minute. We need to adapt to the evolving technology of the automobile. And finally, we need to rationalize the asset base that we have today.
I'm going to talk about each of these, but when you put it all together, we're going to grow, expand, adapt and rationalize. I call it gear forward, okay. And this is a name and a title that folks across the company are beginning to understand as to where we're headed as a company. So let's just take a few minutes and go through these 1 by 1. Grow the customer offering.
Many of you in the room know Rob Wagman, my predecessor as CEO of LKQ. And Rob often used the phrase that the strategy is to put 1 bar part on the truck.
And what did he mean by that?
Simply that there was an opportunity for LKQ to continue to augment and add to the product portfolio of what we provide our customers. And if we can do that, we would be able to grow the revenue, basically leveraging the existing infrastructure, the existing warehouses, the existing delivery fleet and the existing human capital, if you will. So lots of folks at LKQ are very familiar with the phrase, one more part on the truck. And indeed, while we've done that pretty well, I think, over the last several years and we're going to continue to think of new part types that we can offer to our customers, I believe that services add a whole new dimension for LKQ. Now let's be clear, we have absolutely no intent to do anything that is in competition with our customers, not at all.
Those are not the type of services that I'm talking about. But there will be an opportunity for us to actually create a service offering that helps our customers be more competitive. And that's at the end of the day what we're trying to do. We're trying to deepen the relationships with our customers. And we've already added some services into the product offerings.
And let me give you a couple of examples. Last year, each of Sator in the Netherlands and KAO, our specialty business back in North America, acquired software companies. And people say, why did we acquire a software company? Well, these are software companies that really provide operating systems for our customers to be more productive and more efficient, okay. In the case of SaaSOR, it's really a software it's almost an advanced CRM system dedicated to independent garages, who are really good at repairing vehicles and less good about really tending and keeping track of their customers and the like.
So we are going to provide our customers the garages in the Benelux region with an ability to get closer to the ultimate owner of the vehicle and in return, we think we can get a bigger share of the wallet from those repair shops. In the case of KAO, as Bill will talk about, it's a software program really dedicated to the RV dealers and distributors that we sell to to really help manage their business more effectively. So again, yes, one more part on the truck, we are going to continue to do that, but you can also look on a very selective basis for us adding services to the overall offering. Expanding the global footprint. Again, we started the European expansion in 2011 and over the past 7 years, 4 key platform acquisitions, ECP, Sator, Riaga and now Stahlgruber and then 50 tuck in acquisitions to expand our presence.
What it's done is, it's created a business today here in Europe that is more than 3 times larger than our next largest competitor in the European theater. Okay. We operate in 21 countries that represent about 68% of the total car park in Europe. While we don't need to be in 100% of the countries in Europe, sometime over the next 5 years or so, placing a few more flags will be a good thing for us and you should expect that we will do that. But let's make no mistake.
We have just late last night closed on the largest acquisition in the history of our company, €1,500,000,000 worth of revenue, €1,500,000,000 purchase price, if you will, and today represents day 1 of the path forward. And we are going to be very focused on making sure we get STAHLGRUBER integrated. We have our hands full at the moment. But what do we know about the rest of the world? Well, we know that by 2021 or 2022, there will be more automobiles in China than any other country on the planet.
China will represent an incredibly large opportunity for a variety of players in the automotive industry. So again, nobody in this room should be surprised if sometime over the next 5 years, LKQ plants a small flag somewhere in the country of China to address that marketplace. Again, the Chinese market is complex. It has inherent risk not found perhaps in the countries where we participated thus far. And so we're going to be slow and we're going to be careful and we're going to be deliberate.
Lastly, there are other areas in Asia that have very large populations, very large car parks. India obviously comes to mind And that may be on the agenda over the next 5 to 10 years as well. The evolving technology, there is no doubt that the automobile is going to see more change over the last over the next 10 to 15 years than it's seen since people started making cars back in 1900. Okay? The reality is automobiles are becoming computers on wheels, okay?
And as the car park changes, the folks who provide parts like ourselves, we need to evolve and change as well. And importantly, we need to be ahead of the curve. The good news here and whether it relates to connectivity, kind of assisted driving and automotive safety, autonomous vehicles, electric vehicles, rideshare with Uber and Lyft and Maven and all the rest or the Amazon of all things. The good news here is this is going to be an evolution, not a revolution. And the car park and the automotive industry has evolved continuously since cars were put in production.
It will continue to evolve. The pace of change, I think, is going to increase. But we absolutely have the ability to adjust and adapt our business. And the key here is we need to stay ahead of the curve relative to the rest of the competition. To that end, we've as some of you may know, we've recently established a new group, a new department within LKQ.
We call it the strategy and innovation team. It's been up and running now for a few months. And the goal here is not for the strategy team to define the future. The goal is to have the strategy team work hand in hand with our businesses, with our business leaders and understanding how do we best take advantage of those items up on the screen. Because here's what I know, these kind of I call them disruptive forces, okay, are going to change the automotive industry and they're going to change the parts distribution business, okay?
The small players in our space are going to have a really hard time dealing with these changes. What I know is we've got the scale, we have the capital and we have the human talent to take these items and turn them into competitive advantages for LKQ. And that's what we're going to be about. And we are going to continue to use what we have at LKQ to take market share from our smaller competitors just as we have over many, many years. And then lastly, I call it rationalize the asset base.
This doesn't necessarily mean getting rid of assets, though in some cases we are. Those who have followed our acquisition of the glass business back in 2016, you know that we've started to integrate a handful of the PGW warehouses, which tend to be smaller, 13000 to 15000 square feet into our much larger LKQ facilities. There is a case where we get rid of the facility, we get rid of run payments and utilities and we can integrate it in. But what was this really has to do is putting our existing assets and using them more effectively and to increase the productivity of the infrastructure. We're going to do this by driving higher margins.
We're going to have better working capital utilization. And at the end of the day, we will have an improved return on assets or return on invested capital. Okay. So long term, we're going to grow the customer offering, we're going to continue to expand the customer footprint or the global footprint, We're going to adapt to the changing technologies and we are going to rationalize the asset base. Four key things that we're going to do over the next 5 to 10 years to make sure that we maintain a very strong competitive position.
And while these are really good long term initiatives, we also recognized the need to balance that against the kind of the near term environment in which we're operating in. So, 4 key near term priorities that I want all of you to leave here with. And you need to know that we are very intently focused on each of these 4. 1st, organic growth. As you saw in Q1, we had a couple of our businesses where for the first time the organic growth came down, particularly in Europe and the specialty business.
We finally got our footing back as it relates to the North American business. But again, we are focused on in each and every one of our business segments, making sure that we can sustain a above average rate of organic growth. The second, margin improvement. Again, we had a couple of our businesses, particularly North America and the European segment that suffered some shortfalls in our expectations as to operating margins. My colleagues here today are going to spend a fair amount of time talking about these two items.
So I'm just going to leave it at that. Obviously, we need to integrate STAHLGRUBER, okay? And we have a team that is going to be intently focused on making sure that we bring the STAHLGRUBER organization into LKQ in a seamless manner and that we get all if not more than the synergies that we explained at the time that we announced the transaction back in December over the next couple of years. Lastly, and maybe not so readily apparent to the folks in the room, talent acquisition. Again, the key to any business, clearly, I believe the key to our business is creating a world class leadership team, okay.
And we've actually made some significant progress over the last several quarters. We again created the strategy and innovation team that's led by a gentleman by the name of Bob Ruppa. We got Bob out of JCI, where he's part of their global strategy effort. Prior to that, he was a partner at Booz and started his career at Ford. Teamed him up with Josh Meyer.
Josh spent most of his career being the Director of North American Strategy for Bosch. And it's a great team. There's 4 people in total. We've added a global CIO, Ash Brooks headed down in Nashville. We've added a Global Chief Information Security Officer.
Chad Cowen, who I mentioned, Chad was running the IT effort back in North America. And just probably about 9 months ago actually pulled him over to Europe, the offices out of Amsterdam to run the IT effort here in Europe. Tomorrow, we have a gentleman starting, who's going to lead the whole evaluation process for a potential back office consolidation for our European operations, whether that be again in Bangalore or whether it be somewhere in Europe. So we are adding really key elements and people to the management team. We have several months ago started a formal search process for a Chief Operating Officer of Europe.
And the whole goal here is to give John Quinn some additional help in managing the day to day activities of LKQ's operations in Europe. We are also looking to add someone to fill the HR role for all of the European theater. So again, we have added some terrific talent. We are going to continue to add talent to broaden the abilities of our leadership team to take LKQ forward for many years to come. With respect to our continued growth, again, there's 3 key ways that we grow at LKQ.
First is to gain market share in each of our existing markets. A lot of this has to do with greenfielding, new facilities, warehouses in particular, adding to the distribution infrastructure. And this is where tuck in acquisitions come into play, where we can buy small businesses and just pull them right into the overall infrastructure. We will continue to do that. New product areas, as I said, one more part on the truck, right.
We did this with glass, we did it with the specialty business, with remanufactured engines, more recently, we manufactured transmissions, we did this with paint, all down the line is we will continue to add new products for us to sell to our customers. And then the expansion into new markets, obviously, the 4 key platform acquisitions in Europe represent that. A lot of this has to do with M and A activity, acquisitions if you will. No doubt, we've used acquisitions as a core element of our growth strategy over the last 20 years. Some of the transactions represented here by the logos represent either key product platforms or geographic platforms that we've added.
But it's important to keep in mind that the vast majority of the acquisitions we do are tuck ins, where again we buy smaller businesses that are in our existing line of business and pull them into the broader infrastructure and oftentimes eliminating most, if not all of their back office activities. With respect to platform transactions, what are we looking for, right? We're looking for good, well run businesses. We don't fix things. We buy great businesses.
We buy businesses that either have an existing position or the capacity to become a market leader in their respective markets.
At the end of
the day, in real estate, they always say the 3 key factors in real estate are location, location, location. With respect to our businesses, it's management, management and management. So we are looking for companies that have great leadership teams and importantly leadership teams that are going to stay with us and run the business after we close on the transaction. Good cultural fits imperative. We have a very entrepreneurial spirit to all of the LKQ operations on a global basis.
And so we're looking for entrepreneurs. And obviously, and importantly for this crowd here, right, we need to earn a really good financial return on our investment. We recognize that returns in the early years are going to be low because the capital has just been deployed. But our timeframe, when we think about acquisitions, our holding period is forever. Our holding period is forever.
And we want to sure that we can earn a good return on capital over the longer term horizon. As I like to say, what you buy is important, but what you do with what you buy is more important. And this is just a snapshot of 3 of the major platform transactions here in Europe and think about what we've accomplished. We acquired ECP in October of 2011. It was doing about £270,000,000 of revenue.
And with Sukpal and Maarten and the broader team here, they've quadrupled the size of the business really since 2012, phenomenal growth. Sator, under Simon Galvin's leadership and his team, We bought that in 2013. We was doing the better part of €290,000,000 of revenue, increased that by more than 2.5 fold. And importantly, converted a good portion of the business from a 3 step distribution model to a 2 step distribution model, which is much more effective and helps us create better margins. And then Rhiag, which is a very recent acquisition just in 2016, we have dramatically expanded the footprint, particularly in Central and Eastern Europe.
So we have a really good track record of actually doing something different with the companies that we buy. And it's keeping that core management team in place and giving them the resources they need to be effective and to continue to grow the business. This is just a chart highlighting the number of acquisitions completed over the last 6 years. Clearly, since the start of time, if you go back to 1998, we've closed on 275 acquisitions over the last 6 years, 131 and clearly over the last 4 to 5 years, a significant portion of the capital has been devoted to building out our European platform. Obviously, given the size of the STAHLGRUBER transaction, 2018 in terms of capital deployed will probably be an all time record.
But we do not anticipate that we're going to do another 25 acquisitions in 2018 as we did last year, because the importance of integrating the STAHLGRUBER acquisition into LKQ. So you should expect the number of acquisitions to come down. So in summary, our company continues to be, I think, incredibly well positioned to create successful outcomes. And those outcomes are for our customers, for our employees and importantly, those folks who provide us capital, which includes our shareholders, our bondholders and the banks who are part of our credit facility. Each of our businesses operates in a very large, highly fragmented market, which has allowed us to create industry leading market positions.
We've dramatically diversified the revenue stream over the last 20 years. There are a number of positive trends, which are really leading towards the continued increase in the use of alternative parts to repair and accessorize vehicles. Alternative parts being recycled parts, refurbished parts and aftermarket parts. And that really is due to the value proposition that we create for the folks who use those parts, our customers, the repair shops, the installation shops and ultimately the end consumer. And finally, we have a very sound financial model that is characterized by very good organic growth, strong margins, good free cash flow and obviously a capital structure that has limited near term repayment requirements and a lot of liquidity.
So I am extremely proud to be the CEO of LKQ as we continue the journey forward. Notwithstanding some of the near term headwinds, I've never been more optimistic about the future of our company. At this point in time, I'm going to turn the podium over to Justin Jude, who's going to run you through the North American business.
Thank you, Nick, and good morning, everyone. As Nick Sedai, I'm Justin Joot. I'm the Senior VP of our North American operations. I'm going to walk you through some high levels updates on our North American business. Last year, we finished off at $4,800,000,000 just shy of 5.
We had just below 20,000 employees and almost 500 locations. If you look at the chart on the right hand side or the lines of business, I'm sorry, on the right hand side, these are our 3 key top performing from a revenue standpoint lines of business that exist in North America today. We have many other lines of business, but these are the 3 key drivers today. We are and continue to be the number one provider of alternative collision parts that's both recycled as well as aftermarket. We are also still the number one provider of engines and transmissions on the used recycled side and remanufactured side as well.
And with our recent acquisition of PGW, we are now the number one wholesale provider of automotive replacement glass in North America. All of our lines of business still see fragmented markets, as Nick talked about, and good opportunity to have significant growth. So we take all the different lines of business that exist in North America today. We typically group them into 3 different segments: collision, mechanical and heavy duty truck. What you'll see up here is our private label brands that we go to market in each segment.
And then on the paint side, you'll see a few logos that are key distributors of these product lines and the paint body and equipment. We put glass into collision just because it's easier, but at the end of the day, there's not a whole lot of overlap with collision and glass, as we've noticed after the acquisition. On the mechanical side, we have, like I said, we're the number one provider of used engines and transmissions. A lot of that is becoming out of the strong growth that we've added ATK. So last year alone, they produced 105,000 engines with our transmission acquisition, our remanufacturing plants and our new greenfield that Nick talked about before in OKC, we produced 25,000 transmission last year, 25,000 transmissions.
Our first line in OKC is up and running fully. We are now working to deploy our secondary run. So ATK luckily is firing on all cylinders right now. We're also in heavy duty truck space as Nick talked about. We have 21 salvage yards across North America that will dismantle that will procure and dismantle everything from cement trucks to semis.
