LKQ Corp

NASDAQ:LKQ

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, my name is Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation's Second Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions].

I would now like to turn the call over to Joe Boutros, Vice President of Investor Relations. You may begin your conference.

[Joe Boutross, VP, IR]

Thank you, Operator. Good morning, everyone, and welcome to LKQ's second quarter 2020 earnings conference call. With us today are Nick Zarcone, LKQ's President and Chief Executive Officer; and Varun Laroyia, Executive Vice President and Chief Financial Officer.

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-Q and subsequent reports filed with the SEC.

During this call, we will present both GAAP and non-GAAP financial measures. 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-K in the next few days.

And with that, I'm happy to turn the call over to our CEO, Nick Zarcone.

[Nick Zarcone, President & CEO]

Thank you, Joe, and good morning to everyone on the call.

This morning, I will provide some high-level comments related to our performance in the second quarter, before discussing some of the key industry metrics that are impacting the revenue trends in each of our segments. Varun will then dive into the financials with the key focus on the impact of the measures we initiated in late March across the entire organization to right size the cost structure and maximize cash flow. He'll also discuss our liquidity and the strength of our balance sheet, before I come back with a few closing remarks.

So much has happened since the pandemic began sweeping across the globe. And while some of you may sense the worst is over, others likely feel we're still in the center of the storm. It all depends on where you live. But one thing is universal. We all owe an incredible debt of gratitude to those on the frontlines. The doctors, nurses, first responders, and all those bring themselves at risk to serve their communities and the communities where LKQ operates across the globe. To them, I send a great big thank you and offer sincere appreciation from the LKQ family for their heroic services.

In light of the environment, our second quarter results were very strong, and materially ahead of our expectations when we chatted 90 days ago on our first quarter call. Our ability to quickly and successfully navigate through incredible decreases in demand to report strong margins and earnings and even better cash flow is a testament to the courage of our global leadership team to make the hard decisions to protect our company.

As you all know by now, the efforts by governments around the world to flatten the infection curve had a profound negative impact on mobility. With the material drop in miles driven, activity levels at repair shops in North America and Europe dropped precipitously, as did the demand for repair parts.

As economies around the globe began to open up and mobilities of all types increased, so did the demand for the parts we supply and we ended the quarter on a much sweeter note than how it began.

As noted on Slide 8, total revenue for the second quarter was $2.6 billion, reflecting a 19% decrease from the level recorded in the comparable period of 2019. Global parts and services organic revenue declined 16.8% in the second quarter, while currencies and the net impact of divestitures and acquisitions accounted for a 2.1% decrease.

Importantly, the low point in demand was the first half of April. While we're still below 2019 levels on a consolidated basis, we have seen continuous improvement with each passing month, with April same day revenue being down approximately 30% compared to 2019, May down 13%, and June down less than 8%.

From an EPS perspective, the second quarter diluted earnings per share on a GAAP basis of $0.39 compared to $0.48 last year. On an adjusted basis, diluted EPS was $0.53 compared to $0.65, or an 18.5% decrease.

Like revenue, EPS improved in each successive month of the quarter, with May and June, clearly reflecting the benefits of the cost reduction programs implemented in each of our segments.

As you will note from Slide 12, organic revenue growth for parts and services for our North American segment in the second quarter declined 22.5%. According to CCC, collision and liability-related repairable claims in the second quarter were down 42%. The continued outperformance of our North American organic growth relative to repairable claims growth, combined with the OE supply chain disruptions in dealer closures during the quarter, give us confidence that APU is increasing and we're gaining market share.

Additionally, according to the U.S. Department of Transportation, miles driven in the U.S. were down 40% year-over-year in April and 26% in May. The June results are not yet available. But we expect they will be better than May, but still down about 10% compared to last year.

To put our performance, and the miles driven decline into perspective, the softness period during the Great Recession came in mid-2008, when miles driven declined just 3.9% relative to the prior-year.

I would also highlight that despite the revenue decline, the segment EBITDA margin in North America was 14.8%, the highest second quarter level achieved in the last five years. North America operational efficiency efforts have resulted in permanent cost reductions of approximately $80 million annually, which includes headcount reductions, closure of over 30 locations, and the elimination of redundant or end-of-life fleet assets no longer needed. Our North America team has done an outstanding job of managing their cost structure and being very disciplined on operational matters.

Lastly, on North America, during the second quarter, our recycling businesses processed over 169,000 vehicles, resulting in, among other things, the recycling of 780,000 gallons of fuel, 425,000 gallons of waste oil, 340,000 tires, and 158,000 batteries. Importantly, every ton of new steel made from scrap steel feedstock conserves about 2,500 pounds of iron ore, 1,400 pounds of coal, and 120 pounds of limestone. As the global leader of recycled vehicles, during the second quarter we processed about 260,000 tons of scrap steel, which preserved significant levels of natural resources, reduced the demand for scarce landfill space, and played an important role in reducing air and water pollution.

