LKQ (LKQ) Q2 2026 Earnings Call Transcript

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DATE

Thursday, July 30, 2026 at 8:00 a.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer - Justin Jude
• Senior Vice President and Chief Financial Officer - Rick Galloway
• Vice President of Investor Relations - Joseph Boutross

TAKEAWAYS

• Revenue -- $3.4 billion, a decrease from $3.5 billion in the prior year period.
• Adjusted Diluted EPS -- $0.67, compared to $0.84 last year, reflecting lower profitability in Europe.
• North America Organic Revenue -- 0.5% growth, representing the first positive organic growth for the segment in nine quarters.
• Alternative Part Usage -- over 40% for the quarter, surpassing the previous record set in the first quarter of 2026.
• North America Segment EBITDA -- $207 million, yielding a margin of 14.1% for the period.
• Legal Reserve -- $10 million expense, which created a 70 basis point drag on North American segment EBITDA margins.
• Aftermarket Collision Revenue -- approximately 2% growth, contributing to the recovery in the North American market.
• Europe Organic Revenue -- 12.6% decline, primarily driven by disruption from an Enterprise Resource Planning (ERP) implementation in Germany.
• Germany Revenue Impact -- $140 million estimated quarterly loss, resulting from service disruptions during the ERP transition.
• Europe Segment EBITDA -- $109 million, a year-over-year decline of $42 million.
• ERP EBITDA Impact -- $50 million, representing the estimated reduction in European earnings due to implementation challenges.
• Europe Cost Savings -- over $40 million, achieved through cost structure optimization, procurement savings, and productivity gains.
• Germany Revenue Run Rate -- over 85% of normal levels by the end of July, indicating operational stabilization.
• Private Label Penetration -- 26.6% in Europe, moving toward the company's long-term target of 30%.
• Specialty Organic Revenue -- 4.5% growth, which management described as resilient top-line performance despite market pressures.
• Specialty Segment EBITDA -- $33 million, with a margin of 6.7% for the quarter.
• Specialty Credit Loss -- $8 million noncash reserve, related to the acquisition of a distressed vendor in the second quarter.
• Operating Cash Flow -- $111 million for the quarter, bringing the six-month total to $55 million.
• Free Cash Flow -- $60 million for the quarter, compared to negative $36 million for the first half of the year.
• Net Leverage -- 2.8 times EBITDA, with total liquidity standing at $1.9 billion.
• Debt Prepayment -- $500 million, used in July to retire the outstanding balance of a U.S. term loan originally due in 2027.
• Shareholder Returns -- $129 million, distributed through share repurchases and cash dividends during the second quarter.
• Revised Adjusted EPS Guidance -- $2.60 to $2.90, lowered from the previous range of $2.90 to $3.20.
• Revised Organic Revenue Guidance -- negative 1% to negative 3%, updated to reflect current performance in Europe.
• Revised Free Cash Flow Guidance -- $625 million to $775 million, compared to the previous outlook of $700 million to $850 million.

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RISKS

• Jude stated, "While the implementation has been more challenging and taken longer to stabilize than planned, we've identified the issues, implemented recovery actions and remain confident in the long-term strategic value of the ERP investment," referring to the Germany conversion disruption.
• Jude noted, "In the U.K., it is just heightened competition with a new -- I mean, an entry that's kind of expanded in a number of locations," which has created volume and margin pressure.
• Jude stated, "Our commercial execution in these regions did not meet our expectations," referring to underperformance in the U.K. and Benelux markets.

SUMMARY

Management reported a divergence in segment performance, with North America returning to organic growth while European operations faced significant headwinds from a large-scale enterprise resource planning (ERP) implementation. The company stated that record levels of alternative part usage and record-low insurance CPI are driving demand in North America. Conversely, service disruptions in Germany following the system migration led to a reduction in full-year financial guidance. The company remains engaged in a strategic review of its business portfolio, including the Specialty segment, to identify opportunities for shareholder value enhancement.

• CEO Jude described the ERP migration as a "scaling event" that moved $2 billion of revenue onto a common platform, increasing the share of the European business on a unified system from 5% to over 30%.
• CFO Galloway noted that "absent the ERP disruption, Europe was on track to generate double-digit EBITDA margins for the quarter," despite volume pressures in the U.K. and Benelux.
• The company completed a comprehensive review of its full product brand portfolio, which is a required step before initiating further SKU rationalization and delisting actions.
• In the U.K. market, management identified a competitor that expanded from 80 to 230 locations over several years, necessitating a leadership change and more aggressive customer retention plans.
• Jude attributed the North American collision market recovery to rising used car prices and negative insurance CPI in May and June, which encourages insurance carriers to prioritize lower-cost alternative parts.
• Management stated that the strategic review remains active with advisors from Bank of America and Goldman Sachs, but the timing and outcome of the process remain uncertain.

INDUSTRY GLOSSARY

• Alternative Part Usage (APU): The percentage of vehicle repair parts that are non-OEM (Original Equipment Manufacturer), such as recycled or aftermarket parts.
• Enterprise Resource Planning (ERP): A software system used by a company to manage core business processes like sales, inventory, and finance on a single platform.
• Multi-Shop Operator (MSO): A collision repair business that operates multiple facilities, typically having standardized procurement and higher alternative part utilization.
• Section 232 Tariffs: U.S. trade duties imposed on certain imported goods, such as automotive parts from Taiwan, for national security reasons.
• Two-step business: A distribution model where a wholesaler sells to a retailer or repair shop who then sells to or services the end consumer.
• Three-step business: A distribution model involving a manufacturer, a distributor/wholesaler, and a retailer before reaching the end consumer.

