Lkq Corp (LKQ) Q2 2025 Earnings Call Transcript

Hello everyone and thank you for joining the LKQ Corporation's second quarter 2025 earnings conference call. My name is Lucy and I will be coordinating your call today. During the presentation you can register a question by pressing star followed by one on your telephone keypad. If you change your mind please press star followed by two. We kindly ask all participants to limit their questions to one main and one follow-up. It is now my pleasure to hand over to your host, Joe Butress, Vice President of Investor Relations, to begin. please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to LKQ's second quarter 2025 earnings conference call. With us today are Justin Jude, LKQ's President and Chief Executive Officer, and Rick Galloway, our Senior Vice President and Chief Financial Officer. Please refer to the LKQ website at lkqcorp.com for earnings release 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 as well as slide presentation. Hopefully everyone has had a chance to look at our 8K, which we filed with the SEC earlier today.

And as normal, we are planning to file our 10Q in the coming days and with that i am happy to turn the call over to our ceo justin jude thank you joe and good morning to everyone joining us on the call as you all know i have now been in the ceo role for a full year the year has presented some macro challenges and some short-term operational obstacles but also opportunities for longer term value creation alongside my leadership team we have made some tough but necessary decisions to fundamentally reshape how we operate, and put us back to a path of consistent value creation. The decisions made are aligned with our overarching strategy, a multi-year transformation to simplify our portfolio, sharpen our focus, and position us as a high-performing company centered on our core business segments. Our global team is laser-focused on growing our market share while driving productivity and efficiently managing our cost structure. At our September 2024 investor day we set our strategic priorities simplify our business portfolio and operations expand our lean operating model globally with a focus on margin enhancement invest and grow organically and pursue a disciplined capital allocation strategy and so as we move forward we are going to share how we are doing against each of these a scorecard if you will that makes it clear for the investment community to see how we are doing I can't sugarcoat that today the results are yet to show this progress and the macro headwinds necessitated our revised guidance. We are not where we need to be and so we are going to push harder and move faster. To that end, we are focused on two immediate things. One, additional cost-cutting measures primarily in Europe but also in North America with a goal of cutting another $75 million in costs. Two, a heightened emphasis on the strategic review of our business units and operations that may result in the sale of assets that further accelerate our simplification strategy and capital allocation priorities. We are seeing a turn in the market for strategic activity with credit markets opening, momentum behind mid-sized transactions and private equity actively seeking to deploy capital. While this will not be a linear process, I remain confident that we are on track to realize the full benefits of this strategy by 2027 as outlined at our September 2024 Investor Day. It is worth noting that we are doing these things at a time when there are broader challenges in the overall auto industry and macroeconomic environment. It is a dynamic and fluid environment, given amongst other factors, the rising input costs and the uncertainties around tariffs are creating confusion. We are not alone in the industry in facing these challenges, but you can either complain and make excuses or focus on your business and operating model to deliver the best possible results. Our team has chosen to focus on executing our plan, controlling the things we can, such as being efficient and managing our costs, and looking for opportunities to take advantage of the current dislocations and disruptions in our core markets to gain market share and expand margins. We know in a challenging earnings environment, cost discipline is paramount, which is why we've taken actions to remove 125 million of costs in the past 12 months without compromising our ability to execute and service our customers. This is just a first step, and as I mentioned, we are going to continue to scrutinize our cost structure and find additional ways to enhance our margins. Next, I will discuss our business segments. North America's first. North America's organic revenue fell by 2.2 percent per day, which is less of a decline than the last five quarters, and an outperformance of reparable claims by over 650 bps, well above our historical 450 bps outperformance. Importantly, our aftermarket collision parts business witnessed slight growth in the quarter. We are still seeing consistent demand across our hard parts business in Canada and margin enhancement as we convert from three step to two step. Lastly, as an update to the issue of repairable claims resulting from declining used car pricing and rising insurance premiums, we previously said that the comps will start to ease as we progress into 2025. However, the June numbers were weaker than anticipated and at this juncture we think it is prudent to assume minimal market recovery in the back half of the year. Moving on to Europe. Europe's organic revenue decreased 4.9% or 3.8% on a per day