Now let's turn to Europe. As you're aware, when COVID initially hit Europe, many countries within the European Union closed their borders to non-essential travel and implemented severe lockdown measures to combat the virus. As a direct result, travel demand fell across Europe, resulting in fewer cars on the road, almost no traffic congestion, and a corresponding decline in the demand for service and repair parts.

According to INRIX, a leading traffic analytics data provider, since the lowest point, every European country continued to increase the rate of miles driven throughout Q2, with 10 out of the 19 countries analyzed, getting back to pre-COVID levels of travel by mid-June. The pre-COVID levels of January and February reflect seasonal low points. So while up, on a pre-COVID basis, we are still below 2019 levels on a seasonally adjusted basis. That said it's good to be headed in the right direction.

Organic revenue for parts and services for our European segment in the second quarter decreased 16.6%. As I stated on our Q1 call, not all regions were impacted by the COVID pandemic at the same time, or to the same degree, creating different growth profiles for each of our European businesses. This difference in growth continued in the second quarter as drivers began to get back on the road. Importantly, all of our European businesses experienced a recovery in May and June from the April lows, with Germany and the Netherlands recovering the fastest, and the UK, and Italy lagging.

In Western Europe, early on Italy was the hardest hit by COVID. Looking at miles driven, Italy reached a low the week of March 23, with miles driven being down 76% relative to pre-COVID levels. Since its low, miles driven in Italy has grown at an average weekly growth rate of 14%, but slowed in the back half of June to just 8% weekly growth. Despite that growth and the recovery relative to pre-COVID levels in certain large markets, like Rome and Milan, miles driven are still down over 20% relative to their seasonally adjusted 2019 levels.

In the UK miles driven reached below the week of April 6, with miles driven being down 74% relative to the pre-COVID levels. According to INRIX, the UK has the slowest recovery of miles driven out of the 19 countries studied and at the end of June was just at 67% of its pre-COVID level.

Germany saw less of a reduction than Italy and the UK. Travel in Germany dropped to 40% of its pre-COVID level the week of March 30th and by the end of June, rebounded to 98% of pre-COVID levels.

In light of the major economic crisis facing the auto industry due to the COVID pandemic, the European Automobile Manufacturers Association has radically revised its 2020 forecast for new passenger car registrations, expecting it to decrease by 25%. This effectively means that the industry association expects new car sales in the European Union to tumble by more than 3 million vehicles from 12.8 million units in 2019 to some 9.6 million units this year. These massive declines in new car sales will eventually lead to an older car park, which favors the aftermarket parts industry and will ultimately be good for LKQ.

Lastly, on Europe, on May 31, STAHLGRUBER Holdings sold 100% of the shares of its telecommunications business called STAHLGRUBER Communication Center. While this was a small transaction, it again reinforces our ongoing commitment to rationalizing our European asset base in the divestiture of non-core businesses.

Let's move on to Specialty. During the second quarter our Specialty segment had an organic revenue decline for parts and services of just 1.4%, performance well above our expectations. Importantly, when looking at April and May combined, Specialty witnessed a 10.4% organic revenue decline on a per day basis, with June exhibiting organic growth of 14.1% on a per day basis, a clear sign that April was the bottom.

SEMA estimates that the impact of COVID, industry sales will likely be down 12% for the full-year 2020. But clearly, our Specialty segment is tracking far better when compared to this industry expectation. The RV side of the Specialty business showed particular strength during the back half of the quarter. We believe the surge in demand for RV-related parts and accessories is due to customers looking for safer and alternative forms of outdoor and leisure travel.

According to Ipsos Research, 46 million Americans plan to take an RV trip within the next 12 months. In light of the COVID crisis, it's clear that RV travel and campaigns provides an appealing vacation option for families and their travel choices.

The performance of our Specialty segment in the second quarter underscores the fact that the segment is far less cyclical than we believe the market appreciates. This quarter also highlights the point that even when many consumers scale back or delay non-essential purchases, vehicle and RV enthusiasts will always find a way to keep pursuing their passion.

On the supply chain front, we are generally in a good position. The salvage options are a little thin and prices were up a bit. But overall, there were no major issues.

Our self-service business was having some difficulty finding an adequate level of vehicles at reasonable prices earlier in the quarter, as some of the city impounds were closed and open street purchase volumes were down. But over the last few weeks, purchase volumes have rebounded.

And our remanufacturing business has experienced some tightness in the supply chain with respect to some domestically sourced parts that are needed to rebuild engines and transmissions.

In Europe, we have seen a few warning signs with respect to the availability of certain products from select suppliers. But we're leveraging our pan-European network to move inventory to where it's needed.

And in the Specialty segment, the combination of certain suppliers being closed early in the quarter because of the pandemic, and the surprisingly strong industry demand, has created a bit of a backlog situation. Our strong inventory position coming into the pandemic has been an advantage for Specialty and we're working to rebuild our inventories to avoid any potential stockouts.

