Good day and thank you for standing by. Welcome to the LKQ Corporation's Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Joe Boutross, Vice President of Investor Relations for LKQ Corporation. Sir, please go ahead.

Thank you, operator. Good morning, everyone, and welcome to LKQ's second quarter 2021 earnings conference call. With us today are Nick Zarcone, LKQ's President and Chief Executive Officer; and Varun Laroyia, Executive 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 next few days. And with that, I'm happy to turn the call over to our CEO, Nick Zarcone.

Thank you, Joe, and good morning to everybody on the call. This morning I will provide some high-level comments related to our performance in the quarter, and then Varun will dive into the financial details, as well as our improved outlook for 2021 before I come back with a few closing remarks. This was another quarter of significant operating progress, driven by excellent execution and improved business conditions. I could not be prouder of the LKQ team. A few years ago when we pivoted to operational excellence, we knew that there would be a transition period during which we would need to invest in our people and processes to improve the operating model. We also recognize that there would be difficult decisions needed to right size the cost structure and drive efficiencies. We undertook this shift with the expectation that we would come out the other side as a leaner, more nimble and stronger organization, one that could succeed in difficult conditions like we have seen with the pandemic over the past year, as well as thrive during the good times. Those expectations are being realized. While I'm not ready to proclaim mission accomplished, I believe we have made tremendous progress in our operational expense transition as evidenced by the continued outstanding results that we've delivered over the past year. Record outcomes don't happen by accident and the team has driven strong profitability and cash flow by among other actions applying a disciplined pricing approach, implementing permanent cost-saving actions, including closing underperforming locations, consolidating delivery routes and reducing headcount. Timing our operating policies to reduce waste and increase yield, such as harvesting more catalytic converters per car, actively engaging with our vendor partners to ensure that we are receiving attractive pricing and market payment terms, and monitoring our receivables so that we minimize past due balances. Now onto the quarter, we were able to produce yet another record quarter. Indeed each of the last four quarters results represent the highest earnings per share reported in the respective quarters with Q2 of 2021 reflecting the first quarter with over $1 of earnings per share and the highest segment EBITDA margins in over a decade. Varun will dig into the market details shortly. Revenue for the second quarter 2021 was $3.4 billion, an increase of 31% as compared to the $2.6 billion in the second quarter of 2020. In the second quarter, parts and services organic revenue increased 22%, while the net impact of acquisitions and divestitures decreased revenue by 0.3% and foreign exchange rates increased revenue 5.4%. This creates a total parts and services revenue increase of 27%. The organic revenue growth for the quarter reflects the annualization of the pandemic impact during Q2 2020. Net income for the second quarter of 2021 was $305 million as compared to $119 million for the same period in 2020, an increase of 157%. Diluted earnings per share for the second quarter was $1.01 as compared to $0.39 for the same period last year, an increase of 159%. On an adjusted basis, net income in the second quarter was $340 million compared to $161 million in the same period of 2020, an 111% increase. Adjusted diluted earnings per share for the second quarter was $1.13 as compared to $0.53 for the same period of 2020, a 113% increase. Now let's turn to some of the quarterly segment highlights. Slide 5 of our presentation sets forth the monthly revenue trends for the quarter, and as you can see coming off a low base of the second quarter of 2020, the growth rates improved significantly year-over-year for each of the segments with April and May being the most notable. The vaccination rates in our key geographic markets are encouraging. Europe in particular, witnessed a solid increase in vaccinations throughout the second quarter, although it still lags the United States. We, like many, are closely monitoring the Delta variant and the risk of policy actions potentially slowing economic growth if the variant were to rapidly spread. Turning to North America, according to the U.S. Department of Energy, fuel consumption for the second quarter was 28% above the prior year and 5% below the second quarter of 2019. From Slide 6, you will note that organic revenue for parts and services for our North American segment increased 19.7% in the quarter on a year-over-year basis. When looking at our performance relative to collision and liability repairable claims data in the quarter, given the aberrations associated with the significant swings in 2020, we believe the most relevant comparison is to the second quarter of 2019. During Q2 organic revenue for parts and services for our North American segment declined about 9% on a per day basis relative to 2019, while repairable claims declined 15%, so another period of outperformance for our North American operations. I want to highlight a couple of examples of how the North American team continues to push the operational excellence initiatives. In 2019, our North American team initiated a lean operating strategy based on the principle of doing more with less. During the first step of this strategy, the team asked the simple question, what does winning look like? The answers to that question allowed the team to unify and develop several key performance indicators that were deployed in early 2020 prior to the pandemic, and we immediately generated positive results. We are now in the second phase of this strategy which is systematically implementing a lean roadmap to optimize those KPIs. We are transitioning the team to a daily management system which addresses safety, quality, delivery, and our customers. This system is improving our communication and accountability while driving root cause and corrective actions along with sustainable sharing of best practices. In Q2, our salvage procurement team began utilizing artificial intelligence to optimize the procurement