LKQ Stock

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.

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.

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 projections ] 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 top line 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 in 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.

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 onetime 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, containing 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.

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

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's hard 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?

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.

And Jeff, on the SG&A, yes, that's the biggest driver of the $18 million increase is this onetime legal settlement.

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 do 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 can you just get us going on -- is that really the case? And how do you see this playing out?

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, you can 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.

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 reduction, taking the model that we had in North America through productivity, 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.

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?

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 in private label.

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

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?

Yes. Great question, Craig. Let me maybe start off with the why again on -- I know I covered this in Q1, why are we doing the system conversion. I mean we've added 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, standardize 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 stockholders. 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 small 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.

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...

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 that it will be less disruptive. Obviously, a lot of lessons learned on this, really needed initiative that we have.

And not to Rick, you hop on the calls for 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?

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 complexes, 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.

Your next question comes from the line of Josh Patwa with JPMorgan.

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.

Thanks, Josh. 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 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.

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.

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.

Your next question comes from the line of Jon Babcock with Barclays.

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.

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.

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? .

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 crushing. 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.

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 what to sell that business?

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.

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

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?

Yes. I think I can take that at the start, Bret. And then Justin, if you want to add some things. As far as the low water mark, 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 sometimes 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.

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.

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?

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 onetime 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.

Your next question comes from Gary Prestopino with Barrington Research.

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?

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 onetime 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 onetime 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 onetime we take accountability for them, we need to improve them. but there are some nonoperating items that came through our numbers.

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?

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 in improving performance since we acquired them in the middle of Q2.

And is it behind you?

Yes. Yes, that's behind us now.

Okay. And just real briefly, when you release 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?

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 table.

Your next question comes from the line of Scott Stember with Roth Capital Partners.

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?.

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.

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?

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

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.

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

Yes. Just the margin headwind as a result of that?

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 we -- 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?

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?

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.

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

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 actually 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 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.

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

Good day, and welcome to the LKQ Corporation's First Quarter 2026 Earnings Conference Call. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you.

I'd now like to welcome Joe Boutross, Vice President, Investor Relations, to begin the conference. Joe, over to you.

Thank you, operator. Good morning, everyone, and welcome to LKQ's First 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.

Thank you, Joe, and good morning, everyone. We appreciate you joining us today. Q1 was another quarter of solid progress across our operating segments, and we're increasingly confident in our positioning as North America continues to recover. This quarter reflected the team's operating discipline and relentless focus on the things within our control, taking market share, protecting margins and improving productivity. LKQ has started 2026 with a strong foundation, featuring a more focused organization, disciplined execution and an unwavering commitment to long-term value creation.

Now I'll provide a brief update on each segment, highlighting demand trends, commercial execution and the actions we're taking to expand profitability. North America organic revenue declined 0.5% on a per day basis, an improvement over last year's decline of 4.1% and a sequential improvement from Q4's decline of 1%. These results highlight a gradual recovery and reinforce our confidence in the direction of our North American operations.

Comparable claims were down approximately 2% to 4%, demonstrating steady recovery from the levels we saw throughout 2025. Importantly, we achieved strong performance in our aftermarket collision product line, surpassing the growth levels of the segment. This positive momentum was partly driven by an increase in utilization of alternative parts, which reached a record high of nearly 40% through February, and we anticipate that this favorable trend continues in March as well.

We also renewed several MSO agreements and further integrating ordering capabilities with our key partners. These integrations are designed to increase the ease and velocity of ordering, improved procurement workflows and position us to capture more share of wallet. Elitek, our calibration and diagnostic business delivered strong organic growth and healthy EBITDA margins in the quarter. For context, an increasing share of collision repairs require calibration and diagnostics. And we estimate that requirement has risen to roughly 75% today from about 62%, 3 years ago. We view this as a durable, long-term tailwind, and a compelling opportunity to extend our service offering.

Our bumper to bumper hard parts business in Canada again delivered positive growth. And as I mentioned in the past, we plan to methodically expand this business further, given the still fragmented do-it-for-me hard parts market across North America. We're seeing promising signs of stabilization in North America that reinforce our optimism for the business. Used car prices are climbing, noncomprehensive total loss rates are declining, auto insurance premiums are easing, all positive indicators for our industry. Notably, used car values improved every month this quarter, with March alone up 6.2%. These trends will drive a reduction in total loss frequency and boost the proportion of accidents that translate into repairable claims, supporting continued growth and opportunity for our company.

While we can't predict the exact timing of a broader recovery, the indicators are moving in the direction that supports our model. And importantly, we believe we built a stronger foundation. So as volumes improve, we're confident in our ability to convert that into growth and margin expansion. In Europe, we saw a softness early in the quarter, similar to what we experienced in Q4, followed by steady month-over-month improvement with March showing stronger demand. While the macro backdrop remains mixed, we're focused on controlling what we can control, service levels, execution and cost. Overall, performance was in line with our expectations as we continue to execute operational initiatives to improve service and further optimize our cost structure.

Eastern Europe and Germany delivered positive organic revenue growth and while the U.K. and Italy were down year-over-year, we were encouraged to see sequential improvement. Our private label initiative continues to make progress in the quarter with volume penetration reaching 25.3%, up from 25.1% in Q4, which aligns with our objective of reaching 30% over the coming years. We are continuing to use targeted introductory pricing to support adoption, and we expect to thoughtfully improve pricing as customers gain confidence in the quality and reliability of our exclusive branded products.

As previously communicated, we executed a planned ERP migration in one of our key European markets, which was completed during the first week of April. We anticipated temporary sales disruption associated with the conversion and appropriately reflected that in our full year guidance. The project is progressing ahead of our initial expectations, and while we are not yet fully optimized post conversion, our priority is maintaining customer service, and we are seeing daily improvements in sales levels. ERP conversions are intensive projects, but we approached it with deliberate execution. This achievement supports our integration road map and enables future process standardization, cost reduction initiatives and enhancing the ability to become a seamless pan-European distributor.

Lastly, turning to specialty. Specialty delivered another solid quarter with organic revenue up 3.4% and that marks 3 consecutive quarters of positive organic growth. RV revenue growth was nearly double digits, and we also saw strong growth in marine, reflecting continued demand and strong execution by the team. Last quarter, I noted the specialty process was robust with strong interest from both strategic buyers and financial sponsors. That remains true. At the same time, the recent geopolitical tension have introduced uncertainty into the credit markets and some potential buyers have seen their lenders tightened financing terms as a result. We haven't shut down the process, but given the environment, we felt it was important to be transparent with our shareholders about the timing and the dynamics we're seeing.

Before I hand the call over to Rick, I want to provide an update on our ongoing strategic review. We are still early in the process, and we intend to be thoughtful and pragmatic. We have engaged both Bank of America Securities and Goldman Sachs alongside the Board and management to identify and evaluate a full range of alternatives with the objective of maximizing long-term shareholder value. We believe there are multiple paths to create value, and we are committed to evaluating them rigorously. Management and the Board are aligned to take careful strategic look at the business. We know we have a strong company, and we will be active, thoughtful, and deliberate as we assess the path forward.

Given where we are with the process, investors should not expect an immediate update, but you should expect that we are treating this with urgency and evaluating alternatives thoroughly. Finally, to be clear, our teams remain fully focused on executing day-to-day, and the strategic review does not change our operating priorities or our commitment to serving customers and delivering results, something our teams never lose sight of and for that, I'm extremely proud of their continued dedication.

With that, I'll turn the call over to Rick to walk through the quarter in more detail.

Thank you, Justin, and welcome to everyone joining us today. Our performance reflected solid execution in North America, improving trends throughout the quarter in Europe and continued focus on productivity and cost actions. These positives were partially offset by headwinds from fuel, bad debt, and pricing and mix pressure in certain areas. We reported revenues of $3.5 billion, a 4.3% increase year-over-year. Diluted EPS was $0.30 and includes a $0.17 per share impairment related to our equity method investment in Mekonomen, which is excluded from adjusted net income.

On an adjusted basis, diluted EPS was $0.67 compared to $0.74 in the prior year. On free cash flow, the quarter tracked close to our expectations and reflected normal seasonality. As we have observed historically, first quarter working capital is a headwind with receivables increasing from year-end as volumes built through each month of the quarter. Free cash flow was negative $96 million versus negative $57 million a year ago. As in prior years, we expect Q1 to be a use of cash and the remaining quarters to generate positive free cash flow. In North America, top line performance remained solid despite year-over-year headwinds from repairable claims and tariffs and we believe, we continue to gain market share.

Consistent with prior quarters, pricing remains competitive and our ability to fully pass through higher costs while maintaining margins is constrained. As we anniversary the tariff increases in the cost of sales in the back half of the year, we expect to see EBITDA margins normalize on a year-over-year basis. Other revenue grew due to higher metal prices and higher volumes. Segment EBITDA was 14.1%, down 130 basis points year-over-year but up 140 basis points sequentially. Gross margin in North America was 42.4%, while down year-over-year, driven primarily by the dilutive effect of passing through tariff pricing and customer mix.

Gross margin improved sequentially. The sequential improvement was supported by strength in the aftermarket business and higher commodity prices, partially offset by pressure in salvage due to softer salvage revenue and higher car costs. As we lap the tariff-related cost step-up in the back half, we continue to expect year-over-year margin comparisons to improve. SG&A in North America improved by 90 basis points as a percentage of revenue compared to the prior year, reflecting our focus on controlling what we can control, cost discipline and that drove operating leverage on higher revenue.

In Europe, revenue benefited from FX, but organic volumes remain pressured, and top line pressure flowed through to margins. The segment EBITDA declining 150 basis points to 7.8%. Gross margin in Europe was 38.3% in the quarter, a 50 basis point reduction due to a competitive pricing environment in certain key markets and higher input costs. SG&A costs increased approximately 80 basis points to 30.9%. While lower volumes and inflation pressured overhead leverage, aggressive productivity and restructuring initiatives helped partially offset this impact. With the cost actions we've undertaken, we believe the business is well-positioned when market conditions normalized.

In our Specialty business, revenue was in line with expectations for Q1. For the quarter, organic revenue was up 3.4% versus prior year, while EBITDA decreased by $3 million. Gross margins increased in line with revenue, but higher SG&A, primarily related to $6 million in higher-than-normal credit losses related to a nontrade receivable, more than offset the increases in margin dollars.

Turning to the balance sheet. We ended the quarter with total debt of $3.9 billion and leverage of 2.6x EBITDA. Our $500 million term loan came current at the end of Q1. We intend to either extend or refinance prior to the scheduled maturity date. We remain committed to maintaining a strong balance sheet and our investment-grade rating. Our effective interest rate was 5.0% in the quarter. We returned $77 million to shareholders during the quarter through our dividend. In line with our disciplined strategic capital allocation policy, we spent $5 million on 2 small tuck-in acquisitions in Europe.

Turning to guidance for 2026. Following our first quarter performance, and considering current market conditions and recent trends, we are reaffirming our full year guidance for organic parts and services revenue, adjusted earnings per share and free cash flow. The change in GAAP guidance for earnings per share is primarily related to the impairment on our investment in Mekonomen, which is excluded from adjusted net income. We continue to expect organic parts and services revenue in the range of negative 0.5% and a positive 1.5%. Adjusted EPS between $2.90 and $3.20, and free cash flow between $700 million and $850 million. We still believe it is too soon to reflect a meaningful market recovery in our outlook.

While we are appropriately cautious on demand, our confidence is grounded in execution. We remain focused on managing our cost structure and continue to expect to realize the more than $50 million in annual cost savings I mentioned when we first released 2026 guidance with most of that benefit coming in 2026, and our offsetting volume and inflationary pressures through productivity initiatives and additional restructuring actions and disciplined capital allocation. That said, as Justin mentioned, we continue to see green shoots across our business and in particular, early indicators that suggest improving demand, including easing insurance premium pressures, improved used car values and broader stabilization in the automotive environment. Thank you for your time.

And with that, I will turn the call back to Justin for his closing remarks.