So where do we go from here? We have clearly benefited from a solid rebound in demand during the quarter. As noted by the detail on Page 5 of our presentation, revenue of our North American and European businesses were down just 14% and 8% respectively on a year-over-year basis in the month of June compared to being down 34% and 29% respectively in April. That said, the pace of improvement has slowed materially, and progress in the first few weeks of July has stalled, as we have experienced slight revenue declines on a week-over-week basis, with the year-over-year declines widening.

Specialty is still up a bit in July compared to last year, but not at the same level of June. Hopefully this is just a temporary setback, but with the wave of outbreaks occurring around the globe, the range of outcomes for the back half of the year is still wide and uncertain.

Here in the United States, the uptick in positive test results in many states, including Florida, Texas, and California has prompted reversals of several economic reopening plans, and even cities that have managed to suppress the virus are taking precautions. Those reversals, including widespread decisions to move forward with virtual schooling, could negatively impact mobility and put pressure on our ability to attract adequate labor.

In the second quarter, the recovery benefited from the CARES Act which injected trillions of dollars into households and businesses somewhat offsetting the economic impact of widespread closures. As key components of that law begin to phase out, we may start to truly see the potential impacts of the rapid uptick in unemployment making the view for the balance of the year even foggier.

While it is difficult to predict, we do not anticipate getting back to 2019 revenue levels in our North American and European segments until sometime in 2021, meaning continued negative revenue comparisons to 2019 levels over the back half of the year.

The Specialty business should track prior-year revenue levels in the third and fourth quarters.

As to our profits and cash flow, we exited the second quarter at levels that are not sustainable. As reported, we leaned on our people hard at the start of Q2, placing thousands on furlough and having most all salaried personnel taking a 10% to 20% reduction in pay. We have reversed those downward adjustments and moved forward with normal merit increases beginning in Q3, albeit on a delayed basis. In addition the majority of those furloughed are now back on the payroll, so we can serve the current level of demand.

On the cash flow front, we have been very effective in turning our inventory into cash and taken advantage of tax payment holidays. But we will ultimately need to replenish our inventory levels to sustain this renewed level of revenue and pay our taxes. That said we do anticipate achieving permanent productivity improvements in terms of margins and working capital across our businesses.

And at this point, I will turn the call over to Varun.

[Varun Laroyia, EVP & CFO]

Thanks, Nick, and good morning to everyone joining us on the call.

When we reported our first quarter results in April, we were facing a great deal of uncertainty about how the pandemic would play out across the globe. We spent the last few months operating in a very volatile environment, making plans and adapting those plans for the rapidly changing conditions. While the detailed actions shifted over time, we did not waver in our key objective to protect our employees, the communities in which we operate and the business.

In my remarks, I'll discuss the actions we took to manage the business during the second quarter, and to position the company for ongoing success to eventually emerge even stronger.

So before I get into this topic, I will cover the financial highlights from our second quarter. As Nick described, the negative impact of COVID-19 on revenue was not as severe as our internal forecasts suggested as we entered the quarter. The favorable revenue outcome combined with the benefits of aggressive cost reductions produced a solid profitability and cash flow result for the quarter.

It takes a special set of circumstances for me to describe roughly 20% decreases in segment EBITDA dollars and adjusted diluted EPS as a solid result. We know that quarter-over-quarter comparisons are difficult as a result of the COVID-19 impact on 2020. When revenue declined by $622 million, a decrease in profitability in dollar terms is inevitable. Since growth didn't make sense as a benchmark, we had to think differently about what defines success in this environment.

We challenged our field teams to drive margin improvement and be as efficient as possible in operating their businesses. And when we look to the segment EBITDA percentage as an indication of their abilities to scale the business model and achieve leverage when revenue declined.

With the level of fixed and hybrid costs in the business, maintaining the segment EBITDA margin in a period of falling revenue is a significant accomplishment. Our segments rose to the challenge and the second quarter with North America and Specialty reporting quarter-over-quarter improvements and Europe finishing within 30 basis points of 2019.

A large portion of the favorable result is attributable to an earlier revenue recovery than anticipated, though our segment teams deserve a lot of credit for delivering on the cost savings initiatives by taking swift and decisive action. As you'll see on Slide 17, North America achieved a segment EBITDA margin of 14.8% or 40 basis points better than a year-ago. This improvement is driven by a 110 basis point growth in adjusted gross margin attributable to the positive impact of cost reductions in COGS from right sizing actions, higher precious metals prices, as well as other margin improvement actions. Other income produced an incremental 50 basis points from business interruption proceeds received in the quarter related to a prior fire loss.

Overhead expenses were 120 basis points higher than the prior-year primarily due to the leverage impact from the quarter-over- quarter revenue decline. Higher bad debt expense of $5 million contributed to a 40 basis points uptick to the higher overhead percentage. In dollar terms, overhead expenses were down $81 million year-on-year.

