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    LKQ
    Earnings call· Jun 2026(Q2 FY26)

    LKQ Q2 FY26 earnings call LKQ

    Jul 30, 2026 Source

    Executive summary

    LKQ Q2 FY26 — Europe ERP Challenges Offset North America's Return to Growth

    LKQ's second quarter saw North America return to positive organic growth, driven by improving collision market indicators and record alternative part utilization. However, this was overshadowed by significant ERP implementation challenges in Germany, leading to a substantial decline in European revenue and profitability. Management is focused on stabilizing the European operations and executing recovery plans, while maintaining long-term strategic priorities and a disciplined capital allocation approach.

    Highlights

    4

    • North America parts and services organic revenue increased 0.5%, marking its first quarter of growth in nine quarters.

    • Alternative part utilization (APU) surpassed 40% in North America, a new record, indicating positive market trends.

    • Specialty segment delivered resilient organic revenue growth of 4.5%, meeting expectations for the quarter and first half.

    • Europe achieved over $40 million in year-over-year productivity gains and cost reductions, offsetting volume pressures outside Germany.

    Concerns

    5

    • Europe parts and services organic revenue declined 12.6%, primarily due to ERP implementation challenges in Germany, impacting revenue by an estimated $140 million and EBITDA by $50 million.

    • Adjusted diluted EPS decreased to $0.67 from $0.84 in the prior year, largely reflecting lower revenue and profitability in Europe.

    • Full-year adjusted diluted EPS guidance was reduced to $2.60-$2.90 from $2.90-$3.20.

    • Full-year free cash flow guidance was lowered to $625 million-$775 million from $700 million-$850 million.

    • Specialty segment's EBITDA margin was 6.7%, impacted by an $8 million non-cash credit loss reserve related to an acquisition.

    Guidance & targets

    4
    CategoryTargetConfidence
    Organic parts and services revenue growth
    negative 1% to negative 3%
    high materiality
    Medium
    Adjusted diluted earnings per share
    $2.60 to $2.90
    high materiality
    Medium
    Free cash flow
    $625 million to $775 million
    high materiality
    Medium
    Germany ERP revenue recovery
    100% of normal run rate
    high materiality
    Medium

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    North America parts and services
    Achieved positive organic revenue growth for the first time in nine quarters, outperforming the market despite declining repairable claims. EBITDA margin was impacted by a $10 million legal reserve, with underlying performance in the high 14% range. Paint volume remained a headwind.
    EBITDA margin: 14.1%Aftermarket collision revenue growth: ~2%Canadian hard parts business growth: mid-single digitsRepairable claims decline: 1% to 3%Alternative part utilization (APU): >40%
    		—0.5%—$207 million
    Europe parts and services
    Organic revenue declined significantly due to ERP implementation challenges in Germany and softer demand in the UK and Benelux. EBITDA declined $42 million YoY. Excluding ERP disruption, the segment was on track for double-digit EBITDA margins due to productivity gains and cost reductions. System performance and operational processes have normalized, with Germany's revenue run rate reaching over 85%.
    EBITDA margin: 7.5%Estimated ERP revenue impact: ~$140 millionEstimated ERP EBITDA impact: ~$50 millionEstimated volume pressure EBITDA impact (UK/Benelux): ~$30 millionProductivity gains and cost reductions: >$40 million (YoY improvement)Private label volume penetration: 26.6%
    		—-12.6%—$109 million
    Specialty
    Delivered resilient top-line performance with organic revenue growth in line with expectations. EBITDA margin was affected by an $8 million non-cash credit loss reserve related to an acquisition, which is now resolved. Gross margin and mix remain areas for improvement, with freight and fuel costs acting as headwinds.
    EBITDA margin: 6.7%
    		—4.5%—$33 million

    Operational metrics

    17
    Legal reserve expense
    $10 million
    Q2 FY26

    Included in North America segment EBITDA, explaining the difference between reported and underlying operational margin.

    ERP disruption EBITDA impact
    $50 million
    Q2 FY26

    Estimated reduction in Europe's EBITDA during the quarter due to ERP implementation challenges in Germany.

