Good morning. My name is Rex, and I'll be your conference operator today. At this time, I would like to welcome everyone to LKQ Corporation's Second Quarter 2022 Earnings Conference Call. Thank you. Mr. Boutross, you may begin your conference.

Thank you, operator. Good morning, everyone, and welcome to LKQ's Second Quarter 2022 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 coming days. And with that, I am happy to turn the call over to our CEO, Nick Zarcone.

Thank you, Joe, and good morning to everyone on the call. This morning, I will provide some high-level comments relative to our performance in the quarter, and then Varun will dive into the financial details and provide an update on our guidance before I come back with a few closing remarks. The second quarter of 2022 was one of the most unusual and complicated operating environments we've encountered, maybe ever, but clearly, since the financial crisis. During the quarter, we were confronted with ongoing COVID risk and the issues associated with an uptick in positive cases in our workforce. Major labor constraints, ongoing supply chain disruptions, a challenging inflationary environment globally as evidenced by June being the highest level of inflation that the United States has seen in some 40 years. Soaring energy prices, commodity price volatility, the unfortunate conflict in Ukraine, and political unrest across the globe. And all this has resulted in major volatility in the foreign exchange markets with the euro weakening materially in the quarter and reaching parity with the dollar in July. I think I speak for all CEOs across all industries when I say the sheer number of cross currents and headwinds have created some very challenging business dynamics. Yet, the LKQ team delivered another quarter of solid performance, driven by excellent focus and execution, exceeding many expectations, both internally and externally. I am very proud of the hard work and dedication demonstrated by our 45,000 employees that enabled our company to deliver on behalf of our stockholders and our customers during the quarter. I am equally proud of the team's commitment to effectively manage the dynamics of our business, which they can control, while not losing focus on growing the business, developing our people, and continuously looking for opportunities to generate leverage and synergies across our operating segments. This effective management will serve the company well as we progress through the balance of 2022 and continue to confront many of the same headwinds. Our confidence in our team's ability to manage through this environment is validated by the reaffirmation of our 2022 guidance, which Varun will discuss shortly. Now on to the quarter. Revenue for the second quarter of 2022 was $3.3 billion, a decrease of 2.7% as compared to $3.4 billion in the second quarter of 2021. Parts and services organic revenue increased 3.8% on a reported basis and 4.2% on a per day basis. The net impact of acquisitions and divestitures decreased revenue by 1%, and foreign exchange rates decreased revenue by 5.6% for a total parts and services revenue decrease of 2.7% on a reported basis or 2.4% on a per day basis. Other revenue fell 2.9%, driven by a decline in precious metal prices. Net income for the quarter was $420 million as compared to $305 million for the same period of last year. Diluted earnings per share for the quarter was $1.49 as compared to $1.01 for the same period of 2021, an increase of 47.5%. These amounts reflect a $127 million gain on sale of the PGW Glass business in April or $0.45 a share. On an adjusted basis, net income in the quarter was $307 million as compared to $340 million for the same period of 2021. Adjusted diluted earnings per share for the quarter was $1.09 as compared to $1.13 for the same period last year, a 3.5% decrease. The adjusted results exclude the impact of the PGW sale. Now let's turn to some of the quarterly segment highlights. In North America, organic revenue for parts and services for our North American segment increased 10.7% in the quarter on a year-over-year basis, which exceeded our expectations. This performance confirms the resiliency of our business model and our team's ability to effectively implement pricing initiatives to offset inflationary pressures. As it relates to volume, during the quarter, we saw some weakness, which was consistent with a 2.6% decrease in second quarter fuel consumption as measured by the U.S. Department of Energy. Additionally, vehicle miles traveled saw a little year-over-year growth, and Q2 growth was down relative to Q1. The largest pressure point in North America continues to be the aftermarket collision parts product line, which experienced reduced year-over-year volumes due to lower performance rates associated with the supply chain disruptions. During the quarter, we benefited from some minor relief in the aftermarket supply chain relative to Q1, which translated into a very modest increase in our fill rates, with June aftermarket fill rates reaching the highest levels of 2022. While we are still well below historical levels, we are encouraged by this modest positive trend in the supply chain, which is also evidenced by the decrease of spot container costs that the market witnessed during the quarter, albeit the shipping costs are still multiples above pre-pandemic levels. During the quarter, we were successful in getting a higher level of aftermarket collision parts shipped from Taiwan, but most all of that inventory is still on the water and won't be received in our warehouses until late summer or early fall. Our salvage collision part volumes were up a bit compared to last year as we were able to shift some of the aftermarket demand over to recycled parts. Recycled and remanufactured mechanical part volumes were generally flat on a year-over-year basis. The value proposition of alternative parts could not be more attractive than insurance carriers based loss pressures from increased parts costs, rising labor costs and technician shortages at the repair shops, broader supply chain issues and decreased availability, and increased cost of rental cars. During the quarter, collision repair costs increased 11.6% year-over-year with cycle time still being over double their historical averages. Recently, the value proposition of CAPA Certified Aftermarket Parts is being recognized by the largest auto insurer in the United States, that being State Farm through a small pilot program. On June 20, State Farm began an 8-week program where it introduced aftermarket bumper covers, headlights, and taillights when preparing repair estimates and settling auto claims in the Oklahoma and Texas markets. As you all know, State Farm has historically not utilized the aftermarket collision parts. We cannot predict the outcome of the