We also are a large provider of aftermarket cooling products into the heavy duty truck space as well as some select collision parts. Since our core business is automotive, we take data from AAIA that shows the U. S. Market from an automotive repair standpoint. So this is what $243,000,000,000 market, this is what consumers would pay to get their vehicles repaired.
If we look at the next level down, we have a do it for me space and we also have the do it yourself space. We play in the do it yourself space a little bit with our self serve, but our core business as Nick talked about is wholesale or the do it for me side. If we take that number and further break it down into the mechanical side and the collision side and then since these are at retail levels, we break out the labor and we break out the market that the shops charge the consumer to really understand the addressable market that LTQ plays in today. And as I mentioned, we did $4,800,000,000 year. That's inclusive of Canada and that's inclusive of our self-service operations.
That $71,000,000,000 obviously does not include Canada and it does not include the do it yourself side. So still a significant opportunity for LPQ to grow in our space. If we focus on the collision side, a good trend that we've seen in the last 5 years and we'll continue to see is the enrollments of the DRPs. So DRP is a direct repair program where a body shop enters into an agreement with an insurance company and that body shop meets cycle time, meaning they can get that car out faster. They can get that consumer in and out of that rental car faster and save the insurance company money.
They also meet certain customer service indexes. They also meet certain repair guidelines and they also meet effective use of alternative parts, reman and aftermarket. So we see this as a great trend because insurance companies want faster cycle times, the shops need quicker parts delivered and they also need a good quality. So LKQ is the best provider in those areas today. You've heard us talk about I'm sorry, I talked about the enrollment in DRPs is growing.
The nice thing we're also seeing is the large MSOs are growing and the independent body shops are on a decline. So in the last 10 years, the volume going through MSOs, the large MSOs in the U. S. Has gone from 9% to nearly 25%. This is also the needs most of these MSOs are also DRPs.
So as these guys get bigger, LKQ typically wins more market share. We have agreements in place with nearly all the top MSOs as well as the insurance carriers. So when these MSOs, whether they're regional or national, they need a supplier they can count on coast to coast and there is nobody else besides LKQ that can do that. Here's just a list of some of our key partners that we do business with today. It's everything from body shops to mechanical shops to insurance companies.
You'll see Abra Auto Body all the way to USAA Insurance. We like to put this out there to our employees and to the investment community just to show that we're proud of some of the customer relationships and partnerships that we have today. So in the past, you've heard us talk about the collision, the sweet spot in general, whether it applies to mechanical or collision. This graph kind of shows the collision sweet spot for LK2. The majority of our parts that we sell into the collision world, whether it's aftermarket or recycled, is in that 3 to 10 year range.
So if you look at this chart showing what's expected in VIO or vehicles in operation on the oncoming years, you will see a couple of 100 bps improvement of migrating vehicles in operation into LTQ's sweet spot. With the heavy SAAR rate that we've seen in the past couple of years, that typically causes a lag on our sales. Those new vehicles don't get to the auctions quick enough. We have to tool up new aftermarket products. So in some cases, when you have high SAAR rate, there is typically a lag in LKAQ sales.
But we see some favorable tailwinds coming with our sweet
spot.
And with that tailwind of our sweet spot as well as the complexity of vehicles, there's 2 other good trends that we're seeing ultimately occurring in the collision market. The first one is parts proliferation. So we see more number of parts in the last 5 years entering an estimate and we expect that number to grow at the same rate. As more parts are in the estimate, LTQ wins our market share, we will sell more products from that trend. In addition, with the complexity of the vehicles as I talked about and the technical product lines that we're carrying, that's driving the average prices up as well.
So another benefit from a revenue standpoint that we'll see coming in the short term. And whether we're talking collision or mechanical, this graph or this slide helps show average savings that we will show to a consumer or to the insurance companies. All the prices on the screen are at list price or at retail essentially and then we typically then give a discount to our shops and give them a net price. So in many cases, you'll see kind of a depiction of what the average savings is to OEM. And then when we give our customers that discount, there's typically even greater savings.
We play in a space of highly fragmented competitors. So we always have to balance our pricing between the multitude of competitors that we have. I think in the U. S. Alone, there's still 4,000 automotive recycling facilities.
So we always have to balance our pricing between that of OEM, for the OEs and then that of the multitude of competitors that we have in existence today. I mentioned the multitude of competitors. The nice thing about this space is it's still highly fragmented. So whether it's through expansion and consolidation or expansion of just good organic growth, we see still a good opportunity. There's a few key things that LKQ brings to the table that kind of sets us apart from our competition.
And one is just economies of scale. We are 20 times the next the size of the next closest competitor we have and it's a long tail after that. In addition, our senior management team, if you look into the map on the far right, the color quadrants, we have regional vice presidents that manage these geographical areas and the average tenure of these gentlemen in our industry is 22 years. So we have a strong management team helping us get us to the future. In addition, our strong logistics at foot that first map you see of what we call the Southeast, that's a depiction of our typical network.
So in this instance, we can take apart from Miami, Florida and get it to our Knoxville, Tennessee and across the U. S. And across North America, we have good representation of these similar geographical network abilities. In many cases, these regions interconnect to each other, so we can get parts across regions as well. This distribution footprint that we have is very costly to replicate from a competitive standpoint.
But in addition, it gives us nationwide coverage for customers that need it, consistent warranties as well as industry leading fill rates. Talking about some key initiatives we have this year, I talked about the tailwinds and the fragmented market that we have. LKQ still sees working with our strategy team, a good organic growth expected in the next 5 years of 3% to 5%. As Nick talked about with that strategy and innovation team, they're working closely with my business leaders to understand offerings, new product lines that we can get into either existing product lines going to our existing customers or adjacencies that might help us get one more part in the truck as Nick talked about. In addition, they're helping us as Nick talked about monitoring the effect and timing of what's happening with autonomous vehicles, ADAS and electrification.
So we don't have our head in the sand. These guys are doing a pretty good research to understand the impact and timing that will come to LKQ. On the gross margin improvement side, if you asked all my regional vice presidents, the top thing is gross margin. Everybody's aware of it. Everybody's working on it right now.
We're seeing continual improvements. We know costs are going up. We are pushing our prices up where we need to. We are optimizing our pricing to gather back and claw back some of our margins. In addition, on the salvage side, today it's a manual process.
We are automating that and moving it to an automated system that can react to the market real time and fast and truly test the elasticity of salvage products. So we see further enhancement on the margin side of salvage as well. In addition, I'll talk about on a future slide, continuing to enhance our salvage procurement process. The integration standpoint, Nick spoke a little bit about PGW. We have integrated some locations.
We still have many more locations to integrate over the next 2 years. In addition, as of today, we have fully internalized their IT support systems as well as the back office side. So June forward, we should start to see good cost savings on the PTW side. In addition, I'll talk about, today we have, I would say the number one catalog in aftermarket collision parts. We also have the number one catalog when it comes to recycled parts, whether that's collision or whether that's mechanical.
We are working with our IT team to develop a point of sale system, a a single catalog where our reps can truly sell from one screen everything we have to offer. There will be nobody else in the industry that has this today. From an operating leverage standpoint, we're working to minimize the freight impact. Everyone hears about it's a shippers world, Shipping rates are going up, whether it's small pack or LTL or full truckload. We are moving as much as we can to our own trucks where our cost of delivery is cheaper.
And in many cases, we're working through our warehouses to optimize our packaging and making sure that we're shipping the most efficient way as possible. In addition, last time we had our investor presentation, I explained that we're rolling out Roadnet. That was kind of our Phase 1. We have 4,500 delivery trucks in North America today. So it took us some time to get everybody on board, get the process implemented.
Now it is just our culture to use road net. And now that we have gathered a good year and a half worth of data, we are starting to migrate to Phase 2 where we feel more dynamic routing, more optimized routings will lead to a 3% to 4 percent efficiencies in our delivery. In addition, and Nick talked about in wholesale North America, we have our North America headquarters in Nashville, Tennessee, which we continue to centralize and standardize processes to gain efficiencies as we move them to Nashville. In addition, we then have increased the use of our Indy operations. So there's still opportunity for us to reduce our costs and gain a little bit more leverage.
In addition, I'll talk about on the slide here in a few minutes that we have got some heavy focus on employee retention as Nick talked about recruitment and talent acquisition. So I mentioned that we are enhancing our salvage procurement standpoint. So before we had a standalone system to do our salvage bidding and in the past we would just cast the big net. So at the auctions today where we procure 98% of our Savage vehicles, there's roughly 4,000,000 cars a year that come into our view to bid on. We only can absorb and produce roughly 8% of that volume.
So we've taken that system that was kind of standalone, rewritten it into our salvage ERP system and made it a lot more efficient and a lot more customizable and as well as a lot more scalable. So now that 4,000,000 vehicle that comes into our population, we quickly filter out the vehicles we have no interest in at all. And then additionally, when we present these vehicles to our bidders of the cars, they can see they don't have to they have less and less decisions on is this a V eight or is this a V6? It's more of, hey, is the engine in the car? Does the damage look like it hit the engine?
We're more and more automating. Is it a V eight automatically? Is it a GT? Is it LX? So the screen looks
a little bit complicated.
And I would say from a system standpoint, it is. But from a user base standpoint, we've simplified it very well. And if you noticed on Nick's slide earlier, we've moved our key bidders over to our indie operations where we have 100 people doing what we call picture bidding today. So in most cases, like I said, all we're doing is looking at a screen and saying is that left fender good. More and more of the system is automatically determining what exactly is that left fender.
Is it for a GT and LX or 4 wheel drive or 2 wheel drive? And we're taking, I guess, and simplify the process pretty heavily. And we expect to see improvements from an efficiency standpoint as well as a gross margin improvement. I spoke a little bit about the retention plans that we have. So we took a piece of our tax savings and applied it towards enhanced benefits for our employees and we really wanted to invest back more into our people.
What we did not want to do is get a one and done bonus that a lot of companies have done. We wanted to have some long term impact that our employees can benefit from. So we attacked 5 key areas and I'm just going to highlight a few different areas that we touched within each one. So from a healthcare standpoint, I will tell you if it's a single individual, we cut their costs by $25 a month. If it's a family plan, we cut it by $50 a month.
So as of April 1st, employees that had a family automatically realized the annual increase in their wallet by $600 That's something we expect to continue on. From a retirement standpoint, we enhanced our 401 matching. We also shortened a time period that it takes employees to be able to invest into the 401 plan. From a PTO standpoint, we have a lot of our field operations that we've enhanced and increased the PTO that they have. So in our world today, we live with the same macroeconomics that most of the companies have.
The lowest unemployment that we've seen in quite some time that puts a lot of pressure on our recruitment, puts a lot of pressure on our retention. So we feel that these enhancements that we've done will help us benefit keeping the employees, retaining them as well as being able to recruit new talent. On the education side, we added a full time employee reimbursement plan for college. In addition, we have a Joe Olson scholarship fund, which we expanded to more winners. And we also created some, as Nick talked about serving our communities, we also created some charitable support where our locations, if they have a local charity that they need to support, the company can help offset some of that as well.
So we're excited about these benefits. We've had nothing but positive feedback from our employees. And we hope that this will once again give us some better opportunities to recruit talent, keep our retention and ultimately drive some efficiencies. So in closing, I talked about that value pricing slide, the value proposition that we have on the way we price our parts and how we're competitive. Still a high fragmented market that exists out there today.
We think there's going to be future consolidation. But from a pure organic standpoint, we still expect to see that 3% to 5% revenue growth over the next several years. Once again, the key initiative that we're working on is investing back into our people and making sure that we have the right people and we can retain the right people. And from an operating leverage standpoint on the short term, once again, we are heavily working on our gross margin. We're seeing daily improvements on this.
Along those initiatives on gross margin as well as a few other operating initiatives will get us back to our historical operating margin levels that we've seen in the past. And then some of the other initiatives I spoke about are kind of a longer term or they take a longer time to employ. And so we'll see once we kind of stabilize our operating numbers back to where they need to be, we'll start to see another 10 to 20 bps improvement for each year after that. So that's all I have today. Everybody, thank you for your time.
I look forward to interacting with you through the rest of the day. And I will now turn it over to Mr. Bill Rogers.
Good morning, everybody. My name is Bill Rogers, and I run the Specialty segment for LKQ along with a great team and I've been doing that for just over 3 years. So with that, let's jump right in. As a quick overview of the Specialty business, We've had last year sales were around just over $1,300,000,000 We have over just over 3,000 employees. We have many, many customers and many suppliers.
Our stocking position on SKUs is about 185,000 different SKUs in 7 distribution centers, geographically located in North America in a great position utilizing 45 cross stocks to deliver to our many customers next day. If you look at the financial performance, the history of our financial performance, you can see we have done very well in terms of growth rates on the sales side. We're at over 13% and we've leveraged the profitability well at over 18%. We're in a strong number one position in the markets that we serve and very, very focused on continuing to retain that position and on profitable growth. We're very fortunate to have worked hard and established many very strong brands in our own company brand portfolio covering both the automotive and RV sides of the market.
Additionally, we have recently acquired Warren Industries, which is in last November, we acquired them. And that adds the premier off road brand to our portfolio. And this is really consistent with our strategy of going after and pursuing critical or marquee brands down the road within our Specialty segment. This slide is what I call a growing list of special relationship brands. These are brands where we have some sort of a special relationship, whether it's an exclusive or some partial exclusive or an exclusive within our particular market segments or a specific region.
So this is a key focus for us going forward to go after more of the company brands and brands that we have special relationships with. And finally, we carry all the most recognized brands for the markets that we serve and really enables us to be the first or a call for all the customer base that we serve. We've worked really hard at establishing many key advantages that enable us to be the leader in the markets that we serve. Our logistics network and inventory position are the best and enable us to always deliver. We have a daily relationship with our customer base and we do transaction processing very well.
This is real work with real cost and it's underestimated by many others out there. Our product application data is the best. Our sales team has extremely strong and long relationships with our customer base, and our technology is head and shoulders above the competition. We work hard to maintain these advantages and our leadership position. I love this illustration because it's truly a representation of what we do every day in every location with the products that we sell.
So I'm going to step you through it, it's a little complicated and try to make it a little easier with the letters going around. So if you look at the black box in the middle, you have a typical situation where a consumer comes into one of our customer locations. In this case, it's a construction worker looking for a toolbox for a pickup truck. And if you look at the A letter there, the customer, the jobber in this case, would call into one of our call centers and we cover the country in terms of call centers from the East Coast to the West Coast following the time zone. So we're open early and late.
But he would call in, in this case, go to our Dallas. Due to his location, typically, he would go to our Dallas call center. And there, they would help make sure he gets the right product. We put it into the system or they could have done that with our business to business system, which is also the majority of the way our orders come in. And in this particular case, we would start dropping our pick tickets after 5 p.