Full Conference Call Transcript

Operator: Hello, everyone. Thank you for joining us, and welcome to LKQ Corporation's Second Quarter 2026 Earnings Conference Call. After today's prepared remarks, we will host a question-and-answer session. [Operator Instructions] I will now hand the conference over to Joe Boutross, Vice President of Investor Relations. Joe, please go ahead.

Joseph Boutross: Thank you, operator. Good morning, everyone, and welcome to LKQ's Second Quarter 2026 Earnings Conference Call. With us today are Justin Jude, LKQ's President and Chief Executive Officer; and Rick Galloway, our Senior Vice President and Chief Financial Officer. Please refer to the LKQ website at lkqcorp.com for our earnings release issued this morning as well as the accompanying slide presentation for this call. Now let me quickly cover the safe harbor. Some of the statements that we make today may be considered forward-looking. These include statements regarding our expectations, beliefs, hopes, intentions or strategies. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors.

We assume no obligation to update any forward-looking statements. For more information, please refer to the risk factors discussed in our Form 10-K and subsequent reports filed with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and slide presentation. Hopefully, everyone has had a chance to look at our 8-K, which we filed with the SEC earlier today. And as normal, we are planning to file our 10-Q in the coming days. And with that, I am happy to turn the call over to our CEO, Justin Jude.

Justin Jude: Thanks, Joe. Good morning, everyone, and thank you for joining us. The question I hear most often is why investors should have confidence in LKQ's ability to improve performance. The answer is simple, confidence comes from evidence. As I look across LKQ today, I see a company that has a unique global distribution network for auto parts and a relentless focus on serving our customers. While this quarter fell short of our expectations, this is a company that is stronger and better than the reported results may suggest. Our North American segment returned to positive organic growth for the first time in nine quarters. Preparable claims showed another quarter of sequential improvement and alternative part utilization continued to increase.

Specialty also continued to deliver organic growth, demonstrating the resilience of its market position. In Europe, our reported results were affected by ERP implementation challenges in Germany and softer performance in certain European markets. We take accountability for those results. While the implementation has been more challenging and taken longer to stabilize than planned, we've identified the issues, implemented recovery actions and remain confident in the long-term strategic value of the ERP investment. It expands our common platform footprint, creates the foundation for a more integrated operating model and supports better service, productivity and margin performance over time.

The investments we're making today are designed to increase LKQ's earnings power for many years and this quarter does not fully reflect the underlying earnings potential of the business. We continue to execute on our strategic initiatives designed to enhance our long-term competitive position and earnings power. This morning, I will review the progress in North American specialty, discuss our recovery actions and long-term opportunity in Europe and then address our full year outlook and strategic review before turning the call over to Rick for a more detailed financial review. Now let me address each segment in a little more detail, beginning with North America. The progress in North America was solid.

North America delivered positive growth in the quarter of 0.5% compared to a decline of repairable claims of 1% to 3% for the quarter, showing once again how North America can outperform the market. 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. One of the most effective levers they have to reduce cost of repair is to utilize more alternative parts.

And alternative parts usage or APU, was over 40% of the quarter, surpassing the previous record achieved in Q1 of this year, which is a positive trend for our business. While there is still room for improvement, the underlying trends are moving in the right direction. Our execution also improved. Salvage gross margin exceeded our expectations through improved procurement and operations, there was sequential improvement in fill rates and North America exceeded our free cash flow expectations. Paint volume remained a headwind, but the broader trajectory in collision and salvage improved. North America remains focused on enhancing our salvage procurement, improving fill rates, strengthening our pricing and analytics capabilities and consistently executing against our operational initiatives.

Turning to our European segment. The challenges we face in Europe are ours to address. While market demand was softer in certain regions, the primary drivers of our underperformance were implementation and execution challenges that are actively being addressed. As I mentioned earlier, the ERP conversion remains an important and needed step in modernizing the business. While the implementation created disruption, we moved with urgency to address the issues. The customer impact lingered longer than expected, but our recovery has gained momentum. The system performance has improved and operational processes have normalized, and 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.

While there is still work ahead, we are encouraged by the trajectory of the business and remain confident in our ability to restore service levels, win back our share of wallet and realize long-term benefits of this transformation. This conversion was a scaling event and increases the share of our European business operating on a common platform from approximately 5% to more than 30%, providing a strong foundation for a more integrated operating model. Over time, we expect this to drive productivity gains, simplify our technology landscape, enhance customer service capabilities and support margin improvement across Europe. The most difficult scaling step is now behind us. The recovery is underway and the long-term benefits of the program remain fully intact.

Outside of Germany, the U.K. and the Benelux regions underperformed on the revenue side. While softer demand contributed to the results, our commercial execution in these regions did not meet our expectations. To combat the lower volumes, we delivered more than $40 million on a year-over-year improvement in the quarter through the initiatives we put in place, including cost structure optimization, procurement savings, productivity gains and the closure of underperforming locations. We also changed leadership where performance was unacceptable and sharpened our recovery plans around commercial execution, cost control and customer retention. We made additional progress in the quarter with respect to our SKU rationalization objectives.