pilot or estimate how this will impact State Farm's parts strategy going forward, and neither should you. That said, as with many things, the first test is the widest and the tallest, and we're cautiously optimistic that aftermarket parts could potentially become a larger portion of State Farm's parts spend over the long term, as they work through the outcomes of this pilot program. Moving on to our European segment. Organic revenue for parts and services in the second quarter increased 4.2% on a reported basis and 4.9% on a per day basis. Our regional operations continued to experience varying revenue performance in the quarter, but every geographic market was positive year-over-year with our Benelux, U.K., Central and Eastern European, and salvage businesses being the top performers. Importantly, Italy realized year-over-year growth, which reflected the second consecutive quarter of positive revenue performance in that region. As mentioned last quarter, we halted all sales of parts into Russia when the war commenced. This decision reduced same-day organic growth for the European segment during the second quarter by approximately 1.5% to 1%. Excluding the impact of the lost Russian revenue, same-day organic growth in Europe was 5.4%. When taken as a whole, the European volumes were down a bit during the quarter, but pricing was strong. We continue to make great progress with our 1 LKQ Europe Program. Alongside solid organic growth during the quarter, our European segment achieved double-digit segment EBITDA margins which represented incremental improvements, both sequentially and year-over-year. Our European teams focus on pricing actions, private label branding, and procurement initiatives generated positive results in the quarter. As I've said before, the execution element of the 1 LKQ Europe program will be with us forever, and it will be the driving factor behind the productivity improvements in years to come. Given all the current operating challenges in Europe, including the foreign exchange and geopolitical dynamics, I am very pleased with Europe's performance in the quarter. Now let's move on to our specialty segment. Organic revenue for parts and services for specialty declined 11.5% in the quarter, largely due to a tough year-over-year comp. As you may recall, this segment reported 30% organic growth in the second quarter of last year. So on a 2-year stack, the annual revenue growth is still well into double digits. Indeed, specialty revenue in the second quarter would have been a record for the team, if not for the buoyant performance in 2021. Our RV parts category performed better than the segment level growth as a whole during the quarter, as demand for the majority of our RV parts offerings is driven more by the size of the RV part and not new RV unit volume. That said, certain product groups such as towing that have some exposure to new unit volume, underperformed in the quarter. Also, some of the softness that the SEMA-related products experienced in the quarter was due to a year-over-year decrease in light vehicle sales in the U.S. In particular, pickup truck sales were down nearly 12% in the quarter, an important vehicle category for our specialty offerings. Now on to self-service. Organic revenue for parts and services for our Self-Service segment increased 13.2%. There was some softness towards the end of the quarter in precious metals prices, which also impacted segment EBITDA margins year-over-year. Self-service also had increased vehicle procurement costs as we were challenged to source inventory. The recent volatility in commodities further validates the rationale for breaking out this nondistribution Self-Service business as a separate segment, given it represents the vast majority of the other revenue category. Let's move on to the initial Q3 revenue trends. Revenue for North America's wholesale operation has gotten off to a solid start, though we don't anticipate it will continue at the double-digit growth rates experienced in the first half of the year. Our European segment is also witnessing a good start, with growth rates continuing at second quarter levels. Lastly, specialty revenue is slowly trending back towards prior year levels now that it has lapsed the incredibly strong growth rates experienced in the first half of 2021. We are experiencing some level of supply chain shortages and disruptions across all our segments. These disruptions are creating product scarcity and freight delays that are resulting in meaningful availability pressures. While supply chain challenges are also driving cost inflation across all our segments, we have been very effective in passing along these higher 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 our segments to ensure that we stay ahead of any competitive pressures and help backfill the open positions with the best candidates we can attract. Our focus on the total rewards received by LKQ employees, not just compensation, is helping us navigate the difficult labor markets. From a corporate development perspective, in the second quarter, we acquired four businesses. In the United States, we acquired Bumblebee Batteries, another EV battery remanufacturing operation. In Europe, we acquired a workshop concept in The Netherlands, two very small former Hess Automotive branch locations in Germany, and the equity interest of our former joint venture partner in a small aftermarket parts business in Germany. In addition to closing on the sale of our PGW business during the quarter, we also divested our equity interest in two small joint ventures. Lastly, on the ESG front, on May 23, we released our 2021 Sustainability Report and unveiled our new brand identity, reflecting the company's transformation from a salvage dismantler and recycler to a leading global value-added and sustainable distributor of vehicle parts, accessories, and services. LKQ is widely known and respected for our environmental stewardship. But within our 2021 CSR, we provided a deeper understanding of our social impact initiatives and strong governance structure, both of which underpin the long-term strength and success of our business. This year's report is another step in evolving our holistic ESG focus across our global organization with new and robust disclosures and accomplishments. Also during the quarter, 50/50 Women On Boards, a leading education and efficacy campaign driving the movement towards gender balance and diversity on corporate boards recognized LKQ as a 3-plus company. This award acknowledges our efforts in understanding the importance and advantages of having a diverse board that ultimately benefit stockholders, customers, employees, and communities. And I will now turn the discussion over to Varun, who will run you through the details of the strong second quarter financial performance.

