Genuine Parts Company

Ladies and gentlemen, welcome to the Genuine Parts Company second quarter 2023 earnings conference call. Today's call is being recorded. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. At this time, I would like to turn the conference over to Sid Jones, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us today for the Genuine Parts Company second quarter 2023 earnings conference call. With me today to share their remarks are Paul Donahue, our Chairman and Chief Executive Officer, Will Stangle, our President and Chief Operating Officer, and Bert Napier, Executive Vice President and Chief Financial Officer. Tim Walsh, our Senior Director, Investor Relations, has also joined us. In addition to this morning's press release, a supplemental slide presentation can be found on the Investors page of the Genuine Parts Company website. Please be advised this call may include certain non-GAAP financial measures which may be referred to during today's discussion of our results as reported under generally accepted accounting principles. A reconciliation of these measures is provided in the earnings press release. Today's call may also involve forward-looking statements regarding the company and its businesses. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings, including this morning's press release. The company assumes no obligation to update any forward-looking statements made during this call. Now, I'll turn the call over to Paul for his remarks.

Thank you, Sid, and good morning. Welcome to our second quarter 2023 earnings conference call. We are pleased to report another solid quarter with record sales and double-digit adjusted earnings growth. Our second quarter once again highlights the value and benefit of our global automotive and industrial businesses and the mix and geographic diversity of our company, which we believe are competitive advantages that differentiate TPC in the marketplace. A few highlights from our second quarter results include total sales of $5.9 billion, an increase of 5.6% from the prior year, total company segment margin of 10.4%, an increase of 60 basis points from the same quarter last year, earnings per share of $2.44, an increase of 10.9% from adjusted earnings per share last year, and our 12th consecutive quarter of double-digit adjusted earnings growth. And finally, we continue to maintain a strong balance sheet while generating solid cash flow to support our growth initiatives and capital allocation priorities. Our global team remains focused on the strategic initiatives we highlighted at our Investor Day in March. and we believe our one CPC approach is contributing to our strong financial performance. We compete in two very large and fragmented markets and see significant opportunities to grow our business, expand our margin profile, and generate strong cash flow to support our strategic investments while delivering returns to our shareholders. As we continue to navigate a dynamic macro environment, We believe our focused execution, investments in our business, and strong industry fundamentals position GPC for long-term success. Looking at our industrial segment, demand trends held solid through the second quarter, even as the rate of sales growth tempered a bit relative to the first quarter, as we expected. Motion's growth rate on a two-year basis continues to be exceptional. And while certain economic indicators have slowed, we believe our strong market share position, along with the diversity of our products, services, and end markets, bode well for our continued growth prospects. In addition, future reshoring opportunities and the growth of domestic manufacturing industries provide significant opportunity for motions. And as you will hear from Will, our team's focus on productivity and efficiency is driving significant margin expansion in the industrial segment. Our global automotive business continues to benefit from the broad geographic diversity of our markets. In addition, we believe our long history of supporting the DIFM customer segment, which is 80% of our global automotive sales, positions us well as sales growth to DIFM customers continues to outpace DIY sales growth. During the second quarter, our international automotive businesses delivered strong mid-single to double-digit growth while our U.S. automotive business experienced low single-digit growth. The fundamentals of the automotive aftermarket remain favorable with trends such as increasing miles driven, an aging and complex vehicle fleet, rising interest rates, and continued high prices for vehicles, all contributing to underlying demand. While the near-term environment remains dynamic, we are very pleased with our year-to-date performance. And with the strong earnings growth in the second quarter, we are once again raising our outlook for 2023 earnings per share, which Bert will discuss further. As we look forward, we remain confident in our strategic plans and will continue to invest to strengthen our business and achieve both our near and long-term financial targets while returning capital to shareholders through the dividend and share repurchases. So in closing, I'd be remiss if I didn't highlight the outstanding work of our HR and IT teams in Q2 around our implementation of Workday. In early July, we completed the first phase of our implementation of the Workday HR platform in North America, continuing to demonstrate the modernization of our system platforms and supporting our teams with the right tools and the right technology. Our HR and IT teams delivered an exceptional outcome well ahead of schedule, showcasing the benefits of our one GPC talent and technology initiatives. So before I turn it over to Will, we want to thank each of our 58,000 GPC teammates for their hard work and continued dedication to serving our customers around the world. So with that, I'll turn the call over to Will.

