LKQ (NASDAQ:LKQ) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
LKQ Corporation announced significant leadership changes, appointing Sal Abadi as the new CEO, effective December 15th, and engaged Alvarez & Marsal to address operational performance issues in Europe.
The company reported a 5.1% decline in third-quarter revenue to $3.3 billion, primarily driven by a 9.8% decline in European organic revenue, and adjusted diluted EPS fell to $0.50 from $0.84 year-over-year.
North American operations saw a 2.4% decline in organic revenue but maintained a strong EBITDA margin of 14.4%, while Specialty segment revenue grew modestly by 90 basis points despite external pressures.
LKQ suspended its full-year 2026 guidance due to ongoing leadership transitions and performance challenges, particularly in Europe.
Management emphasized the need for improved execution and operational focus, especially in Europe, and highlighted the potential for revenue recovery with improved customer service and system efficiencies.
Full Transcript
OPERATOR
If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Joe Boutrous, Vice President, Investor Relations. Joe, please go ahead.
Joe Boutrous (Vice President, Investor Relations)
Thank you. Good morning everyone and welcome to LKQ’s third quarter 2026 earnings conference call. To kick off the call, we have a prerecorded message from John Mandel, LKQ’s Chairman of the Board, that will provide some additional context related to our recent press release regarding changes to our leadership team and an update on the company’s strategic review. Following John’s message, Rick will provide some high-level comments on each of our segments, followed by a detailed overview of our financials in the quarter, and then we will open the call for questions.
I kindly ask that you focus your questions solely on the company’s performance during the quarter. 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.
And during this call we will present both GAAP and non-GAAP financial measures, and 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. As normal, we are planning to file our 10-Q in the coming days. With that, operator, we are ready to begin the call.
John Mandel (Chairman of the Board)
Thank you, Joe, and good morning everyone. We appreciate you joining us. Following last Friday’s announcements, the Board felt it was important that you hear from us directly before Rick takes you through the quarter. I’ll keep my remarks brief, but I want to share some perspective on the decisions we made and why. The Board’s focus is on delivering results for our shareholders, and that is what guided the changes we announced. LKQ is an exceptional business.
We have unmatched scale, leading market positions in multiple regions, a unique global distribution network, and talented teams across the company. Our financial and operating performance has not reflected the strength of this business, and that has been disappointing both to our stakeholders and to this Board. We’ve been operating in a challenging environment, and our execution, particularly in Europe, has not met the standards we expect of ourselves.
The Board has been actively engaged on these issues for some time now, and the strategic review we began earlier this year was one part of that work. We believe that LKQ has significant strengths that are not currently reflected in its operating performance, and our focus is on ensuring those strengths translate into improved results for shareholders. Last week we announced three actions. First, we made a change at the top of the company. The Board has appointed Sal Abadi as President and Chief Executive Officer, effective December 15th. He succeeds Justin Jude, who departed the company on October 23rd. We thank Justin for his years of service and contributions to LKQ. Until Sal joins, the company is being led by an interim Office of the Chief Executive Officer made up of Sue Gove, Chair of our Audit Committee, and me.
We’re working closely with LKQ’s leadership team to oversee the company’s operations during this period. After a thorough search, the Board concluded that Sal is the right leader for LKQ at this moment. He spent more than three decades leading large, complex distribution and industrial businesses. As CEO of Veritiv, a high-volume, multi-site distribution business, he led a significant transformation of the company with its share price increasing more than 13-fold during his tenure, culminating in its $2.6 billion sale to Clayton, Dubilier & Rice in 2023.
He also brings public-company and international experience as well. Sal knows what it takes to win in a business like ours, and he brings the operating rigor, commercial instincts, and sense of urgency we need to sharpen execution and manage change with greater discipline. Second, we made a leadership change in Europe and engaged Alvarez & Marsal to advise the company on its European business on an interim basis. Alvarez & Marsal has a mandate to stabilize operations, including the ERP-related issues, and restore service levels across the region. The team is also helping ensure continuity for customers and suppliers across the region while supporting our efforts to improve operational discipline and performance.
Third, we suspended our full-year 2026 guidance in light of the company’s recent performance and leadership transition and while Sal completes his review of the business. Finally, I want to update you on our strategic review. The Board’s commitment to unlocking value for shareholders has not changed. We made changes in leadership and brought in Alvarez & Marsal to advise with respect to our European operations. Because of this, and in light of the appointment of Sal and the other leadership changes we announced on Friday, the Board has decided to suspend the strategic review, including the specialty sales process.