M. This particular product get loaded onto a tractor trailer in our Kansas City distribution center and get on the road and headed out for an overnight drive that eventually gets over to the D letter. And in the middle of the morning or early, early morning hours, the truck arrives and we have a team of the folks that do the local deliveries, sitting there waiting to unload the truck. We get through that whole process in a few hours and those delivery vans for the local markets head out. And in this particular case, by noontime, our driver shows up at that same customer with that toolbox, very big and bulky item and enables that customer, the jobber to install it onto their construction workers' vehicle by 2 p.
M. So all order to delivery within 24 hours, which is extremely powerful. And again, this doesn't just happen in this location. It happens the same way in all of our locations, and we cover North America this way. The macro environment has been very favorable for us.
If you look at the vehicles that we care most about versus the overall, they've all been on a higher growth rate than the overall. And the overall growth rate has been very strong. So we've been in a good position for these new vehicle sales for the vehicles that we care about. Additionally, RV, which is a big market that we serve in terms of aftermarket parts and accessories, has been having record years in the U. S.
North American market from a unit shipment perspective. And the forecast or the recent numbers continue to be good and the forecast also looks strong. Another macro indicator that we tend to focus in on is the unemployment rate, which has been very low and favorable for the types of products that we sell. So all in all, we feel like we're able to sustain a very healthy organic growth rate of it over 3% every year. Our historical rates have been even higher than that and we see no reason to think that anything would change.
I thought it would
be nice to kind of give you a feel for how the vehicles that we and the markets that we serve are modified in the types of vehicles that we care about most. So in this illustration, you can see the different types. So the top one is a muscle car, gives you some examples of the types of muscle cars that typically get accessorized more and the types of accessories that we would most commonly use and our customers would demand. Utility vehicles is another big and growing market and with more and more types of utility vehicles in the North American market, growth rates have been very good. Pickup trucks have been a mainstay for us for a long time.
There's really so much that you can do to a pickup truck, and that typically happens in North America. And we have a huge selection of products that service those vehicles. And a real growing segment is the SUV, CUV area and we have many, many products that go with those, many cargo management type products and a lot of them are very application specific that really lends itself to our business model where we have big distribution centers with many, many SKUs and complicated application specific type data requirements. So the majority of these vehicle types in terms of overall vehicle sales are growing. And so we see the market as being very strong.
Another vehicle type that I wanted to dive in just a little deeper on is the Jeep. I don't know about you, but I don't think a stocked Jeep actually looks very good. And if you look at the market study that SEMA has done, it very much confirms that most vehicles, most Jeeps out there do get accessorized quite a bit and they're stating the amount at 62%. I'm sure if you were in North America and you looked at Jeeps, you could probably do your own off the cuff survey and it might even be higher. So most vehicles in the Jeep category end up being accessorized in some way.
And Jeeps are a huge influencer. Just a little bit further on the study, Seema went through and talked about the different types of accessories that vehicle type uses, the timing in which those consumers would start to accessorize it and how they would go about doing that. So again, very highly accessorized vehicle and a good example of what we see in the business that we do. Our overall M and A or acquisition strategy is very much in line with our overall growth strategy. And we have and continue to target some key areas.
So acquisitions in the distribution area will continue to be a focus for us and we look and continue to look at areas within some of the existing markets that we have where we're less penetrated. So it would be really focused around complementary areas in those existing markets. It also would be focused in adjacent spaces where we have some elements of product mix already for an adjacent space and it really makes sense to go after some distribution in customer bases in some adjacent areas as well as different opportunities to continue looking at geographical expansion. 2nd area that is a focus for us are critical brands. The Worn acquisition is an example of that where if a critical brand comes around, then we're going to be very motivated to pursue that and want to be in the mix on any of these marquee brands that come up.
And lastly, on the technology side, as Nick said, we are very focused on adding and continuing to maintain our leadership position and the advantage we have. So any software or technology or service related option that might help us be more valuable to our customer base is something that we would try to pursue. So key initiatives for us are very focused on driving profitable growth by bringing on new lines and new products and services, adding new customers, increasing existing customers and the customer penetration that is getting more lines within the existing customer base. This not only helps us, but it really helps our customer base as well. A lot of the customers get focused on what they do every day and it's really our role to help introduce them to new products to help them grow and help them expand.
And they look to us for that and we really pursue that role because it helps everybody in the end. We continue to focus on expanding both our company and those special relationship brands that I talked about. And finally, we continue to grow our service capability to help customers grow in the online business. The online buying and selling business is a reality and we have programs that help drive foot traffic to our brick and mortar customers and help them get tapped into the whole online reality. So just quickly to close and to summarize our overall value proposition, we are in a strong leadership position in the markets that we serve.
We have multiple competitive advantages that are very, very difficult to duplicate. We're in a very favorable macro environment. We don't see that changing anytime soon. We have a very strong team driving market leadership initiatives aimed at profitable growth. And this is all based on a very sound business strategy to expand both organically and through acquisition.
So that concludes my remarks. Now I'll turn it over to John Quinn.
Thank you, Bill. Good morning, everybody. Thank you for coming. I am John Quinn. I'm the CEO of Alpiq's European Operations and many of you know me for many years.
I thought you used to
be the CFO of the company, couple of CFOs ago.
I'm just going to talk about 3 topics, but I was going to them in some depth. The 3 topics are just give you an understanding of the European market and then give you an overview of LKQ's operations within Europe and then finally talk about LKQ's European strategy and how we're reacting to some of the trends in the marketplace. There's a waterfall that we presented previously. It's very similar to one that Justin put out for North America. This is the European waterfall.
It starts with the entire market at consumer prices of €200,000,000,000 Breaking it down very similar to what Justin did between that do it yourself and do it for me. The do it yourself in this case only includes e commerce, so the market is actually probably bigger. Same theory, brake, mechanical and collision, strip out the labor and the markup that our customers put on. And at the retail or at the wholesale excuse me, at
the wholesale level, it's about
€102,000,000,000 market. So the key takeaway is bigger market than you might see in North America. Justin's equivalent number is about $70,000,000,000 you'll recall. I'd like to try to help people understand Europe by putting in a compare and contrast a little bit to U. S.
And also try to explain where we are as company in Europe today. Starting just with the population, Europe is a much bigger population base in the U. S, about 374 1,000,000 people versus 323 in the U. S. In the countries that we operate, we're not in every country in Europe, and the countries we operate in, we're representing about 486 $1,000,000 More complex than doing business in the U.
S, in U. S, one country, one currency, typically one language. In the Europe, you're looking at 21 countries that we operate in, 34 in the entire market. We operate in about 16 different languages with 13 different currencies. GDP in the total European theater is roughly the same size as U.
S, but you'll see that GDP per person is lower here in Europe, but there are huge discrepancies. There are places in Europe where the GDP per person is actually higher than the U. S. And there's places where it's obviously much lower to bring down this average to what you see here. In terms of vehicles in operation, there are more vehicles in operation in Europe, which isn't surprising when I just explained to you that the market in terms of the actual repair bills are higher.
So more vehicles, more market size. Where we are operating, it's roughly the same size as the U. S. Market, about 263,000,000 vehicles. Another way to look at Europe, this is just an interesting graphic that Bloomberg put out a little while ago.
The size of the bubble shows the GDP per capita, excuse me, per country. So you can see that the green line represents the Eurozone countries. You can see the biggest markets in Europe include Germany, the UK, Italy, France and Spain. Figure with the Stahlgruber acquisition, we now have the presence in the biggest market, which is the largest both in terms of GDP and also the vehicle park. We're represented in many of these countries.
We have a very limited presence today in France, the 2nd largest or 3rd largest market. And in Spain, we have virtually nothing to speak of there. European Union, just nice graphic to explain how the European Union works and we're talking about hard exit and soft Brexit, what does that mean? The purple line is the countries that belong to the European Union. We talk about soft exit, it's really do we does the UK end up with inside one of those other boxes, for example, the European Free Trade Association, which includes countries like Norway and Switzerland, it would be a soft exit.
If it ends up completely outside of all those boxes, it will be hard exit and obviously with harder borders. Just a little bit of a compare and contrast is very, very high level here. Western Europe versus Eastern Europe. There's a tendency in vehicles in Europe to move West to East. So cars are new cars bought in Germany, the 9 months for example, oftentimes will end up in Poland or maybe even moving further east into Romania.
The market growth in Western, particularly in the car park in Western Europe is growing, but it's growing more slowly, typically less than 3%, whereas in Eastern Europe, we're seeing very high levels of growth. Not reflected necessarily in the new car sales, but it's because the car park is growing because of all the vehicles that are moving out of countries like Germany into those countries. Average age, not surprisingly, the average age in Eastern countries is much higher, roughly around 15 years average age versus about 9 years in the Western countries. And the number of vehicles per inhabitant is much lower in the Eastern block. So about 500 cars versus 600 cars.
These all these statistics in the East are coming up as the countries get richer. This is a graph we've showed previously. We used this when we announced the Stelberg acquisition back in December. We're very, very pleased to be able to explain how that strategically the acquisition that we announced this morning is being closed yesterday, fills in the footprint. We now are able to literally drive from the Netherlands to the Ukraine, particularly through our footprint.
This is essentially located in the biggest car park, in the biggest GDP economy in Europe. And you can see from a logistics point of view, it's beautifully strategically located for us. Nick talked about us being roughly 3x larger than the next biggest competitors in Europe to attach this transaction. On this graph, we're including the turnover for Mekonomen, which is a public company in Scandinavia, headquartered in Stockholm that we own 26.5 percent of. Including that company, we're roughly on this slide, €5,200,000,000 turnover, which is little over 3x the next biggest, which would be probably Allianz, which is owned by GPC out of the U.
S. Or Wessel Mueller, which is about $1,500,000,000 out of Germany. So what does LKQ look like in Europe? The slide shows a pro form a. It takes LTM results for Q1 for LKQ and then added Stog River results from 2017.
In these figures we've pulled out the Czech Republic, which Nick mentioned, we've not closed on. It's subject to competition clearance. But with that, you can see on a pro form a basis, we were roughly $11,900,000,000 Nick mentioned almost $12,000,000,000 in turnover and European operations are representing about 48% of that revenue. The company On a pro form a basis, it generated $1,300,000,000 worth of EBITDA with the European operations coming in a little bit under CAD500 1,000,000,000 at CAD589 1,000,000. Germany will be with this acquisition, the largest of our European markets coming in at 29%, just popping out the ECP, which is going to be around 28% of business.
So nice geographical diversification in some of the biggest markets in Europe. A lot of questions have been around European margins and what is going on there, what are we doing, why is it happening, what are we going to do about it. So I'd rather just take that head on. The graph on the right shows EBITDA trend. You can see from the orange bars, the EBITDA has been growing, but the line on that graph is EBITDA margin, which has been deteriorating.
Couple of reasons for that, some of these are what I would consider to be temporary, some of them are structural and some of them are will be turned around as a result of some of the initiatives that I'll talk about in a minute. Going back to 2016, we bought a company here in the UK called Andrew Page. It was in receivership, which is equivalent of going bankrupt. We bought the assets out of receivership. It was a money losing negative EBITDA company.
We ended up in a whole separate arrangement with the competition authorities, which meant we were not able to integrate that. We cleared that hurdle earlier this year. Martin will talk a little bit about that. But until we were able to get our hands on the business, we weren't able to do anything and we continue to lose money. That caused an immediate depletion in our margins, obviously, in Q4 2016 until the anniversary of that in last year.
You can see the impact. We also did an acquisition, it was a small acquisition in terms of the cost of the acquisition. AD Poland is a large revenue, but a low margin business. Very good ROIC, we believe. Yirgi will maybe talk a little bit about that later, our CEO for the CEE region.
We think we're going to double the EBITDA in that business, which will give us a very nice ROIC, but it is a lower margin business. The businesses in Central Europe tend to be a lower margin business. Uriel explained some of that. The reasons for that, the businesses there are growing very quickly, not only ours, but our competition's. There's a lot of fragmentation in that market still.
Those markets have not been consolidated. Structurally, I suspect that for a couple of years, you're going to see lower it's going to be a lower margin, higher growth environment. Ultimately, I think as that market matures and consolidates, the margins will come up. But today, it's growing faster than the company as a whole and it's causing a mix dilution on our margins. That is a structural thing that is going to continue for some time.
T2, we took possession of this building in January 2016 and we have been incurring costs since that time. Some of those costs were just to build out and kit of this facility and to start incurring rent and so forth. But we also are continuing to carry duplicate costs. So we have had a number of additional facilities and we've also had some costs associated with the commissioning of this building. Those costs, the way the GAAP works, we end up capitalizing the cost of this facility into the inventory and then it gets amortized over the inventory turns.
So cost for this facility, cost for the legacy warehouses, which we have not all completely out of yet. We've got one more facility to get out of from the legacy ECP business and we also have business the NDC coming from Andrew Page. Those costs will continue through Q2 and Q3. We really only get those completely out of the system early Q4. So that's a temporary thing.
It's structural. The die is largely cast with respect to that, both in terms of what we're going to see coming through the margins in the next two quarters, but also with respect to the way they're going to fall apart excuse me, fall away, not fall apart, the way they fall away in Q4. We already talked about mix. STAHLGRUBER, circa 8%, that is going to be a bit of a challenge in the sense of it's going to create a large it's a large acquisition that's going to influence the margins. We've announced some synergies in that.
We're very, very confident in that. But it will even if we were to achieve the synergies tomorrow, again, this accounting issue causes those to take some time to show up. So we will not see the benefits of those probably coming through until next year, some of them. Obviously, we're going to hit the ground running tomorrow morning when the Germans get off their holiday, which is there today. We're very confident.
The question was why let me get back to 10% margins. When I came to Europe 3 years ago, Europe was running at lower than 10% margins. And one of the questions a number of the analysts asked me is when are you going to get the margins to 10%. I was very confident that time that we would. We got them back to that within about a year.
Then some of these things that I call the margin drivers occurred with respect to Andrew Page in Poland and T2 and so forth. I'm very confident we'll get them back to that level. We do have to eliminate the temporary prices. We have to get the strategic benefits of the integrations going, which I'll talk about in a moment. Just to give you a little bit more color and a little more granularity when I talk about these initiatives and what the impact of these various things are in more specifics.
The graph shows some potential ranges. There's a high and a low for each of these initiatives. Just eliminating the legacy and the burning costs associated with T2 and the other legacy facilities that we're carrying today, we believe that's going to add between 1% and 1.5% to our margins once this building gets up to the productivity levels of the pro form a. The building is running extremely well today as the facility is, but the productivity levels are still not where they need to be or where we pro form a. They're certainly on track in terms of the pro form a, meaning that we are where we expected to be, but we are not where we expect to be ultimately.
At this time, the productivity is where we perform it, but it's not as good as it ultimately will become. 2nd item on this is and it says AP, which stands for Andrew Page on accounts payable. Andrew Page continues to have negative EBITDA margins, getting them up to a company average and even a little bit better because on an incremental basis, hopefully, we can do better. That will add another 30 to 50 basis points. Procurement, you'll hear from Fernando Himaf, our Head of Procurement later today.
