LKQ Corporation

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. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. 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 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 8K, which we filed with the SEC earlier today. And as normal, we are planning to file our 10Q 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 reported results may suggest. Our North American segment returned a positive organic growth for the first time in nine quarters. Repairable claims showed another quarter of sequential improvement and alternative part utilization continued to increase. Specialty also continued to deliver organic growth, demonstrating the resilience of its market position. In Europe, our reported results were affected by ERP implementation challenges in Germany and softer performance in certain European markets. We take accountability for those results. While the implementation has been more challenging and taken longer to stabilize than planned, We've identified the issues, implemented recovery actions, and remain confident in the long-term strategic value of the ERP investment. It expands our common platform footprint, creates the foundation for a more integrated operating model, and supports better service, productivity, and margin performance over time. The investments we're making today are designed to increase LKQ's earnings power for many years, and this quarter does not fully reflect the underlying earnings potential of the business. We continue to execute on our strategic initiatives designed to enhance our long-term competitive position and earnings power. This morning, I will review the progress of North America in 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 1-3% for the quarter, showing once again how North America can outperform the market. While the market is not fully recovered, several external indicators continue to reinforce our belief that collision markets are improving. Not only has used car pricing continued 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% for 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 further 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 UK 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 skew rationalization objectives. I am pleased to say that we have completed our review of our full product brand portfolio. As I had previously stated, completion of this review is required before further delisting action items can be considered to ensure 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, and the company, together with its advisors 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 52 cents, and adjusted diluted earnings per share were 67 cents. compared with adjusted diluted EPS of 84 cents in the prior year period. The year-over-year decline larger 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's segment EBITDA was $207 million, representing a segment EBITDA margin of 14.1%. The quarter included a $10 million expense related to a legal reserve resulting in a drag on segment EBITDA margin of approximately 70 basis points, meaning the underlying performance was in the high 14% range. This reserve relates to an isolated one-time event and it helps explain the difference between the reported margin and the operational progress we saw in the quarter. Europe Parts and Services organic revenue declined 12.6%. The primary driver was the disruption related to the ERP implementation in Germany. We estimate the quarterly revenue impact was approximately $140 million. Europe segment EBITDA was $109 million, a year-over-year decline of $42 million, representing a margin of 7.5%. The decline primarily reflects the ERP implementation challenges in Germany, as well as softer demand in the UK and Benelux. We estimate the ERP disruption reduced EBITDA by approximately $50 million during the quarter, while the volume pressures predominantly in the UK 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 UK 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 six 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 2.8 times EBITDA. During the quarter, we returned $129 million to shareholders through share repurchases and dividends. In July, we prepaid the outstanding $500 million U.S. term loan originally due in Q1 2027 with proceeds from our revolving credit facility. We expect to use free cash flow generated over the balance of the year to reduce the outstanding balance of our revolving credit facility following the prepayment of the term loan. Our capital allocation priorities remain unchanged. We will continue to deploy capital in a disciplined manner, balancing investment that support growth in the business, maintaining a strong balance sheet, and returning capital to shareholders. Finally, with respect to our guidance, our revised 2026 outlook and assumptions are included on slide 11. Operationally, North America remains on track against its full year plan. The outlook assumes repairable claims remain near current levels with modest improvements during the second half. We are encouraged by the improvement seen during the quarter, particularly in June, but are not assuming a significant market recovery. Europe remains the primary area of operational focus and is driving the majority of the reduction in guidance. Our revised outlook assumes continued improvement in service levels and revenue in the affected German operations during the second half, but at a more measured pace than we previously expected. It also assumes that conditions in the UK 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 UK 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 in 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.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Jeff Lick with Stevens Inc. Your line is open, Jeff. Please go ahead.

Thanks. Good morning, Justin, Rick, Joe. Thanks for taking my question. I want to focus maybe on Wholesale North America and just the evolution or 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, in the last call, you talked about how in a depressed environment, the business kind of first goes to the MSO, and then as you start to see some improving conditions that will go to the, you know, in the operators and that should help margin. You know, where do you see that on that progress, you know, 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? Thank you.