This will give Sal the opportunity to assess the business and the full range of paths to value creation. The Board remains committed to overseeing strategic direction, protecting shareholder interests, and ensuring accountability, including evaluating opportunities that it believes could enhance shareholder value and optimize the company’s strategic positioning over the long term. We believe that is the right sequencing for shareholders, and we’ll provide updates when appropriate.
Everything we’re doing is in the best interest of our customers, our employees, and our shareholders. I want to thank our more than 42,000 employees around the world for their resilience over the past several months and our customers and shareholders for their continued support. Sal looks forward to sharing his priorities with you after he joins. With that, I’ll turn the call over to Rick to walk through the quarter in more detail. Rick will be handling the question and answers today and focus on the operating and financial performance in the quarter.
We will not be able to comment on the strategic review process beyond what I shared here today. Thank you.
OPERATOR
We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of John Babcock with Barclays.
Your line is open, John. Please go ahead.
John Babcock (Analyst)
All right. Good morning, and thank you for taking my questions. I guess, just starting out, Germany was a little bit more of a challenge than I think most people probably expected, and it seems like it persisted more into this quarter. How do you get that Germany impact back? Also, why was this so much more of an issue than you thought when the quarter began?
Rick Galloway (Chief Financial Officer)
Yeah. Thanks, John. Appreciate the question. Look, in Q3, we’ve further stabilized the system and operations. The sales are hovering now around 85% versus the prior year on a per-day perspective. And one of the big focuses for us is going to be on the operational metrics of OTIF, or on time in full. We have to get delivery performance back to where we expect it, which is about 95%. Right now recovery is in progress and it’s a good positive trajectory.
A couple other things that we’ve done is we’ve successfully concluded two more ERP releases to update the system, driving better efficiencies and reliability in the operations. And look, our teams are focused on working with the worst-performing branches. The lowest-performing branches are where we need to bring them up to the expectations with normal trading through on-site support and targeted training. And then this allows our sales teams to work with our customers.
And what we found in the last few weeks and probably the last four to six weeks is customer sentiment continues to improve across our NPS measurements, and our customer journey insights are helpful in prioritizing the overall improvement initiatives. So the improvements are there, the operational improvements are there. The next phase of this, John, is in control and capable and being able to get our customers to rely on us, and that reliability has much improved and is giving our sales team an opportunity to actually win back that share.
John Babcock (Analyst)
Okay, thank you. And then in terms of the UK and Benelux, was there any notable change from last quarter, or was there—so in other words, was there something that worsened? And then also, as a separate point, I was wondering if you also might be able to talk about why Alvarez & Marsal was chosen here to help with the European operations as opposed to doing it internally.
Rick Galloway (Chief Financial Officer)
Yeah, appreciate the question. There was further deterioration that we saw in Q3 in both the UK and our Benelux area. One thing to keep in mind, on our Euro Car Parts business, which is in the UK, they’ve been struggling for a little bit. What we’ve identified is many of these are within our control. The struggles that we have are product availability, being able to say yes to our customers more often. But one thing to be clear is we’re still number one in the UK by a wide margin.
What we need to do is get back to servicing our customers, focus on the customers, and get any distractions away from us. We have the strongest footprint, the strongest delivery network, and the team there is loving to win. They continue to want to win. The focus needs to be on fundamentals. One of the reasons we hired Alvarez & Marsal was their big focus on fundamentals of improving service levels, enhancing the inventory, logistics, execution, and also sharpening our overall approach on this trade segment that we have. These actions are underway immediately, and what we’re looking at is the team needs to move with urgency and really take away any distractions. Having Alvarez & Marsal come in is allowing us to really focus that team with a team of theirs that has a footprint to help really focus the business on the improvements at hand and really work with urgency.
John Babcock (Analyst)
Okay, very helpful. And then if you don’t mind me squeezing one more question just on North America. Seems like your organic sales pace was maybe not the typical outperformance relative to repairable claims. If you could talk about that, that would be helpful, and then I’ll pass it over.
Rick Galloway (Chief Financial Officer)
Sure. A couple things that occurred within the quarter actually happened within our non-collision business. We had some delivery performance issues in some of our non-collision parts of the business that tend to outweigh—drive that beat to repairable claims—and they did not see the same improvement that we had seen previously. The good news is that those delivery performance issues have been significantly rectified as we moved into the fourth quarter and we’re looking much, much closer to year over year.
We’re not quite back to growth in those parts of the business, but we’re just slightly under in those parts of business. That was one of the major impacts of why that beat wasn’t there as normal.
John Babcock (Analyst)
Thank you, very helpful.