Thank you, Paul. Good morning, everyone. I'd also like to thank the global GPC team as well as our supplier partners for their ongoing commitment to serving our customers. We appreciate all the hard work to take care of our customers every day with solutions that help keep the world moving. We do this with focus on our foundational priorities, including talent and culture, sales effectiveness, technology, supply chain, and emerging technology, all complemented by a disciplined M&A strategy. We work together as one GPC team to create customer success and shareholder value. On behalf of the entire GPC team, we would like to congratulate Kevin Herron on his well-deserved retirement after an amazing 34-year career at the company. Kevin earned success in all of his roles over the years, including the last five years as president of the U.S. automotive business. He embodies our GPC values and has been an inspirational leader and mentor to many around the world. We're deeply grateful for his significant contributions to Genuine Parts Company and and wish him the very best in his retirement. With Kevin's retirement, we also want to congratulate Randy Breaux on his promotion to Group President, GPC North America, effective July 1st. In the new role, Randy will oversee both the automotive and industrial businesses across North America, while assuming day-to-day responsibility as President of the U.S. Automotive Group. Randy is a proven leader with a track record of performance. His relevant expertise across distribution industries, familiarity with GPC teammates and stakeholders, and success at motion make him the ideal candidate for the role. This transition represents the depth of our leadership team and our talent strategies as we continue to leverage the power of OneGPC. Now, turning to our two business segments. Total sales for global industrial were $2.3 billion, an increase of $125 million, or 5.9%. Comparable sales growth increased 6.0% in the second quarter versus last year. The cadence through the quarter was relatively consistent, with April being the strongest month, followed by mid-single-digit growth in both May and June. The sales growth at Motion was broad-based again in the second quarter, with all product categories and major industries served posting positive gains from the prior year. During the quarter, we saw strength from industries such as food products, iron and steel, chemicals, mining, and oil and gas. In addition, Motion continues to make excellent progress with its initiatives, including inside and outside sales, pricing, e-commerce, growth-focused tech, and supply chain strategies, they're all helping to win profitable market share. As an example, Motion has seen a nearly two-fold increase in average daily sales across its e-commerce platform since 2021, which now represent nearly 30% of total Motion daily sales. In AsiaPAC, our Motion business also delivered strong performance in the second quarter with double-digit sales and profit growth. Customer-centric initiatives across talent and culture, inventory availability, and operational excellence are delivering positive results. Industrial segment profit in the second quarter was $283 million, or 12.5% of sales, representing a 190 basis point increase from the same period last year. The profit improvement in industrial was driven by excellent operating rigor in both North America and Australasia, and the disciplined execution of strategic initiatives. In addition, the Motion North America team continues to realize synergies related to the KDG acquisition. The team is substantially complete with the branch consolidation and merger efforts well ahead of initial plans, and we expect to exceed our three-year $50 million synergy commitment by the end of this year, also well ahead of initial plans. Turning to Global Automotive, Total sales in the second quarter were 3.7 billion, an increase of 188 million, or 5.4%, versus the same period in 2022. Similar to the first quarter, total automotive sales benefited from our global diversification, as our businesses outside the U.S. posted mid-single-digit to double-digit growth in local currency. On a comparable basis, global automotive sales increased 4.3% ranging from low single-digit growth in the US to low double-digit growth in Europe. We saw global automotive sales inflation moderate from high single-digit growth in the first quarter to low to mid single-digit growth in the second quarter. We remain encouraged by favorable fundamentals and solid team execution, which we believe will continue to drive profitable growth. Global automotive segment profit in the second quarter was $329 million, up 2.1% versus the same period in 2022, and segment operating margin was 9.0% compared to 9.3% in 2022. As expected, automotive's margin showed an improvement versus the first quarter. The improvement in the second quarter reflects the impact of the cost actions implemented at U.S. Automotive, and we expect to see an increased benefit of these actions in the second half of the year. Now, let's turn to an overview of our automotive business performance by geography. In the U.S., automotive sales grew approximately 2%, with comparable sales growth up 1% for the second quarter. April and May were the stronger months, while trends lagged in June, particularly as we headed into the July 4th holiday weekend. That said, we're encouraged by the early trends thus far in July. Growth was relatively consistent across our regions with the east and west regions recovering in the second quarter after the slow start to the year due to the impact from weather. More broadly, we offset sluggish categories in heating and cooling, exhaust, and ride control with strength in various core categories such as filters, batteries, and fluids, all of which had growth above the U.S. average. Sales to both commercial and retail customers were positive, with commercial growth outpacing retail. Our commercial business saw sales increases across most customer segments, with fleet and government outperforming again this quarter with high single-digit growth. In Canada, sales grew approximately 6% in local currency during the second quarter, with comparable sales growth of approximately 6%. Our Canadian performance reflects strong growth in several categories like heating and cooling, paint and body, and tools and equipment, all of which were up double digits. Our automotive and heavy-duty businesses performed well, both posting mid-single-digit growth in the second quarter. Our Canadian team executed well in the quarter, especially given the destructive wildfires across the country. and we continue to see attractive opportunities for long-term growth due to our leading market position, solid industry fundamentals, and share gain initiatives. In Europe, our automotive team delivered another exceptional quarter, with total sales growth of approximately 15% in local currency and comparable sales growth of approximately 11%. We continue to drive strong growth in market share gains across our European markets due to the ongoing execution of our key initiatives. For the second quarter, we delivered mid-single-digit to double-digit growth across each of our geographies as our teams continue to win business with key accounts, drive higher share of wallet with existing accounts, and expand the NAPA brand in the regions. The team is on track to deliver 400 million euros in sales of NAPA branded products in 2023. In addition, we continue to strategically roll out our next drive offering across our European markets that position our team to lead the industry in the growing EV aftermarket. Recent Oltan acquisitions in Europe are tracking ahead of growth and synergy plans as we leverage our scale, integrate with discipline, and expand margins. For example, comparable growth in our Iberian markets was approximately 25 percent during the second quarter, significantly ahead of our initial expectations. In the Asia-Pac automotive business, sales in the second quarter increased approximately 9 percent in local currency, with comparable sales growth of approximately 7 percent. Both commercial and retail sales performed well, with retail outpacing commercial in the second quarter. the team continues to strategically invest in the business to extend its customer value proposition. For example, the recent opening of distribution centers in Auckland, New Zealand, and Melbourne, Australia, will drive long-term profitable growth and productivity. We complement organic growth with strategic acquisitions to capture share in our fragmented markets and create shareholder value. We completed several bolt-on acquisitions primarily consisting of small automotive store groups that increase local market density in existing geographies. Our acquisition pipeline remains active, and we will remain disciplined to pursue transactions that extend our leadership positions and create long-term value. In closing, the global GPC team delivered strong second quarter results, and we remain confident in our plans for continued growth through the balance of the year despite a dynamic environment. Our company is benefiting from our strategic business mix and global geographic diversification. Our teams remain focused to execute our strategic initiatives that deliver customer solutions and create value. We're committed to investments in our people, customer solutions, technology, supply chain, and emerging technology that will continue to enhance our capabilities and leadership positions. Thank you again to the entire GPC team for the hard work and excellent performance. With that, I'll turn the call over to Bert.

