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Rick Galloway

Thank you, Justin, and welcome to everyone joining us today. We are pleased with our start to 2025. Cost actions taken in 2024, including exiting underperforming businesses and driving our lean operating model, have positioned us well to offset the top line headwinds across each of our segments.
Overall, Q1 results were largely consistent with the trends we saw throughout the last several quarters. Europe continued its solid performance with a 60 basis points year-over-year improvement in segment EBITDA. In North America, we were pleased with their performance given the anticipated top line pressure as we work through the decline in repairable claims.
Self Service delivered another quarter of year-over-year improvement in both EBITDA dollars and percentage. Specialty's results remained under pressure with soft demand in the RV and SEMA space, partially driven by softening consumer sentiment in light of the ongoing macroeconomic instability, including uncertainty around the effect of tariffs.
Now turning to the first quarter consolidated results. Our first quarter performance was in line with our expectations. We reported diluted earnings per share of $0.65, a $0.06 increase compared to Q1 2024. On an adjusted diluted earnings per share basis, we reported $0.79, a decrease of $0.03 per share versus prior year. The decrease in adjusted EPS is largely due to lower segment EBITDA dollars predominantly from our wholesale North America segment.
Higher legal and professional fees were also a $0.01 headwind as we reached the cooperation agreement with Ancora and Engine Capital in the first quarter. The impacts from interest and FX rates largely offset each other with interest being a slight positive and FX being a slight negative. On a positive note, lower share count resulting from our disciplined share repurchase program drove $0.03 of incremental adjusted EPS versus prior year.
Now for segment results. Going to Slide 8. North America posted a segment EBITDA margin of 15.7%, a 60 basis points decrease relative to last year, primarily due to the organic revenue decline. The decline in organic revenue was driven by a reduction in repairable claims and having one less selling day. partially offset by targeted actions to increase market penetration.
Gross margin improved by 20 bps as a result of product mix and pricing initiatives. Overhead expenses declined by $16 million relative to prior year, including $24 million of decreased personnel costs due to Uni-Select synergies and productivity initiatives. These were partially offset by inflationary cost pressures related to facilities and vehicle expenses as well as higher legal and professional fees.
The leverage effect of the organic revenue decline largely drove the increase in OpEx as a percentage of revenue. We expect headwinds on repairable claims to continue in 2025 but abate somewhat toward the back half of the year. Excluding any potential impacts from tariffs over the balance of the year, we still believe North America's EBITDA margins will be in the low 16s on a full year basis.
Looking at Slide 9. Europe reported a segment EBITDA margin of 9.3%, a 60 basis points improvement over last year. The year-over-year improvement was driven by higher gross margins, the ongoing efforts to simplify the operations and portfolio as well as productivity efforts to offset inflationary pressures on overhead costs.
Overhead costs were also negatively affected in the prior year due to union-related negotiations. Given the actions we've taken to drive productivity and simplify the portfolio and absent any macroeconomic impact from the tariff situation, we continue to project EBITDA margin will be double digits on a full year basis in 2025.
Moving to Slide 10. Specialty EBITDA margin of 5.4% is 100 basis points below the prior year, primarily driven by a decline in organic revenue and resulting leverage effect on overhead costs. Demand softness in the light vehicle and RV product lines remain challenges for the business.
Economic instability stemming from tariffs has resulted in declines in consumer sentiment, which negatively impacts discretionary spending in some of the markets in which Specialty operates. Given the ongoing uncertainty and demand softness, we expect segment EBITDA margin to be around the low end of the 7% to 8% range we provided when we issued full year 2025 guidance.
Self Service generated $20 million in segment EBITDA in Q1, an increase of $4 million and a 290 bps improvement as a percentage of revenue. Disciplined vehicle procurement, combined with overhead cost controls, helped to drive the fourth consecutive quarterly improvement in year-over-year profitability.
Shifting to cash flows and the balance sheet. Free cash flow during the quarter was a net outflow of $57 million. This performance was in line with our expectations due to the timing of our payables, partially related to the investment in inventory in North America in anticipation of possible Q1 port strikes and higher interest payments for the 2031 euro senior notes due to timing.
We anticipate generating positive free cash flow in the next three quarters will bring us in line with our full year guidance, absent any significant tariff-driven market turbulence.
Moving to Slide 11. We remained active in the market, allocating $40 million in share repurchases for 1 million shares. We also paid our quarterly dividend totaling $78 million. As a continuation of our disciplined capital allocation strategy, we did not make any acquisitions in the first quarter. We borrowed approximately $170 million in the quarter. As of March 31, we had total debt of $4.4 billion with a total leverage ratio of 2.5 times EBITDA.
Although the leverage ratio is slightly higher than the prior quarter, we anticipated the increase as we built trade working capital in Q1, largely associated to the seasonal nature of our business and the increase in inventory purchases in Q4 and Q1 to get ahead of potential disruptions at the ports and from tariffs.
We remain committed to maintaining a manageable debt level and our investment-grade rating. As of March 31, 2025, our current maturities were $558 million, including the $500 million term loan coming due in Q1 2026. As normal practice, we actively manage our capital structure, and we are working through our options with our lending group. We have no significant concerns regarding our ability to extend the maturity date.
Our effective interest rate was 5.2% at the end of Q1, slightly down from Q4. We have $1.8 billion in variable rate debt, of which $700 million has been fixed with interest rate swaps, which effectively provide fixed rate on approximately 75% of our debt.
I will conclude with our thoughts on 2025 guidance, as shown on slide 12. Although there are always uncertainties, we believe we can deliver on our guidance provided back in February, excluding any material impacts from tariffs. The discussions around tariffs may affect our markets directly and indirectly. Companies have taken a variety of methods and addressing the remainder of the year. We will wait to fully analyze the pending changes and update you during our Q2 call when we believe the tariff situation becomes clearer.
That being said, our guidance is based on current market conditions and recent trends, excluding the potential impacts of tariffs and assumed scrap and precious metal prices hold near first quarter prices. On foreign exchange, our guidance is near March average rates, including the euro at $1.08, the pound sterling at $1.28 and the Canadian dollar at $0.70.
The global tax rate is at 27.0%, which is consistent with our original guidance and prior year. In our original guidance, we expected organic parts and services revenue growth between 0% and 2% given our Q1 results. We are likely headed toward the lower end of that range. Excluding potential tariff impacts, our adjusted diluted EPS remains in the range of $3.40 to $3.70, and our free cash flow remains in the range of $750 million to $900 million.
We will balance our trade working capital and capital expenditure needs to fund our strategic growth objectives for 2025 and beyond.
Thanks for your time. I will now turn the call back to Justin for his closing comments.