Thanks, Rick. Before we open up to Q&A, I want to reinforce a few points. Despite the challenging environment, we were pleased with the quarter and the progress we're making through disciplined execution. In North America, we believe the recovery is taking hold, and we are positioning ourselves for success going forward as the environment improves. In Europe, while the macro remains mixed, we are executing on the initiatives within our control, and we're seeing sequential improvement. The actions we've taken to improve performance are beginning to show through, and we believe we are on the right trajectory. As we move through 2026, we remain focused on the fundamentals, serving customers, taking share, expanding margins and converting earnings to cash. We believe that the focus, combined with improving industry indicators position us to create long-term value for our shareholders.

Operator, we will now open up the line for questions.

[Operator Instructions] And your first question comes from the line of Craig Kennison from Baird.

I wanted to focus on North America and a couple of metrics that you shared, one of which was APU at 40%. And I think you said you signed some MSO agreements. I'm curious, as you have success, let's say, in that MSO channel, what are the implications for your overall penetration for alternative parts and your margin profile?

Yes. The good news, you mentioned on APU, it got close to 40% through February. We're seeing stats in March. It's not fully out yet where that number is still close. One of the big benefits as MSOs take share, they're higher utilizers of alternative parts. They have better lead time, cycle times with insurance carriers, so they naturally get more share. We win with the MSOs. We're up in the teams with those guys. My comment about agreements as we renewed agreements. We are in the shops of every single MSO today. We have a pretty good relationship.

We're continuing to work on integration, which helps us not only get more share of wallet, but it improves efficiency on our side and the MSOs. So the relationships are really strong with the MSOs. We're growing as they grow as well. They do get, obviously, the better price overall just because of their share of volume. The nice thing is they use way more alternative parts at a rooftop than any other non-MSO. So we gain margin dollars and we gain efficiencies from that.

When you talk about those integrations, to what extent does it drive APU even higher at maybe a stickier level?

Yes. So if you look at it on paper, there's benefits on margins and cycle times of using alternative parts. We have great lead times, great service fill rates available. With the automation and the strong MSOs, what they do is they automate it. They take some of that decision-making process away. They automate it towards clearly factual looking at lead times, looking at margin dollars on a part, and then the system can automatically order it. And when that integration occurs, we see the volume go up with LKQ, which ultimately drives more alternative parts at the MSO.

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

I guess just quickly on repairable claims, there was obviously an improvement from -- in 1Q relative to 4Q from -- I think it's now, what, 2% to 4%, you said from 4% to 6% down last quarter. What do you think is driving that improvement structurally?

Yes. So long-term benefit of repairable claims will be the insurance premiums. It's not immediate, but just talking on insurance premiums, we're seeing those flatten out. We're seeing some states decline. That's changing the consumer behavior. The biggest benefit and the most real-time response that we get on improving repairable claims is on the used car side. So through Q1, used car prices went up 3.6%, 6.2% alone in March.

And so if you think back -- if you think about the estimating process, as soon as an estimate is written, it's immediately compared to that used car value. And if it's below the threshold, it turns into a repairable claim. If it's above the threshold, it gets totaled out. And so when we see the used car prices like in March, grow 6.2%, that immediately reflects into the repairable claims. So I would say used cars is more real time and quicker to get the benefit. And as insurance premiums drop, that will drive repairable claims improving as well.

And then just next on the ERP system. Obviously, you've just started implementing that in Europe as of early April. And maybe it's too early to say here, but I was just kind of curious how are employees taking to it so far? And when do you expect to get a sense as to the operational benefits there?

Sure. Good question. First off, on the ERP, you think about it. We have dozens of ERP systems over there. It creates inefficiencies from an infrastructure. It creates risks from outdated systems that need that could be sunsetted. And it also prevents us from really leveraging our pan-European scale across Europe. The other area that ERP brings is more sophistication, more capabilities to interface with our customers at some of our current systems lack. So there's good value in being able to create a pan-European system from an ERP system. It creates best practices for us. It standardizes a lot of our operations.

The conversion, obviously, as you can imagine, it's intense with the teams, both on the corporate side, out in the field. I would say the stress level is probably pretty high the first week and every day is getting better and better, and the teams are really sticking with us and helping us out. One good stat is one of our prep to go live was on Easter Monday over there. And most -- if you can imagine, most of Europeans take those days off, we had 100% representation at our branches on that conversion training, which just shows how much the employees are committed to this process as well.

Your next question comes from the line of Jeff Lick from Stephens Inc.

Justin, you had mentioned some signs of improvement in Europe as the quarter went on. I was wondering if you could elaborate on that. And then also, as it relates to the private label initiative over there, I was wondering if you could kind of walk through maybe more of the timing with respect to as you migrate from the introductory prices to a more regular pricing cadence.

Yes. So on Europe, we started off the year, I would say, very similar to Q4. Soft demand, pricing competition still exist over there, especially when volumes are down and demand is down, competitors get aggressive. We saw a little bit of improvement in February and it got a little bit even better in March. So we just saw continual improvements. We're seeing April very similar to March. So it's -- I wanted to say it's back to where normal is in Europe, but we saw those continual improvements on demand, which helped us out.

As you mentioned on private label, we're continuing to push it. We are offering introductory pricing just for the fact that some of these brands are new to these customers. We want them to have a comfort level to try to use that. And so we offer that introductory pricing to get them to buy into it for that first try. And as they do continually order that branded products across multiple product lines, they get a better comfort level of a quality in a consistent service level and then we can start ratcheting prices up. We have plans right now as we grow that volume, which I think at 25.3% for Q1 to start ratcheting up the prices throughout 2026, with full effect in 2027.

And maybe just to add one piece of color. We did get to see sequentially, Jeff, from Q4 to Q1, a sequential improvement in the overall private label margin. So it is taking hold, and we are getting to be able to raise that price a little bit as it gets that penetration.

And I'm just curious, I know they were small acquisitions, but I think sometimes investor perception is that you're on your back foot in Europe and making a couple of tuck-ins implies that you're still playing offense. So I was wondering if you can just give any detail on those.

Yes, these tuck-ins created some abilities that we didn't really have. So EV in Europe is less than 4% penetration, so it's still low. But our shops do require some training on that. We acquired a business that can repair and remanufacture EV batteries. We're leveraging that to help create training for our workshops to create better knowledge for them where they can repair these vehicles. In addition, we bought another remanufacturing company that specializes in electronic components.

There's a lot of remanufacturing of the mechanical parts, engines, transmissions, starters, alternators. The real expensive parts are these components that maybe the only option is OE or maybe even used. And so we acquired another business that -- it's a small business, but allows us to take some of our salvage product that we have that is cored out, feed it into the remanufacturing and then be able to offer those remanufactured components at a fraction of the price of what the OEM cost.

[Operator Instructions] And your next question comes from the line of Bret Jordan of Jefferies.

When you think about the cash flow guide and sort of the generation of cash as the year progresses, how do you think about the working capital balance? I think you're levered at 2.6x. Do you think you can get sort of a better accounts payable inventory ratio? Or is it just really a matter of selling down inventory?

I think it's a combination, Bret. There's a few things going on. Keep in mind, last year and historically with self-service, we had sold self-service last year. Q1 self-service typically has positive free cash flow just based on the timing of that business. So that was one piece that happened year-over-year where we didn't have that anymore. It fell in line. It actually fell better than we had expected in Q1.

As you go throughout the year, continual improvement in overall inventories and the mix between inventories and payables, we were able to see another about 8% improvement in DPO for our European operations. So we've been talking about that sort of 10-ish percent on a regular basis year-over-year to try to keep improving the overall payable. So it's an ongoing thing. It's not just where it all comes at the fourth quarter or something like that, but it will definitely be more back-end loaded this year, even more than what it was last year, but we'll see that throughout the quarters. We'll be positive every quarter the remaining part of the year, though.

Okay. And then I guess, on capital return, it sounds like maybe specialty might be hung up a bit. So big cash infusion might be delayed. Is there thought of buyback rather than dividend, just given where the -- from a valuation standpoint where it trades?

Yes, we definitely -- I'll take the portion of that and if you want to chime in as well, Justin. But we definitely look at the value of share repurchases versus dividends. We're committed to the dividend. We've had the dividend now for the last several years. We haven't increased the dividend, but we had another $77 million that we did. We didn't purchase any shares in Q1, primarily because we knew what the free cash flow was going to be and where our leverage was going to fit in at the end of the quarter. But we are very committed to continuing our normal capital allocation strategy similar to what we had last year. So you would expect to see share repurchases throughout the rest of the year at a level that we think is a reasonable amount.

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

I wanted to start with total loss frequency. While the near-term benefits from stronger used car prices and the related decline in total loss frequency are clear. Could you maybe walk us through how you're thinking about the longer-term implications, specifically as vehicle complexity continues to increase, do you expect this will structurally push total loss frequency higher over time? And how should we think about implications for LKQ thereof? I have a follow-up.

Thanks, Jash. I mean if you look back at total loss over the last decade, it definitely has increased pretty substantially. A lot of the reasoning why that has increased is just better accuracy. So 10 years ago, the estimatics weren't as sophisticated as they are today. So a vehicle would get in the wreck, they would expect the repair cost is $5,000. They would start to repair it, and as it kept continuing through the body shop, it would turn into a $8,000 or $9,000 repair.

And so they weren't accurate on understanding whether that car should been on total loss with AI and a lot of other technology that the carriers are using that the estimatics are using. They're able to determine that, that car is a total loss up ahead early on. And so that's kind of the big reason why some of the total loss rates shot up. I think it's all just based on economics, right? So cars become more complex, they're more expensive. Part repairs are becoming more expensive. If those things stay in line like normal, then I don't see total loss rates really moving much over the next decade or so.

Understood. That's helpful. Just as a follow-up, on the North American organic revenue growth, would you be able to dissect the impact of some of the weather-related disruptions we had in Q1? And I was also curious if you could speak to the margin headwinds you may have seen from higher diesel prices, both in Europe and North America, either in March or quarter-to-date?

I can just talk high level on the revenue side and Rick can maybe comment on as a follow-up. Throughout the beginning of 2026, we started off decent. We had some, I would say, bad weather. In some cases, bad weather helps us. In some cases, bad weather creates a consumer not to drive at all and it leads to some headwinds of getting repairable claims or getting cars and accidents and getting them fixed. So net-net, weather really didn't have much impact on it. Our growth throughout the quarter is a lot of share gains, APU growth as well as some of these used car pricing anomalies that I was talking about, not anomalies, but used pricing increases that are helping to drive repairable claims up. So weather was somewhat muted for us in the whole quarter.

And as far as the cost side, Jash, we didn't see very much in the way of movement throughout the quarter. I think the Iranian conflicts have been one of the catalysts that have increased petroleum costs and diesel fuel. That happened much further into the quarter, so very, very minimal impact, one of which we're confident we can pass on to the consumer. So we're not too concerned about a net impact on that.

And Jash, just realize, I mean, we got teams on pricing that are looking at freight in, freight out, raw material costs going into some of our products. And our teams are really quick on pushing that price through to pass it on to make sure we're not stuck holding the bag. So although the pricing is volatile, our teams can handle it and make sure that we push that pricing on. So there's no real impact to us net-net for the rest of the year.

That's very helpful. And just if I could sneak one more in. You had previously indicated the expectation for a potential update on the specialty segment sales by the first -- by the end of the first half. I'm curious if there are any developments or timing updates you'd be able to share at this point.

Yes, nothing new other than what I said in my script to where the credit markets tightened up, which caused some concerns for us on getting a transaction through and we wanted to be transparent with that. We haven't killed the process by any means. But if anything substantially changes, we will obviously inform our investors, but nothing different than what was in my notes on my script.

Yes, I think the positive news is that the Specialty organization is operating very well. Revenue is up. We've had 3 quarters in a row of positive revenue. So the trends for that market -- for that business and that industry in general is good and positive. So really happy to see that.

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

This is Jack on for Scott. Just how are you seeing the recent changes to tariffs affecting your business with the IEEPAs going away and then ultimately replaced by 122s and the 232s. Can you just talk a little bit about that, please?

Yes, Jack, I can take some of that, and then, Justin, if you want to add anything. The interesting thing about the IEEPA tariffs is it had a very minimal impact for us. Most of ours is through Section 232. And as you know, that really hasn't changed all that much. There's been a lot of communication back and forth. There's been communication about the Taiwan deal as another potential. And so for us, it's been fairly status quo we're continually watching things like Section 301 that's coming out. But right now, there's nothing definitive and there's no detail that came in that said what the final numbers are.