Thank you, Will, and thanks to everyone for joining us today. Our teams continue to operate at a high level and perform through this dynamic environment, and I'm pleased to walk you through the highlights of our second quarter performance. Before I get started on the details of our results, I would like to note that we had no non-recurring items in the second quarter and six months of 2023. Our comparisons to the prior year, however, exclude certain non-recurring items in 2022, primarily related to the sale of S.P. Richards Real Estate and the integration of KDG, which represented a net $59 million benefit, or $0.42 per diluted share. GPC revenues increased 5.6%, or $313 million, to $5.9 billion in the second quarter of 2023. This reflects a 4.9% improvement in comparable sales, including low single-digit to mid-single-digit levels of inflation and a 1.8% contribution from acquisitions. These items were partially offset by a 0.9% unfavorable impact of foreign currency. The value and advantage of our balanced portfolio and global diversification was highlighted again as we delivered another quarterly sales record. Our gross margin was 36.1%, a 110 basis point improvement from the second quarter last year, driven by the ongoing favorable impact of our pricing and sourcing initiatives. We believe the execution of key strategic initiatives around gross margin will continue to drive strong results, and for the full year, we now expect our gross margin rate to improve 30 to 50 basis points from 2022 onwards. an increase from our prior estimate of 20 to 40 basis points of improvement year over year. Our total operating and non-operating expenses in the second quarter were $1.7 billion, up 9% from adjusted expenses in 2022 and at 28.4% of sales. This compares to total adjusted expenses of 27.6% of sales in the second quarter last year, or approximately 80 basis points of deleverage year-over-year. The deleverage in SG&A in the second quarter is primarily attributable to a few key factors, two of which were planned, our investments in wages and benefits for our teams and increased spending in technology. Our investments in the IT and digital initiatives we showcased at Investor Day impacted SG&A by 20 basis points in the second quarter. In addition, Planned investments in wages and benefits for our team members impacted SG&A by 30 basis points, much of this at the feet of inflationary pressure on wages. Finally, during the quarter, we recorded charges related to cost improvement actions at our U.S. automotive business and a true-up of stock compensation expense for retirement-eligible employees totaling 30 basis points, both of which we would not expect to repeat in the future. For the full year, we continue to expect SG&AB leverage of 30 to 40 basis points, driven by investments in our team members and IT. Our second quarter growth and gross margin improvement drove total segment profit of $613 million, up 11.8%. Segment profit margin was 10.4%, a 60 basis point increase from last year, and our sixth consecutive quarter of margin expansion. While we delivered strong overall margin expansion, margins in our global automotive segment were lower in Q2 due to pressure in our U.S. automotive business. As we discussed in the first quarter, following the slow start to the year, we anticipated that the profitability of this business would remain challenged in the second quarter, and it did. However, our teams are making great progress. As evidenced by the acceleration in the rate of gross margin expansion from the first quarter to the second quarter, and the sequential improvement in segment margins. As Will mentioned earlier, we are executing cost improvement actions to address the elevated levels of operating costs in this business and to continue to improve profitability. We expect these actions, combined with our ongoing discipline on costs across the remainder of the business and execution of our broad base of strategic initiatives to drive further improvement in operational efficiencies and productivity for GPC. Our second quarter net income was $344 million or $2.44 per diluted share. This compares to adjusted net income of $313 million or $2.20 per diluted share in 2022, an increase of 10.9%. This represents our 12th consecutive quarter of double-digit adjusted earnings growth and is a true testament to our team's hard work and continued focus to drive our profitability. Turning to our cash flows, we generated 457 million in cash from operations for the first six months of 2023. Recall that our cash flow in 2022 included a sale of $200 million in receivables under our AR sales agreement. For the first six months of 2023, free cash flow was 252 million, and we closed the second quarter with $2 billion in available liquidity. Our debt to adjusted EBITDA is 1.6 times, which compares to our targeted range of 2 to 2.5 times. We remain well positioned with the financial strength and flexibility to take advantage of future growth opportunities across GPC. Our key priorities for capital allocation remain unchanged and include investment in our business through capital expenditures and M&A, and the return of capital to our shareholders through dividends and share repurchases. During 2023, we have invested $205 million in capital expenditures, including $117 million in the second quarter. These investments continue to support the initiatives we believe will drive growth and the modernization of our business moving forward. Acquisitions remain a key element of our growth strategy, and we invested $106 million year-to-date for acquisitions and we continue to generate a robust pipeline of acquisition targets for our businesses. Thus far in 2023, we have also returned $395 million to shareholders in the form of dividends and share repurchases. This includes $260 million in cash dividends paid to our shareholders and $135 million in cash used to repurchase 841,000 shares. As we enter the second half of 2023, we are well positioned to effectively deploy our capital through all business cycles. Turning to our outlook for 2023, we are updating our full-year guidance previously provided in our earnings release on April 20th. We are raising our guidance for diluted earnings per share to a range of $9.15 to $9.30, an increase of approximately 10% to 11.5% from 2022. This represents a 20-cent increase from our previous guidance of $8.95 to $9.10. Our sales guidance is unchanged, and we continue to expect total sales growth for 2023 to be in the range of 4% to 6%. By business segment, we are guiding to the following, 4% to 6% total sales growth for the automotive segment, with comparable sales growth also in the 4% to 6% range. For the industrial segment, we are expecting total sales growth of 4% to 6%, also with 4% to 6% comparable sales increase, and we continue to expect sales growth to moderate in the second half of 2023 relative to the first half of the year. Turning to a few other items of interest, our guidance includes cash from operations in a range of $1.3 billion to $1.4 billion and free cash flow in a range of $900 million to $1 billion. We continue to plan for CapEx of $375 to $400 million for the full year, which includes incremental investments in technology and supply chain, among others. Overall, we are very pleased with our first half results. Through this dynamic environment, our teams have demonstrated their ability to be agile while staying focused on serving our customers around the world. Our updated outlook for 2023 earnings per share reflects the ongoing confidence in our teams, and their ability to execute and drive solid results. We believe GPC is truly differentiated. With our business mix, global footprint, our size and scale, the execution of initiatives, and our talent, we have a unique value proposition. We look forward to reporting on our progress in our third quarter call in October. Thank you, and I will now turn it back to Paul for a few closing thoughts before we address your questions. Paul?