Justin Jude

Thanks, Rick, for the financial commentary. Before we open up for questions, I would like to remind everyone, we remain committed to our long-term key strategic priorities, and our team is agile to navigate short-term challenges.
First, we need to grow above the market. Next, simplify. Simplify our operations by ensuring lean thinking is in everything we do. And simplify our portfolio across our markets, businesses and product lines. Improve free cash flow by growing profitably and strengthening our balance sheet, invest in growth organically and via small, highly synergistic tuck-ins with the continuation on the moratorium of any large acquisitions. Focus on our capital allocation strategy around returning capital to our shareholders through a combination of share repurchases and dividends.
In Q1, we met most of our strategic goals with our 46,000 employees adeptly managing volatile markets. Whether it's tariffs or some other challenge, no matter what our company may face, I'm truly proud of how consistent our team emerges stronger and better prepared for the future.
Operator, I'll now turn the call over for questions.

Question and Answer Session

Operator

(Operator Instructions)
Scott Stember, Roth MKM.

Scott Stember

Good morning and thanks for taking my questions. Regarding North America, it sounds as if the comparisons get a lot easier in the second quarter just on a repairable claim basis. But can you talk about what trends in a real-time basis you're seeing from the insurance companies regarding used car pricing? Has there been any change in their behavior regarding whether or not they will junk a car or repair it?

Justin Jude

Yeah. Good question, Scott. Throughout the 2024, there's been a lot of shift in market share with insurance carriers. We talked a lot about the high rising insurance cost premiums, people raising their deductibles. I think with a lot of the shift of competition, we will not expect -- I don't expect to see rising insurance prices anymore for the time or at least for the next year or so. I think they're going to be more competitive.
From the used car standpoint, we had an almost two-year, I think, decline of used car values. We saw in April, that number actually ticked up. Obviously, it's only one month. But it's nice to see that used cars have -- used car pricing has plateaued and started to improve. Those dynamics of flattening insurance premiums, rising used car prices, and we're going to talk about tariffs, probably somebody is going to ask that question, but tariffs typically will drive a car pricing, and that will be good for the industry.
We actually had also one state that approved an increase in the repairable total loss value. So it used to be 70%, and I think it's a small state called Rhode Island, but it was 70%. They raised it to 85% to help improve keeping cars on the road and getting repaired. And we're seeing some of that noise start to happen in a good way in other states, where they will increase the threshold of when a car tolls out.
So overall, we only got one good month of used car pricing, but we're starting to see some trends that hopefully will improve the repairable claims.