On Slide 20, you'll note Europe's segment EBITDA margin of 7.4% represented a 30 basis point decrease relative to 2019. Adjusted gross margin improved by 100 basis points, going to margin improvement initiatives, including cost offsets in COGS and reduced inventory write-downs. Overhead expenses were unfavorable by 110 basis points primarily due to higher bad debt expense of $10 million or 80 basis points, and the negative leverage effect on fixed costs from lower revenue.

Specialty on Slide 23 reported a segment EBITDA margin of 12.9%, a 20 basis point increase relative to the prior-year. Gross margin declined by 120 basis points due to primarily unfavorable mix effects related to both channel and product. Overhead expenses were favorable by 150 basis points attributable to personnel cost actions taken over the prior 12 months. Unlike the other segments, the leverage impact was nominal, as organic revenue declined by just 1.4%.

At a consolidated level, restructuring expenses totaled $31 million with $6 million of inventory write-downs recorded in cost of goods sold. The restructuring charges relates to our ongoing programs to eliminate underperforming assets and cost inefficiencies. Benefits of the programs are already being realized and are projected to reach the full-year run rate benefit early next year.

Net interest expense decreased by $10 million due to lower average debt level and a lower average interest rate. This variance continues to reflect the excellent work our global teams are doing to generate cash, which has been used to pay down debt in the trailing 12 months of approximately $800 million.

We also benefited from the redemption of a 4.75% U.S. senior note in January of 2020 financing it with cash and borrowings from lower cost facilities. With the year-to-date debt pay down, the early reduction of the U.S. senior notes has been fully neutralized.

Last quarter, we stated that we expected volatility in the tax rate this year, given the potential for varying outcomes in our full-year results. We certainly saw that volatility in the second quarter. Our effective tax rate was 25.7% for the quarter, which included a 200 basis point decrease compared to the annual effective rate used in the first quarter. The rate change resulted in a $0.02 per share pickup positive effect on adjusted diluted EPS for the year-to-date adjustment to the provision. The rate decrease is primarily attributable to the impact of higher projected full-year pre-tax income and geographic mix benefits. We expect the tax rate on the full-year basis to be approximately 28%, a little bit higher than our original guidance of 27.5%.

Operating cash flows was $718 million, a 56% increase over the same period in 2019. Free cash flow of $686 million was a 66% improvement over the prior-year leading to a net debt-to-EBITDA ratio of 2.2 times based on our credit facility definitions. We used our free cash flow to repay $552 million of debt in the quarter. Listen, under normal circumstances, these would be exceptional numbers. Under the present circumstances, I believe these are amazing numbers. The second quarter operating cash flow figure is higher than every annual figure in the company's history, with the exception of last year. Granted, there were non-recurring benefits in the second quarter numbers, such as the tax deferrals that will largely unwind in the second half of the year. So to generate this level of cash during a period of lower productivity and higher degree of uncertainty is truly remarkable.

These results were made possible by the decisive actions that we took since mid-March to protect the business from the COVID-19 disruption.

I'm now going to expand on what we've done to-date to protect our business and our plans for the remainder of the year. In my remarks last quarter, I stated that our focus would be on what we could control. That is, one, reducing costs to reflect the new level of market demand; and two, continuing the focus on generating cash flow and ensuring adequate liquidity. I believe the numbers we've reported for Q2 support that we were successful in both objectives.

Regarding the cost actions, we focused on three areas: personnel-related actions, variable cost decreases that follow from lower projected revenue, and third, other cost takeouts including route consolidations, branch rationalizations, and elimination of non-mission critical spending.

We had estimated that the cost reductions would be $80 million to $90 million if revenues were down 40% to 45%. Looking at Slide 6, you can see that we reduced our quarterly SG&A expenses by 18% or $162 million, sequentially, while revenue declined 12% sequentially from Q1, thus creating a leveraged benefit from our overhead expenses. As expected, the majority of the benefits came from personnel costs actions, including furloughs, reductions in force and salary cuts.

We generated roughly a further $10 million in cost savings in COGS, again largely related to personnel expenses. The total savings for the quarter of approximately $175 million was lower than the quarterly run rate savings we mentioned last quarter as a result of a couple of factors. First, we paid out vacation balances and medical benefits for our furloughed employees in April and thus did not realize the full benefit of the cost actions that month. This was anticipated and communicated 90-days ago. Second, and more importantly, the projected revenue decreases of 40% to 45% did not materialize. So our variable cost decline was lower than expected, as we brought back some of our workforce earlier than anticipated due to the revenue recovery. We were happy to put our people back to work as revenue increased and we still managed through quick and decisive actions to drive SG&A expenses to 28.1% of revenue compared to 30% in Q1 of 2020.

This type of leverage was significantly better than what we have modeled at the start of the quarter, and is a testament to the strength of our team, and the resilience of the business model.

Outside of a significant year-over-year increase in bad debt expenses of $14 million caused by the economic conditions facing our customers, we are pleased with the trend in our overhead expense management, and believe that we are delivering on our plan as evidenced by the results achieved in the second quarter.

