AR September 2006

While many might view the auto recycling industry as thousands of small dismantling facilities located throughout the country, the multi-billion dollar industry is changing.

“It’s actually a large industry,” said George Eliades, executive vice president of the Automotive Recyclers Association. “I think the perception of the industry has changed and is changing because there is a big focus on recycling and reuse.”

The auto recycling industry is a $25 billion a year industry, according to the trade association group based in Fairfax, Virginia making it the 16th largest sector in the United States employing more than 46,000 people. The trade group estimates that there are more than 7,000 legitimate automotive recycling companies across the nation.

The auto recycling industry currently serves approximately 14 percent of the auto parts market, Eliades said. The market share has been fairly constant over the past few years. “The potential for growth is greater now because people are paying attention to improving the environment. I think the consuming public is also more concerned about the cost of replacement parts and quality recyclable OEM parts are an attractive alternative.” Eliades said.

“As more people become publicly aware of the availability, quality, and the advantages to using quality recyclable OEM parts, I think we definitely will increase our share of the market. We’re committed to and encourage the reuse of recycled parts.”

While the auto recycling industry is growing, the number of individual recycling companies across the country is shrinking. “There is more consolidation today then in the past. I think that trend will continue because it makes sense for a lot of companies to join into some kind of group in order to help themselves in the market,” Eliades said.

The largest nationwide provider of recycled auto products and related services is LKQ Corp., headquartered in Chicago. It operates over 100 facilities across the country, offering customers a broad range of replacement parts. LKQ has acquired more than 30 operations since its founding in 1998. It has acquired nine businesses just this year.

LKQ acquired Transwheel Corp., an aluminum alloy wheel refurbishing and distribution business with facilities in Indiana, Connecticut, Maryland, Florida, Michigan and Illinois, in January. Transwheel recorded revenue of $28.5 million in 2005.

In February, LKQ acquired Michael Auto Parts in Orlando. It serves the professional repair market and generated $12 million of revenue in 2005. LKQ also purchased two retail businesses, one near Charleston, South Carolina and one near Baton Rouge, Louisiana. Combined, the firms generated less than $3 million of revenue.

LKQ also acquired two businesses in April consisting of three facilities in Oklahoma and three facilities in Michigan with revenue of $9 million. In June and July, LKQ acquired two retail oriented business that generated revenue of $24 million with facilities in Houston and Daytona Beach, Florida and a facility outside Denver.

Revenues at LKQ increased 43.4 percent to $195 million in the second quarter ended June 30, 2006. Organic growth increased 10.8 percent. Net income increased 52.9 percent to $11.7 million compared with $7.6 million during the same quarter last year. “We once again achieved a record revenue quarter with impressive revenue growth,” said Joe Hosten, LKQ chief executive officer, following release of the quarterly results.

LKQ is expected to make more acquisitions this year. Craig Kennison, an analyst for Robert W. Baird & Co. Inc. in Milwaukee, said in a research report that LKQ has approximately $45 million remaining on its current credit authorization. “We believe the company easily could expand its facility by an additional $100 million.” Kennison said.

Kennison said he expects 15 percent to 20 percent earnings per share growth on 10 percent to 12 percent organic sales growth during the next three years. He said LKQ plans to complement organic growth with acquisitions that could add an additional 5 percent to 10 percent to sales and earnings per share growth during the same period.

Many owners of smaller recycling companies are selling because they are getting a good price said Eliades of ARA. He added that timing is also a factor for owners considering retirement. “While I think there are fewer companies, the industry is not getting smaller. It is, in fact, expanding. With fewer companies, those that continue are stronger entities.” Eliades said.

The single biggest issue facing automotive recycling today is salvage, Eliades said. “If we don’t get salvage, we won’t have recycling companies and none of the other issues will matter. We’re trying to keep repairables and get a higher percentage of the vehicles not exported for legitimate reasons and others sold to unscrupulous buyers for parts. This helps automotive recycling and the environment.”

Recycling automotive parts also saves valuable landfill space, Eliades said. “The auto recycling industry is all about saving raw materials,” Also, the more recycled parts the less need for manufacturing new parts. “Recycled parts saves energy and are less costly to the consumer than brand new parts,” Eliades said.

Metal makes up about 75 percent of a motor vehicle. About 85% of it is recycled, Eliades said. The industry recycled around 14.5 million tons of steel in 2004.

Other parts, like carpets, plastics, and tires, are also recyclable. About 10 percent of recycled tires end up in new tires. In total, around 95 percent of cars retired from use are recycled, making autos the most recycled consumer product in the world today according to Eliades.

“What we’re trying to do is encourage recycling and reuse so that there is no waste left over, if that is possible,” Eliades said. “Automotive recyclers are some of the most entrepreneurial people on the planet. If there is value in any part of that vehicle, they’ll find it, recycle it and make it available for reuse.”