Hey, thanks, Jeff, and good morning. On the North American side, we saw the reproval claims being down, you know, 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 is 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 the 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. You know, 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 yeah, 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, yeah, that's the biggest driver of the $18 million increase is this one-time legal settlement.

Okay, just as a quick follow-up to get us going on Europe, because I'm quite sure some of my peers are going to dig into that a little bit more, but you made the comment that X, 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 kind of just set the table there? I'm sure there can be more questions coming, but kind of just get us going on, is that really the case and how do you see this playing out?

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

Yeah, I think just to add on to that a little bit is that we saw the volume tightening up in Benelux and UK, as I talked about. Thank you for joining us.

and just a quick follow up there. Where are you at on the private label pricing kind of evolution? You talked about, you know, migrating a decent chunk of the business to private label and that you kind of had to have some kind of gateway pricing to get enticed 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?

Yeah, 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 yeah, we did, to your point, we had introductory pricing. And look, there's still economic concerns over there. Consumers paying more at the pump. Thanks very much and best of luck with the rest of the year. Thanks, Jeff. Your next question comes from the line of Craig Kennison with Baird. Your line is open, Craig. Please go ahead.

Yeah, thanks for taking my question. 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?

Yeah, great question, Craig. Let me maybe start off with the why again. I know I covered this in Q1, but why are we doing a system conversion? I mean, we've had 80 acquisitions plus in Europe. We have 30 plus ERP systems. It's a patchwork of aging systems that were quite honestly built for much smaller operations. They're becoming increasingly difficult to support, and many of those lack capabilities that our customers are asking for. As customers get bigger, they want integration. and many cases we're not able to do that. And so transforming to a single ERP brings efficiencies, it brings common data models, standardizes processes, gives us better control, resulting in higher visibility, higher efficiencies. And so at the end of the day, we need to continue to drive 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-step. So three-step business is much more simple, stock orders, and then now we have a $2 billion revenue on the platform servicing two-step businesses where there's a lot more transactions, a lot more customers, a lot more people, a lot more employees on that. Once again, we've learned a lot on it, but it was a scaling event. In all future conversions, we don't have any slated for this year, but all future conversions that are going to go into next year become easier, right? Because now it's not a large scaling event. It's much smaller businesses, much smaller ERP systems migrating into a $2 billion market or into a $2 billion platform. So much more confidence in 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 Thank you for joining us today.

Yeah, 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 to continue to hypercare in the German market, continue to refine and recover on the revenue side. But once again, we've learned a lot of lessons. We've built a scaled, 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'll be less disruptive. Obviously, a lot of lessons learned on this, but it is a needed initiative that we have.

Thanks. And not to rake you home for the calls here, Justin, on that. I totally appreciate the need to do this. We'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? you know relatively new leaders to take on a project like this?

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

Thank you, Justin.

Yeah, thanks, Craig.

Your next question comes from the line of Josh Patois with JP Morgan. Your line is open, Josh. Please go ahead.

Hi, good morning. Thanks for taking my questions. Curious if you could split the $200 million analyzed tariff exposure across automotive and non-automotive segments and how the recent capping of Section 232 automotive parts tariffs on imports 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? Thanks and have a follow-up.

Thanks, Josh. I can go ahead and take that. As far as the tariffs goes, as most people realize, the IEPA 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 a very, very small portion of what we've gotten, 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 1st when 232 for Taiwan, the Taiwan trade deal, is moving from 25% down to 15%. So that's a good news story for us. What we're cautiously optimistic is in the back half of the year as we get a turn of inventory through this, how much of that will we be able to hold on to as far as pricing goes? Look, the assumption that I've got in my guide is we weren't able to get any margin enhancement on the way up. I'm assuming we're not going to get much on the way down as we're staying competitive in the pricing, but there is a 40% reduction on those overall tariffs, and that was the lion's share of what we have as far as the overall tariff amounts. The new tariffs have very minimal impact on us as far as that 301 tariffs. Those are pretty, pretty tiny for us because we're actually under that 232 tariff. So we're monitoring it closely. We're seeing what it is. I don't have a further benefit or hit as far as the rest of the year goes on the Taiwanese deal. It is probably better news than, well, it's definitely better news than going the opposite direction. And so, you know, 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 pretty 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. Great. Thanks for taking my questions and good luck. Thanks, Josh.