We've been making good strides on that. We still think there's more to do. We think that the Stauberberg acquisition will give us more headroom and that should generate an additional 70 to 100 basis points over this time period. A couple of projects that you'll hear about later, cataloging and our data analytics projects, these are longer term. If you start this graph, it moving left to right is probably a good way to think about how these projects are going to come on the stream.
The data analytics projects and catalog, we think that could add another 100 to 200 basis points of margin. Longer term, once we are able to get STAHLGRUBER integrated and rationalized,
and we should be able
to get some logistics savings. And Nick has talked about the back office that we are starting ultimately, somebody starting tomorrow is dedicated to that project. Those two items combined should add somewhere between 80 basis points and 130 basis points. Everything except logistics has been already launched on this slide. You'll hear more about that from our European leaders who are going to be joining you on the stage later today.
A little bit about our European strategy, which we are convinced is the right strategy and it will lead us to the best margins in each of our markets. 3 key elements. One is maximizing the existing footprint, which is really about integration and leveraging our current scale. It's really about digesting what we've already got on our plate and proving out the synergies that we've promised the world. The second one is create an environment that addresses the evolving market.
Nick has talked about some of the trends in the market, and I'll go into a few of them in a little bit more detail. And then creating an environment where LKQ is the first choice to customers. This is a little bit about when Nick talked about adding some services, but also about creating an environment where the customers can rely on LKQ for not just parts, but other elements that they need to run their business. Acquisitions, we'll continue to do acquisitions where they fit our criteria. I'm not going to spend any time on that because Nick has already spoken to that.
Very quickly in terms of if you think of before and after, there's a little bit of a roadmap. LKQ, as Nick mentioned, we buy market leaders. The company
is in these bubbles on
the right hand side, ECP, Sator, Riog, whatever, these are all market leading companies in their respective markets. Our goal is to take those good companies in their respective markets to make one great company that's a pan European footprint. So we'll move from individual very fine companies to one great company that's an integrated business with rationalized procurement across the footprint, a rationalized ERP landscape, optimized back office infrastructure. We're going to continue our growth in private label offerings and rationalize the way we deal with those. And then make further inroads into leveraging our warehousing and distribution network.
As an example, you'll see a lot of what we call long tail inventory today. We have duplicate long tail inventory in each of these companies. Ideally, if we could get everybody on one system, if we get the logistics all working, we could reduce the working capital fairly significantly to get rid of all that long tail inventory down to 1 set or maybe throughout Europe. Procurement, Fernando is going to go over some of this earlier, but just to give you a high level, we've broken this down into what we would call phases. Phase 1 was really about getting some pan European agreements in place with a couple of our key suppliers and improving our cross trading.
That is largely done today. We're starting to see the benefits of that roll through. Phase 2 and Phase 3, those are initiatives. Phase 2 is well underway and Phase 3 is just starting as this year. That's to expand some of those agreements to at least 50% of our direct spend, rationalizing our private label and streamlining some of the portfolio of products that we sell.
Phase 3 will be more focused on indirect spend, harmonizing our central procurement and then moving towards the actual taking costs out of the logistics system and working very closely with our suppliers to try to get direct delivery from the warehouses as an example.
So I talked about maximizing the existing business and
the procurement is one example of that. In terms of European initiatives, this is not everything we have going on, but I'll just give you a flavor of a few of the things, because these are the kinds of activities that we believe will ultimately create a world class company here in Europe for LK2 Corporation and our customers. The first trend is more complex parts, cars and parts proliferation. Nick talked about this. We believe that the complexity of vehicles, cars becoming computers on wheels, it's going to make it very difficult for smaller garages to repair cars.
The technology and the infrastructure that they need to identify what is wrong with the car, what the right part is and so forth, mentioned that is very expensive. Smaller graduates are going to struggle to do that. We think that that's a trend that is actually pleased to our hand. However we are responding to it is providing what we call best in class catalog. When we have a catalog, it's not really talking about a list of parts.
It's really a piece technology that identifies which part goes on which vehicle to repair the vehicle based on the computer diagnostics. Customer training, our customers need constant training. In many places in Europe, you have to be certified if you're going to work on a vehicle. They need training and they need to be able to get certified. Something called concepts, which I'll explain in a second, is basically a branded name for a garage.
2nd big trend is there is a trend towards fleets. We're seeing that not only with the Ubers of the world, but also with respect to leasing companies and private fleets. We are expanding our fleet offering and we're going to try to use that to leverage our relationships with our customer in a favorable way. E commerce, which is both B2B and B2C, obviously, is expanding because it's general trends in the marketplace. ECP has a very nice e commerce business and a lot of talent in that.
We've been using that to try to expand that talent and capability across Europe. Big data is something everybody talks about, big data, machine learning and AI. We have started a project looking at our data and I'm going to explain that a little bit. We created centers of excellence around each of these areas. Different things are happening in different places.
What we've tried to do is throughout Europe look at who is best within the portfolio that we have, use those people for example in the ECP case, using their e commerce, leveraging that across into Italy, for example, that you'll hear about later on. This is the slide. I'm not going to go over all this. This is just explaining a little bit of our European catalog, which we call the European Master Data Manager. Again, I explained earlier, this is really about identifying which parts go in which vehicles.
There's a tremendous amount of value if we can do that correctly. We can sell additional parts. We can help the customers identify the right part. We can reduce the number of returns, we can find out which parts we don't have and we can fill those gaps. We've just rolled this new version of the catalog out and I've been talking about it for over a year now.
We've just rolled it out to Euro Car Parts. Eurocar Parts had an excellent catalog previously. We think this one the new version is a little bit better. And we're going to be taking this and rolling it out across Europe later in the next 12 to 24 months. Just to give you an example why this is so important.
Again, there's a lot of data and it's based on a fairly small sample. But what we did was we looked at parts that we had in stock, and we knew that they fit some vehicles. With the new catalog, we were able to identify additional vehicles the same apartment fit. By being able to help the customer identify the right part, they're able to get the repair done and we were able to increase sales of those parts. So we use the benchmark of parts that had not been identified for new vehicles versus the parts that we had identified at least one additional vehicle that that part would fit on.
Small sample that earlier this year when we implemented this, we got about a 9% uplift in the turnover of those parts. The real benefit is not only just the sales, but it also gives us lower returns, as I said, because otherwise customer might order 2 or 3 parts trying to figure out which one really fit. It reinforces our reputation as being the go to company when you want to get the parts. And ultimately, having a single catalog across Europe will lower our cost. Today, we're carrying the cost of probably 8, maybe a staggered or 9 or 10 different catalogs.
Each one of those is a piece of technology that has to be manned and maintained. Ultimately, we'll end up with 1 system and 1 catalog running all of Europe. Just another couple more examples. This is an example of training center. This one happens to be in the Czech Republic.
We have these throughout Santor and at the UK. We bring our customers in. We provide them training. They can get certified on various parts, brakes, clutches, whatever. They use the equipment that's in our facilities, gives us an opportunity to sell them additional equipment, very important way of establishing a relationship.
You think about the competitive environment, the smaller distributors are not going to be able to invest in this kind of thing and not going to have enough customers in order to make this economical. Nick talked about services. This is an example of the service that we provide. We do charge for this typically and but it is a way of increasing our customer relationship while also providing the services that they clearly need. I talked about concepts.
What we mean by concepts in Europe is really a brand on a garage. Many, many of the graduates in Europe like be associated with a concept or with a distributor. We own a number of trademarks around these and we have literally thousands of these graduates branded with these types of trademarks. So you've got Elite and Auto Kelly in Central Europe, those are legacy Riyadh brands, El Paso is a legacy Riyadh brand in Italy that's very popular. Auto First is an example that comes out of the Netherlands and the U.
K. Adopted that. The customers like these. They get access to training, some of our systems, helplines, technical support, and we will give them better pricing in exchange for a larger share of wallet. Power fleet services, we talked about that continuing to grow.
Today, we do offer fleets assistance with their maintenance. In the future, we're going to expand these relationships to include a much stronger link with our graduate customers. Our goal is to help our customers use more parts by helping them their businesses by repairing the vehicles owned by the fleet. So the goal would be to connect the fleet customers with our garage is allowing a three way win. The fleet customer gets a guaranteed repair from a network of facilities, the garage gets work referrals and additional revenue from that and we get to sell more parts.
So it's a tripartite agreement. We can do that with fleets. This is an example of our e commerce business. The one up on the top right is Eurocar Parts and the recently launched this week with Ecomedy in Italy. This is another example.
Today, much of this is B2C, but we're also using it and have plans to expand this to integrate it into our customers as well. So that when you go to the checkout basket, we'll give you an opportunity, would you like that part installed rather than part delivered to your house, we'll just deliver to the garage, you can take your car over and get the part installed. So it's a great way of creating customer connectivity. It's a service that we can provide to our customers. We get to sell more parts, they get to more parts and the consumer is happy.
Final one, just business analytics as a service is what we refer to as our data project. Last year, we initiated a program with Newcastle University. Newcastle University has a data science specialist. And one thing I'll take you has an enormous amount of data. Last year, we partnered with the Newcastle Science Center to explore how we could start to analyze and use the data for competitive advantage.
Now this gave us access to the data scientists and helped us build models to analyze the business. The data teams using ECP's data as an operations testing ground, we're looking at 4 broad areas. I won't go into all the level of detail and it's on the slide, but quickly, on the finance area, in particular, we're looking to understand the elasticities of demand and modeling price and volume scenarios for the company. We're understanding our customers better. We've been able to identify segmentations based on numerous characteristics to try to understand their behaviors, their particular needs and pricing elasticities, analyzing our employees' performance and behavior.
And then finally, on the operation side, looking at our inventory profiles, looking at ways we can increase sales or reduce the capital. So we're looking at inventory that's not turning fast enough and looking at inventory where there's places where there's customer demand, but we don't have the right inventory in the right place. There's some graphs down at the bottom. They're just small examples, but they're very effective. What we found is that we've been able to reduce inventory in some levels, but also increase the number of products either by introducing new products or just stocking local brands with a particular product.
So those are just a couple of
the examples. You'll hear more about them today. I'm going to have some of the European leaders come and give a little bit more granularity on some of these, a little more color to them. Hopefully, that gives you an overview and some insight into why we're very excited and extremely confident about our ability to grow the European business and grow our margins.
I think we have a few minutes and I'm going to ask Nick
to come back up and Rune and he can respond to questions. Questions?
Are there slides available? They are. They've been posted on our website and yes, they're live as we speak. But a lot of content. Thank you.
When I got us started, we're a little overwhelmed, but I think we're you got a good sense of the magnitude of work that we put in today. And we're going to, as mentioned, have the first group that presented have the chance for some Q and A. But I'll speak on behalf of everyone here. I think we did a great job at the opening. And I think that class for everybody here is in the room.
It's a big commitment to come all the way here. And again, thank you and on behalf of allocating you. We're a little behind on schedule, so we're going to try to go through questions as quick as possible. You'll have more time with management and other folks on our team to speak while we're having lunch in there, past the lunch room on the right hand side of the restrooms if anyone's been here for a while a break. And so with that, we'll open up to the floor
and We
have about 10 minutes, John.
Yes. Bill and Justin, you want
to join us up here as well?
We have a
few minutes, John.
Yes, sure. Yes. So for those on the Internet, the question is on Slide 63, that's the slide I think you're referring to. Yes. There's scenarios with respect to the proposed initiatives in Europe to get the margins up.
If you look at the margins that companies achieve in the U. S. In our space, best in class, call it O'Reilly, AutoZone, those companies have in excess of 20% EBITDA margins. If you look at the best in class in Europe, they tend to be around the 13%. Mekonomen, Bethelme or some of these companies we've seen, maybe not today, but historically have had sort of low teens margins.
Our investment thesis is that when you may not get we will not get to the 20% because they have companies like AutoZone or O'Reilly's have a much larger component of do it yourself, very high margin, what we call in front of the counter product. But they also have many of the things that we talked about that we're trying to do today. So we they have integrated ERP with integrated logistics with integrated warehousing, very strong use of private label brands and so forth. Those are some of the initiatives that we have in place today. We're very confident that we will get the margins up.
I don't think the 13% there's no timeline on this, but I don't think to get to the teens. When I talk about getting into best in class margins in each of our market, probably not going to get that in anytime soon in the Central and Eastern Europe markets where the margins are very much lower. But I don't see any reason why in some of the more mature markets, we won't get there as we're able to implement these kinds of initiatives. So everything has to fire on correctly to get
to the top end.
But even if you take the low end, we'll be back in the double digit margins.
And part of it is timing. As you look on this slide, John mentioned as you move from a left to right, the items on the left are more immediate and the items on the right are going to take some time. So the logistics in the back office, that's 3 to 5 years out, okay. We've publicly stated that we're confident in our ability to get Europe with what we own today back to 10% within 36 months. That's our goal long term.
So it's kind of a think of it as an intermediate goal. And then obviously, the goal is to continue to grow margins after that.
And again, first of all,
the strength is a lot of work to win. I wanted to get into North America, if I could actually 2 or 3 real quick questions if I might.
You mentioned long term 3%
to 5% organic growth expected 10 to 20 basis points of operating margin improvement.
By my math, that's about a 16% to 18% incremental margin long term. First question, does that assume that your price and cost will cancel each other out and you will pass through whatever inflation you have. That's what that assumption is, I'm guessing. Related to that, if the OEMs do not raise prices going forward, what arrows are in your quiver to try and offset inflationary pressures, which I think a lot of us in the room would like to understand. And lastly, at what point do you begin to leverage
in North America at which you begin to leverage your operating expense? Sorry for the 3 questions.
If I cut all those questions, the first key one is, I think what happens if OEM does not raise their prices. So we have kind of 2 price levers. We have the list price that we start off with and we give a customer a discount. There may be some marginal improvement that we can get relative to OEM. And then the second lever would be working on rationalizing our discounts, so we get the customers off that price.
We also have a large spend in our Taiwan and Chinese locations or suppliers, so we would have to go back to our suppliers in some cases as well. The next question, I apologize, I'm not sure if I
Frank, staying on that, if I might. Why has it to date, at least, been a struggle. If you have a 20% to 40 percent spread between your list and OEMs, why has this been a struggle to just get maybe a point or 2 or whatever the case may be to be able to offset the inflationary pressures, be it spring or product cost? What's been the friction point?
As I talked about earlier, OEM is a price point that we have to be competitive to, but we still have a large amount of different competitors in our area, whether it's salvage yards or aftermarket facilities that we always work with insurance companies to kind of sell LQQ on why they should use us because we're not the cheapest price guys out there when you look at alternative parts. And then so in some cases, we had some of that margin pressure because of that where we couldn't just move immediately quick. In addition, we struggled on the top line side. So in some cases, we may have gotten a little bit too aggressive and that's where we're looking at rationalizing some of those discounts that we may have given to kind of obtain some of that pricing or some of that revenue growth that we've had.
The other two questions, your 16% to 18% incremental margin assumptions, does that include flat gross margins
of both going forward or is that the assumption for growth in North America?