I am pleased to say that we have completed our review of our full product brand portfolio. As I have previously stated, completion of this review is required before further delisting action items can be considered to ensure a full understanding of both opportunities and risks are known. Our private label initiative continued to make progress in the quarter with volume penetration reaching 26.6% which puts us well on our way toward meeting our objectives of reaching 30% over the coming years. Our priorities in Europe are to restore service levels in Germany, recapture revenue, improve commercial execution, maintain gross margin discipline and continue to align the cost structure with the current demand.

We know what needs to be done, and we will hold ourselves accountable for delivering it. Ultimately, we see our European business being more efficient, more productive, serving the best customers in the market and generating double-digit EBITDA margins. Turning to Specialty. The segment delivered resilient topline performance. Organic revenue increased 4.5% for the quarter and revenue was essentially in line with our expectations for both the quarter and for the first half of the year. Operationally, we continue to see opportunities to improve gross margin, enhance operating efficiency and better leverage our existing cost structure. Our priority is to convert Specialty's resilient revenue profile into stronger and more consistent earnings performance. Turning to our full year outlook.

We are confident that North America remains firmly on track to meet its full year plan and Specialty continues to consistently demonstrate resilient revenue, although we still have work to do to improve its margins. Europe remains challenged. The result of all this combined is that we are reducing our outlook to reflect the reality of Europe's performance, but we are not changing our long-term strategic priorities. Our focus remains on disciplined execution, improving returns on invested capital and creating long-term shareholder value. Let me close with an update on our previously announced strategic review. The process remains active, and the company together with its advisers at Bank of America and Goldman Sachs continues to engage with multiple parties.

We will share updates when appropriate. Rick will now review the consolidated and segment results and our revised outlook. With that, I will turn the call over to Rick.

Rick Galloway: Thank you, Justin, and good morning, everyone. I'll be discussing our consolidated and segment results, cash flow and balance sheet and revised full year outlook. Beginning with our consolidated results. Second quarter revenue was approximately $3.4 billion compared with $3.5 billion in the prior year period. Diluted earnings per share were $0.52 and adjusted diluted earnings per share were $0.67 compared with adjusted diluted EPS of $0.84 in the prior year period. The year-over-year decline largely reflects lower revenue and profitability in Europe due to the factors Justin mentioned earlier. Turning to segment results. North America parts and services' organic revenue increased 0.5%, the segment's first quarter of growth since 2023.

Aftermarket collision revenue increased approximately 2%, and our Canadian hard parts business grew in the mid-single digits, while Paint remained a headwind to the overall growth rate. As Justin noted, repairable claims are showing signs of improvement, and while we are encouraged by the progression, we are not assuming a significant market recovery in our revised outlook. North America segment EBITDA was $207 million, representing a segment EBITDA margin of 14.1%. The quarter included a $10 million expense related to a legal reserve resulting in a drag on segment EBITDA margin of approximately 70 basis points, meaning the underlying performance was in the high 14% range.

This reserve relates to an isolated one-time event and it helps explain the difference between the reported margin and the operational progress we saw in the quarter. Europe parts and services' organic revenue declined 12.6%. The primary driver was the disruption related to the ERP implementation in Germany. We estimate the quarterly revenue impact was approximately $140 million. Europe segment EBITDA was $109 million, a year-over-year decline of $42 million, representing a margin of 7.5%. The decline primarily reflects the ERP implementation challenges in Germany as well as softer demand in the U.K. and Benelux.

We estimate the ERP disruption reduced EBITDA by approximately $50 million during the quarter, while the volume pressures predominantly in the U.K. and Benelux reduced EBITDA by roughly $30 million. Despite these headwinds, the business delivered meaningful productivity gains and cost reductions through the restructuring and efficiency initiatives we have discussed in prior quarters. Absent the ERP disruption, Europe was on track to generate double-digit EBITDA margins for the quarter, even while absorbing the volume pressures in the U.K. and Benelux. This demonstrates that the team is controlling the factors within its influence, prioritizing profitable revenue and steadily improving the underlying earnings power of the region.

Specialty organic revenue increased 4.5% and segment EBITDA was $33 million with an EBITDA margin of 6.7%. Revenue performance remained resilient, while gross margin and mix remain areas for improvement, and freight and fuel costs were headwinds for the quarter. Moving on to our cash flow and balance sheet. Second quarter operating cash flow was $111 million, and free cash flow was $60 million. For the first 6 months of the year, operating cash flow was $55 million and free cash flow was negative $36 million, which was slightly below our expectations due primarily to softer Europe performance. We ended the quarter with total liquidity of $1.9 billion and net leverage of 2.8x EBITDA.

During the quarter, we returned $129 million to shareholders through share repurchases and dividends. In July, we prepaid the outstanding $500 million U.S. term loan originally due in Q1 2027 with proceeds from our revolving credit facility. We expect to use free cash flow generated over the balance of the year to reduce the outstanding balance of our revolving credit facility following the prepayment of the term loan. Our capital allocation priorities remain unchanged. We will continue to deploy capital in a disciplined manner, balancing investment that support growth in the business, maintaining a strong balance sheet and returning capital to shareholders. Finally, with respect to our guidance, our revised 2026 outlook and assumptions are included on Slide 11.