Your next question comes from the line of John Babcock with Barclays. Your line is open, John. Please go ahead.

All right. Good morning. Thanks for taking my questions. Just want to dig back into Europe a little bit here. I guess with regards to the UK and Benelux, in the UK, 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.

Yeah, in the UK, 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 anytime they expand it open, it creates a margin pressure and pricing pressure and volume pressure. And we've seen that continue on. We've obviously got action items going. We've changed some leadership there to Thank you for joining us. On a Benelux standpoint, it's really what I would call a three-step business. There's a large three-step customer that we decided to walk away from. It was a low-margin business. We're still pushing on our two-step volume over there to try 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.

Okay. Thanks, Matt. 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?

Yeah, no, 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. You know, when we first went live over there the first couple of weeks, a lot of stability issues with the system, slowness, systems were crashing. and then towards the end of April we stabilized the system as 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 to that new system you start uncovering basic things that normally happen with conversions. Obviously we had a little bit more than we expected but You know, things like bad data, maybe the system processes weren't operating as they should have. So, you know, call them bugs. A lot of those things have been resolved through May and June. And so, you know, when that happened, our service levels weren't great. And customers are used to strong service levels from our Stahlgruber business in Germany. You know, Stahlgruber is over 100 years old. and many other companies. So customers 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 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 dozen locations that we've got to go in and get them retrained up, and we've sent Tiger teams in 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, you know, 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 weeks and put them back in the field. And, you know, calling on those customers, letting them know that things have returned to normal. And so, you know, it was just a lot of different situations, mainly, I would say, escalated because of the scale of that system. I mean, the first couple 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. Thank you. And then just last question before I turn it over. I was just wondering if there are any updates on the considered sale of the specialty business and also whether or not the performance there is maybe leading you to consider potentially reevaluating whether to sell that business.

Yeah, 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'll be covered in there. And look, at the end of the day, they are the number one specialties, number one 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 always thought we may not be the right owners of that, even though it's a great asset and performing really well. But once again, they'll be evaluated with the overall strategic review that we have going on.

All right.

Thanks, Ken.

Your next question comes from the line of Brett Jordan with Jefferies. Brett, your line is open. Please go ahead.

Hey, good morning, guys. 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 UK, 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 do you think Q2 was a low watermark from an EBITDA margin standpoint?

Yeah, I think I could take that at the start, Brett. And then, Justin, if you want to add some things. As far as the low watermark, we think that Q2 would be the low watermark. One of the reasons why we pointed out that if you look at the overall Europe, I think this is what you were talking about, Justin, when we look at overall Europe, excluding the ERP, even with the volume declines we saw in Benelux and the UK, we were able to offset that through overall productivity initiatives across all of Europe. and so we actually made more even to dollars and more even to percent. We were in double digits if you back out that ERP. When we look at Q3 and Q4 as I go through the guide 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 on 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 forego on low end pricing. and we're still going to make more even to dollars and more even to percent along the way. So Justin, I don't know if you want to add anything.

Yeah, and 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 you know we're giving and showing the customer confidence that now they can start giving that share 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 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'd 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?

Yeah, Brett, that's a great question. Good observation. If you look at the earnings presentation, I put in the earnings presentation, there's actually a one time cost item on an acquisition that we did where there's a A customer of ours 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 non-cash 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. And that's what I think we get to when we get back into Q3 and Q4.

Okay, great. Thank you.

Thanks, Brad.

