Genuine Parts Company

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company second quarter 2024 earnings conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, July 23, 2024. At this time, I would like to turn the conference over to Tim Walsh, Senior Director, Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone.

Welcome to Genuine Parts Company's second quarter 2024 earnings call. Joining us on the call today are Will Stengel, President and Chief Executive Officer, and Bert Napier, Executive Vice President and Chief Financial Officer. In addition to this morning's press release, a supplemental slide presentation can be found on the Investors page of the Genuine Parts Company's website. Today's call is being webcast. And a replay will also be made available on the company's website after the call. Following our prepared remarks, the call will be open for questions, the responses to which will reflect managers' views as of today, July 23rd, 2024. If we're unable to get to your questions, please contact our investor relations department. 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. Reconciliation of these measures is provided in the earnings press release. Today's call may also involve forward-looking statements regarding the companies and its businesses as defined in the Private Security Litigation Reform Act of 1995. 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. With that, let me turn the call over to Will.

Thank you, Tim, and good morning, everyone. Welcome to our second quarter 2024 earnings conference call. Before we turn to the results of the quarter, I'd like to share a few thoughts as part of my transition into the CEO role over the last 45 days. First and foremost, it's an honor and a privilege to serve as only the sixth CEO in Genuine Parts Company's nearly 100-year history. GPC has a special culture which was founded on taking care of our people and offering solutions to our customers efficiently and consistently. This has served our business incredibly well over the years and will remain a core element of our foundation. As part of the transition over the last several months, I've spent time engaging with our teammates, customers, and suppliers around the world. I'll share a few key messages that have come out of those discussions and that are areas of emphasis as we move forward. First, leverage our culture as an advantage. We have a unique and differentiated culture. Our global engagement data shows the vast majority of our employees are incredibly proud to work for GPC. That's a fact of which we are proud and is a testament to our strong, consistent leadership over the years. We must nurture our culture to extend our unique advantage, but we must also continuously evolve with our customers and our markets. Second, build high-performing teams. Our talent strategies have been intentional as we continuously work to be an employer of choice. We have a capable group of leaders around the world that have aligned values and a clear understanding of our shared vision. but we amplify our impact when we relentlessly build high-performing teams throughout the organization who are energized to work together, solve problems, and deliver results. Third, capture our exciting opportunities. We streamline GPC to focus on two core businesses with market-leading positions and significant exciting opportunities. We believe size and scale creates an advantage, and when we work together as we invest in capabilities and share best practices to solve common challenges, we act faster, we're more efficient, and we create value. Fourth, focus and execute our defined plans. We believe we have the right strategies and initiatives in place. We've worked together over the last three to four years as a global organization to understand our opportunities and prioritize the work that we're doing. We align globally around five key priorities, including talent and culture, sales effectiveness, technology, supply chain, and emerging technology, complemented by a disciplined acquisition strategy. This focused approach is not changing. We're intentional, we're disciplined, and we're leveraging expertise around the world to reduce complexity, improve the customer experience, deliver profitable growth, and increase productivity. And lastly, play to win and continuously improve. Thanks to the hard work of our teammates, we've made great progress as a company over recent years. But we're focused on continuous sequential improvement to build on our momentum. We can't be satisfied with good, instead striving to be great, always working to be better and faster in all that we do. Overall, it's fair to say I'm more energized than ever about the opportunities we have as a company and the future for Genuine Parts Company. I want to thank each of our over 60,000 global GPC teammates for their ongoing passion for serving our customers. In addition to serving our customers every day, our teams are executing and delivering on a broad set of initiatives while navigating a dynamic and challenging macro environment. Thank you to all, as always, for your good hard work. Now, let's turn to the specifics of our quarterly results. A few highlights for the second quarter include total GPC sales of $6 billion, which increased approximately 1% versus the same period in the prior year, and included a tough start to the quarter with particularly weak sales month in April across both segments. Total company gross margin increased 50 basis points with continued execution of strategic sourcing and pricing initiatives. And in May, we announced the acquisition of Motor Parts and Equipment Corporation, our largest Napa independent owner in the U.S., with a network of 181 locations across Illinois, Indiana, Iowa, Michigan, Minnesota, and Wisconsin. It's a great example of our ongoing initiative to own more Napa stores in priority markets. Our second quarter results were below our expectations. The variance can be attributed to three key themes. weaker than anticipated customer demand in industrial, accelerated softness in Europe, and choppy demand in the automotive aftermarket in the U.S. Many factors outside of our control, including higher interest rates, geopolitical uncertainty, and persistent inflation, are driving overall weaker customer demand. This weaker demand environment and ongoing cost inflation resulted in adjusted earnings flat year over year for the quarter, which Bert will cover in more detail shortly. Looking at our results by business segment. During the second quarter, total sales