Operationally, North America remains on track against its full year plan. The outlook assumes repairable claims remain near current levels with modest improvements during the second half. We are encouraged by the improvement seen during the quarter, particularly in June, but are not assuming a significant market recovery. Europe remains the primary area of operational focus and is driving the majority of the reduction in guidance. Our revised outlook assumes continued improvement in service levels and revenue in the affected German operations during the second half but at a more measured pace than we previously expected.

It also assumes that conditions in the U.K. and Benelux remain soft and that benefits of our leadership, cost and productivity actions build progressively over the remainder of the year. Specialty continues to grow organically, although our outlook reflects there is work to be done to improve margin and mix. Based on these assumptions, we expect organic parts and services revenue in the range of negative 1% to negative 3%. We expect adjusted diluted earnings per share of $2.60 to $2.90 compared with our previous range of $2.90 to $3.20. We believe the revised range reflects the current pace of recovery and the operating risks we see in the second half.

Additionally, we now expect full year free cash flow of $625 million to $775 million compared to our previous outlook of $700 million to $850 million. In summary, North America is showing encouraging sequential improvement. Specialty continues to grow. Our focus is on getting Europe back on track. Our priorities are restoring service levels in Germany, improving execution in the U.K. and Benelux and continuing to manage cash flow and the balance sheet with discipline. With that, I will turn the call back over to Justin.

Justin Jude: Thank you, Rick. North America is showing meaningful progress and specialty continues to demonstrate resilient revenue. We are focused on sustaining the strength of North American specialty and executing the recovery of Europe with urgency and discipline. We have clear operating visibility and measurable service targets. We will continue to communicate candidly about our progress and hold ourselves accountable for the results. While we are reducing our outlook to reflect the reality of Europe's performance, our long-term strategy hasn't changed. Lastly, I want to thank our more than 42,000 employees around the world for their work through a demanding quarter and thank you to our customers and shareholders for their continued engagement.

With that, we are happy to open the call to questions.

Operator: [Operator Instructions] Your first question comes from the line of Jeff Lick with Stephens Inc.

Jeffrey Lick: I want to focus maybe on wholesale North America and just the evolution of the progress that's being made there. First, if you could add a little bit more on your view on the repairable claims, where you thought you saw those for 2Q? And then, Justin, on the last call, you talked about how in a depressed environment, the business kind of first goes to the MSO and then it should start to see sort of improving conditions that will go to the India operators and that should help margin. Where do you see that on that progress, where we're at in terms of the evolution there? And then just a quick one for Rick.

Is the legal settlement, Rick, in the $420 million of SG&A for WNA?

Justin Jude: Thanks, Jeff. On the North American side, we saw the repairable claims being down negative 1% to 3% range, which is an improvement in Q1. Some of the macro trends that we're seeing out there with used car prices, insurance premiums -- insurance premiums coming negative in May and June, these are all benefiting us and showing that market recovery. So we feel pretty good that the market is heading in the right direction. With the volume still being down, though, kind of to your point, the insurance companies are looking to cut costs and the easiest way they do that is use more alternative parts and improve cycle time, and MSOs typically lead in that world.

So a lot more business is being driven to the MSOs right now. Now MSOs are the bigger customers. They get the best prices. But at the end of the day, they do use more alternative parts than a non-MSO rooftop, so we see a bigger share of opportunity of wallet to grow with those guys. They're much larger scale, so we have less SG&A to deliver. So from a margin standpoint, we actually do better on the MSO side. But yes, MSOs continue to get share right now in that depressed market. But once again, we do see that the market is recovering in the right direction.

Rick Galloway: And Jeff, on the SG&A, yes, that's the biggest driver of the $18 million increase is this one-time legal settlement.

Jeffrey Lick: Okay. Just as a quick follow-up, can you get us going on Europe because I'm quite sure some of my peers are going to dig into that a little bit more. But you made the comment that ex the disruptions from the ERP implementation, things were largely on track and even kind of alluded to the double-digit EBITDA margin. Could you just set the table there? I'm sure there can be more questions, kind of but can you just get us going on -- is that really the case? And how do you see this playing out?

Justin Jude: Yes. So you look at our conversion that occurred in Germany and then so if you take the Germany market out of our overall European performance, we did see EBITDA dollars increase on a year-over-year basis, and we did see EBITDA percentage. So a lot of the operating initiatives that we have in place and working on in Europe are starting to take hold.

Rick Galloway: Yes. I think just to add on to that a little bit is we saw the volume tightening up in Benelux and the U.K., as I talked about. We were more than able to offset that with over $40 million of overall productivity initiatives heavily driven by the head count reductions, taking the model that we had in North America through productivity, KPIs driving performance and transplanting that over to Europe. Those are taking hold and we're seeing the benefits of those that we've been talking about the last few quarters.

Jeffrey Lick: And a quick follow-up there. Where are you at on the private label pricing kind of evolution? You talked about migrating a decent chunk of the business to private label on that, you kind of had to have some kind of gateway pricing to entice people. Does the ERP implementation kind of slow that progress down? And any update on kind of the ramp and being able to kind of walk that price up now?