Yes, Ham. The reality is we're going to get back to our kind of historical gross margins. Again, most of the pressure experienced there has been on the aftermarket product. We talked about that in the Q1 call. The salvage margins have been rock steady, if you will.
We got a little bit of gross margin compression due to the self serve business. That's just the impact of scrap. You don't get the same kind of lift. And so as scrap prices have gone up, effectively the gross margins of the self serve business have come down, if you will. So there's a little bit of a mix shift there.
Longer term though, the 10 basis points, 10 basis points to 20 basis points that Justin talked about, that really is the operating leverage of the business, if you will. We have largely a variable cost model, okay. It may not seem like that when you've got hundreds of warehouses across the country, but every it seems like every other week myself and Varun are approving warehouse expansions or lease renewals at a slightly higher rate. So consistently throughout the year, you've got a cost structure that is growing as the business is growing. You can't continue to grow even organically at 3% to 5% and not expand the infrastructure, not expand the warehouse space, the fleet, the staff and all the rest.
But on the margin, you get a little bit of a lift and that's where we think 10 to 20 basis points a year. So you start laying that out once we get back to our more normal margins.
And not to call you out, Sam, but in
the interest of time, could you keep the questions Craig?
Yes, thanks. John, as you benchmark your business in Europe versus the U. S. Auto retailers, you mentioned the margin side where they have superior margin. What about working capital efficiency?
You know about the negative inventory situation at Riley and Zezema. Is there any potential longer term for
you to get better terms from your suppliers?
Yes. So for the Internet, the question was working capital efficiency. Is there an opportunity to get better pricing or better terms from our suppliers? There's definitely an opportunity that the companies that we benchmark ourselves against the O'Reilly's and Avazone's investment grade, they've got the vendor financing programs in place, which we've talked about in the past. Today, we typically buy at the salvage yard.
We have to pay for the product before it leaves the yard. So there's no 0 days essentially. Product coming from Far East, we often pay for it when it hits the water. We get favorable discounts on that. In Europe, we've been getting favorable discounts with respect to cash in early payment terms.
It's a trade off whether or not we can get to the point where we would actually use a vendor financing program, I'll speak like a former CFO. I think we need to we probably are getting close to the scale in Europe to do that. I don't know the our investment profile or ratings today are going to allow that arbitrage as effectively as somebody in the U. S. It is clearly something that I think there is opportunities to improve the working capital in terms of the inventory levels.
Some of those data that we're looking at, some of the rationalization of the logistics will help those things. But to truly get to like a negative working capital, you really have to have those under financing programs where you're paying your vendors probably 9 months or some whatever. I think AutoZone is around 9 months, if I remember correctly. We're a couple of years off that. Any and when you start those, it takes a long time to build those programs.
I won't say never, but it probably is not in the short term horizon. Is that fair?
Yes.
Yes. Some of our numbers are factoring into what's going on with the accident avoidance systems, where there's some negative downward pressure on actual number of accidents. So we had like a 0.8% increase in Q1. We expect that to kind of remain flat. In addition, some of the current inflation prices that we've seen is on maybe higher OEM parts.
So we may not necessarily get 100% of that through. But in some cases, the 3% to 5%, we kind of modeled out as seeing as a good base number for our improvement. So yes, there's tailwinds on the sweet spot kind of what you're talking about the parts proliferation. In some cases, that sweet spot will help drive that standard parts proliferation. So in some cases, we can't double count the numbers.
But I'd like to say we're able to get more than that and we'll fight for our fair share. But in some cases, we want to be cognizant of I don't want to go after revenue if
it's margin lower the margin to normal by 4Q?
So as I said earlier on a day to day, we are improving our gross margin. It is a top initiative of our RVPs and our sales force today. From a Q2 standpoint, I haven't really understood where we expect to be on a year over year basis, but we're definitely closing the gap.
We're not going to get all the way back to where we were in the Q2, okay? It's going to take some time for some of these initiatives to really take hold. And so again, all the pressure we experienced in the North American wholesale business was on the aftermarket side of the business. We're starting to see some progress, but again, it's not going to jump back. You're not going to see it in the Q2 numbers as jumping all the way back to where we were, but we are making some progress.
Some of the things like the negative impact from the scrap, that's going to stay with us as long as scrap prices stay relatively high. But that's more of a kind of a mix issue. It's not a fundamental issue in the business. You had a 2 part question, I think, Ryan?
That's my expectation, yes. Of all my RVPs, that is what we kind of set as a guideline as a minimum.
Next question. Could you help us just bridge
the solid group of accretion provided in today's press release with the accretion that would be spent time Yes. So the question for those on the phone is, can we talk about the accretion that we identified in the press release related to the STAHLGRUBER acquisition relative to the accretion we provided back in December when we announced the transaction. Because we didn't know when we were going to close back in December, we knew we were going through this whole anti trust process. The accretion we gave you was for the 1st full year of operation and the 2nd year of operation, okay. So think about that now that we've closed, say, June 1, it will be from June 1 to June 1, okay.
But we're only going to have the business for a part of the year this year. So first thing you have to do is you have to rationalize that down for the number of months that we're going to own the business. That's point number 1. Point number 2 is most of the synergies will be achieved in the back end of that 1st full year, because it's not like all of a sudden on June 1, all of a sudden we start generating procurement synergies, it takes a while to put those in. Some of our contracts provide for higher rebates based on any LKQ volume.
But with some of our big suppliers, we won't get the benefit of that until January 1, when the new contract rolls in. In addition, we get benefits from a procurement perspective, So the cost of inventory comes down, but you don't get the benefit of that until you sell the inventory. You have to
wait for the inventory to turn.
So a good portion of that $10,000,000 of synergies in year 1, think about in the back part of the year of operation, which means 2019 as opposed to 2018. The other impact is, we went to the market and raised €1,000,000,000 of financing at what we thought were incredibly attractive rates, okay. 3 blended together 3.75 percent on the €1,000,000,000 was that's €37,000,000 of of interest a year. But we had a couple of months where we are paying
interest on the bonds and we weren't getting the benefit of
the operating income, that's €0.02 a share. So when we talked about in the Q2, we expect the transaction to be dilutive by a couple of pennies a share. That's really the interest carry cost on the bonds. Nothing has changed from an overall kind of value of the transaction, if you will, from an earnings perspective. We think the earnings are for STAHLGRUBER will be right on track with the plan provided to us when we're doing our diligence and the like.
So you've got a $0.02 kind of one time event because we were basically warehousing a €1,000,000,000 worth of money, paying 3.75 percent to the bondholders for a couple of months, while at the same time, actually in Europe, we've got negative rates for cash and so there was a negative arbitrage on that. So hopefully, that answers the question.
The only other thing
is we put the Czech business there.
Yes. And the Czech business is out. So just put it in perspective, the Czech business is not
big. It's about a €100,000,000
of revenue. It's Eastern Bloc revenue, so the margins are lower. And STAHLGRUBER only owns 52 percent of it. So, from an impact perspective, pulling the check business out is not material and that's why we noted that in
the press release as well.
Keeping us on track, we'll take one more question and then everybody can break it to lunch.
And we'll be available in lunch to circulate around as well. Michael?
To revisit 1Q for a moment with North America and the freight related issues, some of that was more discretion than inflation that you were seeking to respond to the pressure of the rate of growth, meet your delivery times, is more expensive delivery and maybe I pass that on maybe in hindsight you could or you couldn't have as opposed to freight shipping?
Sure. So the question was kind of like the cost that we saw on freight increases in Q1, how much of that was impacted by just inflation prices of 3rd party freight versus how much of it is kind of rebalancing inventory to kind of support the sales? I would say roughly 30% of our overall freight spend was probably on rebalancing inventory. I have to look at those numbers to be more exact, but we had an extensive amount. I mean, if you look at our what if we've had a normal winter in the last three years, this past year was not normal.
Now it's kind of normal if you go back 4 or 5 years, but it wasn't what we were expecting based on the most recent trend. The other core part of our business, I mean, we've seen UPS hikes, FedEx hikes, we've seen LTL go up on average of 13%. So in many cases, we're trying to mitigate that as much as possible, as I mentioned by putting it on our trucks. But in some cases, we weren't reactive fast enough in Q1 to get it onto our own truck. So I would say it's probably once again to your question, probably a seventy-thirty split.
Okay.
Lunch is right down the hall. You walked right past it. So out these doors on the left, we're going to try to get back on track. So think about 35 minutes or so to be back in this room. Good to go?
Absolutely. Yes.
So apologies to the folks on the Internet. You're picking up mid presentation. I'll continue from where we were here. Trust me is not necessarily something you can take to the market for a nervous customer of yours that thinks somehow you're now going to be competing in this market very aggressively. We developed an innovative program called Full Force Partners, where we basically said to all of our traditional third party customers that we did not acquire that we would offer you basically the same terms as we give our internal wholesale customers as long as you meet certain volume requirements and loyalty requirements.
And if you look at the 2017 year end results, you'll see that the Netherlands segment that actually grew in terms of our market share with those 3rd parties. This heat map is to scale, so you can infer what happened across the business. As Nick mentioned, we've grown the business about 2 times plus, while at the same time picking up 200 basis points overall. So it's a nice achievement for the Benelux market. And so if I was you, I might be asking, how did you do it?
Is it sustainable? Can you replicate it to other markets, right? The next slide I'll put up there is what I'll call a post acquisition efficiency curve. It is not purely a theoretical curve. It's actually what happened to our EBITDA results over that time period since we acquired Vattor at 2013.
Partial years have been prorated. You'll see basically the 200 basis points pick up at the far end. By the time you're done integrating and leveraging some of the natural synergies and scale that come along, those investments start really paying off in the year, year and a half timeframe after. In January, February of 2017, we announced a similar model for the Belgian market. We're currently probably somewhere at that trough level for integrating the Belgium business.
At the moment, you're not seeing that in anything you would see from our Netherlands results because in the Netherlands, we're having a decent year covering those drags on the market. We expect that by the end of Q1 2019, we'll be back to those folks really accreting and adding to our results within the group. So where do we go next and what's the margin improvement model for us? Down at the bottom, I've got that same post acquisition improvement curve. Incrementally, it builds on itself, but that's all at the margin.
How do we really take it to the next level? And there's some structural revision that has to happen within the group. We currently have 5 significant distribution centers, all within 90 kilometers of each other. We have 2 step and 3 step vehicles crossing paths throughout both markets. And we have 7 actually, there's a little more than 7 back office operations because even today, 5 years later, we're still on 3 different ERPs within the Benelux operation.
So how do we make that next leap? We cut a we take a cut out of the business as usual, integrate our same day delivery centers out of our 3 step model into our 2 step folks and also consolidate much of the back office in our ERP. What's interesting in the 2 step integration of our 3 step delivery process. So in our 5 main DCs, we run a single delivery a day for a same day center. If product in orders in by 11, you will get a delivery.
Within that same geography, our 2 step guys, our original wholesalers, they run 6 to 8 deliveries a day to the customers. And if you want to start thinking about what might be a moat, Amazon invasion, it's that level of service within a company, right? And so we can integrate our traditional 3 step deliveries into our 2 step network, hit them with just nightly deliveries, much more economical, bigger loads and maybe achieve the next level of margin improvement within our group. These are some of the key initiatives for Belgium. We're moving much, much more quickly down there in terms of our integration.
We had 21, 22 acquisitions companies, 5 different ERP systems, 14 different instances. So I think that's about my 5 minutes. I could stand up here
and talk to
you for
a lot longer.
Thank you, Simon. I think it's time for the
Thank you.
Jiri? Hello, everybody. My name is Jiri Novak, and I run for LKQ, the operation in Central and Eastern Europe. And it's quite complex operation because €660,000,000 2017 turnover realized across 8 different countries, actually from today even 10 because we have to add 2 more together with the acquisition of Stahlgruber. It's the Czech Republic, Slovak, Poland, Romania, Hungary and Bulgaria, which are part of the European community, plus the Stalguers, Croatia and Slovenia.
And then we have Ukraine and Bosnia and Herzegovina. We speak 13 different official languages, and we use 9 different currencies. Only 2 countries, the small ones, Slovakia and Slovenia, are part of the European Community. We have one of the largest distribution network in the region, almost 400 branches, 11 national warehouses, all linked together in order to visualize to our customers the fastest and the widest availability. And we have more than 4,500 employees.
As Nick said, this is our asset in Eastern Europe. You've heard already today that it's a growing market in the EU region. We have stable economics with growing GDPs. We have growing car parks, used cars imported from west to east needs more repairs, maintenance. Density of the cars, fast growing, still below the best average, but the true in the same time very low margin markets.
Why? Because we speak relatively about relatively small markets, except Poland, of course, with very price oriented players. Many of the local champions and followers, which are trying to get or maintain the market share through aggressive pricing, making a lot of exports and cross border selling because they want to improve their cheesing volume towards the supplier in order to obtain the supplier's rebate and the bonuses. And disturbing by these export activities, the neighbor countries' price levels because they have no infrastructures there, so they can spoil the market by their prices. However, in some markets, like for example, Czech Republic, where we have really strong position, we are able to generate margins, which are very close to the margins of LKQ average, we can call it.
And of course, in some markets, we are investing into the market share to get to this position through acquisitions. 2017, we acquired company AD, company same impacts in Bosnia Herzegovina. And organically, we open every year 30 to 40 branches. Operating in the low cost countries, we really can get the breakeven within 12 months and full profitability within 2 years. And together with the power of the LKQ, with a variety of the synergies, especially in the procurement, supply chain management, cataloging, some initiatives like customer stickiness, we call it, bring customer to the customer with the fleet services.
We are a we believe we strongly believe that we are driving the consolidation and creating the higher discipline on the market, which has to bring the higher margins at the end. So that's it for me.
Thank you, Erik.
Yes. Martin, your turn. Thank you.
Okay. Well, welcome to our humble home. It's great to see you all here in Tamworth. I'm going to try and dive straight into Slide number 2. We've been around a while and I think you know what we look like and time is tight.
And also 2018 is a really special anniversary for Euro Car Parts. Soilpow is out there somewhere 40 years ago more or less to this day, opened up our first branch in Willesden, North London. And the rest they say is history. But for us, we're blessed that isn't history. It's also the present and indeed the future.
SoilPal, I'm sure what might be saying, his DNA is very much embedded into your car parts today as it ever has been. And under SoilPal's leadership, since the year of acquisition 2011 by OKQ, we have indeed quadrupled our revenue. We also have claimed and we have no intentions of letting it go that number one spot of distributing parts into the UK independent garage sectors and also a number one now in the Republic of Ireland. In the last few years since acquisition, we're also really proud that we have grown into the market leader number 1 in the aftermarket for paint, number 1 for consumables and number 1 also for collision parts. We're also proud that we have maintained our number one position in U.
K. E Commerce in the B2C channels of automotive. I'll just think for a moment, every single day, Chris, who heads up our e Commerce business is actually next door. We sell 50,000 items online to the consumer. Best news of all is that 80% of those items are actually collected by the customer in our branch network, so no extra delivery charges, fantastic business.