Thank you, Nick, and good morning to everyone joining us today. I'm excited to be able to report that we carried the momentum generated by our operational excellence initiatives through the second quarter and produced another strong set of financial results. As Nick described, there is a great deal of volatility in the market related to inflation, supply chain challenges, exchange rate fluctuations, and commodity price movements on top of the geopolitical events and the ongoing pandemic. All these factors could easily have become a distraction and taken our focus away from executing on our operational priorities. I'm proud to say that the LKQ team did not let that happen, and our second quarter results reflect this ability to stay on point. Let me start with some highlights of the last quarter. As we announced in June, Moody's became the final of the three rating agencies to assign LKQ an investment-grade rating following previous upgrades by Fitch and S&P. We believe that we've taken the right actions over the last three years to strengthen our credit profile, and the Moody's upgrade to Baa3 with a stable outlook is further validation of our strategy. As discussed last quarter, achieving an investment-grade rating opens opportunities to improve free cash flow over the upcoming years, in addition to the immediate drop-off in the liens to the credit facility following the covenant suspension. With respect to free cash flow, we produced a healthy $288 million in the quarter, bringing the year-to-date figure to $638 million, and importantly, putting us on pace to achieve our full year guidance of $1 billion. I'm pleased that we were able to build our inventory towards the optimal level as shipping congestion eased a little bit, resulting in a net cash outflow for the quarter of $162 million on this specific account. Strong free cash flow, along with the proceeds from the PGW Glass sale, allowed us to return a significant amount of capital to shareholders. We repurchased over 8 million shares for $404 million and paid a quarterly dividend totaling $70 million. In just the last 12 months, we have repurchased over 20 million shares for approximately $1.1 billion and paid $215 million in dividends. In May, our board authorized a further $500 million increase to our share repurchase program to a total of $2.5 billion being authorized. We had about $600 million available as of the end of June, and we have remained active in the market in July. As previously stated, in April, we completed the sale of the PGW aftermarket glass distribution business for gross proceeds of $361 million. We recognized a pretax gain on sale of $155 million or $127 million after tax. Our U.S. GAAP EPS reflects the $0.45 gain, though we have deducted the gain from the calculation of adjusted diluted EPS. I'll now shift to the quarterly results. As expected, and previously communicated, precious metal prices were a drag on results year-over-year, generating a $32 million negative effect on segment EBITDA and an $0.08 headwind on adjusted diluted EPS. Most of the impact related to the precious metals found in catalytic converters, the prices of which were near record levels in the second quarter of 2021; roughly $20 million of the negative effect was reflected in the Self-Service segment. Exchange rates created a further headwind as the average rate for the euro and pound sterling decreased by 12% and 10%, respectively, compared to Q2 of 2021. The currency impact reduced segment EBITDA by $20 million and adjusted diluted EPS by $0.04 relative to last year. And finally, not having the PGW business for the full quarter was a further $12 million headwind to segment EBITDA versus the prior year. Keeping those external factors in mind, our second quarter results reflect a solid operating performance, while gross margin decreased by 30 basis points compared to a year ago, a 70 basis point negative effect came from the metals prices alone. Benefits in pricing and mix partially offset the metals impact. Overhead expenses, as a percentage of revenue, rose 60 basis points year-over-year due to inflationary pressures. Income taxes were booked at 25.3% for the year-to-date period, a 20 basis point increase over our prior guidance, reflecting the shift in the geographic mix of U.S. dollar earnings, as impacted by the significant shift in FX rates since we spoke 90 days ago. As Nick mentioned, diluted EPS was $1.49 for the quarter, including the $0.45 PGW gain and adjusted diluted EPS was $1.09. I'll now turn to the segment operating results. Starting on Slide 8. Wholesale North America produced an EBITDA margin of 18.7% for the quarter, down 90 basis points from the prior year period. Gross margin declined by 80 basis points. Inflationary increases in material and freight costs were offset by higher parts pricing and productivity initiatives. Segment overhead expenses were roughly flat owing to lower personnel costs from incentive compensation and productivity initiatives to mitigate inflationary pressures. Europe reported a 10.8% EBITDA margin for the quarter, up 10 basis points from the prior year period. As you'll see on Slide 9, gross margin improved by 80 basis points, primarily from procurement initiatives and pricing. Overhead expenses increased by 60 basis points from higher personnel, freight, and fuel costs. The segment's strong second quarter performance reinforces the team's expectation that they will deliver a double-digit margin for the full year. Moving to Slide 10. Specialty's EBITDA margin of 13.4% declined 150 basis points compared to the prior year, mostly coming from a decrease in overhead expense leverage, driven by an organic revenue decline of 11.5%, as I mentioned, anniversaries a very tough comp from the prior year when the business delivered over 30% organic revenue growth in the first and second quarters of 2021. Inflationary pressures also grew overhead expenses higher, including personnel, freight, and fuel expenses. The overhead expense increases were partially offset by 60 basis points of benefits from operating expense synergies, mostly generated from the SeaWide acquisition. To provide some context to the segment's performance, pre-pandemic in Q2 of 2019, specialty reported a margin of 12.7%. Since then, the team has made great progress on pricing and productivity, resulting in a 70 basis point improvement from the second quarter of '19 through to Q2 of 2022, in