Justin Jude: Yes. The ERP doesn't have much impact on it. We have seen a slight margin improvement, a slight price increase on our private label. We will continue to drive that price over time as the adoption rate continues to grow and it has. I mean we're nearly 27% on adoption rate of private label. But yes, we did -- to your point, we had introductory pricing. And look, there's still economic concerns over there, consumers paying more at the pump. A lot of cost sensitivity going on, and that allows us to introduce that private label at that introductory pricing.

But once again, in Q2, we did see a slight price increase and a slight margin increase on our private label.

Operator: Your next question comes from the line of Craig Kennison with Baird.

Craig Kennison: Justin, what are the plans to roll out this ERP system across Europe? I know you started in Germany, but wondering if investors should be prepared for rolling disruptions as you move to other countries?

Justin Jude: Yes. Great question, Craig. Let me maybe start off with the why again on -- I know I covered this in Q1, but why are we doing the system conversion. I mean we have 80 acquisitions plus in Europe. We have 30-plus ERP systems. It's a patchwork of aging systems that were quite honestly built for much smaller operations. They're becoming increasingly difficult to support and many of those lack capabilities that our customers are asking for. As customers get bigger, they want integration. And in many cases, we're not able to do that. And so transforming to a single ERP brings efficiencies, it brings common data model, standardizes processes, gives us better control, resulting in higher visibility, higher efficiencies.

And so at the end of the day, we need to continue to drive over -- drive our ERP over there. Now with the conversion in Germany, a lot of lessons learned, a lot of things that we realized that we could do better, but it was a scaling event for us. We had roughly $300 million of revenue on a legacy system supporting three steps. So three-step business is much more simple, stock orders. And then now we have a $2 billion revenue on the platform servicing two-step businesses where there's a lot more transactions, a lot more customers, a lot more people, a lot more employees on that.

Once again, we've learned a lot on it, but it was a scaling event. In all future conversions, we don't have any slated for this year, but all future conversions that are going to go into next year become easier, right? Because now it's not a large scaling event. It's much smaller businesses, much smaller ERP systems, migrating into a $2 billion platform. So much more confidence that they'll be quicker, they'll be less disruptive and bring better cost savings in the future as well.

Craig Kennison: Thanks. But just to follow up, I think investors are going to want to try to model this. It's been a big disappointment this quarter. And it feels like it's going to happen next year, we're just trying to figure out how to think through the revenue and EBITDA implications of this. I totally get the long-term benefit of this and the absolute need to get on one platform, but we want to get the estimates right.

Justin Jude: Yes. Look, it's a great point, Craig. And as we give guidance into the next year, I mean nothing is going to be converted in the coming quarters. We obviously got a continued hyper care in the German market, continue to refine and recover on the revenue side. But once again, we've learned a lot of lessons. We built a scale -- not just a scaled system, but a scaled team that supports it.

And so we have much higher confidence that when we do the next conversion, which once again will be next year, and we'll come out with that in the future when those will occur in our guidance, but we have much more higher confidence that it will be less disruptive. Obviously, a lot of lessons learned on this, but it is a needed initiative that we have.

Craig Kennison: And now to -- Rick, you hop on the calls here with Justin on that. I totally appreciate the need to do this. But you've also changed management quite a bit in Europe to try to get the right talent in place. They haven't been in the chair that long in some cases. Is it just a lot to ask relatively new leaders to take on a project like this?

Justin Jude: Yes. I mean some of the leaders that we brought on have experience on transformation. They've got experience on integration. If you look at the backside operations, whether it's in our IT leadership or our transformation leaders as well as some of our operational leaders. So their background was in distribution. They have backgrounds of large complex businesses, backgrounds of transformation and conversions and immigration. So I mean they have that experience in the past and so that's one of the reasons we brought those folks on, because they have that right mindset and skill set to help us get through these conversions in the future.

Operator: Your next question comes from the line of Jash Patwa with JPMorgan.

Jash Patwa: Curious if you could split the $200 million annualized tariff exposure across automotive and nonautomotive segments and how the recent gapping of Section 232 automotive parts tariffs on import from Taiwan should reduce that tariff exposure? And then how should we expect any benefit to be split between gross profit benefit or pass-through to customer savings? And I have a follow-up.

Rick Galloway: Thanks, Jash. I can go ahead and take that. As far as the tariffs goes, as most people realize the IEEPA tariffs that came through, those were items that we have processed, and we are starting to get some refunds on some of those that were deemed illegal. Those are pretty small. And those were very, very small portion of what we've got. And we got a few million dollars in our specialty business. That's where most of that comes through. On the 232, the big change for us happened on May 1 when 232 for Taiwan, the Taiwan trade deal is moving from 25% down to 15%, so that's a good news story for us.

What we're cautiously optimistic is in the back half of the year as we get a turn of inventory through this, how much of that will we be able to hold on to as far as pricing goes. Look, the assumption that I've got in my guide is we weren't able to get any margin enhancement on the way up. I'm assuming we're not going to get much on the way down as we're staying competitive in the pricing. But there is a 40% reduction on those overall tariffs. And that was the lion's share of what we have as far as the overall tariff amounts.

The new tariffs have very minimal impact on us as far as that 301 tariffs, those are pretty, pretty tiny for us because we're actually under that 232 tariff. So we're monitoring it closely. We're seeing what it is. I don't have a further benefit or hit as far as the rest of the year goes on the Taiwanese deal. It is probably better news than -- well, it's definitely better news than it going in the opposite direction. And so we're looking to make sure we maintain our overall margins and make sure we have an ability to maintain whatever we can on the pricing side.