Thank you, Bert. Before we get into Q&A, we'd like to take a moment to acknowledge Sid Jones, who has announced his decision to retire from Genuine Parts Company after 33 years of service to the company. Sid has been leading our investor relations team since 2003, and today marks his 83rd quarterly earnings call at CPC in that role. We thank Sid for his many contributions over the years and wish him and his family the very best in his retirement. Tim Walsh has been working closely with Sid and the team for over a year and will be named head of investor relations on August 1st. We look forward to having Tim in his new role and know he will do an exceptional job for us.

So with that, we are now ready for your questions.

We will now begin the question and answer session.

To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And our first question comes from Liz Suzuki of Bank of America. Please go ahead. Great.

Thanks for taking my questions. And Sid, you are going to be greatly missed. So I'm alone with you a lot. Just a question on the U.S. automotive comp. You know, it's plus 1%. You noted that globally both DIY and Do It For Me were positive with DIFM outpacing DIY. Was that the case in the U.S. as well? You may have mentioned it and I missed it. I'm just not sure if you gave that detail for the U.S. in terms of DIY versus DIFM.

We did, Liz. DIFM outperformed retail in the U.S. automotive group for the quarter.

Okay, great. No, that's very helpful. And then just a question on the industrial business. You know, the margins have been really healthy there. I mean, should we think about that 2Q operating margin as a decent run rate going forward? And is there any seasonality we should keep in mind that may have changed one way or another after the KDD acquisition?

Hey, Liz, it's Bert. I don't think I'd park the Q2 as the proxy for industrial for the full year. As we've commented, we see that industrial growth rate moderating here in the second half. Having said that, we still will get margin expansion for the full year on the industrial segment. But we're thrilled with where the business performed in Q2. That 12.5% rate is a proxy for we think we can go long-term, as we shared it in Vestor Day. But we still have a lot of work to do to continue to grow that business and would not use that as the proxy, but look to still see expansion of margin for the full year.

Got it. Okay, thank you.

The next question comes from Chris Horves of J.P. Morgan. Please go ahead.

Chris Horves from J.P. Morgan. Sid, we will miss you very much, and congratulations on your retirement and all the best in your future endeavors. My first question is just following up on the U.S. NAPA comp. I think you implied in April that you were maybe running about a four-year And you implied that June was down. So was June down, sort of low to mid? And can you talk about what you're seeing that you're encouraged by in July and how you're thinking about U.S. NAPA comps in the back half?

Yeah, Chris, happy to walk you through. And I'll maybe just kind of walk through some of the comments that we had in the prepared remarks. So for U.S. Automotive, April and May, as you noted, were the stronger months in the quarter. low single-digit growth. The first half of June, in fact, was a solid start to the month, and we saw a tapering towards the end of the month that left June to be flattish, which puts together the two and then the one comp for the quarter U.S. automotive. We have seen an improvement to start the month in July. Obviously, we've had some extreme heat that is going to have a positive impact, and While it's probably early to call the whole month, we're encouraged by the positive momentum and plan to build on that through the quarter. As Liz just asked, we saw outperformance in do-it-for-me versus retail both growing in positive directions. And we continue to be bullish about our fleet and government segment, which we mentioned in the prepared remarks. That grew nicely in the quarter. Good strength in filters, batteries, and fluids. which are important categories for us. So we're excited about some of the things we're doing from a merchandising standpoint in those categories. And I think it wasn't a total surprise to us, given the weather patterns in the second quarter, that some of our heating and cooling categories didn't perform the way we expected them to, just given it wasn't an overly warm second quarter in the aggregate for the U.S. markets. But we're excited about what we're working on in the business. Obviously, we think we've got more potential than we showed in the quarter. We're excited about Randy's leadership now in place here for the first couple weeks. He's been out in the field working with the teams. I think there's a lot of energy and positive momentum there. Gross margin, as Bert talked about, continues to be a great piece of execution, both on the pricing and sourcing side of the house. Also very proud of the team and their quick adjustments to all things cost. So they're operating with a lot of intensity and focus. And importantly, we're investing in the business for the long term. So making sure that we're balancing near-term actions with long-term potential. So in the agria, a lot to be proud of the team. We're going to continue to grind and push through the second half of the year. But proud of what we're working on.