To be clear, not all these cost benefits are sustainable as we transition into the second half of the year. Some of the cost actions, as Nick mentioned, including temporary salary reductions, bypassed merit awards, and government reimbursements will begin to fall-off in July. We do not expect to go back to the pre-COVID cost structure as our teams have done terrific work during the pandemic to identify productivity opportunities that can be sustained going forward and we'll be very judicious in how we return costs to the business so we do not get ahead of the revenue recovery.

Switching over to liquidity. While we felt comfortable with our position in April, we decided that strengthening our balance sheet would be a critical element of riding out the COVID-19 disruption and positioning the company for long-term success, as the duration of the health crisis was and remains broken ended. As a result, we focused on preserving cash by implementing an action plan that included reductions in inventory replenishment rates to reflect demand projections, active monitoring of customer receivables and terms, continuation of the European vendor financing program, and approximate 40% reduction or more than $100 million deferral on growth driven and non-mission critical capital projects, tax payment deferrals were allowable, and a hold in our share repurchase program, in addition to the cost savings measures. Each of these items generated benefits in the quarter.

We scaled back inventory purchases and produced an operating cash inflow from this element of $453 million in the quarter. Our focus on collecting receivables led to a net inflow for the quarter of $59 million. The vendor financing program over in Europe had a minor impact for the quarter, but saw an increase of supplier participation, which will yield future benefits. Capital spending decreased approximately 30% compared to Q2 of the prior-year, and income tax payments and other tax deferrals such as VAT created approximately $175 million to $185 million in cash savings in the quarter. We didn't repurchase any LKQ stock and the resulting free cash flow was used to repay debt, which will yield ongoing interest expense savings apart from increasing our overall liquidity.

During the second half, we get back some of the timing-related benefits. Most importantly, we plan to increase our inventory levels to support the service and fill rate requirements of our businesses based on the better revenue projection in the balance of year. While we expect to be able to operate effectively at a lower inventory balance than we exited 2019, the June figure is not sustainable for us to maintain our service levels based on what we've seen currently and coming off the low points in late March and early April.

The income and other tax deferrals have already started to reverse in July, as we made our estimated U.S. federal tax payments and will largely unwind in Q3 and Q4.

We expect to generate positive free cash flow in the second half though not at a level close to what we've achieved in the first half of the year.

Relative to March 31, our liquidity position is significantly stronger to the cash generation in the second quarter, and the amendment to our credit facility executed in the quarter.

Total liquidity defined as cash plus availability on our credit facilities was $2.5 billion as of the end of June, an increase of almost $700 million compared to 90-days ago.

You recall that we amended our credit facility out of an abundance of caution to reduce the risk of reaching the net leverage covenant if the pandemic had a severe and extended effect on profitability. Our internal models had suggested that we would be able to meet our payment obligations through the pandemic, though there was a risk that we might exceed the maximum four times net leverage ratio in a severe downside case. However, the debt repayments during the quarter drove a reduction in the net leverage ratio to 2.2 times compared to a maximum net leverage requirement currently in force of almost five times.

With the amendment, and the better than forecasted performance in the second quarter, we believe, we have significantly reduced the risk of a covenant breach on the net leverage.

From a capital allocation perspective, our focus remains unchanged, especially as the fog owing to the pandemic is yet to lift. Apart from continuing to invest in our business by continuing to deliver industry-leading fill rates, service reliability, geographic footprint, and warranty on our products, to extend our leadership position in the markets we serve, we plan to continue to pay down debt and the share repurchase plan remains suspended.

Finally, when we withdrew full-year guidance in March, we cited the uncertainty regarding the impact that COVID would have on the world. Four months later that uncertainty is still present, especially with respect to the duration and long-term effects of the pandemic, and the range of potential outcomes is wide. While our solid Q2 results are behind us with several learnings for our teams on what is possible, there is a risk to the second half with a spike in cases and the lingering possibility for a stall or a rollback in the reopening of economies across North America and Europe.

As a result, we're not providing financial outlook for fiscal 2020 at this time. However, we expect the following elements for 2020 on a full-year basis. One, effective tax rate for the year in a range of 27.5% to 28.5%, interest expense of $95 million to $105 million, depreciation and amortization of approximately $265 million to $275 million on a GAAP basis and $165 million to $175 million on an adjusted basis, which excludes amortization of acquired intangibles. And finally, we believe we have sufficient liquidity and flexibility to meet the needs of our business, and will deliver yet another excellent performance in free cash flow for the full-year of a minimum of $700 million.

This recognizes the fact as I mentioned a few minutes ago that income tax payments and other tax deferrals such as VAT created approximately $175 million to $185 million in cash savings in Q2, and will largely unwind in the second half.

With that, I'll turn the call back to Nick for his closing comments.

[Nick Zarcone, President & CEO]

Thank you, Varun.

In closing it is clear that our focus on profitable growth, enhanced margins, and better free cash flow generation positioned us well as we entered this unexpected turn of events. Our teams have been agile and have done a fantastic job of tackling the cost structure and delivered with tenacious focus this quarter generating solid margin and free cash flow in the midst of a negative growth environment.