of the salvage vehicles we bid on at auction. This artificial intelligence uses computer vision, a technology that allows algorithms to reason based on images to assess the specific damage on each vehicle and to determine which parts can be recycled and reused. This technology enhances the human element of our procurement processes to further improve our part yield per vehicle and to advance the quality standards of each part. Additionally, during the quarter, our Letech business expanded its services beyond on-site mobile diagnostics and repair to also include remote automotive diagnostics and remote programming. Moving on to our European segment, organic revenue for parts and services in the second quarter increased 20.7% on a reported basis, a 19.2% on a same-day basis. When compared to 2019, our European revenue was down about 2% on a per day basis. Our regional operations continued to experience growth and revenue performance in the quarter, but each market was positive on a year-over-year basis. Our UK business had the strongest recovery, largely due to our favorable inventory availability relative to the competition, and we are confident we are gaining share in the UK market. I'm also pleased to say that we are witnessing some modest market recovery in Italy, a market that was dramatically impacted by the pandemic, but it continues to remain a drag on the revenue growth and margins for the overall segment. As you can see from the significant expansion in the European margins, we are making excellent progress on our 1 LKQ Europe program. Since September 2019, when we first announced the program, the European EBITDA margins have increased about 300 basis points from 7.7% in the second quarter of 2019 to 10.7% in the second quarter of 2021. In reality, there have been two distinct components to this effort. One is organizational and relates to creating a fully centralized pan-European leadership team and functional structure. The other is execution-related, which focuses on the key initiatives outlined in prior communications, such as procurement, logistics, and local projects. Over the past two years, we have been working on both components simultaneously. And I am happy to announce that we have completed the organizational transformation. We now have all the right people in the right seats in a streamlined structure that reflects a single business as opposed to a collection of independent businesses. The execution element will be with us forever and will be the driving factor behind the continued productivity improvements in the years to come. A few other items to note in Europe would include that during the first week of July we began onboarding a few group of about 25 employees for our Innovation and Service Centre in Katowice, Poland. The Fource CDC project in the Netherlands remains on track and the start of that major warehouse operation is planned for March 2022. And our ERP implementation at Rhiag in Italy went live on July 5. Some of you may have known that on July 14, the European Commission came forward with the Fit for 55 proposal, which accelerates and details plans for a greener economy and reducing net emissions in Europe by at least 55% by 2030 compared to 1990. As a leader in the circular economy and the largest vehicle and parts recycler worldwide, LKQ embraces the global effort to reduce CO2 emissions. Our European segment and also Mekonomen, where we have a 26% stake, are first movers in supporting our customers for service and repair of hybrid and electrical vehicles. According to the Automobile Manufacturing Association of Europe, banning a specific technology is not the sole and rational way forward and internal combustion engines including hybrids need to play a role in the transition to zero emissions. Now let’s move on to our specialty segment, which again had an outstanding performance during the second quarter by reporting organic revenue growth of 30.1%. Specialty had a record-breaking quarter in terms of revenue, EBITDA dollars, and EBITDA percentages. As witnessed in Q1, the drivers of this tremendous performance continued to be the strong ongoing demand for parts related to RVs and light trucks, combined with a very disciplined approach to controlling costs. We also believe that the stimulus checks benefited the specialty business in the quarter. Across all of our segments, we are experiencing some level of supply chain shortages and disruptions. These disruptions are creating product scarcity and freight delays that are resulting in meaningful availability pressures in certain product lines. The supply chain challenges are also driving product inflation which in turn is generating the most robust pricing environment we've seen in years. Across all of our segments, we have been very effective in passing along these costs as witnessed by our margin performance. Alongside supply chain inflationary pressures, like many businesses across the globe, we are facing wage inflation and increased competition for labor. We are constantly looking at our wage structure and turnover rates across all of our segments to ensure we stay ahead of any competitive pressures and help backfill the open positions with the best candidates we can attract. From my corporate development perspective, in the second quarter, we acquired the business and assets of Green Bean Battery, a hybrid battery reconditioner and installer. Also in Q2, Warn acquired Fabtech Industries, a leading manufacturer of aftermarket suspensions for light trucks and SUVs. Fabtech brands, which include Dirt Logic, and Stealth shocks, are widely recognized premium offerings in the off-road racing and performance segments and are a tremendous complement to our line of Warn products. Both of these small tuck-in acquisitions represent our ongoing effort to evolve our product offerings to match the changes taking place in the car part and to leverage our robust networks across all segments to sell deeper into existing and prospective customers. Lastly, I am proud to announce that during the second quarter, MSCI increased LKQ's ESG rating from A to AA, which is the second increase in the past two years. This new AA rating places us in the top 19% of our index group. Also, earlier this month, ISS significantly increased our social and governance QuickScore ratings. Please refer to Slide 18, which highlights our environmental stewardship in the quarter. And I will now turn the discussion over to Varun, who will run you through the details of the strong second quarter performance.