And, Chris, I would just tag onto that that, you know, the fundamentals of the industry are still solid. Miles driven, going in the right direction as gas prices moderate a bit. New car sales being still a bit soft compared to historic numbers. And we're seeing the same across our international business as well. So as we reported, our team in Europe had a phenomenal quarter. strong double-digit growth. Many of the fundamentals there are the same here as across North America, rock solid. And our team in Asia-Pac, Australia, New Zealand also had another really strong quarter. So fundamentals of automotive are still rock solid, and we certainly see improvement as we move forward through the back half of the year.

Sounds great. And then a follow-up question on the gross margin. I mean, 36.1 is quite impressive. If you look back historically, the second quarter is a reasonable proxy for the year on gross margin. I know 1Q is a lot lower, but perhaps was there anything unsustainable in the gross margin performance in the second quarter? And do you think over time this is a level that this around 36% is sort of the destination, or is it an area that perhaps you could even grow from?

Hey, Chris, it's Bert. Look, I think we had a great quarter here. In the past couple of quarters, I've given you the offsets for gross margin. We had a clean number this time around. We had no offsets from some of the things we've talked about in the past, whether it's inflation or mix. So we're just thrilled with the work that the team's doing and so important in this environment when we've got all the different economic pressures out there. So we've got a great focus on sourcing and getting the right inventory in the right place at the right time. We also have great work happening on pricing across all of the business. And so that 110 basis point improvement for the quarter up to 36.1, I think, is a reflection of really, really hard work. We're going to continue to stay focused on gross margin expansion through those two prisms, through pricing and sourcing. I'm not going to call the ball just yet on where that number can ultimately end up. As I said in my prepared remarks, we're more bullish on where it can be for this year. We had originally been planning for 20 to 40 basis points of improvement, and we've upped that to 30 to 50 basis points. Within that, again, benefit from the execution of our strategic initiatives, We do have a little bit of a benefit modeled in for ocean freight, which we see turning positive for us here in the second half. So those are the two things I'd call out with really no foreseen at this point impact from either FX or inflation or mix.

Thank you so much. Yep.

The next question comes from Scott Ciccarelli of Truist. Please go ahead.

Good morning, guys. I have a follow-up on Chris Horvath's question. So the slowdown you've experienced in U.S. auto, do you think there's any share shifts occurring given some of the strong results we've seen from a few of your competitors, or would you really just point to whether as the headwinds into Q?

Yeah, Scott, we don't think there's any share shifts. We always – We use third-party independent information. We look at it by category and feel good about where we are. You know, we act on that data every week and every month. We review it as a team and feel good about where we are. So, no, we don't think that there's share loss happening here. We have specific strategies by category. that we're executing against. And so the story can be quite different at a category level, but that's part of the science and art of all things category management. So really proud of what the teams are working on. And as I said, we use independent data to keep ourselves honest to make sure that we're winning in the marketplace.

Okay. So maybe some of the delta could be due to geographic differences potentially? When you say geographic, you mean U.S.

geography differences? Well, no, I mean within the U.S. Your results, if we had positive results from both DIY and commercial, and obviously you had a 1% comp, neither was up very strongly. So specifically on the commercial side, could we potentially attribute or did you potentially see significant geographic differentiation differences in your business, you know, what's stronger in the south, weaker in the west, what have you?

We really don't see a material difference across our regions. We've got five regions. The growth rates are not materially different. There's always region-specific customers and dynamics. But as I said in my prepared remarks, we saw recovery in the northeast and west, which we planned and expected based on their slow start driven by weather. We saw that come to bear. And for the second quarter, though, by themselves, there's not a material difference by region.

Got it. Thanks for that. And then just a quick housekeeping item. The $18 million or so that you guys highlighted for cost actions and the stock comp true-up, were they the main drivers in the spike of corporate expense? And should we expect that line item to kind of moderate in the back half?

Hey, Scott, it's Bert. I'll take that one. Look, we did have an increase in the corporate expense as a result of the two items you noted, one on the stock comp true-up and the other on the cost actions. The other thing contributing to corporate, and this is a little obscure in the 10-Q, but if you take a chance to read through the 10-Q, you'll get some good color on that, either from the first quarter or the one that will be filed later today. We transferred some functions at the beginning of this year into the corporate environment that we felt were better suited to be run on a more consolidated basis, one of them being cyber security and our work around cyber security globally. We did a little bit of that related to some of the finance functions and also our management of our product liability cases and litigation. When we did that, we actually got a benefit so far this year in terms of being ahead of where those items were being spent last year, but it did create a transfer left pocket, right pocket, which makes the corporate number look a little bit bigger. We're still guiding for the year of corporate expense in the $300 to $325 million range. Longer term, we target for that to be about 1% of revenue. It's up this year because of those transfers, and we'll look up for the full year. But like I said, we're already seeing the benefit of the move of centralization by streamlining those functions and seeing them operate at a lower cost rate than they had in the past.