for global industrial were 2.2 billion, a decrease of approximately 1% versus the same period last year, and comparable sales were down 1.6%. When we look at the sales performance for our industrial business, the main headwind remains lagging industrial production activity. Over the past 20 months, manufacturing PMI readings continue to be in the longest period of contraction since the financial crisis in 2009, as represented by a PMI index below 50. While we saw a positive reading in March during the second quarter, the monthly PMI readings reverted back into contraction territory versus our cautiously optimistic expectation of an improving backdrop coming out of the first quarter. From a cadence perspective, Average daily sales were softer in April and relatively flat in May and June. In addition, the higher interest rate environment and an election uncertainty is curbing larger capital spending decisions across our diversified customer base as they remain cautious. Looking at motions results across its end markets served, we're still seeing mixed performance across the board. Five of our 14 end markets showed positive growth during the second quarter, which was in line with the first quarter, with relative strength coming from mining and chemicals, offset by weakness in equipment and machinery, fabricated metals, and aggregates and cement. Despite the market softness, Motion's corporate account customer base, which represents approximately 45% of the business, continues to perform well and is showing positive growth. which is a true testament to Motion's strong value proposition. Additionally, during the second quarter, the Motion team successfully renewed several key multi-year corporate account agreements and remains active with various well-defined field sales initiatives. Industrial segment profit in the second quarter was $277 million, down approximately 2% versus prior year and 12.4% of sales. representing an approximate 10 basis point decrease from the same period last year. Our business in North America performed well despite the softer sales performance, but was offset by pressure from our business in Australasia, given the challenging local economic environment and cost pressures. Turning to the global automotive segment, sales in the second quarter were $3.7 billion, an increase of 2%. with comparable store sales decreasing 0.6%. During the quarter, all of our automotive geographies showed positive sales growth in local currency. Similar to the first quarter, the global automotive sales benefit from inflation remained less than 1% in the second quarter, and we expect the same in the back half of the year. Global automotive segment profit in the second quarter was $314 million. down 4.7% versus prior year and 8.4% of sales, representing a 60 basis point decrease from the same period last year. Our second quarter results for the global automotive segment reflect pressures from a challenging sales environment across our geographies, combined with inflation driving higher costs and outpacing sales growth. Now, let's turn to our automotive business performance by geography. Starting in Europe, our team delivered total sales growth of approximately 8% in local currency and comparable sales growth of approximately 1%. We've seen a broadening in the moderation in demand across our geographies in Europe through the quarter. We believe this is driven by an incrementally more cautious consumer as well as a reduced sales benefit from inflation, which is also now less than 1%. Despite this, our teams are focused on serving our customers, delivering on our strategic initiatives, and delivering above-market performance. We're winning share with target key accounts, and the NAPA brand expansion continues to be a differentiator. For 2024, we're on track to deliver sales of NAPA-branded products in excess of €500 million, above our initial internal targets. Our ongoing bolt-on acquisition activity also continues to have a positive impact and create value in Europe. In the Asia-Pac automotive business, sales in the second quarter increased approximately 3% in local currency, with comparable sales growth of 2%. Similar to last quarter, this performance compares to a high single-digit growth in the same period last year. Sales for both commercial and retail increased in the second quarter with retail showing relative strength. The macro environment remains challenging in the region, but the teams are executing well to grow in excess of market and take advantage of their industry-leading position. In Canada, sales increased 1% in local currency during the second quarter, with comparable sales decreasing approximately 2%. Our Canadian team showed sequential improvement from the first quarter despite ongoing pressure from a more cautious consumer and difficult macro environment. Sales in automotive and heavy vehicle performed similarly during the quarter, with both having slightly positive growth. In the U.S., automotive sales increased 0.5% during the second quarter, with comparable sales decreasing 1.5%. This represents a slight improvement in our reported results sequentially from the first quarter and was generally in line with our expectations. As we looked at our sales cadence through the quarter, average daily sales growth was pressured in April and then showed solid sequential improvement throughout the remainder of the quarter. Our overall results also benefited from our MPEC acquisition in May. From a customer segment perspective, sales to our commercial and do-it-yourself customers were both slightly down during the quarter, with commercial outpacing do-it-yourself. For commercial, fleet and government, auto care, and other wholesale were all essentially in line, while major accounts underperformed the group, driven by continued cautious and consumer, as we're seeing elevated levels of deferrals from customers on certain repairs. For sales into our independent store owners, we saw another quarter of more normalized buying behavior, which is a trend we believe will continue throughout the balance of the year. We have active initiatives across our U.S. automotive business and we're encouraged by the progress and the improvements that they're delivering. During the second quarter, we saw further improvements in inventory fill rates and stocking levels for specific categories where we had opportunities. Additionally, the team continues to elevate the execution in our stores and DCs, which is driving better customer service metrics. We're pleased with these results, but we're