    Volume pressure EBITDA impact
    $30 million
    Q2 FY26

    Estimated reduction in Europe's EBITDA due to volume pressures predominantly in the UK and Benelux.

    Productivity gains and cost reductions
    $40 millionyear-over-year improvement
    Q2 FY26

    Achieved through initiatives including cost structure optimization, procurement savings, productivity gains, and closure of underperforming locations.

    Non-cash credit loss reserve
    $8 million
    Q2 FY26

    Hit the Specialty business's SG&A and was the main driver of the decrease in overall margin. Related to the same vendor that caused credit losses in Q1, now resolved by acquisition.

    Total liquidity
    $1.9 billion
    Q2 FY26 end

    Total liquidity at the end of the second quarter.

    Net leverage
    2.8x
    Q2 FY26 end

    Net leverage ratio at the end of the second quarter.

    Capital returned to shareholders
    $129 million
    Q2 FY26

    Amount returned to shareholders during the quarter.

    Term loan prepayment
    $500 million
    July 2026

    Prepayment of outstanding US term loan in July using proceeds from the revolving credit facility.

    ERP system revenue on common platform
    $2 billionfrom $300 million legacy system
    current

    The Germany ERP conversion scaled the common platform footprint from approximately 5% to over 30% of European business, now supporting $2 billion in revenue.

    ERP system revenue run rate
    85%of normal revenue run rate
    end of Q2 FY26

    Revenue run rate in Germany for the last week of Q2, indicating recovery progress.

    SG&A increase driver
    $18 million
    Q2 FY26

    The biggest driver of the $18 million increase in SG&A for North America.

    Adjusted EPS impact from ERP
    $0.15year-over-year
    Q2 FY26

    Estimated impact of ERP disruption on adjusted diluted EPS.

    Adjusted EPS impact from legal reserve
    $0.03
    Q2 FY26

    Estimated impact of the legal reserve on adjusted diluted EPS.

    Adjusted EPS impact from Specialty credit loss
    $0.02
    Q2 FY26

    Estimated impact of the Specialty non-cash credit loss on adjusted diluted EPS.

    Total adjusted EPS impact from one-time items
    $0.20-$0.21year-over-year
    Q2 FY26

    Combined impact of ERP disruption, legal reserve, and Specialty credit loss on adjusted diluted EPS compared to prior year.

    Tariff reduction (Taiwan)
    40%
    effective May 1

    Reduction in Section 232 tariffs for Taiwan, representing the lion's share of the company's overall tariff amounts. Management is cautiously optimistic about retaining margin benefits.

    Industry KPIs

    4
    MetricValueDetails
    EPS$0.52USD/share
    Revenue$3.4 billionUSD
    Cash investments balance$1.9 billionUSD
    Share buyback capital return$129 millionUSD

    Risks & headwinds

    6
    ERP implementation challenges in GermanyQ2 FY26, with recovery expected through H2 FY26

    Organic revenue declined 12.6%; estimated revenue impact ~$140 million; estimated EBITDA impact ~$50 million

    Mitigation: Addressed issues with urgency, improved system performance, normalized operational processes, focused on retraining staff, sales teams re-engaged with customers. Goal to restore service levels and recapture revenue.

    Softer demand and competitive pressure in UK and BeneluxQ2 FY26, assumed to remain soft in H2 FY26

    Estimated EBITDA impact ~$30 million

    Mitigation: Implemented over $40 million in productivity gains and cost reductions, including headcount reductions and closure of underperforming locations. Changed leadership and sharpened recovery plans for commercial execution and customer retention.

    Paint volume as a headwindQ2 FY26

    Negative impact on North America's overall growth rate

    Mitigation: Not explicitly stated, but broader North American execution improvements and focus on alternative parts usage are expected to offset.

    Freight and fuel costsQ2 FY26

    Headwinds for Specialty segment

    Mitigation: Not explicitly stated, but management aims to improve gross margin and operating efficiency in Specialty.

    Used car pricing improvementQ2 FY26

    Positive trend for collision markets

    Mitigation: Not a risk, but a positive indicator for the business.