Also of course, T2, let's not forget it, 4 years of hard work and build investment from LKQ. We are to host this Investor Day to Day, we are generally honored. A new initiative that we're working on the last 12 to 18 months, and I'm convinced will be key in the future. John's already mentioned it is what we call locally big data business analytics. And I'm sure even in a few months, certainly no more than a year, year and a half out, we'll be looking at this as a general and real margin driver in the U.
K. And throughout Europe.
So I
think the message is very important that the U. K. Management team wanted to give you all today is yes, there has been pretty substantive growth in the last 6, 7 years. But let me assure you it ain't done. But also want to be very transparent that the U.
K. Management team absolutely embrace and appreciate that today is also the right time for us to now put the same attention and same focus in cost elimination and really driving margins across every area of our business. And you'll see that flow through in T2 in the next year to 18 months. Steve is at the back there. He's our COO, worked together for 10 years.
In fact, most of the original team acquisition is still here. And Steve and I will talk about that in some more detail. But one stat that resonates with me, I just want to share very quickly, sure Steve will remind us again and no harm in that. But just really recently, we were achieving industry pioneering and leading productivity levels of 120 cases picked per man hour. Today, we are picking over 400 cases per man hour and that number will improve substantively further in the next 18 months.
I'd like you also just to focus on a couple of our new branch networks. First of all, in the Republic of Ireland and secondly, the acquisition of Andrew Page. And as you've heard, we can now get our arms fully around that. And with both Republican Island and also Andrew Page, I would like to remind you this is our bread and butter. So even though we're just starting to integrate that, it will be swift and highly effective.
You should have high expectations on the results there and to be frank, we will deliver. Also now that Q2 is behind us, we have learned a lot as a management team as a business and we are applying that methodology and also hindsight learning for a number of other cost initiatives throughout our own business that includes productivity and headcount and organizational design with franchise because of the business that we now have become. We are capturing, obviously, leveraging benefits from our European initiatives. And we're very excited about now being in a position to grow what we call adjacencies alongside our infrastructure that's existing and none of those will be entered into unless there's a proven ability to really enhance margin. We're looking forward to the completion of our ERP upgrade and the benefits of course that will bring.
And last but no means least, I refer you to the big data and I'd like to close off by sharing, I think the final slide, just three examples, but there are so many more. First of all, imagine a branch full of stock, how you profile that stock, of course, impacts margin. Historically, we've had to rely on on human beings and 40 years worth of knowledge and that's kind of set us apart. But now we can actually analyze millions of bits of data in virtual real time. And more importantly, that data can get served up to our management team in nice digestible intelligent chunks you can act upon at a SKU level more or less immediately.
When you do that in the branch trials that we've rolled out, you overnight get a revenue uplift of between 2% 3%. Similar 3 pilots have carried on through customer behavior, a narrow set of data, but very effective about how you can actually capture customer behavior around products that we don't actually stock in that location. When you analyze that and once again the information can give it to the SKU level, no great surprise, you put that SKU in and you get an instant uplift in revenue. I'm particularly excited about also how big data can influence, I almost said control, our 1300 sales advisers. But just bear with me.
You may have a sales adviser for whatever reason is not converting a product at the same margin of those colleagues. So you can then limit their ability to discount. And when we've done that, there's been no loss of revenue, but crucially, once again overnight, an uplift in margin directly. So just to sum up, growth at ANOVA and as a team we recognize that we can deliver more on the cost elimination and margin improvement. Really looking forward as well to Shoney around later on, but I'll hand over to Paolo now from Riyadh or is it yourself?
Who's up? Thank you.
Thank you, Martin. Good afternoon, everybody. My name is Paul Willermin. I'm the CEO for LKQ operation in Italy and Switzerland. A quick review about our business model, our most important initiative in these two countries.
Starting from Italy, we're in a perfect 3 step model. We have a network distribution network based on 17 branches that cover all the countries. In Italy, we deliver every day to 3,000 wholesalers using more than 1 1,000 delivery routes. We have an average in delivery to the wholesalers about 2.5 hour. And we have we can deliver up to 4 times a day to our customer.
Most important thing to say about the market in Italy is a stable market. And by the last 2 years, there is a big improvement in the new car registrations. This is an important thing because in the medium term is that the number of cars to repair to need to a maintenance will improve in the next 4, 5 years. And in the same time, we have a very long experience with in partnership with the fleets in Italy. The weight of the fleets is increasing a lot.
For example, in the last year, we have an increase in the turnover with the fleet double digit in Italy. It's a very interesting target because we can also push the development of initiatives following this kind of trend. For Switzerland, it's a little bit different. There is a mixed model. 30% of turnover is in 2 step model and 17% 3 step model.
We have only 2 branches, but for Switzerland, we the plan is to cover more the countries because we needed to improve the service level, we need to improve the number of delivery a day for the customer. 2nd slide is about the most important initiative mostly in Italy. Thanks to the 2 years of now collaboration and sharing the most important project, mostly from the side of ECP for the B2C, for the side of SART or for involving wholesalers. This is the 3 mine initiative. 1st is the B2C platform for e commerce go live in this week, 2 days ago.
The official launch of this new initiative will be in the half of the June with a press conference and a very important launch into the market. It's interesting to underline that there is 2 different kinds to sell online. First is the traditional with on delivery. 2nd, with a click and collect model because in this case, we needed to involve our customer, our sellers. There is the first website that involve about 150 shops buy from our wholesalers for the first step.
But the target is to reach about 300 shop in the country to help the customer to and to deliver of the is good. 2nd initiative is to start with a new business like collision part and paint because again using the huge experience from AKQ mostly in the procurement side and the new sources from Italy to have a huge offer in a collision part and paints again not only for wholesalers, but for implementing the 2 step model and again for implementing the partnership with the fleet because the huge value of sales in business with the fleet about collision part. Finally, the last action is to increase the loyalty, increase the partnership with the most important customer we have in Italy with special agreement, again, following the best practice in the Netherlands from Sato, then share more royalty for more services, best price. But finally, a way to increase the integration between us, and our most important customer. That's all for me.
Thank you, Good afternoon, everyone. I'm Ferdinando Imhof and I'm responsible for the European supply chain. Today, I'm going to briefly describe the huge opportunity an integrated European supply chain offers and what we are doing to achieve our goals. First of all, I would like to start from a key fact. So the size and the geographical reach of LKQ in Europe today is absolutely unprecedented and unrivaled.
Now that we have achieved this position, we want to capitalize on our economies of scale, leverage our acquisition strategy to achieve and maintain a unique competitive edge in the European aftermarket. This means even to increase our EBITDA substantially thanks to our capability to our ability to maximize our synergy potential. Of course, we have a clear strategy to achieve this vision. First of all, we are already in the process to make use of our scale to capitalize on our scale to really massively improve our purchasing conditions from suppliers. That means, of course, economic concessions, having a most favored customer status in all European countries, but even optimizing our access to products in terms of width of depth of the product portfolio in all European countries and even very important today information, information related to the parts to repair the cars in a professional way.
Then we can reduce our global complexity by cutting the huge number of minor suppliers we have today. And more efficient structure will allow us to reduce overheads and to obtain better purchasing conditions. Furthermore, we are transforming the great complexity we have in the private label area into a source of synergies because of course each company we have acquired has brought his own portfolio of private labels with own suppliers on economic conditions and bundling now all the volumes and launching European tenders for each product family allow us to get substantial cost reduction from suppliers. Finally, an exceptionally lean supply chain that means with streamlined processes, flows and inventory will allow us to increase revenues, thanks to a better service level and reduced loss sales to cut inbound and outbound costs to improve gross margin, for example, with innovative flows directly from suppliers factories as John mentioned this morning And particularly to enhance our trade working capital and our cash flow reduced write off, thanks to a much higher inventory turnover. Okay.
It is paramount in the execution of this strategy to balance short term achievements, low hanging fruit and more structural activities aimed to pave the way for our future financial success. We have made good initial progress. Today, unfortunately, time is scarce. But I would like at least to give you some more details on 4 of those initiatives. First of all, the contracts, our pan European blanket contracts.
They combine additional European rebates with enhanced payment conditions that we can use both to extend our payment terms or to get substantial discounts for shorter payments. Already 30 big suppliers have signed those contracts covering 40% of our purchases. And what is really important is that this is a scalable system. They allow an automatic extension to newly acquired companies 6 months after closing on average. 2nd point that I would like to focus on is cross trading.
In Europe, our price list today are extremely different from one country to another country because of car manufacturers' price list and of a dramatically different composition of the car parks in the different European countries. And we want to leverage this opportunity to get of course always the best available price for each part. Then I would skip the next three points because I already mentioned them before when I talk about the strategy and I would focus on our IT portal, because I'm very proud to say that this is really a unique state of the art solution in the European aftermarket and it is able to collect each night all procurement information from the different year fees in our 21 European countries, combine them on SKU level or on multi level solution in terms of aggregation of those information. So this is really a fantastic tool to negotiate with suppliers to enhance and to support cross trading activities, private labels because we have really a complete view and knowledge about our prices and our purchasing relevant purchasing information. And again, this is a scalable system because in the past we were able to take on more to integrate to plug in newly acquired companies in usually in 3 months on average.
Finally, a new initiative, but very promising that is the focus on indirect spend management. Of course, we expect to reduce costs, thanks to that increased buying power. But we want even to create visibility about this kind of course across LKQ. And even more important to pave the way for future centralization and share services centers. When I look back at 2016 when we basically established the European LTQ Supply Chain Department, I recognize that the situation the starting point was of course very promising, but more than a little complicated.
Today, we are the largest distribution network in Europe and we have a clear sense of direction. We know how to capitalize on our scale, streamline our processes and reconcile because for us it's very critical local and central functions. And we know that doing these things we will achieve the competitive this unique competitive edge that I mentioned at the beginning of my presentation. Thanks for your attention. I hope.
Yes. We have a
few minutes and
we are scheduled. Just one quick question, Fernando. We announced the closing of the SAIC Global deal a few hours ago. What's your view about the synergies that we can expect
to have? Okay. Just one simple question.
Okay. So sincerely, I'm
really optimistic because scalability is a little bit the hallmark of all our procurement initiatives. And so I'm quite confident we will be able to integrate Stahlgruber in our procurement system quite rapidly and to reap substantial benefits from this because I know it because this is what we did in the past with success with other acquired companies.
Thank you. You're welcome. Now it's time for Varun. Thank you.
Thank you, Andrew. Thank you, Fernando, Yuri, Simon, Martin, everyone. Thank you. Listen, it's great to see everyone here this afternoon. I know you've taken
a lot of time out of your busy schedules to come over to Tamworth and to be with us out here. I sincerely appreciate your commitment to our business. Again, great to see a number of familiar faces from the sell side that we interact with regularly, a number of our long term investors, but also members of our bank group. So a sincere thanks for all the efforts that all of you have made. Early this morning, you heard Nick talk about the longer term priorities of LKQ.
And essentially in terms of what the roadmap for those were. In addition to that, in addition to the longer term priorities, you also heard from Nick something more specific around near term priorities and more specifically about margin enhancement. Subsequently, you also heard from our 3 operating unit presidents as they talked about an overview of their respective businesses, the secular trends that they see benefiting their businesses for the years to come, enjoying the continued organic growth, but then yet again a very specific emphasis on margin enhancement. So I'm hoping as I stand out here that all of you have a good appreciation of the income statement side of things, specifically regarding our margin enhancement initiatives underway. So I'm going to focus on balance sheet specifically.
And again from a balance sheet perspective, talk about leverage, talk about liquidity, talk about maturity dates, interest rate risk and then more fundamentally some guiding principles around capital allocation. Okay. So and then I'll finally finish off with giving a quick update on Q2 trading performance and also the news that broke earlier this morning on STAHLGRUBER and I'll certainly give you some insight on that as to how we're thinking about the accretion for the balance of the year. So starting off with a quick snapshot of the business in today's date, dollars 10,100,000,000 in revenues, TTM Q1 2018, segment EBITDA of $1,100,000,000 coming through. Equally importantly, as you would have gotten a sense of it, our single biggest segment in today's date, pre styled Gruber, is our North America business that Justin Jude runs, certainly is a great margin benefit to the overall business.
The 49% of revenues, the 59% of segment EBITDA, Our specialty unit that Bill Rogers runs is at the market is at the company average, 13% of revenues, 13% of segment EBITDA. And then Europe from the one that John Quinn runs rapidly growing and has been rapidly growing and before STAHLGRUBER about just under 40% of revenues and just under 30% on the segment EBITDA side. I do want to highlight about a week ago, we did get an update from one of the ratings agencies. S and B essentially reaffirmed our ratings about a week ago, being a BB with a stable outlook. So I certainly want to highlight on this slide also.
So as we kind of look back and as we think forward on a pro form a basis, we know that over the past 5 years, this business has essentially doubled its revenue from about $5,100,000,000 up to about $10,100,000,000 This is freestylegruber before we get on to close to 12,000,000,000 euros versus TTM Q1 2018, once Stahlgruber is also included. Same thing with segment EBITDA. If you think about that over that same period, segment EBITDA is up 80% from about $629,000,000 up to $1,100,000,000 in that same period, TTM Q1 2018 and fast approaching $1,300,000,000 on a pro form a basis with STAHLGRUBER included within it. Adjusted diluted EPS follows a very similar trend with 2018 guidance at the midpoint being at $2.25 Obviously, this does not include STAHLGRUBER and we will update the balance of year guidance for 2018 in the coming weeks. As we think about operating cash flows and CapEx, again, just historically, this has been a very steady business with regards to operating free cash flow coming through.
If you look at our capital expenditure, while it's been a steady number for the past 3 years around the average of $175,000,000 it's actually been declining as a percentage of revenue. If you look at 2015, 2016 and 2017 as a percentage of revenue, it's actually down 25%. So you now see the blip up come through for 2018 guidance that we gave partially to do with some of the unspent programs or unfunded programs for 2017 moving into 2018. But essentially the vast majority of our capital expenditure is growth oriented. Where do we invest?
It's going into our North America salvage yards, some additional warehouse space that's coming through, warehousing, forklifts, racking that comes through also, again, all growth oriented in any case. And then again, STAHLGRUBER is not included in any of these numbers. What's the free cash flow profile? Fairly fairly simple, a significant operating cash flow offset by acquisitions and also funding capital expenditure. This is TTN Q1 2018.
The past 5 years is again a very similar story, close to 2.5 $1,000,000,000 of operating cash flows, some financing and again offset by acquisitions and CapEx. You can see the large number come through well in excess of $3,300,000,000 in terms of acquisitions and other investing activities that we've essentially undertaken. More importantly really is given our substantial capital outlay over the past few years, what are our thoughts that we go through when we think about capital allocation? And a couple of points to keep at the back of your mind. One, from a risk management perspective, we want to make sure that we have sufficient liquidity and flexibility to sustain the business through a downturn, right?