OPERATOR
Your next question comes from the line of Jeff Lick with Stephens. Your line is open, Jeff, please go ahead.
Jeff Lick (Analyst)
Good morning, Rick. Morning, Joe. Thanks for taking my question. Rick, I just wonder if you could remind us, with the ERP implementation in Germany—presumably you did that for a reason; you know, eventually you get to the other side—could you remind us in terms of what that return on investment will look like in terms of either reduced SG&A, better volumes, and better gross margins?
Rick Galloway (Chief Financial Officer)
Yeah, good question, Jeff. Appreciate that. Look, there were many reasons to do the ERP implementation. One of the reasons to choose Germany was the system itself was antiquated, with different areas that we were going to need to upgrade that system and make sure that that’s safe and secure and make sure that we can provide to our customers. One of the things is a significant portion of our orders in Germany in particular come in electronically. And our system that we had prior to this wasn’t allowing our customers to do everything that they needed to do, and this opens it up for them to be able to order much easier.
One of the reasons that we’ve done it is that, and one of the positives we’ve seen is the new customers we’ve gone after. We’re seeing a really nice win rate on those new customers that weren’t impacted negatively in the second quarter. The overall returns and paybacks are pretty significant. We’re looking at driving overall revenue increases, we’re driving overall market share improvements, along with being able to shut down one of our corporate headquarters. We had two corporate headquarters; we’re able to consolidate those and reduce our overall SG&A as well. And then the third thing that this allows us to do is really the opportunity for us to do logistics without borders and be able to provide a better logistics footprint across the pan-European business as we continue to move down this path.
Jeff Lick (Analyst)
And then a couple follow-ups there. I mean, look, SG&A was 476, which was the same as Q2 and a little more than Q3 of last year. I’m assuming there’s some elevation there. You know, when you talk about shutting down headquarters, I mean it sounds like those are some chunky buckets. Could you just—any degree of magnitude of, you know, when the dust settles and you’re not paying extraordinary charges right now to fix things—where we could get to?
Rick Galloway (Chief Financial Officer)
Yeah, we haven’t come out and said what those numbers are at this point, Jeff. What we did see within the quarter is we brought in around 300 temporary workers to increase the cost in order for us to get our delivery performance up where we wanted it to get to since the beginning of the quarter. Those 300 have pretty much gone by the end of the quarter. But that was an inflated number that we saw within the quarter. And what we have been able to see is that we’ve been able to take some of the reductions in our overall headquarter costs.
But as far as quantification on that, we haven’t come out and quite quantified that yet. I’d want—wait—not do that on this call.
Jeff Lick (Analyst)
One last quick one. You know, look, when a guy like Sal, the CEO, comes in, he generally asks, you know, the CFO, like, hey, listen, let’s get some easy wins. Let’s just stick to some 80/20 rules. You know, Rick, what are like the one or two, three things we can do right away to get some quick improvement? What are you going to tell him?
Rick Galloway (Chief Financial Officer)
Those are great questions. And when he gets here, he and I are going to have that conversation, Jeff. So he and I will work on that together. But it’s something that we’ll work on together as he comes on board.
Jeff Lick (Analyst)
Awesome. Thanks, Rick.
Rick Galloway (Chief Financial Officer)
Thanks, Jeff.
OPERATOR
Your next question comes from the line of Craig Kenison with Baird. Your line is open, Craig. Please go ahead.
Craig Kenison (Analyst)
Hey, good morning. Thanks for taking my question as well. I wanted to stick with Europe and maybe, Rick, just try to better understand today as it stands: are you still having an issue with delivering on orders that you get in terms of your fulfillment rate, or is the issue now just recovering that demand such that your order rate is back to prior levels?
Rick Galloway (Chief Financial Officer)
You’re talking, Craig, you’re talking specifically about the ERP in Germany. Okay. Yeah. So what we’re seeing is the measurement that we utilize is on time, in full—the OTIF measurement. That number in Q2 was less than 80%. That number needs to be in the high 90s in order for us to be able to say yes to our customer enough, right. So where we’re at on average right now is 95%. So we’re getting really close to that. What I would tell you is 75% of our locations are in the upper 90s. So when we’re sitting there and looking at the top 75% of our locations—we have about 155 locations in Germany—the top 75% of them, they’re at a position that is at a minimum meeting the competition and oftentimes beating the competition.
So it’s not a system issue per se that is causing a whole bunch of problems across the board. Instead, what it is is it’s a training opportunity for us to bring some of our lower-performing branches up to the level of expectation and then be able to say yes more often. And so what we’re seeing is, again, those top 75% of our branches, they’re delivering at a high-90s number and really being able to say yes more often. So that’s where I have the confidence that we’ve got to get those bottom ones up to the proper performance and then be able to get the customers convinced to come back and really be customer-focused on being able to say yes to them more often and not have any disruptions.