Okay, but some of the margin expansion that we've seen at the segment level is because of that cost transfer, just to be clear.

Yeah, it's pretty small, though, Scott. I mean, we're talking about costs totaling year-to-date $29 million in the aggregate, so it's a pretty small move. It stands out at corporate a little bit bigger because of the size and scale of the corporate expense line, but it's very negligible at the segment level.

Roger that. Thanks a lot, guys. Thank you. Thank you.

The next question comes from Brett Jordan of Jefferies.

Please go ahead.

Hey, good morning, guys. Hey, Brett. Good morning, Brett. Congrats to Sid and Randy. Hey, Randy, now that you run them both, I guess, where do you see the biggest opportunity, industrial or auto, in the U.S. in the next, say, two, three years?

Hey, Brett, the good news is Randy's not on the call with us, but that's a tough question for him to answer. He loves both these businesses now. He's been out in the field and has a ton of energy and excited about the opportunities in front of us. I was going to ask him what he liked better, but I figured that was too tough. He wouldn't have answered that question. He likes them both.

It's like asking which one is your favorite kid, you know, Brett?

That's easy. The question on price, I guess, you know, we were talking about sort of low, mid, single-digit benefit from inflation in Q2 last How do you see the second half cadence? The bar gets higher, I guess, year over year, but maybe you've got some incremental price passing along some of the rate inflation from your suppliers. How do we think about the organic price comp second half?

Yeah, Brett, I'll take that one as Bert. On inflation, I'll kind of start at a high level. As we expected, we saw inflation moderate again in Q2, and I think really falling in line with our original thinking as we started the year. Monetary policy in the U.S. and around the world, I think it's having its desired effect. You can see that in the U.S. CPI data. Just to reiterate, for the second quarter, inflation was With low single digits all up for GPC, mid single digits in auto, and low single digits for industrial. That industrial number has stayed pretty consistently in that low single digit range for the year. Auto ticked down from high single digit to mid single digit. And then on the whole, GPC has ticked down from mid single digit to low single digit. So really falling right in line with what we thought when we started out the year. We're seeing some inflationary pressure on operating expenses, particularly in wages, and that was in my prepared remarks. That's sitting in the mid-single-digit range right now. It's probably the most pronounced impact in the business, but we're managing it. We're doing all the right things and taking some actions to try to offset that, and I think that's not a GPC-specific comment. It's a comment that all businesses are facing with wage pressure and inflation and wages As we look ahead, we think inflation will continue to moderate throughout 2023. I think policy will continue to have its desired effect. Auto will tick down from high single digits to start the year to low single digits to close out the year. And industrial is going to bounce along that low single digits for the full year. We'll see GPC close out in the aggregate from a mid single digit to a low single digit. So, you know, it's not a one-size-fits-all for our business segments, but hopefully that gives you a little color on how we're thinking about the rest of the year, and that's all factored into our guidance and our update to the guidance for the year.

Okay, and then one follow-up to another pricing question. I guess one of your auto peers reported a pretty rough Q1 and talked about price competition in the market. I guess, could you comment about, you know, what you see, you know, I guess – From peer pricing, any cadence of change in pricing in your day 23?

Yeah, I'll take a shot at that, Brett, and then maybe Will can tag on with perhaps more specifics. Look, first and foremost, I'd say we're not going to speak to specific strategies of our competitors. We've got a lot of respect for our peers, and they're doing what they've got to do for their business. What I would tell you, The competitive landscape, the dynamics are still rational. We play in huge markets, as outlined by Will. We've got lots of different competitors across all those markets, both big and small. We really spend our time thinking about, Brett, and this is not new news. It's about inventory availability. ensuring we've got the right people in the right markets, ensuring we've got our store footprint, the right store footprint to cover all of our strategic markets, and allowing us to continue to grow profitably. We're in a break-fix model and helping our customers really solve their problems quickly with the right part in the right market at the right price. It's all part of our value prop. That hasn't changed, Brett. And honestly, I don't see that changing anytime soon. Do we think about price? Sure we do. But right now, our customers are really more focused on ensuring they can be productive in their shops, that they're taking care of their customers. And we think we're a pretty good partner, not only here in North America, but around the world to solve those challenges for them. So Will, I don't know if there's anything else from a pricing environment that you would want to comment on.

Well, I would just say, you know, operationally what the teams are working on is incredibly helpful in this environment as it has been for the last couple of years, hence the investment and focus on it. And more importantly, the teams globally are learning from each other. And so I think in one of our previous calls, we've talked about all the great work that's happening in the U.S. automotive industry. We're sharing that work over in Europe. And so these are some of the benefits of working together as a team and sharing all the learnings from an environment that's very similar around the world. And gross margin performance as a total company, I think, is a good data point to suggest that we're having some success. So it's an important part of distribution business, and it's an especially important part of navigating this environment. and we're going to continue to get better at it and invest in it so that we can make the right decisions for our customers.

Great. Thank you.

The next question comes from Greg Malik of Evercore ISI. Please go ahead.

