LKQ: Not cutting service, inventory despite repairable claims decline

LKQ’s Q3 total parts and services revenue increased 1.1%, including organic parts up by nearly half a percent, which the company says is notable “against the backdrop of a 6% decline in repairable claims,” according to an LKQ press release.

During the company’s Q3 earnings call with investors, President and CEO Justin Jude said, “We are seeing ongoing macro challenges, including reduced consumer spending and lower demand for vehicle repairs… We are focused on a multi-year transformation centered around four strategic priorities.”

He noted that, across all segments, LKQ hasn’t been cutting service and inventory levels.

LKQ shared that those strategic initiatives are to:

• • “Simplify business portfolio and operations: Streamlining operations by focusing on our non-discretionary businesses, divesting non-core assets, and enhancing efficiencies.
  • “Expand lean operating model globally: Continuing to scale lean operating model across all regions to drive productivity, improve execution, and accelerate decision-making.
  • “Invest and grow organically: Investing in our core businesses to achieve above-market growth and drive market share gains.
  • “Pursue disciplined capital allocation strategy: Remaining focused on maximizing shareholder value with a disciplined capital allocation strategy and further strengthening our balance sheet to maintain our competitive market position and resilient business model through all market cycles.”

In the North American market, repairable claims continue to experience downward pressure, though the rate of decline has moderated to 6%, Jude said.

“Service levels and inventory fill rates were maintained and not sacrificed during these temporary challenges, enabling results that exceeded the performance of repairable claims,” he said.

Jude said record insurance shopping and rate reductions are positive trends in the U.S. that could help improve repairable claims.

“These trends signal ongoing pricing pressure from carriers and should help insurance rates normalize,” he said. “Our part offerings continue to help carriers immediately reduce costs to offset any lower premiums, just as they did during the financial crisis. We are also seeing used car prices somewhat stabilize, but with continuing volatility, month-to-month values haven’t normalized yet. Our diversification into new products and services in North America is generating positive results.”

He added that LKQ’s Elitek business, which provides technical repairs and calibrations, performed well in Q3 with several key accounts achieving double-digit growth.

Rick Galloway, senior vice president and chief financial officer, noted that LKQ’s wholesale segment, which includes aftermarket and recycled parts operations, posted an EBITDA margin of 14%, a 180-basis-point decrease compared to last year.

“Gross margin contributed to approximately 70 basis points of the decline due to the dilutive effect of increasing prices to offset dollar-for-dollar higher input costs from tariffs and unfavorable customer mix effect as we continue to grow share with the MSOs,” he said.

Jude added, “I do believe when the repairable claim starts to rebound or improve more, we’ll start to see more of the independents come back and get more of the volume. Right now, MSOs are winning more of that share… We’re winning with them.”

LKQ has revised its full-year outlook based on Q3 results and the sale of its self-service segment (Pick Your Part).

Jude said total loss frequency was flat from quarter to quarter in terms of alternative part usage (APU).

“A lot of that’s driven by used car pricing,” he said. “We’re still seeing volatility month to month within the quarter, so that necessarily hasn’t stabilized. We saw improvements, but it dipped again in the quarter with used car pricing… A lot of that is not allowing what I would call total loss to start to improve. APU was flat, which is still positive for us, that it isn’t declining, and we still see opportunity with many carriers to grow that APU number.”

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