Lkq Corp Q2 FY2025 Earnings Call

Hello, everyone, and thank you for joining LKQ Corporation's Second Quarter 2025 Earnings Conference Call. My name is Lucy, and I will be coordinating your call today. It is now my pleasure to hand over to your host, Joe Boutross, 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 the 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 the 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 are planning to file our 10-Q 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 on 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 the goal of cutting another $75 million in costs; two, a heightened emphasis on the strategic review of our business units in 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 among 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 in 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 first. North America's organic revenue fell by 2.2% per day, which is less of a decline than the last five quarters and an outperformance of repairable claims by over 650 basis points, well above our historical 450 basis points 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 U.K., we've renegotiated several dozen national account agreements and resigned 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 customers' 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 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 basis points 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 SYNETIQ Limited, which is a critical building block in the development of LKQ Europe salvage channel, a market that will benefit from the full service salvage intellectual capital in North America. Moving on to specialty. Specialty has turned a corner and is seeing improved results. Specialty's 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 soft in the 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 talented 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 clear 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 this 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 hellbent 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. Diluted earnings per share were $0.75, 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 $0.01 for interest. FX rates added another $0.03. 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 and $78 million for our 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 work 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 effects 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 a successful conclusion to the union negotiations in Germany. This benefited the prior year by roughly 70 basis points. Excluding this nonrecurring prior year benefit, EBITDA margins 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. Specialty's 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 are encouraged by these recent trends heading into the back half of the year. Self Service reported EBITDA 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 30, we had total debt of $4.5 billion with a total leverage ratio of 2.6x EBITDA. We remain committed to maintaining a manageable debt level and our investment-grade ratings. As of June 30, 2025, our current debt maturities were $34 million, a reduction from the $558 million on March 31, 2025, as we extended the maturity date of the $500 million 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 the 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% this year. According to a recent survey, nearly 1 in 4 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. Our 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. 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 million to $750 million. 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. As 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.

The first question comes from Scott Stember of ROTH.

Can you discuss the increased competition in North America? Last quarter, we mentioned that used car pricing was beginning to rise, which might have been beneficial. Are you no longer seeing that as a factor contributing to a recovery in claims?

Scott, regarding used car pricing, at the start of Q2 in April and May, we noticed some improvements, suggesting that prices might be bottoming out. Some of this can be attributed to an increase in demand for new car sales, which has boosted used car prices. However, as we move into June and July, those numbers aren't growing fast enough. We're observing some year-over-year growth, but not necessarily an increase from month to month. When comparing year-over-year changes in used car pricing to repair costs, the growth hasn't aligned, which is contributing to the gap in repairable claims.

What we are seeing is, we're seeing a decent increase in APU. We're seeing 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.

Got you. And then lastly, in Europe, one of your largest competitors reported relatively flat results for the region yesterday. Now you're mentioning some competition. Are you suggesting that you were not properly priced in the market, or is it a combination of a weakening market and increasing competition?

Yes, I believe you are referring to GPC. If we overlook some of the self-inflicted challenges we've discussed, our performance aligns closely with theirs, although it's not always an accurate comparison since we operate in different markets. For instance, in France, while the overall industry was up and we did see growth, we are a small player there compared to their larger presence. Similarly, Spain experienced growth, but we do not operate in that market. Therefore, direct comparisons can be misleading. The main issue we're facing remains the softness in the market. In some instances, as I have mentioned before, pricing becomes challenging due to smaller competitors. Specifically in the U.K., we renegotiated numerous contracts with our national accounts and lost only one, which was a decision based on our unwillingness to lower our prices excessively. It wasn't sensible for us. When evaluating the value proposition we provide to our customers in terms of service levels and fill rates, we recognize the need to adjust our pricing strategy slightly in response to market conditions, but we are confident that we are still maintaining market share.

The next question comes from Bret Jordan of Jefferies.

That the main European topic, I guess, is GSF, obviously, the U.K. 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?