basis, primarily driven by difficult economic conditions, increased competition in certain markets, and some temporary headwinds due to operational challenges. We expect the economic conditions to continue throughout the balance of the year, along with the competitive pressures, which has led to price concessions. As an example, in the UK, we've renegotiated several dozen national account agreements and re-signed all but one, validating the strong value proposition we offer to our customers. Regarding the operational challenges impacting revenue, in a nutshell, we unintentionally created negative customer experiences and ultimately top-line erosion. We have resolved these service issues and are in the process of regaining the customer's confidence and ultimately our share of wallet back. One thing I would like to emphasize here is that Europe represents a significant opportunity for us. As I mentioned in the past, we need the right leaders in place to truly drive the change and achieve the benefits of scale that Europe represents. After recently making significant leadership changes, we now believe we have the right people. This revamped team is now focused on process and performance, both of which have been lagged in certain areas of our European business. This lack of focus from previous leaders played a role in the underperformance in the quarter, and it will take some time to manage these legacy issues. However, we are confident that we are on track with the three-year targets presented at our September 2024 Investor Day. I was in Europe the last week of June to meet with our management teams, and we will be focused on ensuring we are moving quickly to implement our strategy in that market. Europe is a competitive marketplace and our focus is on key geographies where we have the ability to be a top player. We continue to make progress on our SKU rationalization goals. Our SKU rationalization project in Europe aims to reduce complexity and simplify our distribution network across all markets. We have reviewed over 70% of our product brands and reduced stocking by an additional 13,000 SKUs. Our private label penetration was flat sequentially but up 20 BIPs year-to-date, keeping us on track to hit our 2027 target of 27%. In addition to our SKU rationalization, we are streamlining our operations and reducing costs through back office and systems rationalization programs, as well as greater utilization of our global competency centers. Moreover, we believe we're now positioned to expand our market share, and we feel confident we can continue as the leading European player. We started executing on this goal as we recently announced our partnership with Synetic Limited, which is a critical building block in the development of LKQ Europe's salvage channel, a market that will benefit from the full-service salvage intellectual capital in North America. Moving on to specialty. The specialty has turned a corner and is seeing improved results. Specialties' organic revenue was largely flat year-over-year, which is the best quarterly year-over-year revenue performance since the fourth quarter of 2021. We are cautiously optimistic this segment is starting to show green shoots as our July revenue has continued to show positive trends we saw in June. Lastly, self-service. Self-service's organic revenue was softened a quarter from lower part volumes but still managed to deliver a 10% EBITDA margin. Disciplined vehicle procurement combined with overhead cost controls continue to help drive profitable quarterly results in this segment. I want to stress that people are our greatest assets. Ensuring we have the most talent and effective team is critical to our success. As a result, we have created an executive position focused on global talent development. We think this will be an important role, and we are excited about how it will support our overall business around the globe. A few facts that I think are important to share on talent. Since I took over the CEO role last July, we have taken difficult, bold, and necessary steps to reshape our leadership team. Over 25% of the roles at the VP level and above have been refreshed with new talent or redefined responsibilities. This level of transformation reflects our commitment to building a high-performing, agile organization. We're focused on getting the right people on the bus and, just as importantly, ensuring they're in the right seats. These changes, while not without challenges, are foundational to driving sustainable growth and consistent performance, which yield long-term value creation for shareholders. Equally important is the strength of our talent pipeline. Over 50% of it now comes from external hires with a high focus on our European operations to lead us through business transformation. This infusion of fresh perspectives and different experiences is accelerating innovation, bringing a clearer lens on growing the business, finding efficiencies, and positioning us for the future. We're not just evolving. We're focused on fixing, repairing, and building momentum. I'm going to hand it over to Rick now, but I want to emphasize the following. We have size, scale, and an unmatched distribution network. We know the current results are yet to reflect the value we are creating, and we share your frustration. But we are solidifying our foundation and ensuring when the cycle turns in the sector that we will be in the strongest position to capitalize on it to deliver results for our customers, partners, and importantly, our shareholders. That is our mission, and we are hell-bent on accomplishing it.