Jash Patwa: That's very helpful. I appreciate all the color. And just as a quick follow-up, I was wondering if you could break out the price versus volume split in North America for Q2.

Rick Galloway: So on the pricing, I did talk about it briefly in my overall communication. The pricing is positive -- the overall revenue is positive primarily because of pricing. So the tariff pass-through that we got brought us to 0.5% overall revenue growth. So that's great. The overall net volumes are still negative, slightly negative. But the positive thing that we should look at is aftermarket collision was actually up about 2%. So we actually had about 2% improvement in aftermarket collision. We also saw bumper to bumper in the mid-single digits. Our hard parts business in Canada is growing above market. We think it's taken some pretty good share.

Where we've been negative is primarily on the paint business, which is the most discretionary thing that you can do within the repair, so when there's a discretionary component to not do on their overall repair, it tends to be the paint, and so paint has been down and paint's the drag as far as the overall volume goes.

Operator: Your next question comes from the line of John Babcock with Barclays.

John Babcock: Just wanted to dig back into Europe a little bit here. I guess with regards to the U.K. and Benelux. In the U.K., you've discussed some competitive factors in the past. Just kind of curious if that's what's been driving the weakness there or if there's anything else going on? And then if you could just talk a little bit more about what you're seeing in Benelux, that would be useful.

Justin Jude: In the U.K., it is just heightened competition with a new -- I mean, an entry that's kind of expanded in a number of locations. So several years ago, they had 80, now they're up to 230. There's not a lot more markets necessarily that makes sense to expand into, but any time they expand and open, it creates some margin pressure and pricing pressure and volume pressure, and we've seen that continue on. We've obviously got action items going. We changed some leadership there to get a little bit more aggressive on that, the erosion of revenue that we're seeing and ensure that we're getting our cost out, and we did.

So we talked about, even though we had revenue declines in the U.K. and Benelux, we still over-delivered on an EBITDA standpoint. On the Benelux standpoint, it's really what I would call a three-step business. There are some three -- large three-step customers that we decided to walk away from. It was a low-margin business. We're still pushing on our two-step over there, trying to get more two-step business, but we walked away from that three-step business, but then we offset some of that lost revenue with SG&A reductions and productivity. So overall, still EBITDA was up in those markets.

John Babcock: And then in Germany, the ERP disruption there, can you just maybe talk a little bit more about what exactly happened, like why did things go a little sideways there?

Justin Jude: Yes. Look, good question. It's a short question, but it's going to be probably a little bit more longer answer and I'll be a little bit more transparent and candid with you guys. When we first went live over there in the first couple of weeks, a lot of stability issues with the system, slowness. Systems were crashing. And then towards the end of April, we stabilized the system, it was up and running, customers placing orders, and we saw revenue ramp up pretty quick. And so towards the end of April, we were really positive on that. But then as you get that revenue flowing through that new system, you start uncovering basic things that normally happen with conversions.

Obviously, we had a little bit more than we expected. But things like bad data, maybe the system processes weren't operating as they should have, so call them bugs. A lot of those things have been resolved through May and June. And so when that happened, our service levels weren't great, and customers are used to strong service levels from our Stahlgruber business in Germany. Stahlgruber is over a 100-year company, so customers are -- have known us and use us for many, many -- for a generation. And so when we were failing on our service levels, on our fill rates, customers had no choice but to find alternatives. And so we fixed a lot of the bugs.

We've corrected data. We've continued to refine processes to make sure they're more -- they're efficient. We are on a much more stronger system, much more robust system, but it is a new system. And so the other piece that we're continuing to work through is just training those folks that were on that legacy system, that were used to that legacy system, just getting them more and more familiar with the new system. And I would say the majority of our branches are performing well on service levels. They're performing well on revenue.

We have a couple of dozen locations that are -- we've got to go in and get them retrained up, and we've sent tiger teams there to help out. I would say when we were kind of battling through some of the system issues, we took all of our outside sales folks and helped put out fires, take care of transaction issues, customer service issues.

Now that we've got the system stabilized and it's really just getting our teams continue to train and improve on our service levels, we've taken those sales teams in the last couple of weeks and put them back in the field and then calling on those customers, letting them know that things have returned to normal. And so it's just a lot of different situations, mainly, I would say, escalated because of the scale of that system. I mean the first couple of weeks is what really set us off and got us off on a bad start, and we've been climbing out of that. But I would say today, the system is stable. It is up and running.

No issues with that, and we're just now once again, getting our teams retrained to make sure they can operate as efficient as they did prior to the conversion.

John Babcock: Okay. That's very helpful. And then just last question before I turn it over. I was just wondering if there are any updates on the considered sale of the specialty business and also whether or not the performance there is maybe leading you to consider potentially reevaluating whether to sell that business?

Justin Jude: Yes, no update on that process of the specialty other than we have a strategic alternative review on the whole company and specialties included in that. And then so through that process, obviously, we'll be evaluating and talking to different folks on the best outcome for our overall business and different portions of our business, and so that will be covered in there. And look, at the end of the day, they are the #1 -- specialty is #1 in their space. They are growing and outperforming the market, which we still think is flat to down.