So as of now, we're continuing to manage this, continuing to balance it. If you looked at the gross margin -- if you look at the overall EBITDA percentage decline year-over-year for our North America wholesale, almost entirely made up of inflationary pressures due to tariffs. So that decline is fully baked in, and it was 0 last year. But we think that we're -- we've been managing it, not giving away dollars at the bottom line, but we do have a bit of an impact on the margin percentages.

Great. And then can you talk about the different regions in Europe? What are you seeing in the regions that are growing as well as the ones that are relatively weaker?

Yes. As I mentioned in my script, the 2 markets where we saw decent growth in Q1 was in Germany as well as Central Eastern Europe. We were obviously negative in the remaining markets, but sequentially, we got better. So not as negative. So we're seeing some demand continue to improve throughout Q1.

There are no further questions at this time. So I'd like to hand back to Justin Jude for closing comments.

Thank you. Look, we continue to believe our business is undervalued, and we are doing whatever we can to close that gap. We remain highly enthusiastic about our business and 2026 is off to a great start. The resilience of our underlying business, coupled with many of our markets recovering as we enter 2026 should translate into positive results as we progress throughout the year. With that, we will conclude this call. Thank you, everyone.

That does conclude our conference for today. Thank you for participating. You may now all disconnect.

Hello, everyone, and thank you for joining the LKQ Corporation's Fourth Quarter and Full Year 2025 Earnings Conference Call. My name is Lucy, and I'll be coordinating your call today. [Operator Instructions] It is now my pleasure to hand over to your host, Joe Boutross, Vice President of Investor Relations, to begin. Please go ahead.

Good morning, everyone, and welcome to LKQ's Fourth Quarter and Full Year 2025 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-K in the coming days.

And with that, I'm happy to turn the call over to our CEO, Justin Jude.

Thanks, Joe, and good morning to everyone joining us on the call today. Before we get into the quarter, I want to start with an important message to our LKQ team. This past year tested us in meaningful ways, and yet it also showcased the strength, discipline and resilience of LKQ. We accomplished a lot in 2025 and are focused on keeping this momentum going in 2026.

In February of last year, I committed to delivering $825 million of free cash flow in 2025. And despite multiple headwinds, our colleagues around the world executed, adapted and delivered on that commitment. Importantly, we also made meaningful progress simplifying our portfolio. The divestiture of our self-service segment was a key element of the simplification strategy we outlined at our 2024 Investor Day, and we delivered on that commitment in 2025.

Transactions of this scale and complexity require significant leadership focus and discipline. Executing successfully in the midst of a challenging year across our global enterprise reflects the strength of our teams and our ability to deliver against our strategy. I am proud of the outcome and our continued focus on creating long-term value for shareholders. The headwinds of 2025 were real and significant, a continued decline in repairable claims, the impact of tariffs and persistent softness in the European market. Any one of those would have been a challenge on its own. Taken together, they created a difficult environment. And yet our people found ways to serve customers, maintain discipline and deliver on our free cash flow commitment. That is an exceptional achievement and a testament to the grit of our employees.

As many of you are aware, in late January of 2026, LKQ's Board of Directors formally initiated a comprehensive review. Given the strength of our underlying performance, even in the year defined by significant headwinds, it has become increasingly clear that our current stock price does not reflect the true value or long-term potential of our businesses. The Board and I, along with our entire management team, are aligned in our confidence that LKQ's future and that confidence compels us to explore whether alternative structures could unlock value more effectively than the market is recognizing today. This review will run in parallel with our relentless focus on operational execution. Please note that we will not be answering any questions or commenting further on our strategic review process until further disclosure is appropriate or required.

Let me focus for a few moments on the operating highlights in the fourth quarter and the full year across our business. In North America, organic revenue decreased 1% on a per day basis in the fourth quarter and decreased 1.9% for the full year 2025, reflecting a continued environment of weak repairable claims. Even so, we gained market share by deepening relationships with MSOs and insurers, maintained pricing discipline and leverage the scale and breadth of our branch and distribution networks to outperform repairable claims. Throughout 2025, each quarter, we saw improving comparables. Repairable claims were down approximately 10% in Q1 and improved sequentially each quarter. In Q4, repairable claims were down in the range of negative 4% to 6%, demonstrating steady recovery from the early year low point.

Our Bumper to Bumper hard parts business continued to grow in Canada, and we plan to expand this business further given the still fragmented do-it-for-me hard parts market across North America. Now I would like to provide you with an update on our performance in Europe. In 2025, our organic revenue experienced a decline of 5.2% on a per day basis in the fourth quarter and a 3.9% decrease for the full year. This was primarily due to continued weak consumer confidence, macroeconomic uncertainty and competitive pricing pressures. In response, we implemented a more aggressive pricing strategy in select markets to protect share and accelerated our focus on private label growth.

We expanded private label inventory in the fourth quarter with introductory pricing to drive adoption. While these actions have pressured revenue and margins in the near term, we believe they will deliver meaningful long-term benefits. We also completed a review of more than 85% of our Europe SKUs portfolio, bringing the total delisted SKUs to 71,000 or roughly half of our overall target.

While we anticipate eventual market recovery, we're not being passive. Our team is proactively making bold decisions. This year, we're streamlining key business areas to improve cost efficiencies through targeted productivity initiatives. Our efforts include fast-tracking our integration plan throughout Europe, streamlining our product lineup, sharpening our go-to-market approach and applying successful tactics from our North American strategy. And we are on track to go live with a key system integration in early Q2 of 2026, which will serve as a significant catalyst for cost reduction opportunities.

As CEO, I want to express my disappointment in Europe's results. While we never promised that progress would be linear and understand the risks involved in our 3-year strategy, I remain fully confident in our team and the decisive actions we've taken. We are committed to overcoming these setbacks and delivering sustainable value for our shareholders. We remain confident in our leading position across our core markets, and I remain committed to delivering the margin expansion we have previously communicated as we execute through near-term challenges.

Now turning to Specialty. This segment remains a strong performer, delivering 7.8% organic revenue growth on a per day basis in Q4 and 2.7% growth for the full year 2025. We've seen improving results from targeted initiatives to sharpen focus, improve pricing execution and strengthen channel relationships. As discussed last quarter, we returned to positive organic growth for the first time in 14 quarters and sustained that momentum again this quarter. We continue to move forward with the previously announced process to explore the potential sale of our Specialty segment. Interest in our Specialty segment remains robust, and we expect to provide updates in the first half of 2026 as appropriate.

In 2025, our teams gained share in North America while maintaining pricing discipline. We grew our Bumper to Bumper business, made progress on our European initiatives, simplified the portfolio through the sale of our former self-service segment and grew free cash flow. We entered 2026 with stronger management teams, pricing and cost measures supporting margins, ongoing efficiency improvements and productivity initiatives supported by a recently approved restructuring plan and early signs of demand improvement across our businesses.

With that, I'll turn the call over to Rick to walk through the financial results for the quarter in more detail.

Thank you, Justin, and welcome to everyone joining us today. Before turning to the fourth quarter, I'd like to echo Justin's comments on some of our accomplishments from 2025. We completed the sale of our self-service business, further simplifying the portfolio and sharpening our focus on core assets. We delivered strong free cash flow in what remained a challenging market environment, and we continue to aggressively reduce costs through restructuring and productivity initiatives to better align our cost structure with demand.

In Europe, these actions improved the efficiency of our logistics footprint and reduced facilities and overhead costs. In North America, we focused on rationalizing overhead to more efficiently serve our customer base.

Turning to fourth quarter results for continuing operations. We reported revenues of $3.3 billion, up 2.7% year-over-year. Diluted earnings per share were $0.29, which includes a $52 million or approximately $0.20 per share goodwill impairment related to our specialty business.

On an adjusted basis, diluted EPS was $0.59 compared to $0.78 in the prior year on a comparable basis. It's worth highlighting that the prior year included a $0.10 per share benefit from a nonrecurring legal settlement in North America. Our balanced capital allocation strategy contributed positively to earnings with share repurchases and interest expense each adding $0.01 and favorable FX and tax rates contributing an additional $0.02 each. These benefits were more than offset by organic revenue declines and lower EBITDA in North America and Europe.

For the full year, diluted EPS was $2.31 and adjusted diluted EPS was $3.01, at the lower end of the range we guided to in October.

Free cash flow in the quarter was $274 million, bringing full year free cash flow to $847 million, exceeding our expectations and driven primarily by trade working capital initiatives. We returned $116 million to shareholders during the quarter through share repurchases and dividends.

In North America, top line performance remained solid despite headwinds from repairable claims and tariffs, and we believe we continue to gain share. That said, pricing remains competitive and our ability to fully pass through higher costs while maintaining margins continues to be constrained.

Segment EBITDA margin was 12.7%, down 380 basis points year-over-year. Gross margin accounted for approximately 140 basis points of the decline, driven by tariff pass-through dynamics and customer mix. Overhead leverage accounted for approximately 260 basis points, primarily reflecting the impact from the prior year nonrecurring favorable legal settlement that I mentioned earlier. Importantly, our ongoing productivity and restructuring actions continue to support cost discipline in the current demand environment.

Looking ahead to 2026, we expect EBITDA margins to be slightly down from 2025 as we annualize the impact from tariffs. In Europe, revenue pressure weighed on margins and segment EBITDA margin declined 180 basis points to 8.3%. Gross margin declined approximately 160 basis points due to heightened price competition and higher input costs. While lower volumes pressured overhead leverage, productivity and restructuring initiatives helped offset this impact, positioning the business well when market conditions normalize.

Our expectation is that Europe will get back to near double-digit EBITDA in 2026 with aggressive execution on our strategic initiatives and further cost actions. Specialty delivered an EBITDA margin of 4.5%, approximately 40 basis points better than last year. While mix weighed modestly on gross margin, strong cost control drove favorable overhead leverage. With 2 consecutive quarters of organic growth, we believe Specialty is well positioned as its end markets continue to recover.

Turning to the balance sheet. We paid down more than $500 million of debt in the fourth quarter following the self-service divestiture and strong free cash flow generation. With the help of our lending group, we also extended the maturity of our revolver to December 2030 and our Canadian term loan to March 2029, improving our maturity profile while preserving the liquidity and flexibility. At year-end, total debt was $3.7 billion with leverage at 2.4x EBITDA, down sequentially. We remain committed to maintaining a strong balance sheet and our investment-grade rating. Our effective interest rate was 5.0%, slightly lower than the prior quarter. In total, we returned $469 million to shareholders in 2025, 55% of free cash flow, exceeding the capital return commitment we outlined in our 2024 Investor Day.

Turning to guidance for 2026. Our outlook reflects current market conditions and recent trends and assumes tariffs in effect as of February 1. Importantly, we believe it is prudent to not reflect a meaningful market recovery in our guidance until we begin to see sustained improvements in underlying volumes. As a result, our assumptions remain intentionally conservative. While we are cautious on demand, our confidence in the outlook is grounded in execution, particularly the actions we are taking on costs, productivity and capital allocation, which are largely within our control. That said, we are encouraged by several early indicators that could support improved demand over time, including easing insurance premium pressures, improved consumer confidence in automotive and continued stabilization and improvement in used car prices. While these trends are not yet reflected in our guidance, we believe they represent positive developments for LKQ as volumes recover.

We expect organic parts and services revenue growth between negative 0.5% and a positive 1.5%. North America is expected to be slightly positive. Europe remains challenged and is expected to be slightly negative, and Specialty is expected to grow closer to mid-single digits. Adjusted diluted EPS is expected to be in the range of $2.90 to $3.20.

We remain focused on offsetting volume and inflationary pressures through productivity initiatives, additional restructuring actions and disciplined capital allocation. As part of our continued focus on execution and discipline, we recently approved a restructuring plan designed to better position our cost structure to more efficiently serve our strategic markets and support improved performance over time. This plan is expected to result in costs of approximately $60 million to $70 million in 2026 and supports our broader strategic transformation objectives, including sharpening our go-to-market approach, rationalizing our logistics footprint and further consolidating back-office functions. We expect these actions will generate more than $50 million in annualized cost savings with over half to be realized in 2026.