Thank you, Justin, and welcome to everyone joining us today. I want to begin by reinforcing Justin's remarks on our continued commitment to execute on our multi-year transformation strategy that includes simplifying the business and reshaping our focus on core segments. We are and will continue to be relentless in our pursuit of these goals. Now turning to Q2 results. As Justin said in his remarks, our results are yet to reflect all of these efforts and Q2 results were below our expectations. While our initiatives are underway, revenue declines overall have created margin pressure driving down our earnings and free cash flow. We reported total revenues of $3.6 billion. Deluded earnings per share were 75 cents, a $0.05 increase compared to Q2 2024. On an adjusted diluted earnings per share basis, we reported $0.87, a decrease of $0.11 per share versus prior year, primarily due to lower operating results. On a positive note, execution on our balanced capital allocation strategy benefited earnings per share by $0.03 from share repurchases and another penny for interest. FX rates added another three cents. Free cash flow during the quarter was $243 million, despite a nearly $35 million headwind from tariffs, bringing the year-to-date cash flows to $186 million. We anticipate generating positive free cash flow in the next two quarters, but tariffs will present a working capital challenge in the back half of the year that I will discuss shortly. We returned $117 million to shareholders, including $39 million to repurchase 1 million shares in $78 million for a quarterly dividend. We remain focused on deploying capital in a way that maximizes shareholder value while supporting growth. In North America, we were pleased with our top-line performance given the market pressure as we worked through the continued decline in repairable claims. We are confident we are increasing our market share in a declining market. However, increasing competition and market dynamics contributed to a 100 basis point decline in gross margins. North America posted a segment EBITDA margin of 15.8%, a 150 basis point decrease relative to last year, but roughly 10 basis points better than Q1. The decline in gross margins and leverage effect from lower revenue on overheads contributed to the decline in EBITDA margins. In Europe, segment EBITDA was 9.4%, a 120 basis point decrease from last year if you will recall in last year's q2 call i discussed a reduction in labor-related accruals previously recorded after successful conclusion to the union negotiations in germany this benefited the prior year by roughly 70 basis points excluding this non-recurring prior year benefit even a margin declined by 50 basis points we were pleased to see the year-over-year gross margin improvement resulting from procurement initiatives and ongoing productivity measures that outpaced inflation. However, the organic revenue decline put pressure on overhead expense leverage, resulting in the decrease to segment EBITDA margins. Specialties EBITDA margin of 8.5% is 40 basis points below the prior year due to a slight uptick in overhead costs related to inflationary cost increases. With organic revenue being largely flat year over year and positive in June and thus far in July, we were encouraged by these recent trends heading into the back half of the year. Self-service reported even a margin of 10% consistent with the prior year. Turning now to the balance sheet, we repaid approximately $111 million of debt in the quarter. As of June 30th, we had total debt of $4.5 billion with a total leverage ratio of 2.6 times EBITDA. We remain committed to maintaining a manageable debt level and our investment grade ratings as of june 30th 2025 our current debt maturities were 34 million dollars a reduction from the 558 million on march 31st 2025 as we extended the maturity date of the 500 million dollar u.s term loan by one year to q1 2027. as normal practice we actively manage our capital structure and we are working through our options with our lending group regarding the Canadian term loan due in the third quarter of 2026. We think in a high interest rate environment, ensuring our cost of capital is reasonable and managing the timing of our maturities is an important piece of prudent financial management. Our effective interest rate was 5.2% at the end of Q2, consistent with Q1. We have $1.8 billion in variable rate debt, of which $700 million has been fixed with interest rate swaps, which effectively provides a fixed rate on approximately 75% of our debt. Given a confluence of macroeconomic factors in both North America and Europe, coupled with the results this quarter, we are lowering our full-year outlook. In North America, we are anticipating a delayed recovery in repairable claims, ongoing tariff disruptions, and competitive market dynamics. In Europe, persistent economic softness, geopolitical unrest, and ongoing U.S. trade negotiations are all drivers of an uncertain environment. To provide more detail, June's repairable claim numbers were down the most of all three months in the quarter, despite our anticipated recovery. Based on current industry data and recent trends, we no longer expect these declines to rebound in 2025. Auto insurance prices are still rising and are expected to increase an average of 7.5 percent this year. According to a recent survey, nearly one in four people have downgraded or dropped their auto insurance to free up cash. To help further depict the economic factors driving the current market dynamics around repairable claims, we included a slide in the appendix on page 17 with data derived from our proprietary analysis. The ever-changing tariff landscape further erodes consumer confidence and also complicates the views toward a more linear recovery. While we have been pricing in the impact from tariffs, our market remains competitive, and it may be difficult to maintain margins at the same levels in the short term. In Europe, with the persistent softness in many of our markets and increased geopolitical unrest, we are no longer anticipating market improvements. To mitigate the lower revenue expectations, we have taken corrective action, including leadership changes and productivity initiatives, and are targeting additional cost removal in the back half of the year. However, these actions will not be enough to offset the full-year impact of lower revenue. Turning back to 2025, a revised outlook and assumptions are included on slide 13. We expect reported organic parts and services revenue in the range of negative 150 basis points to negative 350 basis points. As a result of the revenue headwinds, we expect adjusted diluted EPS to be in the range of $3 to $3.30, a decrease of $0.40 from the midpoint from the previous guidance. Approximately half of the decrease is from our North American segment, 40% from Europe, and the remainder is largely from higher interest expense. free cash flow will be impacted by the anticipated decrease in earnings and the impact of tariffs on working capital that will be on the balance sheet at year end to partially mitigate these headwinds we are reducing our anticipated capital spend by approximately 50 million dollars we will continue to diligently manage our trade working capital in order to mitigate the lower earnings and tariff impact to drive EBITDA conversion to the extent possible free cash flow is expected to be in the range of approximately 600 to 750 million dollars thank you for your time and with that i will now

