LKQ Corporation 2026 Q3 Earnings Call
Review the key takeaways and the transcript of this earnings call.
- Third quarter revenue was approximately 3.3 billion dollars, down 5.1% from 3.5 billion dollars in the prior-year period; parts and services organic revenue declined 5.4%, foreign exchange reduced revenue by 0.7%, and acquisitions and divestitures net added 0.6%.
- Diluted earnings per share was a loss of 9 cents, compared with earnings of 69 cents in the prior-year period; adjusted diluted earnings per share was 50 cents, compared with 84 cents.
- GAAP results included pre-tax non-cash charges of 111 million dollars, including 88 million dollars of goodwill impairment on the Specialty segment and 23 million dollars of impairment on net assets held for sale for operations in Romania.
- North America parts and services organic revenue declined 2.4%, while segment EBITDA was 203 million dollars and EBITDA margin was 14.4%, 40 basis points higher than the prior-year period; gross margin improved to 42.3%.
- North America alternative part utilization reached a record of nearly 41%, and the hard parts team recorded its third consecutive quarter of organic revenue growth, with low single-digit year-over-year improvement in Q3.
- Europe parts and services organic revenue declined 9.8%, improving from a 12.6% decline in the second quarter; segment EBITDA was 68 million dollars, with a 4.6% margin compared with 10.0% in the prior-year period.
- The ERP-related disruption in Germany reduced Europe revenue by approximately 95 million dollars and EBITDA by approximately 43 million dollars in the quarter; market share was lost in the UK and Benelux.
- Specialty organic revenue grew 90 basis points; segment EBITDA was 25 million dollars, with a 5.5% margin, approximately 180 basis points lower than the prior-year period.
- Third quarter operating cash flow was 411 million dollars and free cash flow was 372 million dollars; for the first nine months of the year, operating cash flow was 466 million dollars and free cash flow was 336 million dollars.
- As of September 30th, total debt was 3.7 billion dollars, total leverage was 2.8 times EBITDA, and total liquidity was approximately 1.7 billion dollars; LKQ repurchased approximately 1.2 million shares for 30 million dollars and paid 76 million dollars in dividends during the quarter.
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Transcript
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Hello, everyone. Thank you for joining us and welcome to LKQ Corporation's third quarter 2026 earnings conference call. After today's prepared remarks, we will host a question and answer session. 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 Boutross, Vice President, Investor Relations. Joe, please go ahead. Thank you, operator.
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 Mendel, 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. 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. 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.
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 will 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've 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. But 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, is not at 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 Abbate as President and Chief Executive Officer, effective December 15. He succeeds Justin Jude, who departed the company on October 23. 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 instinct, 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. A&M 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 A&M to advise with respect to our European operations because of this.
Now, 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 will 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 will 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. Thank you, John, and good morning, everyone.
As you have just heard, this is an important moment for our company. We recognize the significance of the leadership changes announced last Friday and the disappointment in our third quarter results. Neither the executive leadership team nor the board is satisfied with where we are, and we are taking decisive action. Our execution has fallen short, particularly in Europe, and we need to address those issues with urgency, focus, and accountability. I want to be equally clear that we remain confident in the fundamental strength of our businesses. We have strong market positions, differentiated capabilities, and dedicated teams around the world. My goal this morning is to speak candidly with you about what happened during the quarter, what we believe drove our performance, and where we are focusing our attention going forward.
I will start with our operating performance by segment and then walk you through the financial results. Let us begin with North America. In North America, organic revenue declined 2.4%, compared with a decline in repairable claims of 1%-3% during the quarter. Auto insurance pricing continues to decrease, making our parts offering even more attractive to carriers seeking cost-efficient repair solutions. The CPI for motor vehicle insurance declined 5.0% year-over-year in September 2026, its lowest level since December 2024. In addition, self-pay repairs are approaching historical highs, and our parts provide a strong trade-down option that helps consumers manage out-of-pocket costs without sacrificing quality or availability. These favorable trends help drive alternative part utilization to a record of nearly 41% for the quarter, surpassing the previous high that we set back in Q2.
Total loss rates were stable year-over-year, with used car prices modestly lower in the quarter. Total losses remain elevated by historical standards, but that trend largely reflects the aging vehicle fleet, particularly vehicles beyond our four-to-12-year sweet spot, rather than any shift in underlying demand for our parts. The hard parts team posted its third consecutive quarter of organic revenue growth, resulting in low single-digit year-over-year improvement in Q3. Turning to Europe. We are clearly not satisfied with our performance in Europe. Many of the challenges we faced were self-inflicted, and we take full ownership of them. Simply put, we had too many operational initiatives underway at the same time, which pulled our attention inward and caused us to lose focus on the customer.
These challenges manifested in several ways during the quarter, including disruptions to category management and product availability, gaps in our branch profiling and assortment, and service level issues in certain markets. These issues affected our ability to consistently deliver the parts availability, service levels, and competitive pricing our customers expect from us. We are moving with urgency and discipline to address them and strengthen our execution across the region. Turning to Specialty. Specialty continued to grow, but at a lower rate than we saw in the last several quarters. We experienced some modest external pressure during the quarter, primarily from higher fuel prices and interest rates affecting the automotive portion of the business, as well as softer demand in Canada tied to geopolitical trade tensions and retaliatory tariffs.
None of these factors were material on their own, but even against that backdrop, Specialty delivered organic revenue growth of 90 basis points in the quarter. The RV and marine division of Specialty continued to grow in the quarter, and we're pleased with that performance given the challenging market conditions. RV results stood out in particular, with retail dealers seeing low double-digit revenue declines and industry-wide wholesale shipments down over 16% year-over-year in August. According to the RV Industry Association data, our ability to deliver growth in that environment highlights the strength of our team, our customer relationships, and the durability of our value proposition. Now, turning to our financial results. Beginning with our consolidated results, our reported numbers are consistent with the preliminary ranges we provided on October 23rd.
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