Thank you, Nick, and good morning to everyone joining us today. Before I cover the financial results, I want to highlight a number of significant events and accomplishments related to our capital allocation over the recent past. With the pivot to operational excellence in 2018, our approach to balance sheet and capital allocation moved towards targeting investment grade credit metrics. This strategy placed an emphasis on generating strong, sustainable free cash flow, maintaining a conservative leverage position, and deploying capital to the highest return opportunities. I'm very pleased to report that we've made remarkable progress on all measures, and getting the validation of an investment grade rating from Fitch this past May is a tremendous achievement for the organization. Looking back at the last 36 months, starting just after we completed the Stahlgruber acquisition, we have produced $3.8 billion in operating cash flow, which supports a nearly 80% conversion rate of free cash flow relative to EBITDA. As shown on Slide 14 of the presentation, we've used these funds to repay $2.1 billion of debt, which resulted in deleveraging the balance sheet from a 3.1 times net leverage as of June 2018 to 1.2 times as of June of 2021. Additionally, we have repurchased over $800 million of LKQ stock at an average price of approximately $33 per share or roughly 35% below the current share price. We have not sacrificed investment in the business during this period, with roughly $660 million of capital expenditures invested to support our growth and operate more efficiently. Transitioning from the consolidation phase of the company's evolution, acquisitions have been a relatively small part of the capital allocation, though we remain committed to targeted tuck-in acquisitions that deliver high synergies or critical capabilities. Our actions over the last three years have put the company in a very strong liquidity position, which has allowed us to complete the following during the second quarter. First, we've delivered a further $411 million in operating cash flows as we converted 79% of our EBITDA into cash. We redeemed three quarters of the $1 billion euros 2026 euro notes on April 1, the earliest available redemption date with funds from our lower-cost revolver, as well as cash on hand. We repaid the full amount of the remaining term loan of approximately $320 million ahead of schedule, again using funds from the revolver and cash on hand, and we repurchased $304 million of LKQ stock, our highest level of quarterly purchases to date. With our debt transactions, we reduced overall liquidity by utilizing available capacity on the revolver. We believe future cash flow needs can be supported by a smaller facility, so we eliminated the term loan and moved more funds to the revolver, which in turn will lower borrowing costs even further. We continue to believe that LKQ shares represent good value, and our repurchases reflect that belief. As shown on Slide 17, we have continued to repurchase shares under our 10b5-1 plan in July, with an additional $100 million invested through last Friday. Since we were nearing a $1 billion authorization, we went to our Board of Directors for an increase in the total authorization to $2 billion. The Board approved the expansion, and we now have the ability to repurchase a further $1 billion through October 2024. Now I'll move to the financial results. As Nick described, Q2 was a very successful quarter with positive contributions coming from revenue growth, gross margin expansion, and operating expense leverage. Gross margin was a highlight for the quarter, increasing 270 basis points relative to the prior year or 250 basis points on an adjusted basis. The margin improvement is more noteworthy, as it came in a period in which input costs rose across each of our segments. We remain disciplined in our pricing, and as a distributor, we have been able to pass through the higher input costs coming from the supply chain. Gross margin also benefited from the tailwinds of commodity prices. As you can see on Slide 28, scrap steel and precious metal prices, which have been mostly favorable over last year, provided additional benefits this quarter. We estimate that scrap steel and precious metal prices added roughly $57 million in segment EBITDA, and approximately $0.14 per share in adjusted diluted EPS relative to last year. While we started to analyze some of our permanent cost reductions that we enacted in 2020, there was still an incremental benefit in the second quarter. Our SG&A expenses as a percentage of revenue showed the favorable leverage effects of the cost actions and the other revenue growth, dropping to 26.2% in the quarter or 190 basis points better than Q2 of 2020. Even with the tailwinds related to commodity prices, the largest share of the year-over-year increase in adjusted diluted EPS related to operating performance. I'll now turn to that operating performance with our segment highlights. Starting on Slide 10, North America produced its highest segment EBITDA margin in the company's history at 20.8%. Q2 is the fourth consecutive quarter that we've been able to make this statement. The primary factors behind the improvement are similar to the last few quarters as the segment continued to benefit from ongoing gross margin initiatives and permanent cost reductions. We are still driving costs out of