Free cash flow is expected to be between $700 million and $850 million. The midpoint reflects more normalized working capital expectations compared to 2025, while maintaining disciplined capital spending. As in prior years, we expect the first quarter to be a use of cash, followed by positive cash generation throughout the remainder of the year. Thank you for your time.

And with that, I will turn the call back to Justin for his closing remarks.

Thanks, Rick. Before we begin Q&A, I'd like to note some positive early signs of improving market conditions in North America. We're seeing lower insurance premiums, rising used car prices and major insurers suggesting claims could return to historical patterns by late 2026. At the same time, as I've emphasized on our second quarter and 2025 call, we will not build a recovery into our base case until we see it clearly materialize in the marketplace.

We are being cautious and conservative as we enter 2026. Stepping back, I'm highly optimistic about the future of our company. We begin this year on stronger operational footing with a more focused organization. Our foundation is solid. Our opportunities are compelling, and our people continue to prove why LKQ is such a powerful organization.

Operator, we'll now open the line up for questions.

[Operator Instructions] The first question today is from Scott Stember of ROTH Capital.

Yes, just a follow-up on the comments about, I guess, some potential green shoots in North America. Just trying to maybe dive into that a little bit more. What are you hearing? And I know that there's a chance that maybe by the end of this year, but just trying to get a sense of the reality of when we could actually start to see things balance out.

Yes. Thanks for the questions. We're not only hearing it, but we're seeing it. I mean if you paid attention to some of the insurance premiums in 2025, they've been reduced around 6%. We expect those numbers to continue to drop, which will make insurance more affordable then consumers will lead to more -- there's the number of actions as we talked about in the past isn't really down. It's just a repairable claims. So people use insurance to get their vehicle repaired. And as insurance becomes more affordable, and we are seeing it become more affordable, that will be good for us.

I think a large -- a couple of large carriers also mentioned that they're expecting to see claims increase in the back half of the year, which will drive their profits down, but obviously lead to more repairable claims and more cars getting fixed. In addition, we -- it's 1 month, but in January, we actually saw the Manheim saw the used car value increase 2.5% over December, but really up 2.5% or 2.4% year-over-year. So those are good things that lead to more cars getting repaired. So those are the kind of green shoots we talked about.

Got it. And then a follow-up question about Europe. Can you maybe talk about performance, both sales and, I guess, competition by market?

Yes. We won't disclose necessarily by market, but we are still seeing a lot of pressure in the overall demand, just the economies in most of the countries we operate are still struggling. A lot of consumers are cutting spending. That is leading to aggressive price cutting by some of our competition. I would say we were a little bit more aggressive in Q4 on combating price than we have in the past to make sure that we hold share.

We intentionally increased our private label. So we've talked about it in the past to try to drive our private label to increase that adoption. We pushed it out in new markets and we pushed new product lines in our private label with introductory pricing. So that came in more aggressive. As we get that adoption rate up and we see the volume increase on our private label, we can then start moving pricing up. And as you can imagine, margins long term are better on private label, trade working capital is better on private label. But as we move in that private label and we're replacing some of those tertiary brands, we're not replacing the primary brands, but we replaced those second and third tier brands. We are -- we got a little bit more aggressive on prices of those to make sure that we're not left with excess inventory. So some of that was our own doing intentionally, but the majority of the headwinds that we see over there is still just market demand.

The next question comes from Jash Patwa of JPMorgan.

I wanted to start with your comments on expanding relationships with MSOs. Could you maybe peel the onion a bit further and provide some color on the development and share gains with MSOs over the past year? Additionally, I'm curious if you could share any insights on the differential in alternative parts utilization between MSO and non-MSO customers. And I have a follow-up.

Yes. Thanks, Jash. On the MSO side, I mean, if you look at the stats repairable claims, we said we were down around that 4% to 6% range, which is good news. It's improving. It's still down, but it's improving from prior quarters. But if we look at our volumes with MSOs compared to our volume with non-MSOs and then we back into what we feel market share gains have been had with MSOs, we're up, I would say, in the teens with the MSOs from an actual volume. Most MSOs that we talk to are probably flat to slightly up a few percent. So if you look at our share of wallet with the MSOs, that is outperforming their overall volume growth, and we're up with every MSO that we have today.

So we just feel that the value prop that LKQ offers, competitive price, great quality of products, great service levels, it allows us to continue to win with the MSOs. We don't -- we won't report on the exact stats of APU by the MSOs. But for sure, with the MSOs, they have more direct contracts with insurance carriers that drives more alternative parts utilization as part of their agreements with the insurance company. So we do see as MSOs gain share, the APU grows. And so that's great for us. And the MSOs, as you can imagine, have much, much more volume at a rooftop level than a non-MSO. So we gain efficiencies just by delivering more products to them. So when the MSOs grow, it's been good for us.

Understood. That's super helpful. And then just as a quick follow-up. We're starting to -- starting to enter an anticipatedly strong tax refund season that could bring customers back into collision repair shops. Wondering if you sense that optimism from your customers, maybe anecdotally or in terms of sourcing activity to date.

Yes. I mean that's a possibility. We haven't really talked with our customers about it. That hasn't been brought up, but that could be another green shoot that could benefit us.

The next question comes from Jeff Lick at Stephens Inc.

Justin, one of the things that jumped out at us when we visited your facility in Dallas in December was just the growing presence of EVs. And now that we have a pretty big EV lease return cycle, I'm guessing there's not quite the robust parts network in EVs. Maybe you could just speak a little bit about the potential tailwinds of EVs to your salvage business and just to your all parts business?

Yes. I mean on the EV side, you would have seen probably a little bit more increase in EV just in that specific location than maybe in other areas because we have some agreements with a few OEMs where when the vehicle gets wrecked or totaled out, it comes to us. If you can think about dismantling some of these EVs, it's very dangerous. The touching a wrong terminal could cause fires and what have you. So they're very -- a lot of the OEs and some of the insurance companies are really concerned about dismantling these vehicles. So we tend to get a more lion's share of those EVs just because of our quality, our overall service level and our -- just our coverage.

So we do see LKQ being able to capitalize on the EVs as they get out of the market, whether that's from providing parts off of it hoods, fenders, doors and what have you to other collision shops or some of the components on the recycling side. There's a big push to ensure that the battery and some of the commodities that go into the battery production or the motors get left in the U.S. And so whether we're talking to folks in D.C. or talking to some of the manufacturers of the battery or manufacturers of the vehicles, they become very interested in talking to LKQ just because of our coverage and our capability. So we see it as a good tailwind for us.

And then as a follow-up on Europe for you, Rick, you guys have talked about the 200 basis point opportunity, and that was kind of predicated on, call it, flattish organic revenue. We're not needing organic revenue growth. I'm just wondering, obviously, at some point, there's a fine line as revenue leaks a little. But -- and then I also know the new team in place in Europe has found maybe some chunky stuff on efficiencies and costs. Just could you talk a little bit about the relationship of what's the art of the possible in terms of getting EBITDA margin expansion on a slightly negative revenue environment?

Yes, Jeff, good question. The opportunity we have, the 200 basis points expansion that we talked about is mostly within our control. The vast majority is within our control. So when we're looking at the number, we're starting at a lower baseline than what we thought before. However, the 200 basis points of expansion is still within our control. And we're looking at the opportunity we have in the back half of the year, in particular, when I mentioned in my previous comments that we have the SKU rationalization opportunity, the reduction that we have that Justin mentioned in our overall reduction of SKUs that we've eliminated, we've eliminated over half of those items that we're going after.

So in the back half of the year, we're expecting some of those to come through. I would still say we're still optimistic that we have the 200 basis points of margin expansion. We're going to be close to the double digits that we thought within 2026 and still aiming towards that 12% number that Justin has talked about in the past. That's still within range. So obviously, we want the market to recover, but we don't need a whole lot of market recovery in order for us to get that expansion that we've been talking about.

The next question comes from Craig Kennison of Baird.

Justin, I wanted to dig into margin in North America. I mean you talked about competition, but LKQ is significantly larger than any single competitor there. So I'm trying to understand the source of that competition and how pervasive it might be across your competitive landscape.

Yes. The uniqueness of LKQ when it comes to pricing and competition really against most other aftermarket or most automotive sectors is we have both the competitors that provide alternative parts, so the salvage yards, the aftermarket distribution businesses as well as the OEMs.

And when you're in a compressed market rep probable claims are down, everybody is fighting for more volume, sometimes folks feel that they're losing share, they start getting a little bit more aggressive on pricing. And so we see that on the OEM side. We see that on the aftermarket side. We still feel our right to win is better. We might have to give up prices on some parts such as A and B movers, but then we see the offset on some of the slower-moving stuff that we carry and our competition doesn't necessarily carry that in stock quickly to the customer. So we still feel that there's some pricing competition, but we can navigate through that using some of the AI technology that we've been implementing with one of our partners to just help us react quicker to that.

And maybe you could just shed more light on your use of AI and how it can impact your pricing algorithms?

Yes. We had a pretty good system before. We've leveraged once like I said, a partner to help us get more real time, more reactive, looking at SKU, looking at a SKU down to a regional level, maybe even a shop level, understanding the demand. I mean if you look at the data that is existing out there, understanding the market, when I talked about repairable claims, we probably have more data combined than any other entity out there.

And so how do we take that data, leveraging what the demand is, leveraging what the opportunity is and acting real time on pricing to make sure that we can have a right to win. And we're seeing even more opportunity, as I mentioned, on kind of the C&D movers where we have it and every time there's a quote, we're getting the sale. And so there's an opportunity for us to push price on that and maybe we need to offset price on some of the faster-moving stuff, but it's just becoming more real time down to the SKU level, down to the location level of the shop. So we have good sophistication to make sure that we have the right to win.

The next question comes from John Babcock of Barclays.

I just want to delve a little bit more into Europe. Can you just talk about the factors that impacted the business in 4Q versus what happened in 3Q? Just want to understand that a little bit more. And also if you could break that out between market-related factors and company-specific factors, that would be useful.

Yes. Thanks, John. I mean, the overall competition or I say competition, the market continued to deteriorate from Q3 to Q4. The overall uncertainty, consumer spending was down. The competitive pressure continued on. Some of the headwinds on the revenue side were somewhat self-inflicted intentionally. That was kind of in our guidance when we looked at the overall EPS that we may have to do this.

And so the majority of the headwind on the volume is market. And when that market comes down, competitors get a little bit more aggressive on price. Once again, some of the headwinds was self-inflicted where we intentionally tried to replace and did replace volume of private label against the tertiary brands that exist out there. And when you're introducing the new products and you want to make sure that customer switches that brand over to you, we came out with introductory pricing. So there's a little bit of that headwind was us just getting more aggressive on pricing with the private label to get the adoption rate up.

In addition, as that's replacing some of the delisted product, we cut the prices on some of that delisted product to make sure that it moved off the shelf and we didn't take any excess and obsolete. And so some of that stuff we will correct or I want to say correct because it was intentional. We will be able to move the pricing up on private label as the volume has grown.

As a percentage of revenue, private label was roughly still flat from Q3 to Q4. But if you look at the actual volume of units, that number increased to around 25%. So we're seeing market adoption on the private label. We have the pricing power to be able to push that pricing up as the adoption comes. But it's still the majority of it is just that market headwind. But we're not standing still. As we mentioned and Rick talked about, we're still working on the integration to get the cost out of the business to make sure that when the market does recover, we'll be even that much stronger.

All right. And in terms of '26, I mean, it sounds like you're expecting to get back up into the double digits there. Is pricing going to be part of that? Or what else are going to be the big drivers that are going to get you there?

Pricing will be part of that for sure. The majority of it is going to be things that we can control on the cost side. So I mentioned an ERP migration that we're going to do in a region in early Q2. That will be a catalyst to help us drive significant cost cutting on the business. So we are working at continuing to drive out -- drive productivity initiatives up, get some of the cost out, and we will be able to get some price as well in 2026. But the majority of it is things that we can control on the price -- I'm sorry, on the cost cutting side.

