LKQ CORP Q1 FY2025 earnings call

• People - related: Implemented in - cab monitoring equipment in North America fleet, achieving 95% coverage by end of Q1, reducing on - road accidents by nearly 40%; launched global talent development function, with high - potential global leaders starting sessions in February; held North American and European leadership conferences with over 1,300 top leaders.
• Business simplification: Divested two operations, a self - serve yard in Florida and a Europe - based non - core leisure business.
• Capital allocation: Repurchased 1,000,000 shares for about $40,000,000 and paid $78,000,000 in dividends in March; no acquisitions in Q1.
• Segment - specific: North America had positive growth in some businesses despite repairable claims decline; Europe carried out SKU rationalization project, reviewed over 60% of product brands, reduced stocking by 17,000 SKUs, and private label penetration increased by 20 basis points; Specialty faced demand softness; Self - service had consecutive quarterly improvement in profitability.

North America: Organic revenue fell by 4.1% per day. North America also had positive growth in lead tech calibration and diagnostics business and bumper - to - bumper hard parts business in Canada. Europe: Organic revenue declined by 1.8% per day compared to a growth of 4.4% in Q1 of 2024. On a two - year stack, organic revenue growth was 2.6%. Specialty: Organic revenue declined by 4.9% on a per - day basis. Self - service: Generated $20,000,000 in segment EBITDA in Q1, an increase of $4,000,000 and a 290 bp improvement as a percentage of revenue. North America's segment EBITDA margin was 15.7%, Europe's was 9.3%, Specialty's was 5.4%, and Self - service's performance is also detailed as above.

• North America: Expect headwinds on repairable claims to continue in 2025 but abate somewhat in the back half; excluding tariff impacts, EBITDA margins will be in the low sixteens full - year.
• Europe: Absent macroeconomic impact from tariffs, EBITDA margin will be double digits full - year 2025.
• Specialty: Expect segment EBITDA margin to be around the low end of the 7% to 8% range provided in full - year 2025 guidance.
• Cash flow: Anticipate generating positive free cash flow in the next three quarters; organic parts and services revenue growth likely toward lower end of 0 - 2% range; adjusted diluted EPS remains in range of $3.4 to $3.7; free cash flow remains in range of $750,000,000 to $900,000,000.

• Tariffs: Final decisions on tariffs remain unclear, with many dynamics; less than 15% of U.S. business's cost of goods are directly imported from outside the U.S., and tariff impacts are complex to quantify.
• Macroeconomic instability: Affects consumer confidence, negatively impacting discretionary spending in some markets, such as in Specialty business.
• Cash flow: Timing of payables, investment in inventory, and interest payments can impact free cash flow.

Q: Regarding North America, it sounds as if the comparisons get a lot easier in the second quarter, just on a repairable claim basis. But can you talk about what trends or in a real - time basis you're seeing from the insurance companies? Regarding used car pricing. You know, there's been any change in their behavior regarding whether or not they will junk a car or repair it.

A: Throughout 2024, there's been a lot of shift in market share with insurance carriers. We talked a lot about the high rising insurance costs premiums, people raising their deductibles. I think with a lot of the shift of competition, we will not expect I don't expect to see rising insurance prices anymore for the time for at least the next year. So I think they're gonna be more competitive. From the used car standpoint, we added, you know, almost two years, I think, decline of used car values. We saw in April that number actually ticked up. Obviously, it's only one month, but it's nice to see that used cars have, you know, used car pricing has plateaued and started to improve. Those dynamics of flattening insurance premiums, rising used car prices, you know, and then we're gonna talk about tariffs probably. Somebody's gonna ask that question, but tariffs typically will drive up car pricing, and that'll be good for the industry. We actually had also one state that approved an increase in the repairable total loss value. So it used to be 70% and I think there's a small state called Rhode Island, but it was 70%. They raised it to 85% to help improve keeping cars on the road and getting them repaired, and we're seeing some of that noise start to happen in a good way in other states where they will increase the threshold of when a car totals out. So overall, we only got one good month of used car pricing, but we're starting to see some trends that hopefully will improve the repairable claims.

Q: It seems like your biggest exposure in North America is Taiwan. It seems like there's, I think, a blanket reciprocal tariff on most countries for 10%. I think Taiwan is in there as well. How would that have an impact on your business? Do you think you could put price increases through to cover that, or is it just too soon to say right now?