    Insurance CPI negative year-over-yearMay and June (YoY)

    Puts pressure on carrier margins, creating need to reduce repair costs

    Mitigation: Drives increased utilization of alternative parts, which is a positive for LKQ's business.

    What to watch in Q3 FY26

    5

    Germany ERP revenue run rate recovery

    Q3 FY26
    Current85% of normal run rate
    TargetContinued improvement towards 100%

    Why it matters

    The pace of recovery in Germany is critical to overall European segment performance and achieving full-year guidance.

    We finished last week above 85% of our normal revenue run rate in Germany. This is a meaningful milestone that demonstrates the progress our teams have made.

    Q&A highlights

    6

    What was the repairable claims trend in Q2 for North America, and how is the MSO strategy progressing given the depressed market?

    Repairable claims were down 1-3% in Q2, an improvement from Q1, with positive macro trends like improving used car prices and negative insurance CPI. MSOs are gaining share in the depressed market, which is beneficial for LKQ's margins due to higher alternative part usage and lower SG&A per transaction.

    “While the market has not fully recovered, several external indicators continue to reinforce our belief that collision markets are improving. Not only has used car pricing continue to improve, both May and June showed negative insurance CPI on a year-over-year basis, putting pressure on carrier margins, creating a need to reduce repair costs.”

    asked by Jeffrey Lick · answered by Justin Jude

    2 min read5 chapters

    Detailed Narrative

    01

    North America Performance and Market Trends

    The North American segment achieved positive organic growth of 0.5% for the first time in nine quarters, outperforming a 1% to 3% decline in repairable claims. This growth was supported by a 2% increase in aftermarket collision revenue and mid-single-digit growth in the Canadian hard parts business. Key external indicators, such as improving used car pricing and negative insurance CPI in May and June, suggest a recovering collision market. Alternative part utilization (APU) reached a record over 40%, indicating a positive trend for the business.

    02

    Europe ERP Implementation Challenges and Recovery

    Europe's organic revenue declined 12.6%, primarily due to ERP implementation issues in Germany, which impacted revenue by an estimated $140 million and EBITDA by $50 million. The ERP conversion, while disruptive, is a critical step to modernize operations, consolidating 30+ legacy systems onto a common platform. System stability has improved, and the revenue run rate in Germany reached over 85% by the end of Q2. Management expects a full recovery to 100% of normal revenue run rate by year-end FY26, with lessons learned from this scaling event to benefit future, smaller conversions.

    03

    European Regional Performance and Cost Management

    Outside Germany, the UK and Benelux regions underperformed on revenue due to softer demand and heightened competition in the UK. Despite these headwinds, the European business delivered over $40 million in year-over-year productivity gains and cost reductions through restructuring, efficiency initiatives, and the closure of underperforming locations. Leadership changes were made to address commercial execution and cost control, demonstrating management's commitment to improving underlying earnings power, with the segment on track for double-digit EBITDA margins excluding the ERP disruption.

    04

    Specialty Segment Resilience and Margin Focus

    The Specialty segment continued its resilient performance with organic revenue increasing 4.5%, meeting expectations. However, its EBITDA margin was 6.7%, impacted by an $8 million non-cash credit loss reserve related to an acquisition. Management is focused on improving gross margin, enhancing operating efficiency, and better leveraging the existing cost structure to translate resilient revenue into stronger and more consistent earnings performance. The credit loss issue is now resolved following the acquisition of the vendor.

    05

    Capital Allocation and Strategic Review Update

    LKQ ended the quarter with $1.9 billion in total liquidity and a net leverage of 2.8x EBITDA. The company returned $129 million to shareholders through share repurchases and dividends. In July, LKQ prepaid a $500 million U.S. term loan due in Q1 2027 using its revolving credit facility, with plans to reduce the revolver balance with free cash flow. The previously announced strategic review process remains active, with the company and its advisors engaging with multiple parties, including for the Specialty business, which is now part of the broader review.

    AI-generated summary of the company’s earnings call. Not investment advice.