The second point is to be cycle aware. I think for those of you that follow modern economic history, we do know that there is a very regular occurrence of a downturn that takes place. When that will take place is difficult to predict very accurately. But listen, there are some fairly common sense metrics that exist out there. You think about interest rates going up, you think about labor market tightness, you think about commodity prices up and you pretty much get the picture, right?
So part of that is while our business while there is no business that is recession proof, we do believe that LKQ is largely recession resistant. And I'm hoping you got a sense of that when each of our 3 operating segment presidents spoke earlier this morning. The other point to kind of think about it is how we think about capital allocation and the guiding principles behind it. And we need to read it along the lines I've laid this out. The M and A over the long term on a risk adjusted basis will still be the best use of capital as we have demonstrated over the last 20 years.
Notwithstanding Q1, out of 20 years, you think about number of quarters we have successfully gone through that we still believe will be the best use of capital. Although it is difficult to predict the timing of when attractive inorganic opportunities come up. But when they do come up, we want to make sure that we have a legitimate seat at the table to be able to go and pursue those assets. 2nd, if there are no attractive growth opportunities either organic or inorganic, what will we do? We will actively delever.
Again, as we have proven previously and I'll show you some slides further down in the deck in terms of our ability to delever very, very quickly. And then finally, opportunistic stock buyback potential in a low leverage scenario and or a market dislocation as the flexibility of that specific action doesn't commit us for the longer term, but yet at the same time it allows us and aligns well with the future growth of our business. In case I want to be very, very clear about that in terms of how we think about capital allocation, risk adjusted basis that's what will drive long term sustainable shareholder value. If no growth opportunities organic or inorganic, we delever and we have done that. And then subsequent to that in a low leverage scenario as we continue to delever, we certainly hold the opportunities to be able to take advantage of certain dislocations.
Our financial policy has been stable. I don't plan to go through every single bullet point out here, but just to kind of reiterate what we've talked about previously. The focus on free cash flow generation that continues. Secondly, maintain the liquidity that I just referred to previously, retain the capital to grow the business, maintain reasonable debt levels and manage interest rate risk. I will shortly share a slide in terms of what that means on a pro form a basis given the recent Eurobond offering that we led just over a couple of months ago.
Trade working capital was another comment that Ferdinando brought up. I think there was a question to John also previously. And this is just a historic view in terms of last 5 years how trade working capital has come through. To define trade working capital for the broader team out here very simplistically, accounts receivable, add the inventory offset by accounts payable. Okay.
And over the past, let's say, 3 years, there has been an uptick on trade working capital in the 200 basis points to 2 50 basis points as the business has grown. For a business to grow, we need to have inventory. Without the inventory, we cannot sell. A growing business will also have a growth in receivables. But then the other piece to kind of share with you is, as we have expanded our European footprint, the cash flow dynamics are slightly different to what our historic North America business has been.
And so we've seen a slight uptick come through in our trade working capital by about 2 50 basis points. I will share with you that we are actively working on ensuring that this upward trend does not continue and that is a core mission for the business as Nick also referred to earlier in his comments this morning. I will give you a very simple example in terms of some of the programs from a balance sheet perspective, not from an income statement or from an operating perspective, but from a balance sheet perspective that we have already undertaken and we will see the benefit of that within the current fiscal year. In fact, one of our key banking partners out here is a European financial institution And we've essentially undertaken a cash pooling program. And you might think, well, what does that kind of have to do with overall integration of the European business?
Quite frankly, we do not need an all singing or dancing ERP, for example, or certain gating items, but we have historically run our European business as 5 different islands. There was a slide in John's deck, which talked about how even Riyadh between Italy and Switzerland and Central Eastern Europe, STAHLGRUBER, Sator ECP running their independent businesses with independent balance sheets. There's capital in each of those. That capital belongs to LKQ shareholders. And by doing a national by doing a notional cash pooling and we are well underway on that in any case and as I said we expect to complete that program before the end of the year, we believe there is some trapped capital which essentially belongs to LKQ shareholders and our ability to flush that piece out.
And it's just a simple example. It isn't rocket science. It's been done before. And this is something that we already have underway,
okay?
That will benefit our business in any case. Moving on to key return metrics. There's been a lot of conversation about return on equity, return on invested capital. And if you
kind of go back to
2013 of a ROIC of 10.9% and as we think of TTM Q1 at about 9.6%. I will share with you over that period, over that 5 year period, our average invested capital has gone from 3,300,000,000 dollars to just under $7,000,000,000 That's a substantive increase coming through on the level of invested capital. Where has the capital gone? It's gone to acquire market leading businesses to make our existing North America business incredibly strong and also for us to be able to build a market leader with Bill's business on the specialty side. Again, good market leading businesses underlying each of our operating segments.
But the other piece is when we acquire a business or for that matter when we invest in a new yard or a warehouse or for that matter into a new sales branch, there is always a lag effect that takes place. Think about putting up a new branch. On day 1, it doesn't hit the level of maturity that an existing branch will be hitting, call it 12, 18 months down the road. And as we have continued to have both inorganic and organic growth, there is some of that lag effect that comes through. And that really is what comes through on the ROIC numbers, which kind of tend to show about 100 basis points dilution from just shy of about 11 points.
And that's the point I want to impress upon you that as the business continues to grow, we are very, very thoughtful in terms of how we allocate capital and we will continue to be so, but also to understand as to some of the key underlying dynamics of what drives some of the ROIC metrics out here. The other piece that Nick mentioned is that while invested capital will again take a massive blip up in 2018 with the closure of the STAHLGRUBER acquisition, the absolute number of transactions we actually expect to rein back in. So while the absolute value will be up, number of transactions will be down. Essentially what we're saying is we are intently focused on enhancing margins, integrating our businesses and while we've deployed a fair bit of capital over the past few years, we really want to try and get those businesses under the one umbrella in any of in all three of our operating segments. And that we believe will actually add significant more shareholder value at least in the next 2 to 3 years.
Moving on to our weighted average cost of capital, fairly straightforward. I think most of you probably much done this math in any case at about 8.1%. Debt to enterprise value about 31% in current state in current day to day. And then at the bottom of which you really see in terms of how it moves as we keep paying down debt at 20% debt to enterprise value, WACC would actually jump from about 8.1% to about 8.5%. But again, you have the slides, you can see all the key inputs, so that kind of goes into this.
Moving on to capitalization and liquidity, a couple of key points now that we have closed Dahlgruber as of a few hours ago. These perhaps should not be pro form a, but again, we have now closed it. You'll see a number of the footnotes in the slide, which is 5 o'clock last night when we went into freeze mode was still pending the STAHLGRUBER transaction. And then subsequently when we got the news that it was all systems go to close it, Obviously, that is not pending any longer. But total debt goes to €4,600,000,000 on the left hand side as you see.
Total availability under credit facilities of about €1,400,000,000 And then again, as I mentioned, we stay close to the ratings agencies. We certainly share with them what we are thinking about, and they have essentially reaffirmed S and P most recently the BB with a stable outlook rating. This is a quick chart for those of you on the phone, Slide 111. From 2013 till pro form a for Stahlgruber in terms of total debt of $1,300,000,000 up to about $4,600,000,000 But the red line really is the weighted average cost of borrowing. And you see out here, the 3.2% kind of marginally moves up to 3.4%.
The key piece to think out here is we have a balance sheet in a very, very strong position. With the capital that we raised a couple of months ago, as Nick mentioned, we actually got a better rate from where we went to the market 2 years ago. And again off the back of improving credit profile for the business. Even with that, we go to about 3.4%. Importantly, is that the takeaway box that you see on a pro form a basis, over 75% of our debt is fixed rate, right?
So if we now step back and think about it from a specter or a backdrop of rising interest rates, it takes more than 75% of fixed rate in any case with no near term maturities, you can kind of do the math. Every 100 basis points uptick in interest rates will lead to about a $10,000,000 to $11,000,000 increase on an annualized basis of interest expense. Okay, so have a think about that because while it seems it's a large number on the balance sheet, the free cash flow we can delever, The variable component of it is just over $1,000,000,000 and that's the one that could be exposed because what we do have apart from fixed rate coupons that we essentially pay for our bonds, we also have some interest rate hedges that are out there, right. So every 100 basis points will lead to about $10,000,000 to $11,000,000 increase from an interest expense on an annual basis. Net leverage, we've talked about previously, it's at 3.4 percent 3.4 times on a pro form a basis.
But again, going back to 2014 or going back to 2016 when we acquired Riyadh, but also PGW, our ability to delever and come down to within the parameters that we've set for ourselves, we feel strongly about that. I will share with you in the Q1 of 2018, when we essentially did one transaction of an immaterial sum out in East Ridge, Tennessee, we paid $120,000,000 of our debt in that 90 day period, right, where the cash flow go to sum towards CapEx, the rest we basically paid down our debt, so $130,000,000 we took off in Q1 alone. Leverage and liquidity, again, just a quick highlight out here. On the right hand side, you'll see what the total capacity is. What we currently have with regards to our borrowings under our credit facilities and the total capacity of about $1,400,000,000 that we still retain where we are as of now.
More importantly is we have no near term debt maturities coming through. The first one of any magnitude really comes up in 2023 and it's a combination of not only what we've done with our bonds out there, but also going back to last December when we extended and upsized our credit facility and tacked on just over a couple of more years with regards to the revolver that we have out there. So again, no near term maturities should again kind of give you some insight in terms of the strength of the balance sheet. So in closing, what I will share with you is, well, LKQ's investment thesis. We've talked about the market position.
We've talked about the diversity of customers in both North America and in Europe, 2 stable environments where in each of our 3 operating units North America Wholesale, Europe and also Specialty Market Leaders and market leaders by an exponential factor. Cash generation and a strong balance sheet, we've talked about that and a proven record of generating substantial cash flow, the ability to delever rapidly and no near term maturities coming through, and finally the revenue and earnings growth that this business has proven time and time again of our ability to grow top line, but to grow top line profitably. While there may be some near term pressures in terms of how capital is deployed, over the long term, we fundamentally believe that this is a business which is incredibly strong given the market position, given the financial dynamics and also given a strong access to capital and balance sheet that we have to kind of complete the overall story. And then finally, the diversity of each of our segments provides further opportunity for growth and driving operating leverage. And I'm hoping you got a sense of each of those pieces, whether it was North America wholesale with a 3% to 5% organic growth, but a 10 to 20 basis points operating leverage year in, year out or specialty which has essentially been growing top line and growing so with operating leverage about 13 points CAGR on top line, about 18 points coming through on the EBITDA side.
And then from a European perspective, while it's seen a slight slowdown on a margin percentage basis, absolute margin dollars continues to increase, but really the key initiatives, which really has been the centerpiece of the Investor Day today is to give the confidence and to share more details associated with the various initiatives that we have associated with the recovery on the European margin profile side of it. So with that, I would just want to kind of share in terms of how we think about the business. We obviously appreciate your interest and your continued interest in our business in any case. What I would now like to do is spend a few minutes and just give a quick update on the Q2. We do not provide interim updates, but I know there's a lot of interest in terms of how the business is doing.
I will share with you the month of April is the only month we have closed. We close books every month. And later tonight, I close the business, we'll get into the May close also. But I'll give you a quick update in terms of each of our operating units, both from a revenue perspective and then really what we see on the margin side also. So starting up with North America, revenue in the second quarter has continued to be strong.
It's just coming through from what we started off in the second half of twenty seventeen. It carried through into Q1. And for those of you that are either from the Midwest or the Northeast know that through April, we had some inclement weather or we in our business say it was very favorable weather. So that has continued. So revenue continues to be strong thus far.
Obviously, June is yet to come. And the margin actions that we have underway already, they will do they will help us some, but really the ramp up on the margin recovery comes in the second half for our North America wholesale business. Specialty, organic growth on the revenue side in January, February was strong. February, as we've talked about March, as we've talked about, was muted given the weather. People weren't exactly going and rushing out to buy accessories or to deck out their RVs.
But back in April, it has come back and May also continues to meet our expectations. From a margin perspective, the specialty business is rock solid. As the business also probe in Q1, despite the softness on the organic revenue side, they delivered on the profitability side. I have every confidence that that business will continue. And then from a European perspective, as you think about the revenue side of it, not only did all of Europe get hit by weather in Q1 that came late.
As I kind of shared with a number of you, as Nick and I were landing here on that front of the 18th March, there were complete whiteout conditions across Southeast England. It just did not impact us. It impacted the entire industries. I believe the perspective. We were not immune to that nor were our customers or for that matter our competitors.
So weather has been more favorable going into Q2. Easter benefit, we certainly see the pickup of that also in Q2. We had some challenges on the T2 side, but in a few moments, you'll actually get to see it for yourself in terms of how this operation works. And I am very, very confident that you will be suitably impressed in terms of what you see here shortly. So revenue from a European perspective, we are cautiously optimistic we'll show a good rebound coming through in Q2.
And margins, as we've talked about, will come back some, but some of the higher level of COGS that we're running with based on U. S. GAAP accounting for national distribution centerpieces will have a muted will have a damping effect on European margins in Q2. We expect to be out of that by the middle of Q3 as the inventory turns over. And again, just to kind of reiterate, April is the only month that has been closed as of now.
Financially, that met our expectations. May, we will get into that low cycle in a few hours. And then June is yet to be played out, but I thought there'd be some interest in terms of getting a sense of how we see the business in the current quarter. And then finally, I do want to address the STAHLGRUBER transaction that we finally closed earlier this morning. Per the press release, you would have seen essentially what we're saying is given the fact that we raised money essentially coming up to about 2 months, there's a negative carry both on the coupon, but also the escrow amount.
So that's costing us the better part of about €5,000,000 a month. However, we do it now that we close the transaction, we pick up about a month of that in any case, but that will essentially be about a $0.01 to $0.02 dilution in Q2. But then on a remainder of 2018 basis, we expect STAHLGRUBER to be accretive on an adjusted diluted EPS basis of $0.04 to $0.06 What does that mean? On a gross basis, if you were to take the dilutive effects of the negative carry for the 1st 2 months, it's about a 0.06 dollars accretion for the balance of 2018. And then finally, what we will do is no different to what we've done in the past for any major transaction.
When we do meet with all of you in a few weeks' time, we will give a full blown updated guidance with STAHLGRUBER included, which will include free cash flow, CapEx and all the other elements that we have also shared in the past. Okay. So with that, I'm pretty much done with what I was what I wanted to share with the team out here. And I'm going to ask Nick to come and join me. I think we have probably another 8 to 10 minutes where we can certainly take some Q and A before 2 o'clock and we'll be right back on track, any few more questions.
And then what we will do is there will be a short break, a quick bio break and then Martin and Steve Horn, our COO for ECP will give directions for the rest of the afternoon as we would like everyone to get a sense firsthand about this phenomenal facility that the management team has built up. So over to all of you.
Yes, Peter?
Let me just put it up, put up the relevant slide that you're referring to. Yes, I know exactly.
Yes.