addition to growing the business by over $100 million in revenue. Moving to self-service. Self-service reported an EBITDA margin of 15.3% for the second quarter of 2022, a solid result for the segment, but below the heightened margin achieved a year ago. The decrease in self-service's margin in Q2 of 2022 was driven by movements in metal prices estimated as an 840 basis point negative effect year-over-year, higher car costs, and inflationary increases related to freight, fuel, and personnel expenses. The third quarter will be markedly tougher for the segment as the higher car costs from the second quarter cycle through in a significantly lower pricing environment for metals before stabilizing in the fourth quarter. I touched on liquidity and capital allocation in the highlights, so I'll reference a few other items of note. As shown on Slide 13, our year-to-date conversion ratio of free cash flow to EBITDA is roughly 70%, noting that the glass proceeds and the gain on sale are not reflected in these figures. There continue to be timing elements that will reverse over the course of the year, and we are confident in our ability to generate sustainable free cash flow in line with expectations of converting EBITDA to free cash flow in the 55% to 60% range for the full year. We have made further progress in rebuilding our inventory levels to achieve our fill rates targets. As you can see on Slides 31 and 32, we have increased inventory in three of our four segments since December 2021. Specialty was flat through December but was in a stronger position than our other segments and thus hasn't required a similar inventory build. We remain confident that our inventory positions will enable each segment to continue to offer best-in-class availability and service reliability relative to our competitors. Moving on to capital allocation. We paid down our debt balance by $248 million in the quarter. Our net leverage ratio came in at 1.2x EBITDA, and interest coverage exceeds 30x. It's worth noting that our net leverage ratio of 1.2x is in line with the June 2021 figure despite the use of $1.3 billion for share repurchases and dividend payments over the last 12 months. As our earnings release of this morning indicated, the Board has approved a quarterly cash dividend of $0.25 per share, which will be paid on September 1 to stockholders of record as of August 11. I will wrap up my prepared comments with our updated thoughts on projected 2022 results. Our guidance assumes there are no significant negative developments related to COVID-19 in our major markets. Scrap and precious metal prices hold near average June prices, and the Ukraine-Russia conflict does not escalate further. On foreign exchange, our guidance includes recent European rates with the balance of year rates for the euro of $1.02 and the pound sterling at $1.20. Starting with the revenue outlook, we remain comfortable with our revenue outlook and are holding our organic parts and services growth range between 4.5% and 6.5%. We are projecting full year adjusted diluted EPS in the range of $3.85 up to $4.05 with a midpoint of $3.95. We have narrowed the range as we are halfway through the year, but maintained the midpoint of our prior guidance. To understand why we held the midpoint, please refer to Slide 18 in the presentation, which bridges our prior and current guidance figures. We generated operational benefits in the second quarter and expect further upside in the second half of the year. The total operational improvement is $0.11, which highlights the resilience of the business in difficult trading conditions. While the Ukraine-Russia conflict is still a negative on a full year basis, we have seen better-than-expected results as areas of the country reopen with fighting concentrated in the eastern part of Ukraine. We are honored to be able to support critical mobility needs in the country where feasible and are very proud of the work being done by our colleagues in Ukraine. Capital allocation is also a benefit of $0.03 relative to our prior guidance, primarily related to timing. Note that we are including share repurchases through the week ended the 22nd of July in our guidance, and as in prior periods, not assuming any further retail purchases for the balance of the year. That's the good news, mostly tied to the areas directly under our control. And then there are other negatives, which are primarily external factors. Headwinds from the weakening FX rates I mentioned earlier contributed a $0.06 reduction relative to prior guidance. Declining metals prices are expected to have an additional negative $0.07 impact primarily in the third quarter as we turn cars purchased in the first and second quarters when metals prices were higher at a lower projected scrap and precious metal prices. FX rates and metals prices can move significantly over time. We may have further upside or downside if the actual figures play out differently than we have assumed in our guidance. And finally, we remain on track to deliver at least $1 billion of free cash flow for the year achieving strong free cash conversion in line with our expectations for the business. We haven't increased the minimum, given the negative exchange rate effects and the projected tax payment for the PGW gain, which, in the aggregate, are estimated to be approximately $50 million. We expect to overcome both factors to meet or exceed the $1 billion estimate. 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 that financial overview. Let me restate our key initiatives, which are central to our culture and our objectives. First, integrate our businesses and simplify our operating model. Second, focus on profitable revenue growth and sustainable margin expansion. Third, drive high levels of cash flow, which in turn will give us the flexibility to maintain a balanced capital allocation strategy. And fourth, to continue to invest in our future. As you can see from our results, we are committed to driving these metrics forward regardless of the operating environment. We are doing our very best to effectively manage the items which are under our control so as to offset the headwinds which are largely outside of our control. And for that, I offer a tremendous thank you to our team members across the globe that make it happen each and every day. They define what it means to be LKQ proud. And with that, operator, we are now ready to open the call to questions.