Okay. And then just last question before I turn it over. Just on reparable claims in North America. Just kind of curious like how you're thinking about that in '26. Do you expect the trend to improve steadily? What are you thinking there?

Yes. So in our number, John, what we've got is we said we're not going to put a lot of improvement into our forecast. So as Justin mentioned, there's a lot of good news that we're seeing. But until we see it actually in our numbers, we're not going to put it in our forecast or in our budget or guidance. So what we've got is similar to what we had in Q4, we're assuming that kind of goes through the full year of 2026 with a little bit of improvement throughout the year. So the back half of the year, we expect to be a little bit better than the first half of the year.

The next question comes from Bret Jordan of Jefferies.

The comment about up with every MSO, I guess, market share in '25. Do you expect that to be the case in '26? Is there anything out there sort of moving around on longer-term volume contracts in the competitive landscape?

No. I mean we saw our share and our volume grow throughout 2025. Some contracts just became renewed. I don't see any risk. If anything, maybe some more growth on that side just because on the run rate coming out of 2025, we saw good improvement on that.

Okay. And then within specialty, could you talk about the strength and obviously rebounding? Is it light vehicle or RV or both? I guess, as you look at maybe divesting that, is it strong across the board, supporting maybe a better valuation? Or is it sort of spotty where you're seeing the recovery?

It's across the board, both on the automotive side, the accessory side, obviously, and in the RV side. So it's good for us. And that process -- that process is still ongoing for the sale. It has been robust, great interest in it. And with the market recovering on both sides, once again, the automotive and the RV, we see that one being a pretty positive turn out.

The next question comes from Gary Prestopino of Barrington.

Question, Justin. In what you're experiencing in Europe, is that more or less just on the continent itself? Or does that also include U.K. operations? Because I seem to recall that when you bought Euro Car Parts years and years ago, that was a pretty steady business. So if you could parse that out. And if you don't want to do that, I understand.

Yes. So it is across the board in Europe. I mean there's pockets that are doing a little bit better than others. And U.K. was one that we talked about in the past that had -- the economy was tough over there, consumer spending and discretionary spending was low. The good news is we're still seeing vehicle aging grow. But right now, with the environment on the economic side, consumers are just still spending less. So it is across the board that we're seeing some pressure higher in some areas than others. And I know there are some markets in Europe that are positive and some of those markets are where we don't operate yet today. But overall, I would say, on average, it's really across all Europe.

And then just -- in Europe, are you doing things with recycled parts there in that market? I seem to recall you had some activities going on there versus there's very few recycled parts on the continent itself.

Yes. One of our initiatives has been to drive salvage or recycled parts over there and leveraging our North American talent and some of our processes over there. We have been in salvage in a very small scale. We've increased that volume with an acquisition of a joint venture with Ritchie Bros or Insurance Auto Auctions called SYNETIQ in the U.K.

We see as we enter that space, there's more and more demand growing for green parts, more for used parts. The industry just needs a solid distributor of those parts to make sure that they can deliver on time and quality, and that's what we bring. And so we see that as a good growth opportunity, but we're still in, I would say, in the infancy stage as we introduce more and more recycled into those markets.

We have no further questions at this time. So I'd like to hand back to Justin for final remarks.

Thank you. I mean, for the group, I just want to make sure you guys know we remain highly, highly enthusiastic about our business. Despite the challenges of the environment in 2025, I feel our team successfully executed on our core business strategies. We streamlined our portfolio, generated strong -- very strong free cash flow and maintained a disciplined approach on capital allocation. The resilience of our underlying business, coupled with the anticipated market recovery in the latter half of 2026 should translate into positive results.

And with that, we will conclude this call. Thank you, everyone, for joining.

This concludes today's call. Thank you all for joining. You may now disconnect your lines.

All right. So moving along, we now have LKQ Corp., which keeping along with the theme we touched on yesterday, financial engineering. LKQ Corp. recently acquired Uni-Select for $2.1 billion in August of 2023, which is a Canadian-based distributor of parts and accessory across Canada and then also has the FinishMaster brand, which is a distributor of paints, coatings and related products serving the collision market. Those are all -- those businesses are within their Wholesale North America business, which sells aftermarket OEM recycled and manufactured and refurbished products to collision and mechanical repair shops around North America.

And additionally, they also recently closed on the divestiture of their Self Service business in October -- on October 1 for $410 million to Pacific Avenue Capital Partners. And then apart from that, they have the European business, which operates as one of the largest independent aftermarket distributors, selling over 900,000 SKUs across 20 countries in Europe. And then lastly, the Specialty business, which is a distributor of parts and accessories serving the specialty vehicle aftermarket. The company is about $7.5 billion equity market cap and about $3.5 billion of net debt.

It's my pleasure to introduce Justin Jude, the President and CEO; and Rick Galloway, Senior Vice President and CFO.

Good morning, everyone. And to the Gabelli team, I appreciate you guys having us. I know it's been a while since we've been here.

Thanks for being here.

But it's my first time here, so I'm excited to be here. I'll do a quick intro of LKQ, a little bit more detail and a little bit about myself, and then we'll open up the fireside chat and Q&A. So I'm Justin Jude, I've been with LKQ since 2001, held many different titles, responsibilities from IT to supply chain to -- I ran our Specialty division. I ran our North American Wholesale segment. Then I became the CEO in July of last year.

It's been a great company, a great company to work for. The history of LKQ, we were founded in 1998, but we've been an acquisitive company. Over 320 acquisitions since the beginning, and it's always been focused on fragmented markets, always around the automotive side, but always focused on the fragmentation, how do we take scale, how do we build size, how do we kind of revolutionize or create a little bit more sophistication in industries that didn't exist.

And we started with the salvage piece in 1998 and what we call the wholesale -- the full-serve side, where we buy a vehicle, whether it's wrecked, whether it's end of life, we dismantle that, provide parts to it. But we've had a great, great growth trajectory, once again, heavily fueled by inorganic acquisitions, but as well as organically as well.

Our 2 biggest businesses are Wholesale North America and Europe, and I'll talk about them in a little bit more detail. The other business we have that he mentioned was Specialty. Once again, I ran that for about 1.5 years. That's more SEMA products. So accessories, lift kits, big truck tires, RV products, more or less the discretionary spending type products.

The 2 core businesses that we have are very nondiscretionary, more in the maintenance, repairing your vehicles, and that's in our Wholesale North American side and in our European side.

On the Wholesale North American side, it's mostly collision focused, as you can see from the slide. And that is paint, that's aftermarket collision parts and that's used. The benefit of used, which -- where we started from originally, if you remember, is when you produce a dismantle a vehicle, you'll have collision parts and you'll have major mechanical. And so that collision piece led us into -- we wanted to go to say yes more often. So we acquired aftermarket parts. And that's when I came aboard in 2004.

And just constantly looking at opportunities to say yes, service an underserved market, making sure that once again, we brought sophistication capabilities, bringing better fill rates, better service, and that's what we've grown into the North American side.

He mentioned Uni-Select. It did come with Bumper to Bumper, our hard parts business in Canada, right up in Canada, we're #2 player today. Our Bumper to Bumper business, which is hard parts, is very similar to what we do in Europe. So it is primarily do-it-for-me. The market itself is primarily do-it-for-me. We specialize in that do-it-for-me.

But if you look at the gaps and opportunities, I look at it is like we're big in collision in North America, small in collision in Europe, big and hard parts in Europe, small with hard parts in North America. We really see that opportunity to capitalize on each other's strengths and to grow this business organically. We've got to focus a little bit on our European side to integrate that business. We've done a great job in North America as we acquired businesses along the way, integrate them, get the scale out of it, get the synergies, get the efficiencies out of it.

On the European side, we kind of filled the map. We looked at expansion, other opportunities to acquire businesses and expand, but we haven't really done heavy lifting yet. So we kind of delayed that -- COVID happened, supply chain. A lot of the North American integration was done, I was involved with and part of that. And so I'm taking that -- some of that experience from my team and myself going over to Europe to make sure we can integrate that business, really focus on driving costs out of the business, create better customer experiences, make a stronger, more scalable, robust business.

And then we really see a lot of greenfield opportunities and a lot of white space in our European market, not just with hard parts to grow in the new areas, gain more share, but taking some of the things that we do really well in North America, remanufacture. We produce over 120,000 remanufactured engines a year. We do about 15,000 in Europe. So we see that opportunity just once again, cross-pollinating, getting some of the scale and benefits that we've done in both businesses, cross-pollinating that and really turning this into a growth story in years to come.

With that, I'm going to just probably -- let me talk a little bit about why we went. So uniqueness of North America, and this is what we're trying to create in Europe is, especially on the salvage side, you're hindered on the ability to say yes by just what's available in the market. So a customer can call me today and ask me for a used engine or a remanufactured engine. But if there isn't a vehicle that I can go procure and dismantle that vehicle, and have that ability to say, yes, it's not like aftermarket where I just call my manufacturer and say I need more fenders. I need more hoods. You have to have that vehicle.

So the way we allow ourselves to say yes more often is our network, is our network capability where a customer in Ohio can call the sales rep, log on to our website, log into a portal, look up an engine, see that an engine is available next day and they have no idea that's coming out of our Orlando location. That scale that we've created is what we want to recreate in Europe, and we're on a path and we're on a trajectory to do that. But being able to lower our inventory levels overall and still keep the ability to say yes and drive that efficiently.

On the -- once again, why we win, it's the fill rates, it's availability, very competitive prices, and we always go for high quality, whether it's on the used side or whether it's on the aftermarket side.

I think with that, I'm just going to probably open it up to fireside chat.

Perfect. Thank you for that overview. I guess just starting off, can you talk about some of the strategic initiatives the company is going through right now and what kind of some of the early benefits you've been seeing recently?

Yes, great. As I mentioned, we've been a very acquisitive company. And along the way, 90-plus percent of those companies are great. You then realize as you kind of grew up, some of those businesses don't fit long term. And so my strategy has been kind of what I call simplification. So simplifying operations, integrating more, but also simplifying the portfolio.

If there are businesses such as self serve -- and our Self Service business was strong, #1 provider. But with the situation that we're kind of facing in our industry right now, we weren't investing in that business. But it's a strong business that has great opportunity. But from a capital standpoint, it wasn't our highest priority. So we did not -- and I don't want to say it was a distraction. We just weren't focusing on it. We just weren't giving it the attention that it needed. And so once again, it was a great business. We were able to divest that, get good proceeds, as you mentioned earlier. So we felt really confident about that.

But we also want to continue to look at those 320 acquisitions. And are there businesses, are there product lines? Are there countries? Are there branches that we don't necessarily need to operate to provide the good customer service that we strive for. And so we want to continue to simplify our operations. And so looking at the portfolio, both bringing in and divesting is what we're focusing on pretty heavily right now.

Great. And then just kind of touching on the wholesale North America market. Can you just talk about some of the current collision trends in North America and kind of what needs to happen in order for the -- do you see some market recovery?

Yes. So the good news is we don't necessarily see the numbers around, but we don't see accidents really in the last 3-year stack decreasing much more than 1%. So actual volume of accidents is relatively flat. We understand long-term headwinds of ADAS and technology and accident avoidance systems are going to reduce the vehicle accidents. Right now, we're just dealing with economic situation.

And so some of the things that are impacting consumers besides high groceries and the like is their insurance premiums have gone up enormously in the last 3 years. And so you've seen the highest uninsured motorists of all times, and I've been in the industry since 1996. It's the highest of uninsured motorists that I've ever seen, I think the industry has seen. It is the highest percentage of consumers that actually have insurance, but they have liability only. So if you look at somebody gets in a wreck and they either uninsured higher frequency. If they get in a wreck and they have liability only, they'll fix somebody else's car that they hit, but they won't fix their own vehicle.

And so some of those things with [indiscernible] and then when you get in the wreck, do you want to fix your vehicle if your vehicle is 10 years old and the aging of that has decreased the used car value pretty extensively.

If you look at what we do in North America, whether it's collision, whether it's major mechanical, the average repair is between $4,000 and $5,000. So that used car value is very impactful on that consumer's decision of whether I'm going to fix that vehicle or not. So when I see used car pricing starting to stabilize and get back to normal GDP, 2%, 3% increase per year, I see insurance premiums staying flat to slightly going up 1% to 2% for consecutive quarters and the overall consumer sentiment and consumer spending is good, I see those things starting to turn around and driving repairable claims back up.