What we can focus on is to hear and now and address the dynamics that we can effectively control. And that focus was validated by our second quarter results.

In my continued communication with our broader employee base, I have indicated we will get through this together and come out a stronger, wiser, and better positioned organization that continues to be LKQ proud. Clearly, our teams across the globe have embraced this message, and for that, I am thankful and proud of each and everyone's efforts to carry our mission forward, regardless of the hurdles presented. The global teams have done a terrific job of responding to the conditions created by the pandemic, and I'm highly confident in their ability to continue to create successful outcomes.

Lastly, I want to announce that we will be hosting our third Investor Day, the morning of September 10, and we look forward to your participation. Given the pandemic, this will be a virtual event, and we will issue a press release in the coming weeks with details for this session with our broader global leadership team.

Operator, we're now ready to open the call to questions.

[Operator]

Thank you. [Operator Instructions].

Our first question this morning comes from Michael Hoffman from Stifel. Please go ahead.

[Michael Hoffman, Stifel]

Hi, thank you. So I just want to make sure I understood, Nick, your comment about this June ended at down about an 8% but July is seeing some leveling a little pullback. So the way we should think about this is 3Q is probably not as good as June, but it's clearly better than 2Q?

[Nick Zarcone, President & CEO]

Good morning, Michael, and thanks for the question. Absolutely as I mentioned in June, the organic revenue trends were down 14% for North America, 8% for Europe, and up 14% for Specialty. And indeed based on what we've seen thus far, July has given up a bit in both North America and Europe, and even more so in Specialty. So if the current trends persist, you'd be looking at an environment where North America is probably off 15% or so, Europe off 10%, and Specialty being flat with last year. We would hope, obviously, that the world will make continued progress, both in terms of controlling the virus and opening the economies. But right now, there's little hard evidence that that's going to happen.

[Operator]

Our next question comes from Stephanie Benjamin from SunTrust. Please go ahead.

[Stephanie Benjamin, SunTrust]

Varun, you gave obviously very tremendous cost cutting initiatives that came into place in the second quarter. And you walked through a lot of those are going to kind of reverse some as we get to the 3Q, can you kind of walk us through what we would expect to be sustainable at these new revenue levels as we look to 3Q from the cost cutting initiatives?

[Varun Laroyia, EVP & CFO]

Yes, absolutely, Stephanie, good morning. And thank you for the question. I think that is a very, very relevant question to ask. And as you kind of go back in terms of 90 days ago, when we were talking about how we were seeing Q2 play out and really what actions we had initiated, it was the key parameter there was what level of demand we would be seeing. So long story short, it really depends on the level of demand recovery though, we are clearly focused on retaining savings through operational efficiencies.

And frankly as we all learn to do more with less. So for example, in the second quarter while we had roadmapped a significantly higher cost management set of actions, it was predicated by revenue levels being done 40% to 45%. And that's what the $80 million to $90 million was related to on a monthly basis. We ended up 19% down, so about 50% to 60% better than what we had initially anticipated. Though I think from a cost takeout perspective in the second quarter, we certainly pushed hard and not just on the income statement from a cost management perspective, but also obviously on the balance sheet that you've noted.

So as you kind of think through on -- for the remainder of the year, it all depends on the level of demand recovery that we see. And then clearly, as you know, we have a restructuring program that's currently underway. And that really will be permanent cost savings in any case. So later 2019, and then also at the end of Q1, we had called out restructuring charges. Those are proceeding as expected really the full run rate comes towards the back end of the year.

[Operator]

Our next question comes from Gary Prestopino from Barrington Research. Please go ahead.

[Nick Zarcone, President & CEO]

Gary, good morning. I don't think we can hear you. You may be on mute.

[Operator]

And --

[Gary Prestopino, Barrington Research]

Can you hear me now, right?

[Operator]

Yes.

[Nick Zarcone, President & CEO]

Yes, we can hear you now, Gary, yes.

[Gary Prestopino, Barrington Research]

I'm sorry about that. You said you had, I want to just get back to these expense reductions. You said you had about $80 million permanently in North America that you think you're going to keep, I think I jotted that down as you were talking; is that correct?

[Nick Zarcone, President & CEO]

That is correct, Gary. Again, that's a combination of people of France closing some facilities, getting rid of some excess distribution assets, and like.

[Gary Prestopino, Barrington Research]

And then just very quickly --

[Nick Zarcone, President & CEO]

And that's an annual number, Gary.

[Gary Prestopino, Barrington Research]

Okay. So that has 80 out of the 162, so far, that's quantifiable because just picking up on the prior question, Varun, you kind of danced around that a little bit. And I think, in this kind of environment, we just -- we're trying to get a handle on what exactly is going to be permanent and what isn't? And then just real secondly, could you just maybe give us an idea of what the situation is in Europe in terms of economy still being locked down or are they at a better stage than we are in the U.S. or still behind us?