the business, and we currently estimate the permanent cost savings to be $105 million, a $25 million increase relative to the figure shared in last September's Investor Day presentation. Additionally, the commodity pricing benefits on gross margin and operating leverage I mentioned earlier are seen here, helping to drive the North American margins above our long-term expectations. As seen on Slide 11, Europe reported a 10.7% segment EBITDA margin, which represented a 330 basis point improvement over last year. With a year-to-date margin of 10.2%, we are on track to deliver on our margin goals. Europe is benefiting from the revenue recovery, improved net pricing, and cost containment actions taken in the last year. Moving to Slide 12, Specialty continues to execute its operating plan extremely well. Similar to Q1, Specialty generated significant revenue growth in the quarter, without sacrificing margin and continued to effectively manage operating expenses. The segment EBITDA margin of 14.9% is the highest quarterly figure since the business was acquired in 2014. We are also delivering meaningful savings from our focus on the capital structure. The early redemption of the 2026 euro notes created interest expense savings, and additionally deploying free cash flow to debt pay downs and share repurchase generated interest expense savings and an EPS benefit from our reduced share count. We estimate that these factors added approximately $0.03 per share to our second quarter results. Additionally, Mekonomen's solid performance and other investment income improvement generated another $0.02 of year-over-year growth. Given the improved expectation of full-year profitability, we decreased our projected effective tax rate in our outlook from 26.5% to 26.25%, which had a nominal benefit on the quarter. So to recap, our adjusted EPS of $1.13 is a $0.60 increase from Q2 of 2020 which was a low comparable given the pronounced COVID impact last year. The commodity benefits, along with the increases attributable to investments, the tax rate, our capital deployment, and a slight tailwind from foreign exchange, produced about $0.20 of the improvement. The remaining $0.40 comes from our operating performance focusing on profitable revenue growth, enhancing gross margins, and controlling our overhead costs. And this should be the key takeaway when considering the second quarter results. I will wrap up my prepared comments with our updated outlook for 2021. Consistent with the level of detail we have provided in recent quarters, we are comfortable making the following statements, all of which assume that additional mobility restrictions beyond what are currently in place are not implemented in our major markets. Foreign exchange rates hold near recent levels and scrap and precious metal prices trend lower in the second half of the year. Number one, we believe that our parts and services revenue will be higher than 2020 on a full-year basis, and we will continue to recover in our core North America and European segments in the second half of the year as mobility trends benefit from further progress on vaccination rates. We expect the second half growth rates to decline relative to what we reported in the most recent quarter, as the pandemic effects were not as severe in the second half of 2020 for our business. While we expect demand for our specialty products, we remain strong. We anticipate the growth rates to be lower than the first half of the year due to the second half seasonality and the expected end of the stimulus program. As discussed previously, we will have two fewer selling days in North America in 2021, with one having occurred in Q1 and the second to occur in the fourth quarter, while Europe is flat for the year overall with one day shifting from Q1 into Q2. Second, with another excellent quarter in Q2, we are projecting full-year adjusted diluted EPS in the range of $3.55 to $3.75 with the midpoint of $3.65. This is an increase of $0.55 or 18% at the midpoint over our most recent prior guidance. This increase reflects the outperformance in Q2 in addition to higher anticipated results in the second half of the year as we expect the benefits from our ongoing margin and operating expense programs, and our strategic cash deployment to outweigh strong inflationary headwinds related to labor, freight, fuel, and inventory costs being experienced throughout the industry. And third, I began my comments by noting the significant progress we made on our capital allocation strategy, including outstanding cash flow generation in the second quarter. With this in mind, along with the higher projected net income for the year, we are raising our free cash flow guidance to a range of $950 million to $1 billion, with $1 billion at the midpoint. We still anticipate an inventory build in the back half of the year ahead of the traditionally strong Q1 and Q2 seasonal demand. In the interim, our teams, with the active support of our vendor partners, continue to expertly navigate the situation to ensure that we have the right parts in the right places to best serve our customers. And finally, the European payables optimization program remains on track and will help to partially offset the impact of the inventory build on cash flow. Thank you once again for your time this morning, and with that, I'll turn the call back to Nick for his closing comments.