turn the call back over to justin for his closing remarks thank you rick i stated at the outset we have made some tough but necessary decisions to fundamentally reshape how we operate and put us back on the path toward consistent value creation we need to set ourselves up for success and be able to deliver on what we say we are going to do we are implementing our strategic plan and we are holding ourselves accountable to deliver that plan. In closing, I want to reiterate our key strategic priorities. Simplify our business portfolio and operations, expand our lean operating model globally with a focus on margin enhancement, invest and grow organically, and pursue a disciplined capital allocation strategy. My foot is on the accelerator to deliver these strategic initiatives and create value for our shareholders. We expect to see the results, and we know you do too. With that I'll now turn the call over to the operator for questions.

Thank you. To ask a question please press star followed by one on your telephone keypad now. If you change your mind please press star followed by two. When preparing to ask your question please ensure your device is unmuted locally. We kindly ask all participants to limit their questions to one main and one follow-up then go back into the queue if you have any further questions.

The first question comes from scott stember of ross scott your line is now open please go ahead uh good morning thanks for taking my questions um yeah talk about some of the in north america some of the um increased competition that you're talking about and um you know last quarter we were talking about used car pricing uh starting to increase that might be helping are you not seeing that anymore as a driver towards a recovery in claims?

Hey, Scott. On the used car pricing, if you look at Q2 at the beginning of it, April and May, we started to see some improvements in used car pricing to kind of look to be bottoming out. Some of that we're kind of uncovering that there was kind of some pulled-up demand of new car sales, which drove up some used car pricing. So we haven't necessarily seen coming into June or even in July that those numbers are starting to grow fast enough we're seeing in some cases year-over-year growth but not necessarily month over month and so if you if you take that used car pricing change you know year over year relative to repair cost it hasn't necessarily grown at the same rate which is once again creating that gap between repairable claims what we are seeing is we're seeing a decent increase in apu uh we're seeing uh quite a bit of opportunity for us to expand better than what we are seeing on the overall repairable claims.