So the question goes to the free cash flow and some of the zigs and the zags, if you will, historically. Let's go
back to 20 14, you see the
free cash flow came down a little bit. For those of you
who've been hanging around the hoop for
a while, you remember that in the 3rd, Q4 of 2014, we were very concerned about potential port strikes, particularly on the West Coast in early 2015. And so we pre ordered in advance ship a lot of inventory, but the worst thing that could have happened would be for our inventory, not only the warehouses, but not actually. And so the inventory kind of ballooned up in the Q4 of 2014 and you see that really why the free cash flow came down from 2013 to 2014. You see it bounced right back up
in 2015. Why? Because we
sold through all of that inventory. A little bit of the same thing here in 2017. As we highlighted at year end when we had our earnings call back in February, we intentionally bulked up our inventory headed into the end of the year. Part of that was due to the fact that we had the hurricanes on
the salvage side of the business in
the Q3, which led to some very good buying opportunities in Q4 down in that Dallas and Florida marketplace. We increased our salvage inventory and we anticipated a return of purchase. We've had no winter in the United States to speak of in 2016 2017. We anticipated that there would be a normal winter, maybe not as lopsided as it was from a regional basis. And so we bought up on our aftermarket inventory as well.
And you see that's what really drove what's really working capital that drove this down. The $650,000,000 just to be clear does not include Stahlgruber, okay. So it does not include STAHLGRUBER. So we would anticipate that the EPS guidance, the free cash flow guidance and the like, once we roll STAHLGRUBER into NYMEX will increase proportionately given the size of their business. So again, a couple of working capital less in 2014 2017.
We expect absolutely a nice increase here in 2018.
Yes. And Peter, I'll add 2 additional data points to you specifically for 2018. The free cash flow so operating cash flow at $650,000,000 just to kind of line it up with net income and adjusted net income. So net income, as you know, we've kind of given guidance between $611,000,000 $641,000,000 took out the midpoint of 626,000,000 dollars versus a $650,000,000 On an adjusted net income basis, adjusted net income is in the range of $685,000,000 $715,000,000 call it a midpoint of $700,000,000 So if you're
kind of trying
to marry up net income with kind of operating cash flow, I think those are 2 key elements on a more current basis for you to be aware of. Yes, I noticed I can certainly talk about taxes also. I think as most people are aware, with the Tax Reform Act that came through at the end of last fiscal year, LKQ has been a big beneficiary of it, right? We were pretty much a full rate taxpayer. Our new effective tax rate that we've guided for 2018, sorry, I'm losing my mind with the years, is 26%, right?
So we certainly get the benefit of that. But again, as part of that entire piece, there are 2 key elements which essentially had to be put into place as of Q4 or as of December 31. With regards to deferred tax deferred taxes, we actually have deferred tax liability. So we actually are beneficiary of that because the liability has now come down by a lower tax rate. And then there is the kind of deemed repatriation piece, which has actually hurt a bunch of businesses.
We did have an impact on that one that we called out at the end of 2017, roughly about a $51,000,000 I think, but that is paid over an 8 year period. So for the 1st 5 years, we essentially pay about $4,000,000 So first 5 years, we're paying about 8% and then year 6, 7, 8 really kind of £4,000,000 specifically regarding the tax reform that comes through. But again, there is some of that that came through.
Greg?
Thanks. I think when you provided initial guidance around Stahlgruber, the expectation on year 1, 1st year $7,000,000 to $0.19 Is that still the right way to think about it?
Yes, there has been no change from that perspective as of now. The $0.14 to $0.16 for the 1st full 12 months is how we had called it. Given the mid year close essentially, year 1 will straddle 2018 2019. And really as John mentioned earlier in his section, the synergies really kick in into the second half, just given the way accounting works and as to how procurement will work and when the turn of the inventory takes place. But if you think of it as of now on a gross basis without the $0.02 negative hit as such with the bonds that we've raised, we're talking of about $0.06 to $0.08 Again, given the $0.02 dilution in Q2, essentially what we're saying is there'll be 0 point 0 $6 to 0 point 0 $8 accretion in the second half of twenty eighteen, right?
And so you can calculate that piece on a full 12 month basis is pretty much in line with the $0.14 to $0.16 on an adjusted EPS basis. Yes. I think our equity is costing us just a lot not about 10% as of now. But I think what you're saying is for those of folks that are kind of joining us on a webcast, why we would tend to delever versus kind of buyback stock, which obviously has a higher cost associated with that. I think this is the way we kind of think about it Moiz, because it is a fair question.
From a leverage perspective, we know what our covenants are, right? So we can kind of get up to about 4 times. And again, in the case of strategic acquisitions, we can get an extra half turn. We believe there are further growth opportunities out there in any case. When those opportunities will come to the market we do not know.
But for us to give back the capital today only for those opportunities to come out in the next 90 or 120 days, then we are scrambling in terms of to try and pick up that level of capital. So that's one point to think about. The second piece as I called out is just being cycle aware. Where we are in the overall cycle, it's difficult to accurately predict exactly when that may happen. And really when that will happen, we do believe there will be even more opportunities out there for us to be able to kind of even further solidify our market position.
The part of it is keeping some dry powder back with us. And in the absence of not having either the right transaction opportunities that may not have the right growth profile or for that matter where the expectation from the seller is significantly higher than how we can make our models work. Those certainly play into our overall capital allocation thought process to say maybe we are better off delevering. The good part is we have a large revolver facility. And so quite frankly, it acts as a shock absorber to be able to delever very quickly with no friction costs, right?
We have a good amount of permanent capital that we raised as of now, which helps us in the specter of a rising interest rate environment. It's showing the variable debt, which is less than a quarter at this point of time on a pro form a basis, which would be exposed to a higher interest rate piece. But that's how we're thinking about from a capital allocation perspective. Could there be scenarios where there's a significant share price volatility and we do want to do something along those lines? That opportunity remains.
Yes. But again, just keep in mind that over the last 20 years and even over the last 5 years, the financial capability of being able to close on any transaction that we want to do without any financing contingencies. That has absolutely been our trend. Our ability to go into an acquisition scenario and situation and have no financing contingency included in our offer has set us apart on several occasions from everybody else who is at the table. So maintaining that flexibility and that's kind of that optionality, if you will, is important to us.
And once you buy back a share of stock, that capital is kind of gone forever. Okay. So part of it is protecting our liquidity and making sure we have enough capital to act on whatever opportunities may come along, but there could be a point and this is something new for all of you in the room. We've never gone here before. There could be a point where the opportunities slow down from an M and A perspective and we've already delevered the balance sheet to a reasonable amount, not to 0, sort of reasonable amount where then other capital allocation priorities may rise a bit from where they've been in the past.
Great. So listen, I'm conscious Michael, I know you have a question out here. We are about 5 minutes past the hour. I know we have a lot more time later this afternoon in any case, but I do know Steve and Martin do need to try and get this piece moving. We have a bunch of folks waiting outside.
Perhaps if you could try and take it, we have a long ride back later this evening also.
Well, I think this
is Vanish with people on
the webcast. There is a reconciliation issue.
You're referring $133,000,000 as adjusted EBITDA. So on Page 60, where you show 128 in your excess.
The 128 is in euros?
So I think the 128 is in euros versus you're using U. S. Dollars. The €173,000,000, I think that's about €19,000,000 Actually, actually the 2 pieces. So the €128,000,000 is euros.
The €173,000,000 is the €20,000,000 of synergies, the €148,000,000 converted into U. S. Dollars is your $173,000,000 So that's how the reconciliation works. So I don't believe we have an error with the reconciliation. No, I'm not asking
questions. Looking too quickly. Sure. Your 0.3, your capital allocation, do you have a buyback in place?
We do not have a buyback in place at this point of time. And if we did, we certainly would have put in a filing for sure, as you know, one would. Okay? Great. Thank you very much.
Martin and Steve, if you just want
to come over and just give
a quick rundown on what we've got planned for this afternoon. And then I think everyone has a few minutes for a quick bio break before we get started.
Yes. So just very quickly before we dive into the core presentation, we'll say again in a minute. On your badges, there's a colored dot or a colored star. Just make a note of that mentally and we'll have 6 tour leaders come at the end of this segue and we'll divide up into 6 groups and take you through TAMA 2. I'll remind you about that again in a minute.
If you do miss the group or anything else, we won't leave you stranded. It's just a way to try and get things moving. So we'll try and get you down there as quickly as possible. Just very quickly before we do, it's obviously anticipation of the room, which will be quick here like so get you all to drive down, Steve. Just very quickly, we have had a few bumps in the road.
This has been a 4 year project and I'm not going to apologize for being hugely proud of what we now have. I have just exhibited a couple of customer testimonials. If I was in your shoes, I want to know what our biggest customers think about TAMO too. Very quickly, Halfords' national retailer, but some of you might not know, they also have 400 very large garages across the U. K.
That ServiceAll makes. We take care of 90% of their fulfillment of parts and accessories, 90%, and we're linked electronically. So you can imagine if we feel pain, they feel pain. So a great quote from Halford's, never been closer to them. We've worked with them.
They had some pain. We're out of that. They've acknowledged that and they were looking forward like we are to getting more benefits from T2. Similarly, RAC, we put them out there. We've opened them closely for 5 years.
We caused them a bit of pain. They've got 1500 mobile units throughout the UK to work at the roadside. The whole model is fixing the car for their customers there and then, and they obviously need a part for it. Once again, we supply 90% of the parts to them, at least 1500 mobile units. We also exclusively stock a whole range of branded batteries for them.
And so once again, think about that. They've been with us through this journey and they've come out the other side. They're very happy with where we are. Just very quickly, I was going to before we move on to Steve and to explain what you'll be seeing, a number of people, especially in the last couple of months have said, why T2? So just very quickly, in all seriousness, T1 that you have seen just a few short years ago to us was pioneering a new.
What you have though is a limit around $350,000,000 in terms of sales and you've seen how we grow. We could open another 3 or 4 or 5 really big sheds, but clearly that's cost prohibitive. You're never going to get the efficiencies like Stargroover and join and we will soon be enjoying as well. So we tried to get a site, this is the Golden Triangle of the UK where we're sitting right now. And it took some time, we put a plan together and we move forward with this site.
And also we have future proof that going forward. So I'm going to hand you over to Steve, our COO, who is really responsible for all of this. If it's gone well, it's down to me and any problems, it's Steve. No.
No change then. I'm just going to quickly run
through some milestones, how we got here today and a bit
about where we are today. Fun statistics up there. I won't go through the 11 slides, It kind of gives you an idea of the scale and shape of what T2 is about. So after a lot of planning, spades went in the ground in January 2015. As Martin said, the idea would have been to have 1 unit, a 1,000,000 square foot.
The reality was in the UK that wasn't available at that time. And so once this bit of land become available, it become an obvious option to move, particularly been able to retain our existing workforce as well. The build took itself about 11 months and we're handed a shell in December 2015, and that allowed us and TGW to start our fit outs. The ECP fit out was completed in 2016 sorry, in July 2016. TGW still had a fair bit to do.
They had to finish their build plus they had to commission and test the systems and software. That was finished in May 2017, where we signed up the system and it was officially handed over to us. We went into what we call then C trials. And effectively, that's where we're responsible for the system, but it gives us a period of time to stress test it, find what it can, can't do, train all the employees, not just in processes to make the system work, but also when it goes wrong, what do we need to do. That finished in July.
We then went in to start migrating the ECP branches from T1 over the road. Hopefully, you saw that as you're driving in into this environment. We finished that migration in December. So in December, all 2 20 branches will be fully served overnight 6 days a week from here. In that same period, we also exited Bone Hill warehouse and also emptied T1 stockings here.
So things were great until then, and it was in December we started to get indications that there were some system issues. The issue in December was volumes are low for ECP, and with the Christmas holiday, it wasn't till January until those issues really manifested themselves. There was various system issues. What happened was they slowed down the productivity and what was going on, on the site. The impact that had was we had a backlog of goods in and picking.
And the only way to deal with that backlog was to bring in temporary resource. I think you all know bringing in temporary resource is never productive. I'm pleased to say today, we are back on track and we are back to planned resource levels. In January this year, we commenced the fit out of T1 and bring ourselves up to where we are today. That fit out is complete, and T1 is now fully operational.
Also in T2, we've now migrated 25 percent of the Andrew Page branches. The aim is to complete that migration by end of June, beginning of July. What that will allow us to do is to close our Swaddling Coke warehouse to exit the Andrew Page NDC, taking more cost out of the business. So today, we've got a stock holding of about $85,000,000 in T2. We're servicing the 2 20 ECP branches as well as 25% of the Andrew Page branches.
The daily throughput is about 220,000 items. That's 125,000 items in and 225,000 items out. Our service level is 99.7, and that might sound good, but that's still 600 parts that we're failing to get to branches on time. Our challenge is to get that to as close as we can to 100.
So to
summarize, we have achieved everything we planned to do 3 years ago, and we've integrated the Republic of Ireland acquisition and Andrew Page. Did we have issues on the way? Absolutely. But when you compare those issues to the magnitude of the project and especially to well documented implementations through other businesses, those issues were minor. No other competitor in the U.
K. Has anything like T2. It allows us to improve our margins by minimizing logistics costs and in particular and what's very topical in the UK at the moment is protect us against wage increases. And the great news is there's still plenty of opportunity to optimize. Although our pick rate, as you've heard several times today, is around 400, and that's 4x more than we were doing in T1, Our aim is to get that to above 500.
To really maximize automation, it normally takes about 2 years. So that is our target to exceed 500. So T2 today not only supports CCP, but with the future proofing we've put in place, and you'll see that as you walk around, it will support ECP long into the future. So here's an overview of what you should see today.
Goods in.
Goods in, there's decisions made where the stock goes. Anything that goes into automation goes by the decant station. You see some very narrow aisle racking used really for dense storing. The unique element here is we go 18 meters high. There's no one else in the UK that goes that high.
You see some wide aisle storage. The difference between wide aisle and very narrow aisle is wide aisle we pick from the first two levels. So above the first two levels is storage, but the bottom two levels are picking locations. We have a fast pallet area, which is your fast moving product on pallets rather than replenishing is that gravity fed from behind. And then moving into the automation, which accounts for about 70% of the pit here, you'll see mini load, which is a storage facility.
And you'll also see the dispatch sequencer, which is where anything picked into tote goes, the dispatch sequencer holds and then releases in time to meet the transport deadlines. And you'll see our goods to person pick area, which is really where you'll see most of the productivity. As in any warehouse, it's not worth As in any warehouse, it's not
worth investing in automation for
slow moving items in our view. We very much made sure we didn't automate just for the sake of automation. And where there's slow movers, there's actually no better way to store them just on shanks, and you'll see that as you walk around. You'll see the dispatch area and something we're very proud of is the robots. And they're static robots, but they actually stack, lid, label and band all the totes ready to go out into the vehicles.
So we're very proud of what we've got today. It's been a long journey. Hopefully, that's give you a quick appreciation of it, And I look forward to showing you around. I