Got you. So you talked about ADAS and how that's kind of impacting your business. What about the general complexity of the vehicle and EV and if you could touch on EVs as well, how that's impacting?

Yes. complexity for us is good in a couple of different ways. One, it drives higher part pricing. And so if you look at a 2015 GMC pickup and you had a collision, you get a front accident collision and you put it -- you produced it with -- or I'm sorry, you replaced a steel bumper in it. Then it became high-strength steel. Then it became extruded aluminum. And so the complexity of the vehicles, the complexity of the parts themselves actually drive higher price part pricing, and that's good for us.

The MSOs, when the cars are getting more technical, MSOs are going to get more share because they have the sophistication to train their techs, understand what tools are needed. We win with the MSOs. MSOs require large-scale, consistent providers, high quality. So we always win with them. In addition, the complexity of the vehicle makes it difficult for some salvage yards to dismantle vehicles. If you think of electrification and you touch a screw driver to the wrong thing and all of a sudden, that thing got 1,000 volts going through the motor from the battery to the motor, so it's dangerous.

So our scale has allowed us to be able to harvest more parts of those vehicles, understand the opportunity to produce those or procure those parts out of the vehicle. So complexity for us is a good thing.

You mentioned EV. Obviously, that slowed down here somewhat, which is good and bad, I guess, whatever your perspective is. we see the benefit, especially with our European operations to see the impact of EV at a faster pace because the adoption of EV is higher in Europe. And so then we're learning from that to understand what are opportunities, what are risks for product lines. You still sell suspension, you sell wipers, you sell tires, I mean a lot of products that are still being sold at a higher rate and you talk about complexity, just the brake pads of EVs come at a much higher price than ICE vehicle brake pads.

So we see that -- understanding what's happening in Europe, the adoption of it, giving us kind of information of what we need to do better at and invest in. And a good example of that is about 5 years ago, we invested and acquired a couple of businesses that do remanufactured hybrid batteries. And so if you think of the journey of the life cycle of a vehicle, it went from ICE or combustible engine to hybrid where it was a battery, nickel-metal hydride and gas, then went to lithium-ion batteries for the hybrids and then it went to full battery electric vehicle.

So right now, we remanufacture hybrid electric batteries. We actually do the installation of those. That technology of understanding how lithium works has allowed us to begin to invest in research and remanufacturing of electric vehicle batteries, full electric vehicle batteries. So there's not a lot of demand right now. But I know if you fast forward on EV, one of the biggest headwinds of EV is just the residual value of used EV. And a lot of that is because if that battery fails and the only option for a battery is OEM, it's very expensive compared to that used car value.

So we see maybe losing the ability to sell engines used in remanufactured engines and an EV. We see that replacement opportunity on the electric battery side. So once again, we've generated -- we've reproduced a few -- sorry, remanufactured a few electric vehicle batteries. They're in vehicles today, testing them out, making sure we understand how the battery management system works, how the cooling system works, what all needs to be repaired, what needs to be replaced to make sure that once again -- and that technology we're doing in North America, we then transplanted over in Europe and give them the opportunity to either service or repair or sell remanufactured electric vehicles.

So we see EV being a headwind for some people that keep their head in the sand. We're looking at it as an opportunity to make sure that we invest in it. So when the volume comes or if it comes, we'll be ready for it.

So you kind of touched on there with the remanufacturing and the electric vehicles. Can you just talk about the 5 different product types you have within the North American Wholesale segment, and then kind of what the difference in customer base is for these different categories of the aftermarket and the OE refurbished or remanufactured products?

Yes. So maybe I'll jump back to slide, it might help a little bit. So in North America, we're primarily once again collision. Within that collision, there is both salvage products and there's aftermarket products. That has the most biggest headwind right now. Once again, repairable claims coming down as much as they have in the last couple of years. We strive in what we -- by providing alternative parts. So alternative to the OEM, whether that's aftermarket or whether that's recycled.

The benefit once again on salvage is when you produce a vehicle and you sell the collision parts, you're left with major mechanical, so engines and transmissions. That business is still strong for us, but it has some headwinds. Just if you think about an average repair of putting a used engine or a remanufactured engine is $4,000 to $5,000. So that consumer, one has to spend a lot of money to put that engine in. And two, what is my car going to be worth after I put that engine in it.

And so the other piece is paint. It's wrapped up in the collision side. But when we acquired Uni-Select, you mentioned FinishMaster, that paint business we acquired, fully integrated. So today, paint is just another product line sitting on the shelf at LKQ in North America. It's not a separate business. It's a brand. But when a customer calls us today, I can provide all these different product lines out of my warehouse on the same delivery truck.

The other piece that we only have in Canada today is our hard parts is that what we call Bumper to Bumper that came with the Uni-Select piece. We're leveraging a lot of our scale in Europe on buying power to get them access to product lines.

And quite honestly, that was really helpful with First Brands. They're a large supplier, key brands that they have, but being able to leverage our relationships with Europe to fill in those applications as they're having some fulfillment issues, service level issues, we don't see any impact on the revenue side. They're actually a customer of ours as well. If you think about we produce 300,000 vehicles a year when we dismantle those vehicles, we produce a lot of cores, parts that we're not necessarily selling starters, alternators. We actually sell to Cardone or the brand that's within First Brands. It's not a lot of revenue. We had some exposure to that. We reserved for back in Q3. But overall, that's our business up in Canada on the Bumper to Bumper side, primarily the hard part side. But it's -- we're really leveraging our European scale to help us there.

Justin, when -- we got one here, but yes...

You're working and you have 24/7 off. And -- as you look at these companies that are appearing today, they get a multiple on their cash flow. When you're making these acquisitions, you're trying to change the culture from a core to some kind of recurring revenues so that you get a higher multiple. And when you look at a deal, is it EBITDA? Or is it the multiple that it adds to the cluster of the company? How do you view that dynamic?

Yes, great question. First off, I know he had mentioned Uni-Select. That was our largest acquisition we ever did. I was not the CEO at the time. It's -- strategically, it's a good business. But right now, especially with our -- I mean, if you guys look at our stock price, if you look at what's happening in the market, right now, we're not interested in large M&A. Any M&A that we do, and we did nothing in Q3, but it will be tuck-ins, high synergistic ones, ones that may give us key strategic abilities.

But I look at higher return on invested capital over a shorter window than what we have historically. And I want to make sure that with my team out there that I'm driving accountability with, I don't want to just see what the multiple is today. I want to see the multiple after synergies, but I want to make sure that my team will deliver those synergies.

So we have a higher threshold of returns on invested capital and a lower multiple when you look at all the synergies baked in. And so once again, that narrows the list down quite a bit, especially when our teams are focusing on integrating. We don't want to have more distraction. So M&A is very, very low for us.

Just one more. It's like replacing hearts. You're basically changing an engine. Do I send you my engine back and you use that as a core for further -- or what happens? So you just send a new engine out?

Great question. So we sell used engines and we sell remanufactured engines. And when we sell those engines to a lot of times, those shops don't want to get rid of -- I mean -- or they don't know how to get rid of that engine or that transmission that we do. And so we make it a great service. We'll pick that up. Many times, we'll charge them a core because to your point, we do want that back.

In the world of remanufacturing core is king. So if I can bring that core back of that engine that's failed, clean it up, remanufacture it, put all new components in it, any wearable parts in it. So -- and if you look at our logistics across North America, we've got 20- to 24-foot box trucks. We're set up to deliver engines, hoods and fenders. So yes, normally, we want that engine back. Even if we're not going to remanufacture it, the scrap value that's pretty good for us, still worth for us to bring it back and recycle it.

Just as you think about your journey as CEO, you've got a business that throws off a lot of cash. You're very profitable, but you have a lot of different businesses. How do you get the Street to understand the quality of your businesses, the quality of your cash flow, where you want to go from leverage? And just so there's a clear, I would guess, disconnect between the quality of these businesses [indiscernible] afford you from a multiple standpoint?

Yes. I first have to figure out how to get guaranteed $140 million of EBITDA from the Department of War. That was pretty interesting to see that. But it's a great point. I mean I was always operational, never really involved with the investor side of it. So for the last 1.5 years, it's just a different experience for me. And I do see in talking with investors and we agree that -- I mean, we feel we're undervalued. Looking at our stock price, looking at the multiples of our businesses, we're undervalued. And a lot of that is the complexity of our business that's been -- that's gone over many, many years where we've added businesses that have different challenges, different opportunities, different headwinds and tailwinds. And so we're -- we've been inconsistent to an extent.

The collision business is our primary business in North America. It's our most profitable business. That's been under headwinds with repairable claims continuing to be on the decline. So as a company, we've just been kind of inconsistent. So for me to simplify the operations, for me to simplify the portfolio, allowing our teams to focus more importantly because to your point, we do generate strong free cash flow, and we will continue to generate strong free cash flow. We think, once again, we're a great buy. We're undervalued. But we still need to continue to make sure we simplify the portfolio, prevent it from getting more complex, right? So when I talk about restricting acquisitions, we're head strong on restricting those, making sure they're strategic, making sure they fit in the long-term core operations that we have. But just continue, we've got to execute. We got to say what we're going to do and then we got to deliver.

Justin, could you give us an update as to the North American business relative to tariffs? Obviously, there's been some refreshing on the tariff information. And are you able to pass through all of the costs that you're assuming as the importer?

Yes. So the most recent news of executive order, we think, is a benefit when it talks about repair parts. But if you think -- if you understand how things work in government affairs, the executive order comes through, it's got to go through multiple layers until it gets in a language that we can actually then go to customs and say, this is what we can do. Long term, we think that new executive order is a benefit to us.

The previous tariffs or the tariffs that are technically still in existence, we've been able to pass those on dollar for dollar, [ Bret ]. We've struggled on making sure -- and this is really North America aftermarket collision parts, right? Our used parts, our paint really doesn't have tariffs, so it's aftermarket collision parts. And when I compete in the aftermarket collision parts world, I compete with 2 different people. I compete with pure aftermarket distributors that sell the same product lines, and I compete with the OEM side. And in some cases, the OEM had different tariff charges than what we did if they produce in Mexico and we have ours produced in Taiwan.

So we've been able to, from a pricing standpoint, make sure that we stay in between our pure aftermarket competitors and our OEM. we have a better fill rate, better service levels. So we always strive for higher value than our competitors. But on the OEM side, we need to have that value proposition for the insurance company. And we've had mid-teens savings still even as we pass on the tariffs. Historically, we've always been able to make margin on top of those tariffs. We haven't necessarily made those margins on top of the tariff because we don't -- we just want to make sure we don't get too close to OEMs. We still want those savings. But dollar for dollar, we have passed on all the tariff price increases that we've seen.

In the Specialty business, I'm curious about what you guys are seeing on the accessory side of things. Obviously, OEMs are prioritizing pickup trucks and SUVs and some of those higher dollar vehicle categories. But I'm curious if you're seeing any shifts in like consumer discretionary behavior and spending on the accessory side.

Yes. Unfortunately, we haven't seen the market rebound yet. Our specialty business is split roughly 50% SEMA-type product, accessories, specialty and the other 50% is RV. So both of those still have some pressure. They're not -- I don't want to say they're on the decline, but they're not necessarily rebounding yet. We had great growth in Q3. One thing we've done across our business is any time we've had these economic headwinds, we don't want to sacrifice fill rates. We didn't want to sacrifice service levels. And so we had some share gains in Q3. And so our revenue grew 9.4%. That was not underlying market for us. That was just share gains, getting a little bit more share of wallet from some of our existing customers and some of our new customers.

But long term, you're right, the OEs are focusing on truck [indiscernible] and jeeps and SUVs. That's our bread and butter when it comes to SEMA product lines. If we see more movement with not just new RV sales, but RV utilization, that will then help the other portion of our business. But both businesses show growth for us, both the SEMA in Specialty space and the RV.

Can you comment on repairable claim trends in Europe?