So the business is really picking up a fair amount of market share proven by the 650 basis points better than the repairable claims. What we're not seeing, Scott, is the improvement on the overall repairable claims. So what we're saying is, look, the repairable claims number is going to have slight improvements, but the business is operating very, very well.

Continues to drive performance, continues to pick up share, continues to diversify the portfolio so all good news on that side of what we can control gotcha and then last um in europe one of your biggest competitors over there um yesterday reported some uh relatively robust or you know at least flattish results uh for europe and now you're talking about some competition it sounds like were you guys just not properly priced in the market or are you saying it's a combination of the market being it's you know um increasingly weak plus uh the competitive nature picking up yeah i mean i guess you're probably talking about

gpc i mean if you really back out some of the conflicted issues we talked about we're pretty much in line with them but it isn't necessarily always a good compare because we operate in different markets for example france we know that market overall in this group is up we operate in France, but we're very small and we grew. They're larger in France. Spain was up. We don't operate in Spain, but they do. And so it's not necessarily a great compare, but the market said, you know, the primary issue we're seeing still is that the market is just soft. In some cases, as I mentioned in the past, pricing becomes a problem with the smaller competitors. But as I mentioned, you know, specifically in the UK, we renegotiated, you know, several dozen different contracts with our national accounts, and we lost one. And we really lost one because we weren't going to chase the price all the way down. It did not make sense. So when you really look at the value proposition that we offer to our customers when it comes to service level, spill rate, we have to sharpen our pencils a little bit with that down in market, but we still feel that we're maintaining market share. Thanks, Scott.

The next question comes from Brett Jordan of Jefferies. Brett, your line is now open. Please go ahead.

Okay. Good morning, guys. That same European topic, I guess, is GSF obviously the UK pricing issue, and are they abating on the price competition, or does that remain as hot as ever? And then I guess you'd also mentioned negative customer experiences. Could you talk about the relatively weaker markets?

Where did you see the real softness yeah and uk in particular um i mean gsf is still there other other folks are expanding as well and we're the largest today we've got the most covered so as as some of our competitors open branches they create a little bit of noise but gs gsf is still a big one i think it's slowing down somewhat i mean when we look at some of the pricing that we won't necessarily chase down it i know i know how good we buy based on our scale and it doesn't necessarily make sense so So, and we're winning the customer still, Brett, in that market. Even if you look at the national accounts, it's really good for us. I was just there, as I mentioned in my script at the end of June, meeting with the team, talking about not only the long-term strategy plan to integrate that business, transform that business, to really deliver significant opportunity for us, and they're working on that. If you look at the simplification of operations, skew rationalization, They're working on implementing, you know, lean operating model. They have cost-cutting measures. That's $75 million of cost-cutting that I mentioned primarily will be in Europe, and they've already started on that. In addition, as we announced, we did a partnership in the U.K. where we're pretty strong in a collision market with Synetic. So we're now expanding into salvage product lines into that to really fill in the portfolio for us on products. On the North American collision, I think you mentioned some price increase. could you tell us what you took for price increase we will we don't disclose the overall price increase but we have been pushing price obviously the tariffs are are forcing that we're seeing the oems put price i know last time you asked the question we didn't see it obviously if you read the headlines on the big on some of the big oems they're feeling a pain of tariffs i don't think they have any choice but to continue to push price they're pushing it we're pushing it the good news is you know obviously the most tariff product line that we have is aftermarket And with repairable claims being down 9%, our actual volume on aftermarket was positive in the quarter. So even though we pushed price, we maintained service levels, which, you know, with the leverage impacted our margins somewhat, but we wanted to make sure we maintained our service levels. It allowed us to outperform the market. I mean, we grew 650 BIPs, as Rick mentioned, over the repairable claim decline. And we really want to just be poised from a service level and availability standpoint to gain that leverage when the market recovers. Great. thank you. Thanks, Brett.