Your first question comes from the line of Scott Stember.

Congrats on the very strong results despite the nonstop headwinds that you're facing.

Thanks, Scott.

First question, I'm just going to jump right to State Farm. Obviously, they left the market more than 20 years ago, and they've come back in dipping their toe in. Can you maybe just size this up versus prior attempts of them going back in the market? How real this feels, how tangible and how big this could be if it really does come to fruition?

Yes, let's put everything in perspective. State Farm is the largest automobile insurance company in the United States, holding about an 18% market share. They stopped using aftermarket collision parts in the late 1990s due to some policy language that certain customers had issues with. This wasn't about the actual parts, but the language used in their policy. They remained inactive throughout the entirety of their 20-year litigation, which concluded in 2019 with a settlement of around $250 million. That amount is relatively minor considering it stemmed from events that took place 20 years ago. Since then, there's been speculation about whether they would return to the market following the settlement. State Farm is known for being thoughtful and conservative in their approach, operating slowly. Their current effort is just a pilot program in two states with three product lines. However, it's promising that they are now actively examining the market and considering a wider range of parts for the first time, aside from some past pilot programs involving chrome bumpers for pickup trucks. If they were to fully re-enter the market right away, which we don’t believe they will, it would likely take time and be gradual, in keeping with their typical behavior. There is the potential for an 18% rise in aftermarket demand, reflecting their market share. We do not expect to see any effect on our results for 2022 or 2023, as this will likely unfold over a longer timeline.