Scott Stember

Got you. And then the last question, of course, on tariffs, it seems like your biggest exposure in North America is Taiwan. It seems like there is, I think, a blanket reciprocal tariff on most countries for 10%. I think Taiwan is in there as well. How would that have an impact on your business? Do you think you could put price increases through to cover that? Or is it just too soon to say right now?

Justin Jude

Yeah. I'll probably answer that question in a few more -- and my guess is tariffs are on a lot of people's mind on the call. So Rick and I are going to spend a few minutes talking about that. First, I'll tell you, historically, when the industry has seen tariffs, they've been good for the industry, and they've been good for LKQ. One caveat of LKQ, we have a global footprint.
Nearly 50% of our business in Europe is currently not subject to tariffs. But there's a lot of volatility right now with the tariffs. The news seems like it's changing every day. As I mentioned on my -- on the call, we put a task force together to really dig into this. We'll talk about Taiwan.
But we really had one of the task force to react pretty quick just because it seems to be changing every day. And that -- what we've identified, obviously, is based on what we know, there's more tariffs than just Taiwan. There's other countries that we import product from. And if you look at our product costs, we really broke those into two different buckets. The first bucket, I would say, is what's direct, meaning we import from China, we import from Mexico, we import from Taiwan.
Understanding what the tariff impact and where we stand today with what we know on tariffs, that's a little bit easier to identify and quantify. When we talk about the indirect piece, that gets a little bit more complex. So you think about one of our businesses in the US -- buying a product from a US distributor. That product could have been 100% imported from China or Taiwan. That product could have components, take a Jeep lift kit that our Specialty division sales. The supplier that we buy from could get the fasteners and nuts and bolts from China, they could get to brackets from Mexico.
So understanding the impact of our indirect is a little bit more complex. We're working with all of our suppliers on that. But we do have some quantifications of those buckets.
Rick, if you want to talk about that.

Rick Galloway

Sure. Yeah. Let me try to address a couple of things that I'm sure on people's minds as well and quantify these things. So look, certain new tariffs took effect within the quarter, the financial impact was immaterial for us within the quarter. Also, it's important to note that we've been living with the previous Trump tariffs and we've been able to pass it along long. So Scott, to your point, are we able to pass them along? Historically, we've been very, very successful in being able to pass those along.
If I quantify the couple of different things that Justin talked about, the direct imports, those are the ones that are really exposed to the new tariffs in a direct way. The way we are looking at that, and to help quantify for the folks on the call, is overall cost of goods sold if I look at 2024 is cost of goods sold. So it's kind of a baseline, look at the 10-K, be able to quantify that. Less than 10% of our global cost of goods sold are in the bucket that Justin talked about being direct imports. So less than 10% of that is in there.
The quantification before any mitigations is less than $200 million of cost. That would be the quantification of that 10% -- a little less than 10%. On the indirect population, to quantify that and give you guys a little bit of visibility on the indirects, that's the ones Justin was talking about that are essentially purchased from a US company but they're importing from somewhere else. That's roughly 20% of our global cost of goods sold.
So the direct portion is a little less than the 10%. The indirect portion is a little less than 20% of our global cost of goods sold. That 20%, we can't really quantify at this point in time because we're not sure what is going to be passed along, and we're not sure what components of those items are imported by our suppliers.
And so the key -- couple of key points is, look, these are as of tariffs as of today. Those could change in the coming hours or days as we all have seen. And these will evolve rapidly over the changing landscape. And we're going to work diligently with our vendor partners to try to figure out how we can mitigate some of these things. I don't know if you want to cover anything else.

Justin Jude

Yeah. And Scott, I know you talked about pricing. Before we get to that lever, we really, as Rick talked about, we work with our supplier partners, making sure that we're in this together. Can we share the burden of some of these tariffs? Are there opportunities where we can resource that product somewhere else to a different country, different supplier, reduce the impact on the tariff? Are there any inefficiencies within our supply chain or logistics that we can remedy and help offset some of the costs?
And then ultimately, if you think about the products that we import from Taiwan, and your specific question on Taiwan, every aftermarket supplier that we compete with today -- I'm sorry, every aftermarket competitor and distributor that we compete with today is importing those same exact product types from Taiwan. So we're all in this at the same level. So anything that's going to impact us is going to impact our pure aftermarket competitor. And so if we can't reduce the tariff impact by some of those other mitigating levers, then we're going to obviously pass that through to the customer. We won't be left holding the bag.