Thank you, Varun for the financial overview. Let me restate our key initiatives, which continue to be central to our culture and our objectives. First, we will continue to integrate our businesses and simplify the operating model. Second, we will continue to focus on profitable revenue growth and sustainable margin expansion. Third, we will continue to drive high levels of cash flow, which in turn give us the flexibility to maintain a balanced capital allocation strategy; and fourth, we will continue to invest in our future. As you can see from our results, our company executed on each of these initiatives in the second quarter, and for that, I offer a tremendous thank you to each of our 43,000 plus team members across the globe that make it happen each and every day, really defining what it means to be LKQ proud. And with that operator, we are now ready to open the call for questions.

Thank you, sir. We have our first question from the line of Craig Kennison from Baird. Your lines are open.

Hey, good morning. Thanks for taking my questions. Lots of goodness to work with you, but I'll focus on your credit profile and the implications for cash flow. Varun, what are the implications of an investment grade rating from Fitch on your vendor terms? I guess, I'm wondering will the Fitch decision cause any immediate change to your payable terms of key vendors which would be a positive for cash flow?

Good morning, Craig. Great question and great to hear from you. Yes, incredibly pleased with the company firing on all cylinders, you know across revenue margin the goals of free cash flow conversion coming through and then also the way we have deployed it. With last year's specific question about the recent investment grade rating initiation by Fitch, in itself it makes no change to either our credit facility or for that matter vendor terms. But if you go back, and this is a public document, and go through our credit facility agreement, within that piece we have a prewired clause which essentially states that if one of the two currently named rating agencies were to make LKQ investment grade, the fees in our $1 billion credit facility drop off, which of course is a significant number. The second piece is, within the credit facility we have a current feeling that our indebtedness through for grade payables cannot exceed 180 days. So again, just to recap, the Fitch decision in itself does not change anything today, but clearly being one of the three key rating agencies out there, one of them has this view of us, I have no doubt that given the ongoing discussions with the other two rating agencies, they too will come around. I don’t believe it's a question of if, it's more a question of when.

Got it, so just so I'm clear, you need one of the other two to make a change in order to trigger some of those changes in your contracts?

That is correct.

Thank you. The next one is from the line of Daniel Imbro from Stephens Inc. Please go ahead.

Yes, good morning guys.

Good morning, Daniel.

I want to start on North America, Varun, obviously, the gross margin was really strong and part of it that is driven by metal. But can you talk about how the team handled that strong revenue growth with the lower headcount? Have you been able to keep out as many of the expenses that you anticipated? And have there been any hiccups in hiring when you need to given the employment backdrop?

Daniel, good morning. Yes, it is Varun Laroyia, and listen, it's an excellent question. Before I get to the specifics of answering your question, I just want to make sure that all of our 43 plus 1000 associates globally are given a big shout out, what our field teams have done globally, from branch to a warehouse to a dismantling yard, has just been nothing short of phenomenal. Our success, LKQ's success is directly attributable to our field teams. And the last 17, 18 months have not been easy. But they are the ones that have kept this company humming along. And really exceeding everyone's expectations and putting up yet another record quarter. Yes, you're right, with regards to North America margins at 20.8% in the current quarter, or 19.9% in Q1, this is higher than what our long-term expectation has been, has been very clear, both in the first quarter and now most recently, in my prepared comments. Precious metals have been a benefit. And we estimate and if you go to see Slide 28 in the earnings deck, we've actually given transparency in terms of how scrap metal and precious metal prices have been trading. And really what level of benefit has come through, we estimate roughly 350 basis points of that 20.8% margin that North America has put is directly attributable to scrap and precious metal prices. Even if you were to get these out, the business is still delivered well north of 17 points. And so that really is what gives us a lot of comfort, could we have done better, perhaps, but there are inflationary pressures, I'd say the single biggest challenge at this point of time, not just for LKQ, but I'd say across the entire industry here in the United States has been labor, and labor, essentially, whether it be availability, or whether it'd be the cost to get that labor. It is leading to congestion at ports, it's leading to higher freight costs, because delivery drivers are incredibly difficult to find. But that has been the key piece. And that's why I come back full circle. In terms of giving a massive shout-out to our field teams, we have been running short with regards to labor availability. We have taken wages up also, just to make sure that we are market competitive. But we have got branch managers, plant managers, drivers going and making deliveries because we want to make sure that while we have the right part of the right place, we continue to serve our customers. Without customers, we really don't have a business and just want to make sure that that is heard loud and clear our field procedures are outstanding.