Yes. And U.K., in particular, I mean, GSF is still there. Other folks are expanding as well. We're the largest today. We've got the most coverage. So as some of our competitors open branches, they create a little bit of noise but 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, I know how good we buy based on our scale and it doesn't necessarily make sense. So and we're winning the customer still, Bret, 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, SKU rationalization, they're working on implementing lean operating model, they have cost-cutting measures at $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 the collision market with SYNETIQ. So we're now expanding into salvage product lines into that to really fill in the portfolio for us on products.

Okay. On the North American collision, I think you mentioned some price increase. Could you tell us what you took for price increase?

We are not revealing the total price increase, but we are certainly raising prices. The tariffs are making this necessary. We are seeing the OEMs increase their prices as well. The last time you asked, we didn't see that happening, but the major OEMs are currently feeling the pressure from tariffs. They have no choice but to keep raising prices. We are also doing the same. The positive aspect is that our most affected product line by tariffs is aftermarket, and even though repairable claims fell by 9%, our actual volume in aftermarket was positive for the quarter. Despite pushing prices, we have maintained our service levels, which, while impacting our margins, was important for us. This approach allowed us to outperform the market, with a growth of 650 basis points over the decline in repair claims. We aim to be ready from a service and availability perspective to take advantage when the market recovers.

The next question comes from Craig Kennison of Baird.

I really appreciate Appendix 1, Slide 17 and trying to understand that even better. Your unrepaired vehicle metric seems to be 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?

It's difficult for me to predict. We noticed some positive signs in used car pricing earlier and anticipated a market recovery, but that hasn't happened yet. If we look at the overall industry picture, manufacturers are facing significant pressure due to tariffs and lost profits, which means they'll likely have to raise prices and increase new car sales to balance out lower volumes, which would benefit us. A strong presence from the manufacturers in the market is advantageous, as it can lead to increased used car pricing, higher parts pricing, and more new car sales, aligning with our interests. The number of unrepaired vehicles has increased, which is cyclical. The uncertainty lies in when this will change. We need to see a reduction in high insurance rates, and while we've noticed a slowdown in growth, it's uncertain if insurance rates will decrease as companies aim to capture market share. At some point, used car pricing should begin to rise in line with repair costs, returning the number of unrepaired vehicles to more normal levels. Despite the down market, our team in North America is still performing excellently; although repairable claims are down 9%, our team only saw a 2% decline, which is remarkable. If you review the data, we are becoming a preferred option for self-pay repairs, gaining share in that area. Overall, with our service levels and fill rates, we are doing very well. Additionally, our hard parts business in Canada is thriving as we transition from a three-step to a two-step process. We are actively pursuing revenue opportunities and are definitely outperforming the market.

And I think it was Rick who mentioned APU being stronger. I'm wondering if you could share that metric.

We're up really close to 39%, Craig, is where the number is sitting right now.

And when you see, Craig, the always, 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 that APU growth is just really just in a lot of cases, possible because of LKQ's just national coverage that we have.

The next question comes from Gary Prestopino of Barrington Research.

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 since the start of the year. Are you where you need to be 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?

Thank you for your question. I visited the team in June, and I am confident in their capabilities. We have added new skills and perspectives, and we have been pursuing several initiatives in Europe for some time. It is essential to have the right team in place to execute these plans. I previously mentioned our three-year plan at Investor Day, which is a comprehensive strategy that the team must implement. They will need to navigate current market conditions and focus on cost-cutting initiatives, but they are very dedicated to the three-year strategic plan and are working hard to integrate and transform the business to realize its considerable potential in that region.

I think the target that Justin gave out, $75 million, the vast majority of that is 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.

And did you quantify on EPS and what the impact of the tariffs was on the bottom line?

Yes. 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 mentioned that in the second quarter, original equipment manufacturers began raising their prices, and we followed suit. Our value proposition remains strong, and we are not losing anything there. Therefore, I am really optimistic about what we have coming up in the second half of the year.

Was there any change in the impact of ADAS on accident volumes since you discussed this during your Investor Day last year? Has there been any change in that outlook due to ADAS?