Craig Kenison (Analyst)
Thanks. Is there a way to measure the demand component here? In other words, are your European customers—I guess in Germany—deprioritizing you because you haven’t been able to deliver to their expectation? Are you seeing that show up in weak orders?
Rick Galloway (Chief Financial Officer)
Yeah, we’re seeing a couple different buckets, Craig. We look at different buckets of our customer base. Some customers that we impacted significantly have pulled a significant portion of their business away from us, and some have walked away totally and gone to competition. That’s a small percentage of the overall customer base. The majority of our customer base is giving us still a majority of their share, but not getting us back to the same levels that we had before, and that’s a constant conversation.
So the good news is that we’re still working with them. They still enjoy working with our Stahlgruber business and want to give the business back. But we’ve got to be in control and capable and be able to prove that to them. So that’s the efforts that we’re doing right now. Operational improvements are coming through. Now it’s that convincing the customer that we’re in control and capable and we can say yes all the time. And so that’s where we have confidence that the revenue will come back. But again, we don’t want to forecast when that revenue is going to come back. But the relationship with the customer is strong on those individuals. And then again we are winning new share, which is something that is encouraging as well.
Craig Kenison (Analyst)
Thanks. And with respect to winning that business back, should we expect a period of heavier promotional activity to sort of earn the opportunity again?
Rick Galloway (Chief Financial Officer)
You know, when you’re thinking about overall price and giving it back. Look, we’re going to remain competitive on price, but price alone isn’t the answer. So we’re going to have to go and be more aggressive here in the fourth quarter, I think. But one of the things that happens in that business is that they have an annual bonus, which is what we call it over there. And the annual bonus really starts on January 1st. And then there’s a volume component associated with that.
In order to win back some of that share in the fourth quarter, we’re going to be aggressive and make sure our customers are made whole with the disruptions that we had earlier in the year. Look, our customers are looking for a better overall value proposition with consistent availability, service levels, and reliability. And we haven’t been delivering that. So that’s where our focus is, and we’re actively engaged with both existing and new customers to win back that share.
Craig Kenison (Analyst)
Great. Hey, thanks, Rick.
Rick Galloway (Chief Financial Officer)
Thanks a lot, Craig.
OPERATOR
Your next question comes from the line of Scott Stember with Roth Capital Partners. Your line is open, Scott. Please go ahead.
Scott Stember (Analyst)
Good morning, and thanks for taking my questions as well. You made a comment earlier that you were a victim of having too many things going on at once. And we talked about Germany and Europe. Could you talk about anything else that you could refer to, to that statement regarding, you know, management changes, notably in Europe? Is there anything else that we should keep an eye on?
Rick Galloway (Chief Financial Officer)
You know, one of the things I think that shows a clear message is really what the board enacted this week with the suspension of the strategic review. Make no mistake, there’s a lot of work that comes behind doing a strategic review and analyzing the overall business. Look, the strategic review led to some significant actions, including new leadership at the top of the company, new leadership in Europe, and the engagement of A&M. But suspending the review allows clarity to the organization that the highest priorities are to improve our relationship with our customers and drive operational improvements immediately.
Those are the focuses that we have. And the board’s made it extremely clear that if there’s something that doesn’t lead to those strategies and those improvements, then we probably put those on a back burner and really focus on delivering to our customers. So that’s one of the biggest things, being able to pull that off and say the team needs to focus on operations. And then there’s other projects that the team is working on to enhance the future of the company. And so they’ll still keep an eye on that, but really need to get back to the basics and driving performance.
Scott Stember (Analyst)
All right, and then last question on the balance sheet this year, obviously because of net income, you know, free cash flow has come down, but also accounts payable have reversed. Just trying to get a sense if some of this disruption in Europe has led to an unwinding of any of these receivable factoring programs that you have put in place over the last few years.
Rick Galloway (Chief Financial Officer)
Simple answer is no, it hasn’t led to any of that. There’s some timing that happened with payables between Q2 and Q3. So there’s a little bit of free cash flow movement between Q2 and Q3 that we saw. But no, Scott, there’s no difference on the supply chain financing.
Scott Stember (Analyst)
Gotcha. That’s all I have. Thank you.
Rick Galloway (Chief Financial Officer)
Thanks, Scott.
OPERATOR
Your next question comes from the line of Patrick Buckley with Jefferies. Your line is open, Patrick. Please go ahead.
