LKQ expects positive business growth for aftermarket parts as insurance companies look to cut costs

As insurance companies look for ways to cut costs, LKQ expects profit from its North American aftermarket parts segment. 

Justin Jude, LKQ president and CEO, said its North American market saw positive growth in Q2 with a 0.5% increase. Repairable claims were still down 1-3% in Q2, but that is an improvement over Q1, he said. 

“While the market has not fully recovered, several external indicators continue to reinforce our belief that collision markets are improving,” Jude said. “Not only has used car pricing continued to improve, both May and June showed negative insurance CPI on a year-over-year basis, putting pressure on carrier margins.” 

He said insurance carriers are looking for ways to cut costs, and the easiest ways to do so are by using more alternative parts and improving cycle time. 

“A lot more business is being driven to the MSOs [multi-shop operators] right now,” Jude said. “Now, MSOs are the bigger customers. They get the best prices. But at the end of the day, they do use more alternative parts than a non-MSO rooftop, so we see a bigger share of opportunity for our wallet to grow with those guys.” 

Alternative parts usage (APU) was more than 40% for the quarter, Jude said. He added this surpasses a previous record from last quarter. 

Rick Galloway, LKQ senior vice president and chief financial officer, said aftermarket collision revenue increased by about 2% in the quarter. 

Jude said salvage gross margin also exceeded the company’s expectations. 

“North America remains focused on enhancing our salvage procurement, improving fill rates, strengthening our pricing and analytics capabilities, and consistently executing against our operational initiatives,” he said.

While collision and salvage improved, paint volumes remained a “headwind,” he said. 

As LKQ sees overall improvement in North America, the company fell short of its expectations for the quarter, Jude said. He said most of the difficulties were in Europe, due to ERP implementation challenges in Germany and softer performance in certain European markets. 

Galloway said Q2 revenue was about $3.4 billion, compared to $3.5 billion in Q1. 

“Operationally, North America remains on track against its full year plan,” Galloway said. “The outlook assumes repairable claims remain near current levels with modest improvements during the second half. We are encouraged by the improvement seen during the quarter, particularly in June, but are not assuming a significant market recovery.” 

When asked about tariffs, Galloway said Section 232 tariff reductions on Taiwan from 25% to 15% mean good news for LKQ.

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LKQ’s headquarters in Nashville, Tennessee. (Provided by LKQ)