Hi, thanks. I wanted one question on the U.S. auto business and then follow-up on industrial guidance. I just want to... understand a little bit better with that inflation number that we're still seeing around mid-single digits. Would it be fair to say a one comp would translate into negative four units? And then could you give us a little more color on the non-fleet and government business, how the independent dealers did and how Napa Auto Care did?

Yeah, Greg, so it's not as simple as... minus four because we got do it for me in retail so you've got a distinction on transactions there so do it for me you know positive transaction and price do it yourself as expected transactions down ticket up so in the aggregate it's a little bit more noisy than just the minus four on the other parts of the business the auto care business continues to perform Well, obviously our value prop with that segment is incredibly important in a challenging time, so partnering with them to make sure that they're being productive and navigating the environment. So that was a part of the business that performed to our expectation. Major accounts is a very customer-specific book of business. So there's some pockets of strength in that book of business as well as some areas of opportunity. I would reinforce our philosophy here that it's really important that we think about partners and growing our business through the medium term in a profitable way. And so I think we're going to bring a lot of discipline and rigor to thinking about the trade-offs between profitable share and not in our major account business. In the aggregate, a bit of a mixed story, but positive in total.

Did the company stores do materially different than the jobbers?

We didn't see a material difference in the performance. It was pretty close to each other.

Yeah, just maybe DIY, do it for me mix a little bit, but no difference in that cut.

That's right.

I guess the follow-up is on industrial. I just want to make sure I got that right. I mean, with obviously the big numbers and continuing to come through it, but the margin, the 12.5% margin, I just want to make sure I'm not... Do we assume that industrial margins will actually be down in the back half, or they'll still be up for the year? Did I interpret that wrong, Bert?

No. Yeah, actually, you did interpret it wrong, but let me back it up and maybe pull it up and give a little color on guidance in general, and I'll work my way back down to segment margins. You know, as you can expect, we're pleased with the first half performance on an overall basis, allowed us to raise our outlook again for the year, this time by 20 cents to the 915 to 930. And in doing that, we see some upside in industrial profitability versus our previous expectations of the international market. Automotive business, which is about 50% of the segment revenue for global automotive, we see some upside, and then obviously we've taken up our gross margin performance expectations. That guidance delivers EPS growth with a midpoint of 10.6%, and that's putting us in a position to expect our third consecutive year of double-digit earnings growth, which in this environment is, we think, pretty impressive overall. On a growth basis, top line, you know, we had exceptional 21 and 22. We still see strong growth but moderated growth to mid-single digits overall for this year. And that really, you know, as we look at a pretty choppy macro environment and difficult to interpret tea leaves, we're keeping an eye on some of these things that are out there, whether it's inflation, monetary policy, interest rates, the political landscape globally, and foreign currency. So we're keeping a close eye on all of that. We balance that against confidence in our own business. Paul talked about strong industry fundamentals. We've got some great cash flows that allow us to invest in our business. And taking that all together, while it's a little bit more cautious, we do have a lot of confidence in GPC. A few details just to remember. Again, gross margin, we've ticked up to a 30 to 50 basis point increase expectation versus our original 20 to 40 basis points. On segment margins, we're looking for those to be up for the full year, 20 to 40 basis points. That's expansion again. We do think industrial will be up for the year. So just to clarify, industrial will be up for the year, but not using the 12.5% for Q2 as the proxy. Industrial segment margin will outpace automotive, but we believe automotive will be in a position to recover here in the second half, as Will's outlined. The only point I would call out on just a headwind is SG&A. We will see deleverage as we expected for the year, 30 to 40 basis points, which is consistent with our original expectations. So all that together allowed us to take our guidance up for the year slightly better on international auto, industrial profit conversion, and better gross margin expectations.

Got it. Thanks for piecing that together. I guess I will say, Sid, thanks for everything. And I didn't realize 83 quarters you must have started in college. I let them off too easy.

It's been a true pleasure. Thanks, guys, and good luck. Thanks, Greg.

The next question comes from Daniel Embro of Stevens Inc. Please go ahead.

Hey, good morning, everybody. And Sid, I'll add my congratulations to the group. Well-deserved. We miss working together. Will, I want to start on the U.S. auto side, maybe taking a step back from the quarter, just more strategically, obviously, with the promotion of Randy to the new responsibility. Can you talk about what the strategy is there, maybe bringing motion and auto under singular leadership rather than kind of running separately? Is that a reflection of running the businesses closer together? Is that just a personnel decision? Can you talk to me about that? how you view that, and you mentioned some early positive internal response. Can you share any more color on what that's been?

Yeah. Thanks for the question. Look, I think, as I said in my prepared remarks, Randy is a proven leader. He's well understood by our organization and brings a lot of relevant expertise. to the NAPA business. As we've talked about often, at the end of the day, these are distribution businesses. And while they obviously have a different customer and product catalog, the value creation initiatives are all the same. And so Randy's progress and momentum and building a great team there at Motion that is incredibly deep, I think is all relevant and has spoken for itself in terms of the performance. And so I think it's more about how do we quickly build on the momentum of the business, and I think Randy brings us a great opportunity to do that. So I don't think it's operationally, meaning that we're putting the two businesses – in fact, I know it's not. We're not putting the businesses together, but I think it's just going to allow us to be a little bit more efficient and at pace to work together as kind of a one GPC team, which is a philosophy that we've been talking about as an organization. And I think an advantage that we have, given the similarities of all the initiatives that we're doing around the world, to go at pace and drive impact faster than perhaps if we were not together as a company.