And so they are performing well, but obviously, we launched the process and so we thought we may not be the right owners of that, even though it's a great asset and performing really well. But once again, it'll be evaluated with the overall strategic review that we have going on.

Operator: Your next question comes from the line of Bret Jordan with Jefferies.

Bret Jordan: On the European business, I think you guys were confident in the first quarter that the short-term pain of the ERP process would benefit second half margin. But are we sort of thinking that we're going to have a further step down in EBITDA margin in Europe, just given the share loss in the U.K., Benelux, Germany, that there's going to have to be some aggressive near-term spend to try to bring volumes back and we go lower before we go higher? Or are you -- do you think Q2 was a low watermark from an EBITDA margin standpoint?

Rick Galloway: Yes, I think I can take that bit at the start, Bret. And then Justin, if you want to add some things. As far as the low watermark, we think that Q2 would be the low watermark. One of the reasons why we pointed out that if you look at the overall Europe -- I think this is what you were talking about, Justin. When we look at Europe, excluding the ERP, even with the volume declines we saw in Benelux and the U.K., we were able to offset that through overall productivity initiatives across all of Europe. And so we actually made more EBITDA dollars and more EBITDA percent.

We were in double digits if you back out that ERP. When we look at Q3 and Q4, as I go through the guidance and what I have in my estimations is we're still going to have some volume declines. It won't be near as much as what we saw in Q2 for Germany, and then it's going to continue to get better in Q4. We think we finished the end of the year much closer to 100% of our volume, but it's going to be a steady improvement of our German operations. That's the big drag in EBITDA. I don't think that we have pricing we're going after.

The big aggression that we did was the low-margin customers that we have, there's some times that we're not going to compete on that price. So what we did instead is we went after the overall cost and said, we may forgo on low-end pricing and we're still going to make more EBITDA dollars and more EBITDA percent along the way. So Justin, I don't know if you want to add anything.

Justin Jude: Yes. And then on the recovery for Germany, I know Rick talked about it, our goal is to get back to 100% by year-end going into 2027. Obviously, the team is challenged to do that at a faster rate. The good news is we haven't really seen that we've lost customers. We just lost some share of wallet of those customers where the customer had real sensitive on service times of getting a part. They may have to call one of our competitors.

And it's unfortunate, but now that we've got our service levels back up and running, we've got our sales teams back, engaged, we're giving and showing the customer confidence that now they can start giving that share of wallet back to us. So once again, our teams are challenged to grow at a faster rate. But right now, we have that recovery in Europe -- or I'm sorry, in Germany being 100% going into 2027.

Bret Jordan: Okay. And then I guess on specialty, just on an operating leverage question, it sort of seems from a sales standpoint that might be the outperforming business in the portfolio, but not seeing as much on the margin. I mean, it is sort of a distinct supply chain. You think that sales growth would improve EBITDA with leverage. Is there anything going on there that's either incremental cost or pricing that's impacting?

Rick Galloway: Yes. Brett, that's a great question, good observation. If you look at the earnings presentation, I put in the earnings presentation, there's actually a one-time cost item on the acquisition that we did, where there's customer of our -- or a vendor of ours that we had lent some dollars to. We ended up acquiring them as they were having some trouble in the financials and there was an $8 million noncash reserve we had to make on a credit loss that hit our SG&A, and that hit in the specialty business, that's the main driver of the decrease in overall margin. So if you add that back, we're back to the levels that you're talking about.

So -- and that's what I think we get to -- when we get back into Q3 and Q4.

Operator: Your next question comes from Gary Prestopino with Barrington Research.

Gary Prestopino: A couple of questions. It looks like -- and again, these are my numbers, but based on my adjusted EBITDA estimate, if I kick back the $50 million you did beat what I was looking for. I mean what was the impact of earnings per share, adjusted EPS on what happened with the ERP issue?

Rick Galloway: Yes, Gary, it's about $0.15. So $0.15 in the quarter year-over-year is the ERP, the legal reserve will be about $0.03, and the item that I just talked to Brett about would be another $0.02. So you got about $0.20, $0.21 of ERP and these one-time items that hit us quarter-over-quarter. When you look at the $0.84 from last year, you dropped down about $0.20, $0.21 on these one-time type items. And then you look at the overall performance -- and that's the tough thing about the discussion we're having because there's obviously the one-time, we take accountability for them, we need to improve them. But there are some non-operating items that came through our numbers.

Gary Prestopino: Okay. And then with specialty, this is, I believe, the second quarter where we've had an increase in credit losses. You explained what happened in this quarter, was it the same vendor that led to some -- the increase in credit losses in Q1? Or is there something different there? And is that all behind you now?

Rick Galloway: Yes, you're spot on. It's the same vendor, which is the reason why we acquired them in Q2, to stop the bleeding and improve overall performance, and now we've been improving performance since we acquired them in the middle of Q2.

Gary Prestopino: And is it behind you?

Rick Galloway: Yes. Yes, that's behind us now.

Gary Prestopino: Okay. And just real briefly, when you released numbers in Q1, you mentioned that the sale of the specialty business has gotten gummed up a little bit because of geopolitical and credit issues. Are you starting to see entities -- if this thing can be sold starting to reengage with you now that some of those geopolitical issues and the credit issues may have become a little more clearer?