A: Yeah. Well, I'll probably answer that question in a few more. My guess is tariffs are on a lot of people's minds on the call. So Rick and I are gonna spend a few minutes talking about that. First, I'll tell you historically, when the industry has seen tariffs, they've been good for the industry, they've been good for LKQ Corporation. You know, one caveat of LKQ Corporation, you know, we have a global footprint. You know, nearly 50% of our business in Europe is currently not subject to tariffs. But there's a lot of volatility right now with the tariffs. The news seems like it's changing every day. As I mentioned on the call, we put a task force together to really dig into this. We'll talk about Taiwan. But we really had one of the task force to react pretty quick just because it seems to be changing every day. And that, you know, what we've identified, obviously, is based on what we know, there's more tariffs than just Taiwan. There's other countries that we import product from. And if you look at our product cost, we really broke those into two different buckets. The first bucket, I would say, is what's direct. Meaning, we import from China, we import from Mexico. We import from Taiwan. Understanding what the tariff impact is and where we stand today with what we know on tariffs is a little bit easier to identify and quantify. When we talk about the indirect piece, that gets a little bit more complex. So you think about one of our businesses in the U.S., buying a product from a U.S. distributor. That product could have been imported from China or Taiwan, that product could have components. Take a Jeep lift kit that our specialty division sells. The supplier that we buy from could get the fasteners and nuts and bolts from China. They could get the brackets from Mexico. So understanding the impact of our indirect is a little bit more complex. We're working with all of our suppliers on that. But we do have some qualifications of those buckets. Rick, if you wanna talk about that.

Q: Building on the earlier discussion, I'd just like to focus on the North American business. Highlighted targeted actions to enhance market penetration, which have positively impacted revenue along with the pricing initiatives that have improved gross margins. Could you provide some additional insights into these strategies? Specifically, is there a link between your pricing initiative and the potentially easing competitive landscape as some smaller competitors who were initially pricing aggressively might have now pulled back amidst the tariff uncertainties?

A: Yeah. And you may be confusing some of the comments on Europe, some of the pricing pressures that we've seen have been in Europe and a few countries that have put some pressure on the pricing improvements or some gross margin. I want to make sure, are you specific? Well, talk about North America or Europe?

Q: Hi, good morning, and thanks for taking my question. Building on the earlier discussion, I'd just like to focus on the North American business. Highlighted targeted actions to enhance market penetration, which have positively impacted revenue along with the pricing initiatives that have improved gross margins. Could you provide some additional insights into these strategies? Specifically, is there a link between your pricing initiative and the potentially easing competitive landscape as some smaller competitors who were initially pricing aggressively might have now pulled back amidst the tariff uncertainties?

A: Yeah. And you may be confusing some of the comments on Europe, some of the pricing pressures that we've seen have been in Europe and a few countries that have put some pressure on the pricing improvements or some gross margin. I want to make sure, are you specific? Well, talk about North America or Europe?

Q: Hi, good morning, and thanks for taking my question. Building on the earlier discussion, I'd just like to focus on the North American business. Highlighted targeted actions to enhance market penetration, which have positively impacted revenue along with the pricing initiatives that have improved gross margins. Could you provide some additional insights into these strategies? Specifically, is there a link between your pricing initiative and the potentially easing competitive landscape as some smaller competitors who were initially pricing aggressively might have now pulled back amidst the tariff uncertainties?

A: Yeah. And you may be confusing some of the comments on Europe, some of the pricing pressures that we've seen have been in Europe and a few countries that have put some pressure on the pricing improvements or some gross margin. I want to make sure, are you specific? Well, talk about North America or Europe?

Q: When you're doing the corporate tariff math and looking at the imports from Taiwan, how does the delta to the OE product shake out here? Is the OE primarily USMCA compliant or domestic? Yeah. I guess netting out the tariffs, does your value gap to OE remain equal, or are you relatively more or less expensive than you were before?

A: Yeah. Great question. I mean, the devil will be in the details of what the final decision's gonna come out to. As you know, you followed LKQ Corporation for a while. Our pricing is always typically less than the pure aftermarket competitor just because of our quality of our service and fill rate. Then we hover below the OEM. So we always kind of play in that space somewhere in the middle between OEM and the other aftermarket pure players. If there's parity, meaning if all the tariffs go through and there's really no exemption, we'll be on equal playing field. There's enough margin gap there where we can improve price and still be competitive and offer the insurance company and the consumer savings to the OEM. It'll really depend on what happens not only to the tariffs, but then how do the OEMs react. I mean, we actually seen a flat price change in the OEs on April and of the prices that we've seen come through for planning in May. So we haven't seen them move their needle yet, but if, you know, they're gonna be experiencing some of those tariffs that we are, then I expect them to raise their prices as well. But it'll really depend on what the final decision comes to.

Q: On the European price competition, is that primarily GSF, or are there others over there that are being aggressive in other markets outside the UK?

A: I mean, we always have competition on pricing. The most aggressive is in the UK, I would say. We're starting to see some of that slow down. Some of their, you know, they've expanded quite a bit, but we've seen that expansion slow down. But the main area has been in the UK.