Scott Stember

Got it, that's great. Thank you so much.

Operator

Craig Kennison, Baird.

Craig Kennison

Hey, good morning. Thanks for the additional color on tariffs. That's helpful. Maybe to pivot to Europe, Justin, have you seen any impact on revenue or on your fulfillment rates due to your SKU reduction program?

Justin Jude

No, we have not. We've been able to offset the sale of reducing that SKU either to one of our private labels or to another brand that we keep. We talked about some higher numbers, that 17,000 SKUs that we essentially delisted. A lot of those things that were -- have those big -- a lot of the products that we're delisting right now have very, very low volume at the end of the day. where we have other applications, we have other part members that have that application. We've not seen an impact of that.
Most of the headwinds that we see is either competition giving up price in a key markets. We do see some countries that we operate in are just in an economic situation where there's some delays in repairs and maintenance or some people are foregoing maintenance or extending maintenance on our vehicles, and we're seeing that impacted.
Overall, we were pretty happy with our -- and once again, we look at it country by country to see how we're doing and how the market is doing. We're pretty confident we're not losing share. We're still growing. We're still gaining share. And even with that revenue reduction that we saw in Europe, I was pretty proud of the team to be able to deliver an improvement in EBITDA. When the volume drops, normally you lose that leverage. But the team actually has stepped up on some of these initiatives. So -- but overall, your main question, I don't -- we don't see any risk yet, and we would slow down if we did on the SKU rationalization impacting revenue.

Craig Kennison

Thanks. And then as a related question, I think in the press release, you mentioned a 20 basis points improvement in your private label program. Could you give us an idea of what percentage of your revenue is from private label and where you think that could go over some long period of time?

Justin Jude

Yeah. We're in that 21% to 22% range today. We think it can go to up to --

Rick Galloway

Yeah. What we talked about in the last call is that, Craig, it would go -- by 2030, we're looking at around 30%. So as we move along -- look, there will be some small steps. We're happy with the 20 basis points improvement that we had in the quarter. But we think that, that number will likely go close to 30% across all of Europe by the 2030 timeframe.

Craig Kennison

Thank you.

Operator

Jash Patwa, JP Morgan.

Jash Patwa

Hi, good morning, and thanks for taking my questions. Building on the earlier discussion, I'd just like to focus on the North American business. You highlighted targeted actions to enhance market penetration, which have positively impacted revenue along with the pricing initiatives that have improved gross margins.
Could you provide some additional insights into these strategies? Specifically, is there a link between your pricing initiatives and the potentially easing competitive landscape as some smaller competitors who were initially pricing aggressively might have now pulled back amidst the tariff uncertainties?
Thanks. And I have a follow-up.

Justin Jude

Yeah. You may be confusing some of the comments on Europe. Some of the pricing pressures that we've seen have been in Europe and a few countries that have put some pressure on the pricing improvements or some gross margin. I want to make sure. Are do you specifically want to talk about North America or Europe?

Rick Galloway

He's talking about the changes that I talked about improvements.

Jash Patwa

I was just referring to discussion in the earnings presentation.

Rick Galloway

Yeah. So we have seen improvements across several different parts of our business to go after some market share gains. We're pleased with the performance of things like our services business going after some new areas of opportunity. There's not a pricing action that we took, Jash. So it's not -- we're not going after and chasing price. Instead what we're doing is making sure that we have the best service levels across the board, and we're seeing nice gains across that.
So Justin talked about the gap that we have between repairable claims and what we had for revenue. That widened a little bigger than what we've had historically, talking about how we're going after having really good fill rates, nice inventory levels and being able to provide a service level to our customers in order to gain back some of that share.

Jash Patwa

Understood. That's very helpful. And then just following up on the earlier tariff discussion. Thanks again for all the color there. But I just wanted to clarify if aftermarket parts imports are subject to the 10% universal reciprocal tariff. My understanding was that auto parts are exempt from the reciprocal tariffs, and while there could be some moving pieces in there, but it would be just helpful to clarify that.
And then relatedly, you also mentioned some mitigating strategies in relation to tariffs. Is there an opportunity to introduce private label aftermarket collision repair parts in the US as a way to navigate this industry disruption? Thank you.