Yes. So we are very small on when it comes to collision in Europe. However, they have some of the same challenges. It's not as publicized. Some of the data is not easy to get by countries as it is in the U.S. But we're in the U.K., where the largest collision business we have is in the U.K. today. We work with a lot of insurance carriers. We've primarily been up until about 3 months ago an aftermarket competitor or an aftermarket distributor of parts and paint. We now did a joint venture with Ritchie Bros and that SYNETIQ where we are going to be offering salvage now as well.

And so we're very close with -- working with insurance companies who are seeing that demand in repairable claims come down. They're seeing the same thing that we are in the U.S. where people are driving uninsured or liability only. And so we think that headwind will be there for -- until some of these things change. And I don't want to predict when they're going to change, but at some point, I feel they will change.

But we see collision as a big opportunity across Europe because 2 reasons. One, it's underutilized today. There's really no big competitors that provide -- other than OEMs that provide these types of product lines. Two, alternative parts utilization is relatively low in Europe. It always has been. The overall APU, the alternative parts industry doesn't really exist at the scale that it does in North America. And so when we bring our existing technology, our existing distribution and we add collision parts into it, we feel that we can help drive APU expansion. So not only will the market recover in collision in Europe, we continue to gain share. But in addition, we think the overall piece of that pie is going to get bigger as APU grows in Europe.

A couple of quick ones over here. As you look at APU in North America, how do you think through -- is there a ceiling to APU? Where can APU go just given all the cost pressures that the industry is seeing? And then maybe take that a step further, as you get incremental APU penetration or even just see claims, repairable claims bounce off of the bottom, walk us through sort of the incremental operating leverage in the North American business?

So I'll take the first question. I'm going to let my CFO speak just he hasn't spoken at all today so far. So on the APU side, we do see a benefit of the pressure that the insurance carriers are under that you kind of mentioned, a lot of share loss between the carriers have occurred. So you're starting to see them hold prices down, especially on new customers. That's driving -- and look, they're still seeing inflation. They're still seeing part price increases. They're still seeing inflationary pressure on labor. And so if they have to lower their premiums of what they're charging to consumers and they want to remain profitable, how do they do that? They're going to try to use more alternative parts utilization.

And so APU for the third quarter was right at 38%. It was flat quarter-to-quarter. It was up about 150 bps year-over-year. We have some carriers that, quite honestly, are in the low 30s. We have some carriers that are in the low 40s. So if every carrier went to compete with the highest utilization, you see low to mid-40s on that. It will never be 100%. There's product lines that don't have the volume to produce aftermarket or insurance companies may not ever write used airbags or aftermarket airbags or some of those product lines. But looking at what some insurance carriers do today, I see that number to be able to grow to the low to mid-40s. And then from a leverage standpoint, as that volume rebounds, Rick what you think about that?

On the leverage side of it, we saw some pretty significant deleveraging. We're down to around 14% EBITDA in Q3. And the business when we acquired Uni-Select, I talked about being around 17% on a steady state ongoing. There's 2 big things that have happened since Uni-Select. One is the tariffs. That hurts us for about 40 basis points. So that will bring that number down because we're only getting dollar for dollar.

And then the other thing that impacts us is the significant change in MSOs. So the MSO as a percentage of our overall business as the markets come down, we've gotten a lot more MSO volume. So there's about another 30 basis points there. So call it somewhere in the low 16s is where a steady state number should be when the volumes start returning, right? So -- as you think about a 14% number, as the volumes start recovering, we should be able to see a pretty decent snapback relatively quickly. And then I think the more steady-state percentage is probably closer to that 16% because of those 2 items. But nothing materially has changed in the business from what we talked about a couple of years ago.

Unfortunately, we are bumping up on time, but Justin, Rick, really do appreciate you guys coming and hope to see you guys next year.

Thank you. Appreciate it, guys.

Justin, thank you.

Hello, everyone. Thank you for attending today's LKQ Corporation's Third Quarter 2025 Earnings Conference Call. My name is Ken and I will be your moderator today. [Operator Instructions]

I would now like to pass the conference over to our host, Joe Boutross, Vice President of Investor Relations, to begin.

Thank you, operator. Good morning, everyone and welcome to LKQ's Third Quarter 2025 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're 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.

Thank you, Joe and good morning to everyone joining us on the call today. I am extremely proud of our performance this quarter, demonstrating both the resilience of our business and the impact of our strategic initiatives. With some positive operational performance and onetime tax benefits, we have confidence in our full year outlook to raise our midpoint and narrow the range. While I understand that most of you are interested in the financials, it's important to emphasize that our strong performance is a direct result of the relentless dedication and commitment of our teams across the globe who have enabled us to execute and succeed against our strategic pillars.

Let me make some quick general comments on our markets before diving into specifics. We are seeing ongoing macro challenges, including reduced consumer spending and lower demand for vehicle repairs. As recent headlines have shown, other automotive companies are facing similar issues. However, our team has remained focused on controlling the things that we can control. In most areas of our business, we have outperformed the market and we're able to pass through costs. We are in execution mode. And as I mentioned on our last earnings call, we are focused on a multiyear transformation centered around 4 strategic priorities of simplifying our portfolio and operations, expanding our lean operating model globally with a focus on margin improvement, investing and growing organically and pursuing a disciplined capital allocation strategy.

To that end, I would like to highlight certain notable achievements from this quarter. First, we completed the sale of our Self Service segment to Pacific Avenue Capital Partners for $410 million. We were very pleased to see strong interest in business. As a result of this sale, we have not only simplified our business but strengthened our balance sheet, which we believe is prudent to do in these uncertain economic times. The proceeds from the sale of Self Service have been used to reduce debt. We are prioritizing maintaining a strong balance sheet and our investment-grade rating to navigate market challenges, especially in these uncertain times. During the quarter, we had no acquisitions but to be clear, our strategic review process is active and ongoing and in coordination with the finance committee of our Board of Directors. We expect to continue our efforts to simplify our portfolio and operations as markets and opportunities avail themselves.

Second, we continue to improve our lean operating model globally with a focus on margin improvement and are acting with urgency to correct inefficiencies. To that end and as we outlined earlier this year, we targeted an additional $75 million in cost savings for 2025. I'm pleased to share that we made meaningful progress since Q2 and achieved $35 million cost savings, well on track to meet the $75 million target. These gains have come primarily through our European business transformation driven from the leadership refresh in Europe earlier this year. Another important milestone under this initiative is our rollout of a common operating platform across Europe. We are on track to go live in early 2026 within a major market, which will put approximately 30% of our European revenue on a common system. Our recent migrations in smaller markets this year have given us confidence in our ability to effectively manage a larger implementation.

Notably, the second migration had no operational impact, a direct result of the lessons learned from our earlier launch in the first half of the year. Having scale on a common platform will help us replace legacy systems that are at risk but more importantly, enable us to get back to profitable growth and faster integrations that will drive higher returns on invested capital. Lastly, turning to capital allocation. Our approach remains disciplined. We continue to balance share repurchases and dividend payments as part of a thoughtful return of capital program while also ensuring we maintain a strong balance sheet.

Now moving on to our segments. In North America, repairable claims continued to experience downward pressure, though the rate of decline has moderated to approximately 6%. Service levels and inventory fill rates were maintained and not sacrificed during these temporary challenges, enabling results that exceeded the performance of repairable claims. Revenue decreased by 30 basis points per day, marking the smallest decline since Q1 of 2024 and outperforming repairable claims by nearly 600 basis points. Let me highlight a few other positive trends in the U.S. that we think should help improve repairable claims.

At the end of Q2, a record of 46.5% of auto insurance policies were shopped in the past year and many of the top carriers filed for [ rated ] reductions boosting new business. These trends signal ongoing pricing pressure from carriers and should help insurance rates normalize. And our part offerings continue to help carriers immediately reduce costs to offset any lower premiums just as they did during the financial crisis. We are also seeing used car prices somewhat stabilized but with continuing volatility month-to-month, values haven't normalized yet. Our diversification into new products and services in North America is generating positive results.

During the quarter, our Canadian hard parts business, Bumper to Bumper, posted organic growth improvement both sequentially and year-over-year in a market that is also facing a recession like economy. Additionally, our Elitek business, which provides technical repairs and calibrations, performed well with several key accounts achieving double-digit growth in the quarter. In Europe, organic revenue declined by 4.7% on a per day basis, reflecting a tough operating environment characterized by political uncertainty and weaker consumer confidence. We also decided not to retain certain less profitable revenue. And despite these market dynamics and overall volume pressure, the European team was still able to deliver double-digit EBITDA margins of 10% in the quarter, a 60 bps improvement sequentially as they drive toward a leaner operating model and Rick will dive deeper into margins shortly.

The improvements from our Europe operations integration, as discussed at our September 2024 Investor Day will not happen all at once. However, our teams and new leadership are aligned with my approach focused on agile execution to create significant value for our company and shareholders. The challenges in Europe affect the entire industry but LKQ excels in such environments, as shown by our success in North America. Having integrated businesses in tough settings before, I am confident we can achieve similar results in Europe. We made additional progress in the quarter with respect to our SKU rationalization objectives.

The SKU rationalization initiative in Europe is intended to decrease complexity and streamline the distribution network in all markets. More than 80% of revenue in the product brands portfolio have been reviewed, an increase from 70% in Q2. Completion of this review is required before further delisting actions can be considered to ensure a full understanding of both opportunities and risks are known. Since the end of 2024, 29,000 SKUs have been delisted. These products had minimal or no sales and remaining applications are still supported by existing SKUs.

Additionally, we continue to build out our collision model in the U.K., similar to our model in North America. We have developed our U.K. collision model, particularly around crash parts and paint from a base of 0 into a GBP 200 million business. Today, the top 20 insurers in the U.K. have approved LKQ to supply new aftermarket crash parts to their respective body shop chains under our global Platinum Plus private label brand. Currently, approximately 30% of the estimates received via the collision [ estimatic ] systems are being processed and we expect this figure to grow following the introduction of the salvage model partnership with SYNETIQ. At present, 9 of the top 10 insurers have preapproved the use of recycled parts. Finally, we are very excited about the results in our Specialty segment, which delivered a 9.4% increase in organic revenue, marking the first positive organic growth in 14 quarters. This turnaround reflects the success of our targeted initiatives to sharpen focus, improve pricing and strengthen channel relationships.

On our last call, I made some fairly in-depth remarks on streamlining the team across our global footprint and the talent that we now have in place. With another quarter under our belt, we are beginning to see the benefits of this transformation. A culture of execution is radiating through the organization and everyone is accountable to deliver. We've come a long way but there's still more to do. And I'm confident in the team's ability to execute, adapt and lead through cycles, supported by a clear strategy and a relentless focus on execution.

Rick, I'll now turn it over to you to walk through the financial segments' results in more detail.

Thank you, Justin and welcome to everyone joining us today. I want to begin by echoing Justin's remarks regarding our performance in the quarter and the significant progress we made on our multiyear transformation strategy to simplify the business by sharpening our focus on core segments. Executing on our strategic priorities has been challenging in a down market. But as you can see, we have the team that delivers on our commitments in any operating environment.

Before I go into specifics on the quarter, I want to quickly explain the impact the sale of Self Service has had on our financial reporting. As mentioned in our 8-K, Self Service is reported as discontinued operations for financial reporting purposes, which means that its operating results are presented separately as a single line item above net income for current and historical periods and our balance sheet information has also been recast to separately disclose the assets and liabilities of Self Service. The net impact on our prior guidance for adjusted diluted earnings per share is approximately $0.15 per share for full year 2025. Under U.S. GAAP, allocated costs commonly known as stranded costs are not reported in discontinued operations.

These costs have been recast to the Wholesale North America's segment and totaled approximately $5 million per quarter or around 30 basis points to their segment EBITDA margin for all periods presented. Additionally, because we used the net proceeds to pay down existing revolver borrowings, interest costs totaling approximately $5 million per quarter has been allocated to discontinued operations for all periods presented. To assist in understanding the impact on the historical income statement and segment results, we have included several additional schedules in the tables to the press release and earnings presentation that reflect the recast results by quarter on a comparable basis going back to the beginning of 2024. We have also restated our guidance to reflect the impact of discontinued operations. I will take you through those numbers in a bit.