All right. And just going back to North America, you talked about in June, you saw some encouraging results from a fulfillment standpoint. Could you just give a little bit more detail on that?

Historically, our fulfillment rates in North America have consistently been in the mid-90% range. However, after the pandemic and the associated supply chain issues, we dropped below 90%. In June, we made some progress and improved a couple of percentage points, which is promising. Nonetheless, we are still significantly below our target and past performance. The improvement is a positive sign, largely influenced by our aftermarket product line, which has faced the greatest impact from supply chain difficulties. Although pricing for aftermarket parts remains strong, the volume has decreased. We also have substantial inventory on the water, as we successfully filled and shipped containers in the second quarter. Due to the supply chain situation, we expect this inventory to arrive by late summer or early fall. We believe that this will enable us to improve our fulfillment rates further. While we do not anticipate reaching fulfillment rates above 95%, we are making progress in the right direction.

All right. And just lastly, your 4.5% to 6.5% parts and service organic growth rate has not changed, but has the composition by segment changed?

Not materially. Europe is right on track with where we would expect them to be, as I indicated. North America, in the first quarter and the second quarter, we're ahead of our expectations. And so there's a little bit more of a shift and impact from the North American business. The Specialty business, as we've seen, given the monster comps that we had last year, was down, I think, 15% in the first quarter, 11% in the second quarter. We're trending in the right direction. Again, we've only got 20-some days of data on Q3. We're closing the gap. And our goal would be by the end of the year to be a lot closer to prior year numbers. So maybe a little bit of shift from out of specialty and into North America, but again, comfortable with that 4.5% to 6.5% range.

Your next question comes from the line of Craig Kennison.

First question, just on inflation. Nick, can you characterize the rate of inflation in your cost structure and whether that's easing at all?

Thanks, Craig. It's really challenging to assign a specific figure to inflation since it affects us from various angles and at different rates. Fuel costs have surged significantly; gas was priced at $3.50 a gallon and reached over $5 per gallon during the quarter, although prices are beginning to decline. However, that's not the 9% inflation commonly cited in reports about U.S. inflation rates. Labor costs have risen substantially as well. On a positive note, in June, we were able to avoid the spot market for container shipments entirely, relying solely on contracts. While costs remain higher than pre-pandemic levels, the situation is not as dire as we had anticipated. Expenses fluctuate based on category and location, with North America experiencing a different scenario compared to Europe. Generally, all our costs have risen, including the cost of goods and all selling, general, and administrative expenses. Very few items have decreased, apart from any productivity measures we can implement to lower SG&A consumption. However, it’s undeniably a significant challenge.

Your next question comes from the line of Brian Butler.

Well, just the first one. Can we talk about the trade working capital opportunity? And how should we think about our model kind of some of the trade working benefits play out in the second half of 2022?

Brian, it's Varun Laroyia calling. That's a great question and certainly a topic very close to my heart, but also over the past few years for the entire organization out here. It is a key element of the revised annual cash incentive program since 2019. I am tremendously proud of the shoulder that every single individual across the enterprise has put into it. Clearly, as you see, we are happy with the inventory build as some of the supply chain congestions eased. It certainly isn't back to pre-pandemic levels. But if you think about where we've been over the past couple of years, the second quarter was a good quarter for us to be able to pick up inventory in our businesses. And that certainly is what we're here to do to ensure that the right part is available at the right place and at the right time. So that really has been the key for us. As you think about the second half of the year, similar to what we've done in the first half, we don't believe that we need to build up inventory levels significantly above where we currently are. But as you know, we typically do an inventory build in the fourth quarter because of the seasonality of the overall business coming out of the winter season in Q1 and Q2. So we do expect to build up some inventory towards the back end of the year, but the single biggest piece, as you can think about is the payables offset. And you certainly saw that in the second quarter also. While there was inventory build, we certainly had a nice move on our accounts payable balances to offset that. And then the final piece really within trade working capital is receivables. And on the back of some strong organic revenue growth, North America, as you would have seen on Slide 5, reported a 10.7% organic revenue growth rate; Europe at 4.2% on a constant currency basis at 4.6%. We do expect receivable balances to move up. And I'm perfectly okay with that as long as our teams continue to manage the past due receivables. From that perspective, if the only big buildup is on the receivable side, that's okay. That's a sign of a good healthy growing business. So overall, while we've had a good solid start in the first six months with free cash at about $638 million, we feel comfortable about hitting the minimum $1 billion that we have committed. You do need to note that with the FX challenges from a European perspective, the free cash that gets translated back into U.S. dollars, that obviously is lowered as a result of that, number one. But the other piece really is if you think about the PGW divestiture that we did in the second quarter, there are taxes to be paid, estimated taxes to be paid in the third quarter. Those two elements, as I mentioned in my prepared comments, amount to about $50 million. We'll overcome that. Hence, we're still kind of maintaining a minimum of $1 billion of free cash for the full year.