[Nick Zarcone, President & CEO]

I'll take the back half of that question. And indeed, the European economies are more open than the United States. And I think you've seen that in some of the miles driven differences, fuel consumption, and the like.

That said, I mean, we have seen some spikes in Europe in particular cities or particular countries. So the virus is not gone from the European landscape. Obviously, you're probably well aware of what's happening in this country with incredible spikes, both in positive cases and fatalities in many, many states in the U.S., so there's pretty big regional differences here in the U.S., but taken as a whole Europe is doing better than we are.

[Operator]

Our next question comes from Bret Jordan from Jefferies. Please go ahead.

[Bret Jordan, Jefferies]

On the U.S. collision business where you seem to be really outperforming the repairable claims number, could you give us any color as to what might be driving that? Is that a share gain against alternative, other alternative parts or increased alternative parts within the repair mix?

[Nick Zarcone, President & CEO]

Yes, there's not one magic bullet there, Bret. The reality is CCC repairable claims down 44% our volumes in North America is down 22%, so obviously good outperformance. We think there are a bunch of different contributing factors.

First, the OEs were shut down for several weeks. Both their manufacturing facilities and many of their dealers were also closed for a few weeks as well. So if you can't get an OE parked to the shops, they tended to then go to alternative part usage. So just like the GM strike helped us in the fourth quarter of 2019, we believe, there was some, not a huge but some benefit from the OE disruptions caused by the pandemic here in the second quarter. Obviously, we remained open, and we had high levels of inventory and we're eager to serve all of the customers who are looking for parts.

Keep in mind that half of the salvage business is really mechanical parts as opposed to collision parts. And there's no doubt that the mechanical parts performed better during the quarter. And our remanufacturing business which really sells remand engines and transmissions was particularly strong in the second quarter. And then self-service which normally doesn't get a lot of fanfare, actually performed quite well. They had year-over-year increases with admissions, the number of people actually paying to come into our yards, and in the revenue from selling parts, well both those metrics being up on a year-over-year basis.

So just want to re-emphasize that negative growth in 2020, if the sector returns to 2019 levels, probably sometime in 2021, we're going to show really solid year-over-year growth but off of a low base in 2020. And probably not going to be sometime until 2022 until we have a true apples-to-apples comparison.

While you then ask it longer-term we do not see the pandemic it's causing a fundamental shift in the organic growth in our industry. Again while there will be couple of years of not having good apples-to-apples comparison, we think that the core attractiveness of alternative parts stays firmly in place.

[Operator]

Our next question comes from Craig Kennison from Baird. Please go ahead.

[Craig Kennison, Baird]

Hey Nick, good to hear from you. Obviously the pandemic is the big story on the quarter. But I'd love to hear about your progress on 1 LKQ Europe, whether it comes down to procurement or skew reduction or route optimization, just love to hear what you're doing on that front?

[Nick Zarcone, President & CEO]

Yes, absolutely correct. We believe that the core operational efficiencies identified and communicated to the market last September are still valid and achievable. We obviously did not anticipate the pandemic that was going to have such a profound impact on our demand. So while the longer-term benefits will be achieved, the exact timing and sequencing of all those various initiatives that we set forth back in September will likely shift around a bit. Some of the items are getting pulled forward while other items are getting pushed back.

As we talked about, in September right, a number of the items that we had on the drawing boards, and we're working towards really involved the point groups of our existing employees, work-in project teams to come together in a really collaborative fashion and to work on projects in addition to their day jobs. Given the travel restrictions and the need to have 120% of everyone's focus on dealing with the issues caused by the pandemic, some of those project teams quite frankly were put on the sidelines during the second quarter because it was more important to focus on here and now as opposed to margin improvements over the next two to three years.

I'm happy to say, effective July 1, all those project teams are back up and running. They're a little bit behind original schedule, but they're back up and running.

Some of the items like procurement, which you highlighted we've seen the starting point shift because of the pandemic. When your volume of parts purchased fall by 15% to 20%, because of the pandemic, we have some pretty serious discussions to be had with our suppliers. We think ultimately, it's all going to come back in line, but the timing may be off a little bit. But rest assured we believe there's still 300 basis points of margin improvement in Europe. And that was based on a starting point of around 8% EBITDA margins right. The pandemic has not only compressed the revenue, but obviously there was negative leverage, as a result of the fact that some of our costs are fixed in nature.

So we're really driving forward on two fronts. One is to get the starting point back to that 8% level, and then, second, to get the benefits of all the discrete initiatives that we identified as part of the 1 LKQ program. So we're going to be working hard on both fronts.

On France, our CEO of Europe is going to be joining us on Investor Day, this coming September 10. And part of his presentation will cover a very detailed update on the 1 LKQ program but hopefully that gives you a little bit of sense as to where we are.

[Operator]

Our next question comes from Daniel Imbro from Stephens. Please go ahead.