Now turning to Q3 results for continuing operations. As Justin said in his remarks, we are pleased with our results for the quarter. We reported total revenues of $3.5 billion, a 1.3% increase over the prior year. Diluted earnings per share were $0.69, a $0.02 decrease compared to Q3 2024. On an adjusted diluted earnings per share basis, we reported $0.84. As a reminder, this excludes the results of operations from Self Service, which are now reported as discontinued operations. Self Services's operating results contributed approximately $0.03 to discontinued operations. Prior year adjusted diluted earnings per share were $0.86 after adjusting for discontinued operations. Taxes provided a benefit of approximately $0.06 per share compared to the prior year.

We updated our annual tax rate estimate and saw a reduction of approximately 50 basis points, primarily attributable to the shift in the geographic mix of income. Additionally, we benefited from several discrete items, which make up the majority of the year-over-year tax benefit. Execution on our balanced capital allocation strategy benefited earnings per share by $0.02 resulting from share repurchases and another $0.01 for interest. Foreign exchange rates added another $0.02 compared to the prior year. Free cash flow was strong during the quarter at $387 million, bringing the year-to-date free cash flow to $573 million. We returned $118 million to shareholders including $40 million to repurchase 1.2 million shares and $78 million for our quarterly dividend. We remain focused on deploying capital in a way that maximizes shareholder value while supporting growth. In Wholesale North America, we were pleased with our top line performance given the soft demand we faced throughout 2025. We are confident we are increasing our market share and we are cautiously optimistic our markets are stabilizing.

However, our markets are competitive and our ability to pass along price increases at a level that maintains our margin percentage is constrained and expected to remain challenging in the near term. Wholesale North America posted a segment EBITDA margin of 14.0%, a 180 basis point decrease relative to last year. Gross margin contributed to approximately 70 basis points of the decline due to the dilutive effect of increasing prices to offset dollar-for-dollar higher input costs from tariffs and unfavorable customer mix effect as we continue to grow share with the MSOs.

Overhead expenses were approximately 80 basis points higher as a percentage of revenue due to incentive compensation costs, professional fees and credit loss reserves compared to the prior year on flat revenues. In Europe, segment EBITDA margin was 10.0%, a 20 basis point decrease versus last year but a 60 basis point improvement sequentially versus Q2. Gross margin improved by approximately 40 basis points, largely resulting from the portfolio actions taken in 2024. However, the organic revenue decline put pressure on overhead expense leverage resulting in the decrease to segment EBITDA margins.

Specialty's EBITDA margin of 7.3% is consistent with the prior year as higher revenue on lower margin product lines led to negative mix effect on gross margin but strong cost controls provided a positive leverage effect on overhead expenses. With organic revenue ticking up in the quarter, we are encouraged by these recent trends. Now turning to the balance sheet. We repaid approximately $262 million of debt in the quarter. As of September 30, we had total debt of $4.2 billion with a total leverage ratio of 2.5x EBITDA. On October 1, with the pretax proceeds from the sale of Self Service, we repaid an additional $390 million in debt, further improving our leverage ratio. We believe it's prudent in these uncertain times to maintain a strong balance sheet to deal with uncertainties and we remain committed to our investment-grade ratings. As of September 30, 2025, our current debt maturities were $537 million, an increase from the end of Q2 as the Canadian term loan is now due within 12 months.

For our normal practice, we actively manage our capital structure and we are working through our options with our lending group regarding the Canadian term loan due in the third quarter of 2026. We have no significant concerns regarding our ability to extend the maturity date. Excluding the borrowings that were repaid on October 1 with the proceeds from the sale of Self Service, our effective interest rate was 5.1% at the end of Q3, slightly lower than Q2. Our variable rate debt of $1.5 billion at the end of September was further reduced by $390 million following the receipt of the proceeds of the sale of Self Service on October 1 that were used for debt repayment.

I will conclude with our thoughts on the updated guidance for 2025. When we updated guidance last quarter, we anticipated macroeconomic factors in both North America and Europe will continue to drive an uncertain environment. Despite these ongoing headwinds, our operational performance in Q3 was slightly ahead of our expectations. We have now revised our full year outlook based on Q3 results and the sale of Self Service. Our revised outlook and assumptions are included on Slide 12. Let me start with earnings per share. Following our third quarter results and continued execution across the portfolio, we are narrowing our full year 2025 guidance to an adjusted diluted earnings per share of $3 to $3.15. This updated outlook reflects removal of Self Service, which was reclassified to discontinued operations and reflects the strength of our core business performance.

Now let me walk you through midpoint to midpoint from the guidance we issued in Q2. In our prior guidance, our midpoint was $3.15. Adjusting for the sale of Self Service, the midpoint of our previous guidance would have come down by $0.15 to $3 even. With the better-than-anticipated performance in Q3, we are increasing our midpoint to $3.07, so a $0.07 increase on a like-for-like basis. We also narrowed the range, putting our updated range of $3 even to $3.15. Please note that our Q4 2024 results included a onetime net benefit of approximately $0.08 per share within our Wholesale North America segment attributable to a favorable legal settlement, partially offset by the impact from a brief cyber incident in Canada.

Moving on. We expect reported organic parts and service revenue in the range of negative 200 basis points to negative 300 basis points, a narrowing of the range provided last quarter. Free cash flow is expected to be in the range of $600 million to $750 million, overcoming a roughly $75 million headwind from the sale of Self Service. In the fourth quarter, we expect to make an approximately $60 million payment for taxes on the sale of the business and an additional $15 million of lower cash flow from the loss of Self Services Q4 segment EBITDA. We are mitigating the $75 million headwind by reducing our anticipated capital spend by approximately $50 million and making up the remaining $25 million through improved trade working capital. As noted last quarter, tariffs continued to be a headwind and we expect that the year-end inventory balance will include a full inventory turn inclusive of tariffs.

Thank you for your time. And with that, I will now turn the call back to Justin for his closing remarks.

Thank you, Rick. In summary, we delivered solid Q3 results. We beat on adjusted earnings per share, raised the midpoint of our full year guidance and narrowed the range. We generated strong free cash flow and maintained our disciplined capital allocation strategy. I said I was going to simplify the portfolio. And while it's still ongoing, we were able to divest our Self Service segment to a solid buyer for a sale price that exceeded our expectations. North America posted a strong quarter, outperforming the market despite weak repairable claims environment. Under new leadership, the Europe team continues its progress with our integration objectives and delivered double-digit EBITDA in a low demand market. And our Specialty segment posted robust revenue growth for the first time in over 3 years. And none of this would have been possible without our 46,000 team members who drive this performance on a daily basis and I want to give them a huge thank you. We are all committed to continue to improve our results, which will ultimately reward all our stakeholders now and over the long term.

Operator, we are now ready to open up the call for questions.

[Operator Instructions] We have our first question from Craig Kennison from RW Baird.

Wanted to talk about Europe. Can you help us understand the competitive landscape in Europe? And then maybe quantify the low-margin business that you're choosing not to chase?

Yes, Greg -- Craig, thanks for the question. From a competition standpoint, I would say it's really no better, no worse. Most of what we're seeing over there is just the demand across Europe with some of the customer -- consumer sentiment being down, some of the political unrest in certain markets. Some countries are doing good. Some countries are not doing so well. You've probably seen the headlines where there's many suppliers and manufacturers in both the OEM and aftermarket side are downsizing. But look, LKQ, we are a premier distributor across Europe. We've got the best overall value proposition.

The cars are aging. Consumers aren't buying new cars. This trend will be good for us in the long run. The market will rebound. And we're not sitting idle, right? We're accelerating our integration, as I talked about in the script and really what we've done in North America -- as we've done in North America to make ourself a leaner model over there to drive more profitable revenue growth in the future and better returns for our shareholders. On your second question on some of the revenue, if there was high service levels or customers were price shopping us and we were the third call, we walked away from some of that. It was -- I mean, it wasn't that many customers overall but -- go ahead, Craig.

No, that's very helpful. It's what I wanted to follow up on. And then I know there's been significant sort of leadership change in Europe. And I imagine it takes time for traction to build for each of those leaders. I'm just wondering if you can give us an update on how you feel about the traction they're gaining.

Yes, it does take time. I mean they don't know our industry but the talent that we brought on, the skill set, the mindset is very strong. They see a lot of opportunities. They understand the real -- 1 LKQ Europe transformation plan that we have. They've done it before in many other situations in different industries. They're realigning their teams, in some cases, replacing team members if they need to. So they're on board and they're helping drive and pull it through versus us pushing them. So it's been very positive with the new leadership over there.

We have our next question from Jash Patwa from JPMorgan.

Just a quick one to start. Could you share what you're seeing lately in terms of alternative parts utilization and total loss frequencies in the third quarter? And any color on repairable claims trends quarter-to-date would be helpful as well. And I have a follow-up.

Yes. So if you look on the APU side, I would say, quarter-to-quarter, it's sequentially pretty flat as well as total loss. A lot of that's driven by -- we've talked about in the past, used car pricing. We're still seeing volatility month-to-month within the quarter. So that necessarily hasn't stabilized. But we saw improvements but then it dipped again in the quarter with used car pricing but then it dipped again in September. So a lot of that is not allowing what I would call total losses start to improve. But APU was flat, which is still positive for us that it isn't declining and we still see opportunity with many carriers to grow that APU number.

Understood. That's super helpful. And just as a follow-up, another strong quarter with North America parts and services organic revenue growth outpacing repairable claims. Could you maybe break down how much of that 30 basis point decline was driven by ticket versus traffic? Just to help us better understand the underlying like-for-like volume trends at LKQ compared to the rest of the industry.

Jash, to make sure I understood, you said ticket versus volume? Or what was that comment or question?

Yes, just the price versus volume.

Okay. Yes, price we probably had with tariffs being pushed through, that was in that circa 1, maybe 2 -- let me get the exact number here.

We have roughly $35 million of pricing coming up just related to tariffs.

Yes. Okay. I don't know what that translates to exact percentage-wise. We're seeing ranges from like 1% to 3%, I believe. We've been able to -- we've been very fortunate to pass on tariff dollar for dollar. We haven't made any margin on it but we've been able to pass that tariff on. The volume is still overall down. A little bit of it is price, obviously, but we're way outperforming the market, which is positive for us. The MSOs at this time are gaining share and we're growing with the MSOs I do believe when the repairable claim starts to rebound or improve more, we'll start to see more of the independents come back and get more of the volume. But right now, MSOs are winning more of that share. And -- but once again, we're winning with them.

We have our next question from Bret Jordan from Jefferies.

This is Patrick Buckley on for Bret. Could you talk a bit more about what's driving Specialty growth? Are there any signs that this is a transition back to more of a growth cycle for the segment?

The industry still is down, both on the RV side, we're seeing and on the automotive side. One thing that we're doing across all of our segments is we're not cutting service levels, we're not cutting inventory levels. I feel that we're gaining some share at this time. It's not really a market recovery. But I do see the market starting to show signs of good improvements. But I would not say the market is necessarily positive. So it's more share gains right now. We want some more share of wallet with some of our larger customers. So we feel pretty good about when the market does rebound, we'll be even stronger on that. But once again, we did not cut service levels or inventory and I think some of our competition did.

Great. That's helpful. And then looking at leverage ratio and capital allocation. I guess could you talk about at what levels do you expect you'll start to focus a bit more on allocating a more significant amount of capital to share buyback?

I can take that one. Yes. So we finished the quarter at 2.5x levered on our math. Keep in mind, on October 1 is when we got the proceeds for Self Service. And that proceeds -- pretax proceeds, roughly $390 million went to pay down debt. So that further improved our overall leverage. Ideally, we'd like to eventually get down to 2x or below. But that could be a slow walk down. So we're pretty comfortable with where we're at as far as the leverage goes. And then as we obviously delever a bit more, it gives us a little more flexibility to put more towards share repo. So constantly balancing the amounts to make sure that we have a balanced capital allocation approach.

We currently don't have any questions. [Operator Instructions] I can confirm there are no further questions and I will hand back over the call back to Justin Jude, the CEO, for any further remarks. Thank you.

Thanks, operator and thanks for everyone joining the call this morning. We appreciate it and we look forward to speaking to you next February when we report our fourth quarter.

Thank you very much. This concludes today's call. Thank you for your participation. You may now disconnect your line.