That’s great. Really helpful color and then just a follow-up on the North American margin, obviously you're right, metal prices, you called out the $51 million I think an EBITDA. But is that part of what's also raising your COGS in North America? If I looked at this via the thing, self-service cost was up 53%, salvage vehicle drove 36%. So if metal prices roll over, should there be some natural offset in that as your cost to acquire vehicles at auction would go down as well?

Yes, absolutely, yes. I think that's what we've kind of said in the earnings call so that salvage prices have been running pretty high for quite some time. But again, it's partly to do with where the dollar has been creating. So lots of export trade has been taking place. As we know there's been a shortage of chips and so OEM sales have come down. As a result, huge cut prices in our precious metals around that is certainly flowing through our COGS also. There is no doubt about it.

Great. Thanks so much guys and best of luck going forward.

Thank you, Daniel.

Thank you. The next one is from Brian Butler from Stifel. Your line is now open.

Good morning, thanks for taking my question.

Good morning, Brian.

First one just kind of on that point of the labor and kind of inflation, could you maybe just kind of rank where you see it? I mean, looks like labor is at the top, but we're on and kind of put in perspective on magnitude, where does freight and fuel fall below that on the inflation pressures?

Yes, I would put that in probably that order labor first. Because you have to remember that over 60% of our operating expenses ultimately come back to people; it's the biggest portion on the P&L the biggest expense. And so, and we have 43,000 plus people around the globe, so that's number one. The second would be freight. And that not only relates to ocean freight, which is up significantly, but also the domestic freight, whether it be in the U.S. or in Europe, and then, some people put fuel as part of freight, we try and separate it out. Obviously, you can track oil prices; they've been up as well. I'd point to you Page 7 of our deck, which kinds of sorts out where we have saved money over the past year or so. And you know, most of the savings has been on the people side, and then secondly on the delivery side, and then finally kind of facilities and the like. So, again, I would put it in that order; think about people, freight, and then fuel.

Okay, that's helpful. And then just my follow up. When you think about the M&A pipeline, and your focus has been recently on kind of the operational excellence, can you give a little color on where that M&A pipeline stands and what might be targeted in the next year or two or what assets you're still looking at?

Absolutely. So I mean, we are always looking for ways to add to our strengths as an organization and whether that comes in acquiring new geographies where we don't have a presence, whether it comes from acquiring new product lines or new skill sets. Obviously, the focus currently is on kind of newer technologies. Right? So we've made a number of acquisitions over the last year in the whole diagnostics and calibration space. And we're building up a very nice business there. As you know, and we've mentioned in the call, the Green Bean acquisition in Q2, that relates to battery technologies. And we all know that ultimately battery servicing and dealing with EV batteries, whether it's hybrids or battery-electric vehicle batteries, is going to become important, so you should expect additional investment in that area. So anything we can do to evolve our product and service set and the services is a key component there, relative to the evolution of the car park; that's what we're going to do. And you should expect that you will see additional acquisitions, probably smaller, because particularly in these newer technologies, there are no big companies out there to buy. So we can, again, make sure that we are on the cutting edge as it relates to what we can provide our customers.

Yes, and Brian, this is very consistent with what we've been talking about for quite some time, including at our Investor Day that, M&A, while it may seem that the pace of M&A has slowed down, not really, really the focus has been different, rather than going whale hunting. As the European segment was built up, the focus has really been as Nick said, the focus has been on high-synergy tuck-ins and building critical capabilities, and that focus remains.

Great, thank you. I’ll get back in the queue.