[Daniel Imbro, Stephens]

Yes, thanks guys. I appreciate all the color this morning.

[Nick Zarcone, President & CEO]

Good morning.

[Daniel Imbro, Stephens]

Wanted to follow-up on something I think you mentioned last quarter, Varun, just the competitive backdrop. Obviously, we've seen some smaller bankruptcies across Europe. I'm sure some of your competitors in North America are struggling and you're gaining share there. But how is the competitive landscape shifting, are prices going higher? Are you seeing it easier to push those through? Any kind of update there you can provide?

[Varun Laroyia, EVP & CFO]

Yes, I think it's a great question. And again -- it again --is -- given the pandemic that's sweeping through; there are a bunch of puts and takes that are coming through. So for example, in North America, when this kind of started off, call it end of March, beginning of April, for example, there were a number of businesses that kind of closed their doors, simply put, because they were kind of stay-in-shelter items or measures, same thing over in Europe also.

Then we did see in North America, for example, when the CARES Act, the PPP came out, we saw a number of our competitors reopen their doors, and they were out there open for business and so again that that kind of competitive landscape picked up.

But if you think about, where our North America business ended up coming through with revenue declines versus say what the CCC data would state, we've significantly outperformed what the metrics that they should be measured against are.

And again, there are a number of different elements. But the one key element that I'll share with you is, as we know that OEMs were closed for a certain period of time in the second quarter, a number of the dealerships were closed also in the second quarter for a certain period of time and hence the parts departments.

LKQ have being an essential business was open, and when customers needed parts, guess who they called. And this is really where the resiliency of the LKQ model comes through in terms of having a phenomenal geographic footprint, the service reliability, and an unmatched breadth and depth of inventory. So that kind of played out in the second quarter.

And as I said, when we had the GM strike, call it in the back end of last year in many ways you kind of make your own destiny and that's how the North America team has been incredibly agile and nimble.

Across the pond in Europe, similar situation. It is a very fragmented market out there. But as you know, we have market leadership positions in several markets. And out there also our team's done outstanding job, both in terms of having the availability and also being open to business where they were allowed to do so. So we believe we did kind of take share over in Europe. But again, it's very difficult to get numbers from a European perspective to be able to direct you in terms of what level of gain share took place out there.

And then, finally, for our Specialty business, we know, for example, those of us in the U.S., we love the outdoors, the RV market has been doing incredibly well. A number of our suppliers who kind of reported over the past few days have also kind of reported strong demand coming through. And again, it kind of goes back to saying how is it that what folks thought would be perhaps one of the most in a cyclical business in an economic downturn is performing so well. And it really comes back to folks have a certain level of income that kind of put aside, either going out, watching concerts, going to movies, traveling. And as those activities have been curtailed, folks have really gone forward in kind of living out that passion. And that really is what we've seen. So again, from that perspective that business has done incredibly well and kind of being the market leader in what we do on the Specialty side. We know we've done incredibly well out there also.

So I hope that kind of gives you a good overview across each of our segments in terms of what the market landscape is.

[Operator]

Our next question comes from Michael Hoffman from Stifel. Please go ahead.

[Michael Hoffman, Stifel]

Thanks for coming back to me. So in the EU, there's this mandatory requirement to do safety inspections and they kind of have programmatic timing and when that happens, what's your thoughts about how much -- what happened in 2Q with some of that as opposed to we just were driving more?

[Nick Zarcone, President & CEO]

It depends on the timing of the quarter. Clearly, Michael in April, the mandatory inspections were not unilaterally, but many, many countries were put on a temporary hold as each of the governments was trying to figure out how to deal with the pandemic, right. And getting your car inspected wasn't the highest priority at the time. By time you got to the back end of the quarter, many of those temporary delays in the inspection process were removed. And so folks were absolutely having to get their cars and to get inspected to get their registrations renewed and the like.

So that was a little bit of it. But there's no doubt that miles driven has come back very significantly in Europe. I mean whether Italy from being down 74% at one point in time to today probably being down 10% to 15%, 20%. That's a huge recovery. Germany going from down 40% at its low to maybe being down 10% today. So, there's no doubt that the recovery miles driven probably the largest factor in driving the revenue, particularly in the back half of the quarter.

[Operator]

This concludes our Q&A session for today. And I will now turn the call back to Nick Zarcone for concluding remarks.

[Nick Zarcone, President & CEO]

Well, as always, we greatly appreciate the time and attention that you've given us here this morning. Hopefully, the information provided gives you a good sense of what's going on here at LKQ.

And importantly, we look to continue the discussion, the morning of September 10, when we have our Analyst Day. Again that will be a virtual format. It will run probably the better part of five hours or so. And we'll have all of the operating heads of our businesses from across the globe as part of the lineup for the presentation. So we can go in-depth on each of the three businesses, as well as hit the high points from a corporate perspective, a strategy perspective, and a financial perspective.

So we look forward to sharing that with you in September. And again, we thank you for your time and attention here this morning.

[Operator]

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.