The next question comes from Craig Kennison of BARD. Craig, your line is now open. Please go ahead.

Hey, good morning. Thanks for taking my question. I really appreciate Appendix 1, Slide 17, and trying to understand that even better. Your unrepaired vehicle metric seems to be, you know, one of the top issues that you face. how do you see that unfolding? Some of those trends look to be very long-term while they may be cyclical. Insurance rates are still high and that behavior may persist for some time. So I'm curious when you think that will ultimately find a bottom.

Yeah, it's hard for me to speculate. I mean, we saw some green shoots and used car pricing, as we mentioned early on, and we expected the market to recover. We haven't seen that yet necessarily. If you look at the big overall picture craig on the just the industry in general i mean as i mentioned earlier the oems are under tremendous pressure a lot of tariff impact for them you know lost profits they are going to have no choice but to pass on pricing increase you know new new car sales to offset the volume those will be good for us right if the oems have a strong um presence in the market that's good for us it leads to higher used car pricing higher part higher part pricing more car sales on a new side leads into our sweet spot. And so the repairable, the unrepaired vehicles, that number has grown. That is cyclical. As you mentioned, what we don't know is when it's going to turn around, right? I mean, we've got to see abatement of high insurance rates. And I think we've seen the growth of that slow down. The question is, will, you know, insurance rates start to drop as insurance companies want to gain market share? Used car pricing at some point will start to rebound, to grow at the same rate of repair costs. And so at some point, we see that unrepaired vehicles coming back to more of a normal number. But the team there is really, I mean, in North America, as you saw, we're still executing. I mean, even though in a down market, repairable claims being down 9%, the team was down 2%. I mean, it's just phenomenal growth. So in some cases, if you look at that chart you mentioned, you look at self-pay repairs. I mean, we're the trade down alternative on on the oem side so we're gaining share on that self-pay and overall just with our service levels and our flow rate we're doing really well in addition to help offset you know or create revenue opportunities our hard parts business in canada is performing really well as well as we convert that from three step to two steps so we don't we don't we're not just sitting with our sitting on our hands i guess um you know letting letting the market dictate to us what we're going to do we're still looking at revenue opportunities and once again craig we're definitely outperforming the market.

Yeah, thanks, Justin. I think it was Rick who mentioned APU being stronger. I wonder if you could share that metric.

Yeah, I know the number went up about 150 bps. I don't know the exact. We're up really close to 39%, Craig, is where the number is sitting right now. Yeah, and when you see, Craig, the OEs, as I mentioned, they're pushing price. That's creating even more value proposition for alternative parts, and we're the alternative parts leader. I mean, obviously, we have no tariff impact on our salvage, so it pushes towards salvage it pushes more towards aftermarket and so you know that apu growth is just really just in a lot of cases possible because it all keeps just national coverage that we have great thank you thanks greg the next question comes from gary prestapino of barrington research gary your line is now open please go ahead thank you um good morning well um in your narrative like you mentioned what's going on in Europe.

You've had to change out some people. You're going to focus on cost cuts there. I mean, I think you basically said that you had also been going through some change in personnel over there, you know, since the start of the year. Are you where you need to be and as far as personnel and then what they're doing over there coupled with the cost cuts that you're envisioning? When should we start seeing that impact come into the P&L?

Yeah, thanks for the question. I was over there in June meeting with that team. I feel pretty confident in the team that we have. We've brought on new skill set, new mindsets. I mean, quite honestly, we've been after some of these initiatives for a while in Europe, and so making sure we have the right team that is going to execute against that. You know, I mentioned in Investor Day our three-year plan. It's not a linear progression, Gary. It's really, truly a three-year plan that the team has to execute. Obviously, they've got to navigate through the existing market conditions today, work on the cost-cutting initiatives, but they are truly laser-focused working on the three-year strap plan, integrating that business, transforming it to really unlock the significant potential that I feel we have over there.