Okay. That's very helpful. My second question was on kind of looking at price and volume mix when you look at the U.S. and the EU for the parts and service business for the second quarter?

Yes. It's a great question. As we tried to indicate in our prepared comments, a lot of the organic growth, no surprise, given the inflationary environment that we're dealing with, has come through price. The volume question, again, like the inflationary question, really depends clearly on a business by business, product line by product line. In North America, the aftermarket product volumes were down. Salvage collision volumes were actually up because we were able to transfer some of that demand for our aftermarket product into salvage product. The salvage mechanical side of things were kind of flat. We had some uptick in the reman business. And so net-net, we were down in North America, but some things were down, some things were up. Same in Europe; you really have to go geography by geography. We had some of our businesses where the volumes were up low single digits, which is great. We had other areas where volumes were down, say, 1% or 1.25%. But pricing was very strong again. And specialty, with the 11.5% decline in organic volumes, were down. But again, that's relative to the monster comp. So it really depends on a business by business, geography by geography. I believe our teams are doing a great job of managing. We're always trying to get the most volume that we can because ultimately, that's important to sustaining the business. But equally, it's important, particularly these days, to make sure that we're covering the inflationary pressures through our pricing actions. And so we believe the team is doing a nice job of balancing those two objectives.

Your next question comes from the line of Daniel Imbro.

I want to start on the North American wholesale side. So obviously, the State Farm development feels like they're positive for growth. But I also want to ask about pricing. I think most of the quarter was driven by pricing. Are we still seeing OEMs raise prices further, Varun? And as you look to the back half and maybe into next year, I mean, would the expectation be that given the broader inflationary backdrop, these pricing increases continue? Or is there a risk that pricing flows or probably have to come down on the OEM side?

Yes, Daniel, this is Nick. The OEMs do not simply raise prices on all their parts every month. They are quite selective about their pricing strategies. While some prices may increase significantly, others may remain unchanged. Each OEM has its own approach, and overall, their price increases have generally been slightly lower than overall inflation. When they do increase prices, it creates an opportunity for us and the alternative parts industry to adjust our pricing as well. I cannot predict their future actions, but they face similar inflationary pressures as other businesses regarding input costs, including materials, commodities, and labor. We will continue to monitor how the OEMs are pricing their products to maintain our competitive position, and we believe we are effectively doing so in the current environment.

Great. That's helpful, Nick. And then Varun, maybe one on the European margins. I think we touched on demand a bit in the last question. But I think at the Analyst Day of our call, you guys noted that further margin expansion was possible and above 10% profit levels. Given the change in the last 30, 60 days and FX rates, economic backdrop, inflation, I mean, do you still think it's possible to see EBITDA margin expansion this year, next year for Europe as you look ahead?

Yes. Listen, great question, Daniel, and thank you for giving us the opportunity to respond to that. Listen, I think, as you know, Q1 with the Ukraine-Russia conflict, there were some challenges associated with that. But the underlying business operates in a very resilient market. Folks have kind of talked about the fact that energy prices have been moving up with what's happening further out there. But we really haven't seen a significant drop-off on a VMT basis, number one. And that really is the key driver for our European business. So from that perspective, really happy with the way our European business continues to perform. Nick obviously gave some color on the broader platforms in terms of how they've been performing also. I think the key piece out here has been making sure that we have the inventory to satisfy the demand, which we do. But overall, very happy with the way the margin trajectory of the European business continues, and we feel comfortable and confident about the double digits on a full-year basis. With regards to 2023, we haven't given any guidance as of now. But needless to say, if you kind of go back to our commitment to the markets way back in September of 2019 when we launched the 1 LKQ Europe Program, at that point of time, we said exiting 2021, we would be a sustainable double-digit margin business. We certainly delivered that in '21. We're delivering that in '22. There's no reason for us to start to backslide at this point in time. So while we haven't given any guidance, we do expect there to be further goodness from a margin and profitable growth perspective across our European segment.