Thank you. The next one is from Bret Jordan from Jefferies. Your line is now open.

Hey, good morning, guys.

Good morning, Bret.

Hey, on the payables, if you do get a second rating agency to tip your way, what would be sort of a shorter-term impact? I think you're close to 50% accounts payable to inventory, but what kind of step up would you see if you got to investment grade?

Great question, Bret. The biggest uplift really will be from our European business. And just given the nature of the European business and how we compare that from April's optimization program relative to say the Big Four here on car park site in North America. Our North American business per se, we have some opportunity. But if you think of the salvage business, whether self-serve or full-serve, it's just a different business model. If you think about the size and scale of a European business, which at this point in time is roughly half the company, that really is where the opportunity is, and we certainly see that there's further upside down there, not just with the fact that we would get the investment grade rating at some point in time. And so the 180-day ceiling obviously gets lifted. That's more of a tactical piece, but more on an ongoing basis as the team continues to engage. It's active discussions with a number of our vendor partners. The focus really had been let's get to the top 40 and then the team continues to go further down the chain, as part of the overall supplier rationalization discussions, making sure that we continue to get our calls at attractive prices, but also had what we believe to be market convention terms.

Okay, thanks. And I guess quick question on supply chain. Is the disruption and sort of inventory availability actually a positive for you in the sense that you're gaining share as others are maybe less available, and I guess give anything anecdotal on what percentage of repairs are now alternative parts in North America?

Yes. Great question. Obviously, the supply chain not just in our industry, but in most industries is under duress at the moment. For us, it really depends on the business and the product line, because there's significant differences across the LKQ platform. Like in salvage, there's no impact, because all that product is here, and it's easy for us to get at the options. Our aftermarket business here, however, most of the aftermarket collision products for the whole industry, not just us, ours comes out of Taiwan and it's not an issue related to our ability to procure the products. The manufacturers have the ability to stamp out the parts. The issue is getting it from the warehouses in Taiwan to the warehouses in Tampa or Toledo or Topeka, or wherever we need them here in the U.S. And everyone knows what's going on with the issues related to container capacity; port congestion is a major issue. I mean, we've got ships sitting on the water just waiting to be unloaded. There's a lack of capacity to unload the ships. There's a shortage of drivers to do the dredging within the ports, moving the containers around. And then there's a shortage of trucking capacity to actually get the containers from the ports to our locations. So what's that doing, it's extending the timeframe of how long it takes us to get product and costing a little bit more money. The good news is the vast majority of our ocean freight is under contract, at least for quite some time now and going into the future. Spot rates, as you know, are up anywhere from six to eight fold. The good news is, again we're under contract. We're bringing in 15,000 containers a year, that's 300 containers a week. And I wouldn't want to be a company that's importing 300 containers a year, or 50 containers a year, which many of our smaller competitors are dealing with. So we don't have the inventory that we want, but we can — we're making it work. And clearly, we think we're in a better position than most of the small players out in the marketplace. Now you move over the specialty, and it's different. Yes, they bring some products in from the Far East and we're dealing with the exact same issues in the aftermarket in North America. But they also source the majority of their product domestically or at least within North America. And there are real issues with the capacity of manufacturers who simply cannot keep up with demand. We would like to have more inventory in our specialty group. We've said in the past quarters, and this quarter was true as well, we've probably lost some revenue because we then have products on the shelves. But again, as the largest distributor and what we do, we are doing much better than the smaller competitors. And Europe is somewhere in between, Bret. I mean, the reality is, they import less product from Asia than we do in our North American collision business. But they are also experiencing some tight supplies on certain products that are produced within the EU. So it's creating issues, but we think we're doing a pretty good job of managing through.

Great, thank you.

Thank you. Next one is Stephanie Moore from Truist. Your line is open.

Hi, good morning. Hi, Nick, hi Varun, hi Joe.

Good morning.

Good morning.

I wanted to touch on the European margin performance and expectations kind of implied in the second half of the year, obviously as the record and tremendous Q2 results. But if you just kind of back into even your updated guidance, it does account for a bit of a slowdown the back half off of the Q2 levels, but admittedly, nice improvement year-over-year. So I'd love to get some color just as you kind of updated your guidance, what your thoughts are for the back half in terms of the margin performance. And why there should be some kind of slowdown from the second quarter, just any puts and takes there would be helpful? Thank you.