Justin Jude

Yes. In regard to the -- I'll start with the private label piece first. Majority of our sales that we have on the aftermarket side are private labeled under Platinum Plus. The uniqueness of collision parts, there's not a lot of brand recognition in the aftermarket collision space world. And so to create consistency, we've been branding a lot of our products as private label under Keystone Platinum Plus for a few decades. So the majority of the collision parts, hoods, benders, bumper covers, headlights are already branded.
Regarding the tariffs, it's pretty complex. If you guys have researched it, whether it's 10%, 25% or even 32%, some of our product lines fall into different buckets of those, specifically coming from Taiwan. Obviously, if you get into China, some things or 25%, some things are 145%. But on average, I think the Taiwan is roughly 25%.

Rick Galloway

Yes. So Jash, let me -- without going into so much detail because this is really a complex issue, there's a Section 232 that deals with both steel and aluminum and automotive. The way that the reciprocals work is if it's in those tariffs which are 25%, they're excluded from the additional 10%. So what you're seeing is the exclusion of automotive. It's excluded only because it's already got a 25% tariff on that item.
So that's kind of the way to think through this. So what our team has done is they've gone through every single SKU on a direct basis, looking at whether or not that's included in the detail and is it part of the steel, aluminum or automotive. And if it's not, then there's a 10% reciprocal tariff.

Jash Patwa

Great. Thanks so much and good luck.

Operator

Gary Prestopino, Barrington Research.

Gary Prestopino

Hi, good morning. Could you just remind me what your targets are on your SKU rationalization in Europe?

Justin Jude

Yeah. So when we kicked this project off, we did say it's going to take over three years because we want to make sure that we're not going too fast and impacting revenue. We feel as the improvement in private label, so adding more private label SKUs on top of the reduction of our existing SKUs, this -- what's the exact number that we quote, do you know?

Rick Galloway

Let me -- Gary, let me get back to you on those numbers. I've got to pull them up on the specific items that we talked about. We talked about three different items that we are going to go after. We're talking about SKU rationalization. We started around 750 million items that we had, and we brought that down to around 700 million at this point.
Overall, SKU reduction we believe, is going to get us down to about 600 million by end of 2027. So we started with 750 million, we're going to get down to about 600 million. That's inclusive of private labeling. So we're going to obviously go below that 600 million. And we're going to increase based on the private labeling.
And then the other component we have is, obviously, we got to review these items. So the goal is to get to 100% of that by the end of 2026. By the end of 2025, we'll be at 80%. So we're north of 60% at this point. We've got another 20% to go for the rest of the year.
And then the third item that we had was overall private labeling, and that's the one that Scott asked, I think, a little bit earlier, or maybe Craig did, trying to get up to what was that number. And so what we said was about 30% by 2030.

Justin Jude

Okay. Thank you.

Operator

Bret Jordan, Jefferies LLC.

Bret Jordan

Hey good morning, guys. When you do the tariff math, and looking at the imports from Taiwan, how does the delta to the OE product shake out here? Is the OE primarily USMCA-compliant or domestic? I guess netting out the tariffs, does your value gap to OE remain equal? Or are you relatively more or less expensive than you were before?

Justin Jude

Yeah. Great question. I mean the devil will be in the details of what the final decision is going to come out to. As you know, you followed LKQ for a while, our pricing is always typically higher than the pure aftermarket competitor just because of our quality, of our service and fill rate and then we hover below the OEM. So we always kind of play in that space somewhere in the middle between OEM and the other aftermarket pure players.
If there's parity, meaning if all the tariffs go through and there's really no exemption, we'll be on equal playing field. There's enough margin gap there where we can improve price and still be competitive and offer the insurance companies and the consumer savings to the OEM. But it will really depend on what happens not only to the tariffs, but then how do the OEMs react. I mean, we've actually seen a flat price change in the OEs on April and some of the prices that we've seen come through for planning in May.
So we haven't seen them move their needle yet, but they're going to be experiencing some of those tariffs that we are, then I expect them to raise there prices as well. But it will really depend on what the final decision comes to.

Bret Jordan

Okay. Great. And then on the European price competition, is that primarily GSF or are there others over there that are being aggressive in other markets outside the UK?

Justin Jude

I mean we always have competition on pricing. The most aggressive is in the UK, I would say. And we're starting to see some of that slow down. Some of their -- they've expanded quite a bit, but we've seen that expansion slow down. But the main area has been in the UK.

Bret Jordan

Okay, great. Thank you.

Operator

We have no further questions. So I'll hand back to Justin Jude, CEO for closing remarks.

Justin Jude

Well, we appreciate everybody joining the call today, truly thankful for that. And we look forward to speaking to everyone in July when we report on our second quarter results. Thank you, everyone, and take care.

Operator

This concludes today's call. Thank you for joining. You may now disconnect.