Your next question comes from Gary Prestapino with Barrington Research. Your line is open, Gary. Please go ahead. Hi.

Good morning, all. A couple of questions. It looks like, 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? Justin EPS on what happened with the ERP issue. Do you have that?

Yeah, Gary, it's about 15 cents. So 15 cents in the quarter year over year is the ERP. The legal reserve would be about three. And the item that I just talked to Brad about would be another two. So you got about 20, 21 cents of, you know, ERP and these one-time items that hit us quarter over quarter. When you look at the 84 cents from last year, you dropped down about 20-21 cents on these one-time type items and then you look at the overall performance and that's the tough thing about the discussion we're having because there's obviously the one times we take accountability for them we need to improve them but there are some non-operating 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 It led to the increase in credit losses in Q1, or is there something different there? And is that all behind you now?

Yeah, you're spot on. It's the same vendor, which is the reason why we acquired them in Q2, to stop the bleeding and improve overall performance. And now we've been improving performance since we acquired them in the middle of Q2. And is it behind you? Yes. Yeah, that's behind us now.

Okay. and just real briefly, when you released numbers in Q1, you mentioned that the sale of the specialty business had 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 become a little more clearer?

Yeah, 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've just kind of rolled specialty into the overall strategic review that we're doing for the whole company. So that'll get re-picked up if there's other interested parties in the whole co or other interested parties and pieces of the business that'll all be evaluated. But the overall geopolitical that created some concerns hasn't necessarily, even though it may have changed and show that there's some improvement, it hasn't necessarily gotten some of those bidders back to the table. Okay, thank you. Thanks, Gary.

Your next question comes from the line of Scott Stember with Roth Capital Partners. Your line is open, Scott. Please go ahead.

Hi, guys. This is Jack Weisenberger on for Scott. Thanks for taking our questions. Just when talking about guidance, you know, 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 a factor in that lowered guidance?

The bulk of it is because, Jack, appreciate the question. The bulk of it is because of the ERP implementation and 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 a 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 rates essentially for the Benelux and the UK are more of the norm for Q3 and Q4 and that's the remainder couple cents that we've got coming down for the back half of the year.

Okay, great. Thank you. And then just with repairable claims having improved sequentially for the past few quarters, you know, what are you seeing in July? Are you seeing these same jutes continue into 3Q?

Yeah, 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.

Thank you, guys.

Thank you, Jack.

As a reminder, if you would like to ask a question, please press star one to raise your hand. The next question comes from the line of Josh Patois with JP Morgan. Your line is open, Josh. Please go ahead.

Great. Thanks for squeezing me back in. 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 seemed known by April end 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 in the competitive response that surprised you to the downside? Thank you.

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

Yes, just the margin had been as a result of that.

Yeah, 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 aren'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 looked to offset. The second part of the question I didn't quite get, did you jump over to Europe?

Yeah, I was just trying to, I mean, you know, a lot of the initial Germany disruption seemed 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, the first couple weeks, we had a lot of stability issues. But then coming to the back half of April, we saw revenue climbing at a very, very fast rate and so gave us confidence going into May and June. As that revenue continued to climb, we started uncovering, as I mentioned, some system issues, whether that was bad data, whether there 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 dozen branches back up to par where the majority of our branches are performing today to get that revenue recovered.

Very helpful. Thanks, Justin.

Thanks, Josh.

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 want to take away from this is we talked about North America. We are seeing great positive trends in a macro environment with insurance premiums coming down, used car prices continuing to climb, repairable claims sequentially improving in the 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 EERP 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, you know, I'm sorry, EBIT dollars and EBIT percent. So overall, the team is performing pretty well. The ERP side of Germany, yes, it was disruptive. Yes, it was a little bit more than we expected, but we have great recovery plans. We have clear line of sight of what we need to do, and we're showing continual improvement on that. And we feel confident we'll hit that run rate by the end of the year. and with that I will end the call. I appreciate everybody joining the call today.

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