Justin Jude: Yes. The -- it hasn't really changed any of the communication with some of the bidders in the past. And so as I mentioned earlier on one of the questions, we just kind of rolled specialty into the overall strategic review that we're doing for the whole company. So that will get repicked up if there's other interested parties in the holdco or other interested parties and pieces of the business, that will all be evaluated. But the overall geopolitical that created some concerns hasn't necessarily -- even though it may have changed and showed that there's some improvement, it hasn't necessarily gotten some of those bidders back to the table.

Operator: Your next question comes from the line of Scott Stember with ROTH Capital Partners.

Jack Edwin Weisenberger: This is Jack Weisenberger on for Scott. Just on talking about guidance, what does kind of the low end of the new range, assuming about Germany's recovery timing versus the high end? I know you mentioned you plan on getting to 100% recovery by the end of the year. Is that kind of the mid-range? And how much were the other European markets factor in that lowered guidance?

Rick Galloway: The bulk of it is because -- Jack, I appreciate the question. The bulk of it is because of the ERP implementation and a slower recovery. We thought we would be a little bit more recovered than we are right now. And so we think it's prudent for us to kind of slow this down as far as the overall recovery. That's the bulk of the further reduction that we have. The assumption that I've got into the numbers is that I continue to improve in Q3 and Q4. And as we talked about, that we get back to about 100% by the time we exit the year.

If you look at the low end, the low end would assume it's more of the status quo. So if you look at the low end of the guide, it's more of a status quo in the ERP, and that would be the overall impact. And then as far as the rest of Europe, we did assume that we would have market recovery in the back half of the year. So there would be some recovery. What we're assuming now is that we have the status quo.

So the current run rate essentially for the Benelux and the U.K. are more of the norm for Q3 and Q4, and that's the remainder, a couple of cents that we've got coming down for the back half of the year.

Jack Edwin Weisenberger: Okay. Great. And then just with repairable claims having improved sequentially for the past few quarters. What are you seeing in July? Are you seeing the same [indiscernible] continue into 3Q?

Justin Jude: Yes, we don't necessarily have data on what is happening with repairable claims overall from a summary standpoint. We do see somewhat consistent volumes in North America coming out of June into July, though.

Operator: [Operator Instructions] The next question comes from the line of Jash Patwa with JPMorgan.

Jash Patwa: I was just wondering if you could quantify the margin headwind from the spike in diesel costs across the segments. And then as a follow-up, a lot of the initial Germany disruption seems known by April and at the time of Q1 earnings. So I'm curious if it was the pace of recovery through the remainder of the quarter that came in below where you'd expected. And was there something on the competitive response that surprised you to the downside?

Rick Galloway: Jash, I missed the question. Were you talking diesel prices?

Jash Patwa: Yes. Just the margin headwind as a result of that.

Rick Galloway: Yes. So we have had a little bit of margin headwind. We've done the best we can to offset that as far as overall revenue and then working on overall efficiencies as well. But it has been a little bit of a headwind. We haven't -- weren't going to quantify the exact amount, but there is a bit of a headwind on that. We think that net-net, we're usually able to pass along those price increases. But in the short run, it does tend to be a bit of a headwind, which we look to offset. The second part of the question, I didn't quite get. Did you jump over to Europe?

Jash Patwa: Yes. I was just trying to -- I mean, a lot of the initial Germany disruptions seem to be known by April end when you had Q1 earnings, so I was curious like if there was something in the competitive response that surprised to the downside and perhaps impeded the recovery through the remainder of the quarter?

Justin Jude: Not necessarily on the competitive side, no. I mean, as I mentioned earlier, in the first couple of weeks, we had a lot of stability issues. But then coming into the back half of April, we saw revenue climbing at a very, very fast rate. And so it gave us confidence going into May and June, as that revenue continues to climb, we started uncovering as I mentioned, some system issues whether that was bad data, whether it was some bugs. All those things got resolved, which kind of slowed us down from the faster recovery coming into May and June. All those things have been resolved.

And now we're just in a retraining standpoint to make sure we get our service levels at a couple of dozen branches back up to par where the majority of our branches are performing today to get that revenue recovered.

Operator: We have now reached the end of the Q&A session. I will now turn the call back to Justin Jude for closing remarks.

Justin Jude: Thanks, operator. Just three things I want you to take away from this is we talked about North America. I mean we are seeing great positive trends in the macro environment with insurance premiums coming down, used car prices continuing to climb, repairable claims sequentially improving into Q2. We had obviously a positive performance on revenue in North America, our first time in nine quarters, so showing great trends in North America.

Then if you jump over to Europe and you kind of put ERP to the side, we talked about it, but even though we had some volume pressure, the team is actively pursuing all the initiatives they need to take productivity improvements to offset that volume and we actually saw EBIT improvements outside of the ERP country that we converted as well as -- I'm sorry, EBITDA dollars and EBITDA percent, so overall, the team is performing pretty well. The ERP side of Germany, yes, it was disruptive. Yes, it was a little bit more than we expected, but we have great recovery plans.

We have clear line of sight of what we need to do, and we're showing continual improvement on that, and we feel confident we'll hit that run rate by the end of the year. And with that, I will end the call. I appreciate everybody joining the call today.

Operator: This concludes today's call. Thank you for attending. You may now disconnect.

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