Patrick Buckley (Analyst)
Hey, good morning, guys. Thanks for taking our questions. On North America, did you see any notable market share shifts in collision parts? Was there anything on the MSO volume side or in parts, or anything notable to call out on the paint side?
Rick Galloway (Chief Financial Officer)
Business as usual on the paint side. It continues to move in a direction. Look, one of the things we’ve been really clear about is the most discretionary part of the repair is paint. And so when you’re seeing repairable claims at negative 1 to negative 3, you can imagine that paint tends to be a little bit worse than that. And that continued for this quarter. You know, one of our larger MSOs did have a different sourcing approach that they did within the quarter. It did reduce our share a little bit. Look, we remain active and constructive with discussions with them. They’ve been going very well. We’ve been working to reach an agreement that works for both sides. But beyond that, we’re not going to comment on any individual customer relationships.
It’s also important to understand that we also have the highest level of CAPA-certified parts and the most recognizable private label brand of Platinum Plus. These are reasons why our relationships with the MSOs are so positive, and we continue to grow with every other MSO within the quarter, year over year.
Patrick Buckley (Analyst)
Great. That’s all for us. Thanks, guys.
OPERATOR
Your next question comes from the line of Josh Patwa with JP Morgan. Your line is open. Please go ahead.
Josh Patwa (Analyst)
Hi, good morning, and thanks for taking my questions. Just one. On North America, would you be able to parse out the volume versus price trends underlying the negative 2.4% organic revenue growth in North America? I’m wondering if the combination of IPA tariff refunds and lowering of the Section 232 automotive tariffs from Taiwan has created a deflationary pricing environment that could be on organic revenue growth over the next few quarters. Thanks, and have a quick follow-up.
Karla
Yeah, Josh, appreciate the question. The IPA tariffs have minimal impact on our North America business. Those are primarily related to China, and that has a little bit more of an impact on our specialty side of the business. As far as the movement in tariffs that we had with the Taiwanese deal, the tariff did move from 25% down to 15%. We did start seeing some of that reduction within the quarter. We also have a pricing engine that we’re pretty excited about that is really looking at many different things to optimize overall pricing to make sure that we’re looking at volume versus pricing versus margin, all the kinds of stuff that we need to look at. It’s showing some nice early signs. As far as the price versus volume goes, price was a little bit favorable year over year, and then the downside was on the volume side of things, especially with the point I just made with the prior MSO.
So I think that that’s temporary in nature on that part of it, and then we should be able to get that back.
Josh Patwa (Analyst)
Great, Karla. And just as a quick follow-up on Germany, I believe the business was running at about 85% of pre-ERP transition level early in the third quarter. Could you give us a sense of how that progressed through the quarter and where it stands today? And just based on your comments around incentive activity picking up sequentially into the fourth quarter, should we expect Europe EBITDA margins to remain in a similar range as Q3? Thanks.
Karla
Yeah, so we did withdraw guidance, so I’ll be a little bit careful on what I’ve seen. But look, there’s no catalyst that I’m seeing in the business really in any of the segments that would negate our normal seasonality. So keep in mind we have normal seasonality from Q3 to Q4. I would expect that trajectory from Q3 to Q4, and really all the businesses, to continue. So if you’re looking back to last year and you see what the movement was, that’s sort of the way I’m looking at it because I don’t see a major catalyst.
And to the point you’re making on the revenue, the revenue was around that 85% and it’s sort of stagnated. The delivery performance has improved and we haven’t seen the revenue return, and that’s one of the things that we really need to focus on is winning back some of that share with our customer base. So I don’t think that there’ll be anything, you know, significant that we’re going to have to do as far as the additional bonuses, but we will have to make sure that we’re very competitive on the pricing side.
Josh Patwa (Analyst)
Great. Thanks for taking my questions, and good luck.
Rick Galloway (Chief Financial Officer)
Thanks a lot, Josh.
OPERATOR
There are no further questions at this time. I will now turn the call back to Rick Galloway for closing remarks.
Rick Galloway (Chief Financial Officer)
All right, thank you, everyone, for your questions. Look, our execution, particularly in Europe, has not met the expectations, and we know we have work to do. Our focus is clear. Stabilize performance, improve execution, and deliver better results. We also have meaningful strength across LKQ North America. Expanded margins in the soft market. Specialty continued to grow, and those businesses give us a strong foundation moving forward. We look forward to Sal joining us on December 15 and sharing his priorities with you.
Thank you, and have a good day.
OPERATOR
This concludes today’s call. Thank you for attending. You may now disconnect.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
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