The long-term outlook remains unchanged. When comparing the years 2022 to 2025, we see that ADAS technology has influenced overall accident rates. However, this effect was counteracted by a return to pre-COVID conditions, as more people are commuting to offices, leading to increased mileage and more vehicles on the road. As a result, we witnessed a rise in actual accidents. Looking ahead, we anticipate that ADAS will continue to pose a slight challenge to overall accident rates. Nevertheless, as mentioned during Investor Day, despite the reduction in accidents attributed to ADAS, the overall collision market is projected to grow over the next decade. This growth is driven by factors such as opportunities in ATU growth, increased part proliferation, and our ability to gain market share and raise prices. Therefore, we expect the collision market to remain robust for us.

The next question comes from Jash Patwa of JPMorgan.

I was hoping to just 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 claims standpoint? And whether this could move the needle on total loss frequencies if adopted by more states? And I have a follow-up.

Yes. Thanks, Jash. I mean, obviously, those are pretty new in Texas and in New Jersey. 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 leads to more repairable claims. 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 an impact to us.

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're seeing with your vendor base? And if you could just provide some more flavor on this conversations you're having?

Yes. Historically, a significant portion of the aftermarket collision industry has been based in Taiwan. Some Taiwanese manufacturers have operations in the U.S. and a few are considering moving to Mexico. The advantage we have is that salvage parts are not subject to tariffs, which benefits us and enhances our value proposition. However, many manufacturers are currently holding back to see the outcome regarding the final tariff, so there hasn't been substantial movement at this time.

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

Yes, Jash, 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 2.5% or 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 that are down a bit more than what we had expected before. And typically, that happens when used car prices flatline and some of the car park is getting a little bit older, the decision to actually repair that engine is something that the consumer is weighing.

The next question comes from Bret Jordan of Jefferies.

Follow-up on the IAA SYNETIQ partnership in the U.K. Is there a CapEx involved in that? Do you need to build the dismantling yards to create alternative collision parts or is that on their infrastructure?

That's on their existing infrastructure. The partnership is great for us. They need a sales arm and a good distribution model, which we provide in the U.K., where we are the leading collision parts provider in the aftermarket. This allows us to integrate some of those products into our network with no capital expenditure, as the infrastructure is already established.

Can you remind us what you're doing in collision revenues in the U.K. now so we can benchmark that?

We haven't provided that in the past, but it's something less than $100 million, I think, is what we've got. It's parts alone. Yes, it would be well over $100 million, yes, with paint and everything. It's a little bit different, Bret.

The next question comes from Scott Stember of ROTH.

Just a follow-up on tariffs. I'm not sure if you mentioned it, but I believe you said $35 million was the headwind in the quarter. Is that what you needed to offset? I'm trying to understand if, coming out of last quarter, the perception was that you could largely offset it or that it would be very manageable for you. Are you changing that perception at this moment?

The $35 million was what was sitting in inventory at the end of Q2. So that's not what went through the P&L. It had minimal impact on the P&L in terms of costs, and we've offset that with pricing. We believe that will happen in the second half of the year. Nothing has changed from what we discussed before. The numbers are roughly the same as what we disclosed back in Q1. We will continue to monitor this. One key area we need to address is the impact of trade working capital due to the increase in tariffs, which we will have to mitigate and find a solution for in the latter half of the year.

But from pushing it through pricing, there has been no issue. What we discussed last quarter was our confidence in being able to mitigate it, at least by raising the price to cover the tariffs. Historically, we have always managed to maintain a margin on top of that. There is still some uncertainty regarding this, but we are not concerned about passing on the cost increase due to tariffs.

We currently have no further questions. I will 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 basis points. There's no team better than ours globally. And we're set up and poised to take advantage once the market recovers. In our Europe team. One thing 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 strat 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 in a strategy plan for simplifying the portfolio, we're still active on that. So more to come. And obviously, it's been a challenging market for our employees. So I just want to say thank you to all the employees that helped us deliver and continue to deliver every day. And so 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 disconnect.