Your next question comes from the line of Bret Jordan.

On that last question, Varun, you said that VMT has remained pretty stable in Europe. Could you talk about the consumer demand trend, I guess, sort of the cadence in the quarter as obviously compounding volatility over there? Has it had any impact as we've progressed?

Actually, the back part of the quarter was much stronger than the first quarter, Bret, which we were heartened to see. Again, you've got to keep in mind, we're largely in what would be deemed a consumer non-discretionary business, right? We provide service parts that keep vehicles on the road. People need their cars for mobility to get to work, to conduct their daily life. If the car can't operate, they're going to spend the money to put it back into operational mode. And everyone knows in tough times, you can probably stretch out your oil change for a bit, right? You can stretch out some of the service items for a bit. But sooner or later, you need to repair your car; you need to keep it serviced. And that's what we love about our business, right? It's largely consumer non-discretionary. No business is totally recession-proof if you want to use that word, but we feel very comfortable with where we are. And again, our operating results in May and June were much better than they were in April. So we're optimistic.

Great. And then within specialty, could you sort of carve out the performance differences between RV, which I think you called out as being pretty stable, versus the SEMA-related product is sort of within that total specialty decline? Could you give us a feeling on the pieces?

The RV segment experienced a decline that was less severe than the overall business, which was down 11.5%. The RV decline was smaller, and it's important to analyze performance by product category. Core RV products are more closely related to the utilization of the RV and the size of the campground rather than the RV SAAR metric. Our analysis has shown that RV revenue is more closely associated with campground spending than RV SAAR because much of our sales consist of replacements and consumables linked to utilization. During the financial crisis, campground spending remained steady. However, some product areas, like towing, which serves both RV and marine markets, have shown softness. In towing, a larger percentage of spending is allocated to vehicles, which is influenced by declining pickup truck sales, down nearly 12% for the quarter for the second consecutive time. While some of this decline is a comparison to the strong performance in 2021, the specialty group, including all its components, is performing better and is starting to recover to previous year volumes, particularly in the early days of the third quarter. Although we may not reach prior year levels for the entire quarter, we are narrowing the gap, and that is what matters to us.

Your final question comes from the line of Gary Prestopino.

A couple of questions here. First of all, Nick, you didn't cite the growth in collision claims in North America as a comparison to what you did in North America. Do you have statistic handy?

Yes. So repairable claims in the second quarter were up about 6% compared to 2021, but still down 6% compared to 2019. So the industry is still down relative to the pre-pandemic levels.

Okay. That's fine. Varun, how much did foreign exchange positively impact SG&A on an absolute dollar basis?

From a North America perspective, there is little to no FX exposure. The FX exposure primarily originates from our European business. Total SG&A for the European business was around $420 million. If you consider the decline in the euro, which has been about 10%, you can apply that to the $420 million. It might seem unusual to talk about a benefit, but the translation effect from the lower conversion rate is where it manifests.

And Gary, it's important to keep in mind that the FX issues that we're dealing with are translation issues, i.e., just converting the foreign currency in the U.S. dollars. By and large, they are not transactional issues. We do have some transaction exposure; some of the purchasing of parts in Europe is dollar-denominated, particularly things like oil-based products which are dollar-denominated. But those are things where we know in advance we're going to be buying, and we can do some hedging of that. So total FX kind of exchange losses, if you will, from a transactional perspective in the quarter was less than $2 million. So it's all just translation of foreign currency results into U.S. dollar results.

There are no further questions at this time. Mr. Zarcone, I turn the call back over...

Well, we always want to thank everyone for their time and their participation in our call. We know you're all very busy. This is a busy time of the earnings season. We appreciate spending some time with us, and we look forward to joining back up at the end of October. We're going to be pleased to announce our third quarter results. So thanks for your time and attention, and we'll talk to you soon. Thank you.

This concludes today's conference call. You may now disconnect.