Hey, Daniel, I would just add to Will's comments briefly. Randy has done a phenomenal job at Motion, as you've seen in the numbers, and we expect that to continue because we've got a great leadership team at Motion. And as you know, every business, it's much bigger than one person. I would say the same by U.S. Automotive, Daniel, and I'm glad you asked the question because it gives me the opportunity to recognize that team. Kevin did a great job over the last few years of really bringing in a lot of new talent into the leadership group at U.S. Automotive. That team I have 100% confidence is going to continue to drive improvements in U.S. Automotive. And I have no doubt Randy will continue on with the good work that Kevin did by leading that team. So we're excited by the moves. and look forward to the impact that Randy's going to have across both businesses.

Thanks for that. And then to follow up on the automotive guidance, not to get too into it, but trying to reconcile the 4% to 6% comp guide and the 4% to 6% total revenue guide on the automotive side, I think FX rates, just as we sit today, are at least a few points better than when you initially guided. So trying to reconcile how that wouldn't be more of a tailwind. Are you hedging out some of that translational benefit in the back half? Or is the right interpretation it'll be more FX benefit and maybe lighter organic growth just within that same guidance range? Just trying to square away how FX rates can change, but the guide kind of gets maintained.

Yeah, sure. Look, on the top line, I think we've been consistent pretty much throughout the year with our initial outlook on the top line guide. And we've just basically done what we said we would do on both with the 4% to 6%. As we look at the rest of the year, if you're decomping and trying to get a little bit more color on global automotive, I would say that the international automotive will continue to outpace the U.S. We'll expect it to be on the higher end of our comp range. We'll expect the U.S. to be on the lower end. So if the international is a bit on the higher end, you probably get a little bit of improvement from FX, to your point. but that's kind of how we're thinking about those things. And look, the U.S. automotive business, as Will has highlighted, there's more potential there, but we are being a little bit conservative on how we think about the rest of the year and how that business recovers and continues to improve over the second half. On industrial, I'd be remiss if I didn't talk about the industrial side. They've had a fantastic first half, but as we expect in the second half, moderates a bit to low single digits in the second half versus high single digits in the first half, which gives you the 4 to 6 for industrial. But even with that low single digit, as I've said a couple of times, we will see some nice margin expansion for the full year in the industrial segment. So hopefully that reconciles that and squares the circle for you.

Just one follow-up on the comp guide. You just mentioned you called the back half conservative on the outlook, but in the U.S. you're calling for an acceleration. Inflation is moderating, so clearly you're implying traffic is going to further accelerate to get the total comp up I guess what are the specific buckets or what are you looking at in the business that gives you guys the confidence that the traffic will be ultimately accelerating from here through the back half of the year to get that acceleration towards the low end of the four to six comp guide in the U.S.?

Yeah, and I'm not sure I would have interpreted it that way. I'll just reiterate kind of what we're thinking. As we look at the four to six for the back half for automotive, we've had consistent growth throughout the year in the four to six range. We expect that for the next two quarters. full-year automotive at four to six, international on the higher end, and U.S. automotive on the lower end of that range.

And I think we'll just leave it there. Got it. Follow-up offline. I appreciate it, guys. Thanks.

We have time for one last question, and that question will come from Seth Basham of Wedbush. Please go ahead.

Thanks a lot. Thanks for speaking, Ian, and congrats to Sid as well. We'll miss you, buddy. My question, not to beat a dead horse, is back on U.S. auto business and the cadence of comps through the quarter. Perhaps we were mistaken, Will, but I thought on the last quarterly conference call you said that April the date had accelerated from the 3% level in the first quarter. That implies a pretty material deceleration through the balance of the quarter. You said zero-ish, flat-ish in June. Where were we in April and May?

I think... The comment that we made in the first call was true. In April, we did accelerate from the March performance. And as you articulated, and as I think we said, April and May were close to each other in this quarter, and then June was the deceleration, and we called it a flattish. So call it low single-digit, low single-digit, flattish for the quarter.

All right. Fair enough. And then secondly, just following up on your comments regarding the major account segment, it seems like that's the segment where there's been the most price competition. You're being more disciplined with how you approach some customers there. Can you give us any more color? Are you walking away from some business that you don't see as being profitable enough at this point in time?

I'm not sure I'd go that far. I would say, first and foremost, this part of the business is always discussing price, obviously, because they're a big, scaled account. I wouldn't say that those types of discussion are more intense today than they were before. I think we're just bringing a fresh perspective to making sure that our value prop is being appreciated, and we're also doing work with smaller regional quote-unquote major accounts that we can really drive a lot of value with given all the capabilities that we bring to them. So I think it's just a stepped-up level of focus and strategic discipline about taking care of our customers.

Fair enough. Thank you guys very much.

Thank you, Seth.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Yeah, thank you. And I just want to reiterate we are super proud of our team, the way they continue to operate and in a challenging environment around the world. I'd also like to thank all of you for joining us today, and thanks for your combined and continued interest in Genuine Parts Company. We'll look forward to hosting another call in the third quarter and report on our results. So we'll have another call on October 19th. In the meantime, stay cool and enjoy the rest of your summer. Thank you.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.