LKQ Corporation (LKQ) Earnings

Management highlights

### North America Progress - Delivered first positive organic growth in nine quarters, with repairable claims declining 1-3% year-over-year, an improvement from Q1 2026, indicating sequential market improvement. - Alternative part utilization (APU) exceeded 40% for the quarter, a new record, as insurers seek cost reduction tools amid pressure on their margins from falling used car values and negative year-over-year insurance CPI. - Salvage gross margin exceeded expectations due to improved procurement and operations, fill rates improved sequentially, and the segment beat full-year free cash flow expectations. ### European Operations and ERP Transformation - Primary Q2 underperformance drivers were German ERP implementation disruption and softer demand/poor commercial execution in the UK and Benelux, for which management takes accountability. - Post-implementation recovery has accelerated, with German operations reaching over 85% of normal revenue run rate by the end of Q2. System performance has improved and operational processes have normalized. - The German ERP conversion increased the share of European business on the common platform from ~5% to over 30%, creating a foundation for long-term productivity, service, and margin improvements. Management confirms the long-term strategic value of the investment. - Achieved over $40 million year-over-year cost improvement via cost structure optimization, procurement savings, productivity gains, and underperforming location closures; changed leadership in underperforming regions and updated recovery plans focused on commercial execution, cost control, and customer retention. - Completed full product brand portfolio review ahead of further delisting actions; private label volume penetration reached 26.6%, on track to hit the long-term target of 30%. In the UK, weakness stems from heightened competitive pressure from a rapidly expanding new entrant; in Benelux, weakness reflects a voluntary exit from low-margin three-step customer business, offset by cost reductions. ### Specialty Segment - Delivered resilient top-line growth in line with company expectations, but the priority remains converting this resilient revenue into more consistent earnings via gross margin improvement, operating efficiency gains, and better leverage of the existing cost structure. ### Strategic Review Update - The company-wide strategic alternatives review, conducted with advisors Bank of America and Goldman Sachs, remains active, with ongoing engagement with multiple parties; updates will be provided when appropriate. The Specialty segment is included in the broader review.

Guidance

- Overall full-year 2026 guidance has been revised downward, driven primarily by slower-than-expected recovery in the affected German ERP operations and continued soft conditions in the UK and Benelux. - Organic parts and services revenue is now expected in the range of -1% to -3%, compared to prior guidance that reflected higher growth expectations. - Adjusted diluted earnings per share is now guided to $2.60 to $2.90, compared to the prior range of $2.90 to $3.20. - Full-year free cash flow is now expected to be $625 million to $775 million, compared to the prior outlook of $700 million to $850 million. - North America is expected to remain on track to meet its full-year plan, with guidance assuming repairable claims stay near current levels with only modest second-half improvement, and no material market recovery is assumed. - Guidance assumes continued improvement in German service levels and revenue through the second half, but at a more gradual pace than previously expected; it also assumes current soft demand conditions in the UK and Benelux persist through the end of the year, with benefits from cost and productivity actions building progressively. - Specialty organic growth is expected to continue, but guidance reflects ongoing work needed to improve margins and product mix. - Management expects Q2 2026 to be the low watermark for European EBITDA margin, with steady improvement through the second half, targeting a return to 100% of normal German revenue run rate by the end of 2026 ahead of 2027.

Segment performance

1. North America Parts and Services: Organic revenue increased 0.5% (first positive growth in 9 quarters). Segment EBITDA was $207 million, with an EBITDA margin of 14.1% (70 basis points dragged by a one-time $10 million legal reserve, underlying margin was ~14.7%). Aftermarket collision revenue grew ~2% and Canadian hard parts grew mid-single digits, while paint volume remained a growth headwind. This segment contributed 53.2% of total consolidated Q2 revenue. 2. Europe Parts and Services: Organic revenue declined 12.6%, with a $140 million quarterly revenue impact from German ERP implementation disruption. Segment EBITDA was $109 million, a year-over-year decline of $42 million, representing an EBITDA margin of 7.5%. ERP disruption reduced EBITDA by ~$50 million, and volume pressures in the UK and Benelux reduced EBITDA by an additional ~$30 million. Excluding ERP disruption impacts, the segment was on track for double-digit EBITDA margins. This segment contributed 42.9% of total consolidated Q2 revenue. 3. Specialty: Organic revenue increased 4.5%. Segment EBITDA was $33 million, with an EBITDA margin of 6.7% (drag from an $8 million one-time non-cash credit loss reserve). Revenue performance was resilient, but gross margin, product mix, and freight/fuel costs remained headwinds. This segment contributed 3.9% of total consolidated Q2 revenue.