I think the target that Justin gave out, $75 million, the vast majority of that, coming from our European operations. As you know, Gary, it takes a little while to get some of those implemented. I would expect those to be primarily implemented by the end of Q4, and so you should see the full benefit of that in 2026.

Okay. And did you quantify on EPS on what the impact of the tariff was on the bottom line?

Yeah, so Gary, we think we have the ability to pass through all of our tariff costs, and so we're expecting to pass those through. What we are seeing as well as what Justin talked about as far as the competitiveness in the marketplace, so it's a combination of the two. So for us, the tariff piece, we're pushing through all of that through pricing when we net out the cost.

Okay, so you're not having any issues with passing that through?

No, not so far. Justin talked about it. So in Q2, OE started raising their prices and we started doing the same. And the value proposition is strong. We're not losing anything there.

So really optimistic looking in the back half of the year of what we've got coming up. and then just let me sneak in one more quick one and i'll jump off was there in this slide that you put in 17 um has there been any change in the impact of a adass uh on accident volumes from where you talked about during your investor day last year is there any change in that that outlook um that's been de minimis due to adass i mean the long-term yeah the long-term outlook remains the same if you compare on this chart we're comparing 2022 or 2022 to 25 and so ados the technology did

have an impact on overall accidents it was offset by just some of that kind of what i would call covet snapback more people getting back into the office more miles traveled more vehicles and operations so actuality we saw the the true accidents increase uh long term we still see ados having a slight headwind on overall accidents but once again i think we've talked in is it you know, during investor day is even with the reduction in accidents from ADOS, the overall market we still seeing on the collision side growing for the next 10 years. When you look at APU growth opportunity, you look at just, you know, part proliferation, more parts on the estimate, the ability for us to gain share and push price. So we still see the overall collision market being very strong for us. Thank you. Thanks, Gary.

The next question comes from Josh Batwa of JP Morgan. Your line is now open. Please go ahead.

Hi, good morning. Thanks for taking my questions. I was hoping to just, you know, talk to the right to appraisal legislation in some key states like Texas and New Jersey. Could you maybe talk about the implications from a repairable claim standpoint and whether this could move the needle on total loss frequencies if adopted by more states?

Thanks, and I'll have a follow-up. yeah thanks josh i mean obviously those are pretty new in texas and in new jersey um it's kind of too soon for us to tell at the end of the day it's creating a benefit to consumers to dispute concerns with the insurance company on the appraisal to your point or the total loss value so my guess is most consumers would want a higher total loss and typically when there's a higher total loss amount that that leads to more repairable claims uh so as of now we haven't seen any impact to that. I will say we do have our own government affairs department that helps us navigate through some of these things, making sure that consumers have a choice in getting their vehicle repaired with alternative parts. And so we're pretty actively monitoring that, but nothing that we've seen so far, JASH, has any impact to us.

Thanks. That's helpful. Could you maybe talk about the production flexibility of some of your key suppliers? Many aftermarket peers have shared their intentions to relocate production to Mexican facilities and mitigate the tariff impact from USMCA compliance? Is that something you are seeing with your vendor base? And if you could just provide some more flavor on this conversation you're having?

Yeah, I mean, a lot of the aftermarket collision has historically always been in Taiwan. We do have some of those Taiwanese manufacturers that have production in the states. Some have looked at Mexico. The real benefit we've got, obviously, you look at salvage. We have no tariff on that, so there's no impact on that. It's creating a good opportunity for us and better value proposition. But as of now, I think in some cases, a lot of the manufacturers are waiting to see what happens with the final tariff. So no major movement yet.

Got it. If I could just sneak one more in, could you maybe just provide a breakdown of the collision versus non-collision organic revenue growth in North America? I believe you called out non-collision revenue to be strong in the second quarter. Just wondering if you could put some numbers around that, please.