Good morning, Stephanie. It's Varun out here, and let me take that question. So first of all, I'm really pleased with how our European business continues to perform. If you go back when we initiated the one LKQ Europe program and formally gave margin targets. We basically called for exiting sustainable double-digit margins at the end of 2021 backwards in September of 2019. Amazing how fast time goes by, but we are now in the last six months of that three-year journey. And the way the team has navigated these incredibly choppy and turbulent times, with a pandemic thrown in for good measure has been nothing short of phenomenal, really pleased with the team out there, as you obviously have made out, we do have a number of relatively new leaders out there also. But really, the point being in terms of the talent that we needed, we have out there this point of time, very optimistic about the future also, more to the point about your specific question about a slowdown in the second half. Not really, if you actually go back and see the European business historically, and obviously take our 2020 because that was the pandemic year, or at least it's still continuing. But if you drill back historically, Q1 and Q2, typically are strong Q3 is also relatively strong. But then Q4 is typically, seasonally the weakest for our European business. So it's really kind of seasonal is what we are thinking about in terms of how we are forecasting that European business more than anything else, as of now. There obviously are, a lot of flip flop measures taking place as the country opens, as the country is not opened. Yesterday morning, the United Kingdom said that EU and U.S. travelers that have had the double jab would be welcomed without a quarantine; one never knows whether that continues or not. About four weeks ago, we held our European leadership conference that was held virtually, all of our platform leaders that were on the continent did make it into our European headquarters in Switzerland, with the exception of our UK leadership team. And again, that just tells you in terms of what's happening out there. But overall, the way the program is coming along, how the team is executing, we feel good about it. And that is essentially what gives us the confidence to be able to lift the floor on the 9.2 to up to 10/3 up by about 30 basis points to a 9.5 to a 10.3% full year segment EBITDA margin for the European business. And let me kind of just one final piece, also say these numbers include roughly about 20 to 30 basis points of transformation expenses. And at times, it is easy to overlook those pieces, but that is also a drag. But that is the way we have been reporting it. So that number that I just quoted includes, at least in the first half, a 20 basis point drag; you can obviously take that away. And certainly, we do expect to accelerate the transformation efforts in the second half.

And Stephanie, some of the seasonality just goes along with holiday patterns. Obviously, August tends to be a very soft month in this industry as people are on vacation in Europe. And then once you get to the holidays, things really shut down, really after the pretty close to the second half of December.

Great and that makes sense. Thank you so much for your time.

Thank you.

Thank you. Next one is Gary Prestopino from Barrington Research. Please go ahead.

Hey, good morning, everyone.

Good morning, Gary.

Gary.

Nick, could you give me those statistics on the collision claims in the quarter from CCC? I couldn't write it down fast enough; do you have that?

Absolutely. So we think that the best way to look at it, given the total disruption in 2020, is to compare our organic growth because collision claims actually in the second quarter of 2019, which was a normal year for CCC, when comparing 2021 to 2019 was down 15%, while LKQ organic was down 9%.

Okay, 9%. Thank you. Then, just in terms of you guys have done a lot of great work on getting the OpEx down a little. Can you run the business starts growing again, when things do return to normal? I mean, can you run the business in somewhat more of a growth mode, like say 4% to 7% while holding the personnel expenses as a percent of sales at that 15.6%, or as you grow, you've got to add more people?

As we grow in terms of revenue, it naturally leads to more deliveries, more trucks on the road, and increased staffing in the warehouse. We cannot simply increase revenue without also increasing our workforce. I have been clear with my team that we need to see a revenue rebound before adding personnel or significantly increasing expenses. For North America, we have established sustainable margins in the high 16s. In comparison, we were at 12.7% in 2018 and 13.7% in 2019, aiming for over 15%. Last quarter, we indicated margins in the low 16s and anticipate settling consistently in the high 16s as a long-term target, despite minor fluctuations. Therefore, we expect to need to reintroduce some expenses to enable capacity for revenue growth.

Okay, thank you very much. I appreciate it.

Thank you. There are no further questions at this time. Mr. Nick Zarcone, please continue.

Well, we certainly appreciate your time and attention here this morning. Your interest in LKQ means a lot to us. We'd look forward to having another conversation with you in about 90 days when we report our third-quarter results at the end of October. So we'll talk to everybody at that point in time, but again, we appreciate your interest and once again, a big shout out to the 43,000 folks who come to work every day at LKQ. You really make the magic happen. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.