Risks & headwinds

- The German ERP implementation was more disruptive and took longer to stabilize than planned, leading to material revenue and EBITDA headwinds in Q2 2026, and continued slower-than-expected recovery poses downside risk to full-year results. - Heightened competitive pressure in the UK and continued soft demand in the UK and Benelux create ongoing revenue and margin pressure for the European segment. - Higher diesel/fuel and freight costs create near-term margin headwinds across segments, particularly for the Specialty segment. - Future ERP conversions in Europe carry some risk of disruption, though management expects future smaller-scale conversions will be less disruptive after lessons learned from the German rollout. - One-time items including legal reserves and credit loss reserves created unexpected margin drag in Q2 2026. - Geopolitical and credit market issues have continued to limit bidder engagement for a potential sale of the Specialty segment.

Analyst Q&A

• Q: Will future ERP rollouts across Europe cause repeated rolling disruptions, and is the project too much for relatively new European leadership to handle? /

  A: LKQ inherited 30+ aging legacy ERP systems in Europe from decades of acquisitions, so unifying onto a single common platform is a necessary long-term strategic investment to enable customer integration, better efficiency, and lower cost. There are no more ERP conversions planned for 2026, as the team will focus on stabilizing German operations first. Future conversions planned for 2027 and beyond will be far smaller in scale than the large German scaling event, and lessons learned from the German rollout will make future transitions faster and less disruptive. The new European leadership brought in specifically has deep prior experience with large-scale distribution transformations and ERP migrations, so they are well-equipped to manage the program.

• Q: What is the current update on the strategic review for the Specialty business, and has its strong performance changed the company's willingness to sell it? /

  A: There is no material update to the active strategic review process, which now includes the entire company, with the Specialty segment included as part of the broader evaluation. No changes to the process have resulted from recent performance, even though Specialty is the market leader, growing faster than the flat-to-down overall market, and performing well. Management is evaluating all options to deliver maximum shareholder value, including whether LKQ is the best long-term owner for the high-performing asset.

• Q: Is Q2 2026 the low watermark for European EBITDA margins, or will margins go lower before recovering as the company spends to recapture share? /

  A: Management confirms Q2 2026 will be the low watermark for European EBITDA margins. Excluding the ERP disruption, the underlying European business already delivered double-digit EBITDA margins in Q2 even after absorbing volume pressure in the UK and Benelux, as cost cuts and productivity initiatives offset volume declines. The German drag on EBITDA will steadily decline through the second half, with revenue recovery progressing to near 100% of normal run rate by year-end. LKQ is not pursuing aggressive low-margin pricing to recapture share, instead focusing on retaining profitable business and maintaining cost discipline, so margins will improve steadily as German operations recover.

• Q: What caused the German ERP implementation to go off plan? /

  A: The initial weeks after go-live had unexpected system stability issues: slow performance and frequent outages that eroded customer confidence. After stabilizing the core system by late April, ramping revenue exposed more unanticipated issues including bad data errors and unaddressed process bugs that took longer than expected to resolve through May and June. Poor service levels led customers to shift some share of wallet to competitors, even though most long-term customers were retained. The issues were amplified by the large scale of the German conversion, which moved $2 billion of revenue onto the new platform. As of Q2 end, the core system is fully stable, and the remaining work is retraining staff at a small number of underperforming branches, with sales teams back in the field working to recapture lost share of wallet.