Yeah, Josh, we haven't typically given numbers out specifically for that. What Justin talked about was volume for aftermarket parts was actually up in the quarter, so aftermarket volume was up a bit. What we are seeing is on the downside, things that are kind of the last thing to do within the repair, which is paint, as a good example. That's down greater than what even the repairable claims are, because that is essentially the last piece of the overall repair. So if you think about the repair cycle and what we've got going on, you can look at hard parts. Hard parts is better than the negative 2.2 that we put in for the quarter. And then you've got also things like aftermarket parts are better. But we are seeing a little bit in some of our major mechanicals uh that are down a bit more than what we had expected before uh and typically that happens when used car prices are flatlined and some of the car park is getting a little bit older uh the decision to actually repair that engine uh is something that the consumers weigh that's very helpful thanks for taking my questions and good luck the next question comes from brett jordan of jeffries brett your line is now open please go ahead hey guys a follow-up on the iaa synetic partnership in the uk um is there a capex involved in that do you need to build the

dismantling yards to create uh alternative collision parts or is that on their infrastructure uh that's on their existing infrastructure um the partnership is is great for us i mean they're they need a sales arm they need a good distribution model we provide that in the uk and we're the best in that um we're the number one collision parts provider on the aftermarket side so being able to take some of those products and move into our network um and it's it was uh so really no capital expenditure it was already set up on there on the infrastructure side can you remind us what you're doing in collision revenues in the uk now so we can benchmark that we haven't provided

that in in the past but it's something less than 100 million um i think is what we've got it's uh Parts alone, yeah.

It would be well over $100, yeah. Okay. Yeah, with pain and everything, it's a little bit different, Brett.

As a reminder, to ask a question, please press star followed by one on your telephone keypad now. The next question comes from Scott Stember of Roth. Scott, your line is now open. Please go ahead.

Here's a follow-up on tariffs. I'm not sure if you said, but I think you said $35 million was the headwind in the quarter. Is that what you needed to offset? And just trying to get a sense of, you know, coming out of last quarter, the narrative was that you guys could more or less offset or it would be very, very manageable for you. Are you changing that narrative at this point right now?

The $35 million, I'll take the first part, and then you can take the second. The $35 million, Scott, was what is sitting in inventory at the end of Q2. So that's not what went through the P&L. It was minimal impact within the P&L as far as the cost side goes, and we've offset that with pricing. So we think that that'll happen in the back half. So nothing's changed as far as what we talked about before. The numbers are roughly about the same as what we disclosed back in Q1. And then we'll continue to monitor. And the one thing that we need to figure out and are going to continue to drive is the impact of trade working capital with the increase in tariffs is something we're going to have to mitigate and figure out how to do that in the back half of the year.

But from pushing it through pricing, Scott, there's been no issue. What we talked about last quarter was we're confident we can mitigate it, at least push the price to cover the tariffs. Historically, what we've always done is made margin on top of that. And so that's kind of yet to be known. there's some uncertainty there, but there's no concern for us on the tariff increase on the cost side being able to pass that through.

Thank you. Thanks, Scott.

We currently have no further questions. So I'll hand back to Justin Jude for any closing remarks.

Thanks, Operator. I'll just in closing, even with the challenge that we talked about on repairable claims in North America, I just want to give a shout out to the team in North America. I mean, they absolutely crushed it, outperformed the market by 650 bps. There's no team better than ours globally, and we're set up and poised to take advantage once the market recovers. Our Europe team, once again, I was just over there a month ago, really enjoyed meeting with some of our new key leaders, working with them on some of the cost-cutting actions. They're focused on executing against a three-year strap plan, but the integration and transformation of that company is hard, a lot of work to do, but they've got the right skill set and mindset, and I'm excited to see what they can deliver and unlock that significant opportunity. From overall on a strategy plan for simplifying the portfolio, we're still active on that, so more to come. Obviously, it's been a challenging market for our employees, so I just want to say thank you to the employees that helped us deliver and continue to deliver every day. With that, I'll end the call. Thanks, everyone, for your time today.

This concludes today's call. Thank you for joining. You may now discuss.