intensely focused on continuous sequential improvement. And finally, we're making good progress on our initiative to evolve our operating model at U.S. Automotive to own more stores in selected priority markets. Our recent acquisitions of independent stores are being integrated into the NAPA network. with a focus on improved performance and synergy capture. In parallel, we continue to partner with our existing network of independent owners who play an important role to help us serve our local markets. Our current in-flight initiatives are designed to improve growth and operational excellence in both company-owned and independently-owned stores. During the second quarter, we acquired 242 Napa stores from our independent owners as well as competitive stores in key markets. We're leveraging our discipline integration playbook as we integrate these stores into our own store base. We'll continue to make methodical progress with our strategy of owning more stores in the second half of the year as the pipeline remains active, although we don't expect the recent acquisition pace to be linear through the year. With all these evolving factors in mind, we moderated our 2024 outlook for sales and earnings per share, We believe it's prudent to adjust our expectations for the second half of the year based on the current information available to us, particularly as it pertains to the industrial and European market outlook. And Bert will provide further color in a moment. While our quarterly results reflect a softer economic backdrop than we anticipated, our in-flight initiatives and fundamental prospects for our business remain robust. Within automotive, Industry fundamentals like miles driven, the age of the car park, and new and used vehicle prices remain supportive. We benefit from the fact that NAPA's core business serves the commercial customer where many repairs are non-discretionary and break-fix in nature. We like this position as we view the commercial customer as the growth engine of the industry given the increasingly complex vehicle fleet. Within industrial, Our business is well diversified across 14, and growing, different end markets that cover a wide range of the manufacturing economy, and we're positioned well to take advantage when economic conditions improve. Studying PMI cycles over time, we see a pattern of long periods of attractive growth once the index inflects into an expansion territory. Motion's highly technical sales expertise and solutions-based selling drives deep relationships with our customers and helps to keep their operations functioning effectively every day and in every market cycle. As the market leader, we believe we're well positioned to capitalize on the eventual improvement in the manufacturing economy, near and long term, as we expand our customer base and grow share of wallet in this fragmented market. Lastly, before I turn the call over to Bert, on behalf of the entire company, it's only fitting that I take a moment and extend our gratitude to Paul Donahue, not only for his tenure as CEO, but for his many contributions to Genuine Parts Company over his 20-year career. Under Paul's leadership as CEO, the company strategically evolved and transformed for the better. A few highlight accomplishments under Paul's leadership. He simplified the GPC business mix to enable strategic focus on our automotive and industrial segments. He championed the expansion of GPC around the world, growing our global footprint from six countries in 2016 to 17 countries in 2024, including the transformational acquisition of AAG in Europe. He led us through a pandemic and kept our team safe. He kept our culture thriving, and he kept our teams operating to ensure we took care of our customers. He accelerated strategic investments of over $2 billion in growth capital. including the transformational acquisition of Command Distribution Group to extend our industrial leadership position, and obviously many other accomplishments. Altogether, since 2016, GPC has grown its sales from $15 billion to approximately $24 billion. It goes without saying that Paul's positive impact on GPC has been remarkable. His ability to lead our teammates around the world has been inspiring, And he's a tremendous steward of our GPC culture, importantly, a good friend to all. And we certainly look forward to his continued counsel in his role as executive chairman. Thank you again to the entire GPC team around the world. And with that, I'll turn the call over to Bert. Thank you, Will.

And thanks to everyone for joining us today. Our second quarter results were below our expectations as market conditions, including lagging industrial production, and weaker demand in our U.S. automotive and European businesses negatively impacted our performance. Despite the muted market backdrop, our teams continue to operate with discipline and are making progress on priority strategic investments necessary for the business. The softer market conditions, combined with the impact of inflation and acquired businesses on SG&A, resulted in flat adjusted earnings year over year. With that context, let me take a few moments to comment on more specific details of the quarter, along with our updated view on our outlook for the year. My comments this morning will focus primarily on adjusted results, which exclude the non-recurring costs related to our previously announced global restructuring program and transaction costs related to the acquisition of MPEC. During the second quarter, we incurred a total of $62 million of costs on a pre-tax basis. or $46 million after-tax, related to restructuring efforts and MPEG integration costs. As we look at the second quarter, total sales were up 0.8% versus the prior year, reflecting a 2.2% contribution from acquisitions, partially offset by a 0.9% decrease in comparable sales and a 0.5% unfavorable impact of foreign currency and other During the quarter, the contribution from inflation was less than 1% in both our automotive and industrial segments, in line with our expectations. For the quarter, our gross margin expanded by 50 basis points from last year, driven in part by the ongoing execution of our strategic sourcing and pricing initiatives. Our investments in technology and category management capabilities are continuing to deliver positive results in our gross margin performance. In addition, the acquisitions we are making in our U.S. automotive business contributed approximately 30 basis points of gross margin expansion in the quarter. Adjusting for restructuring expenses, total adjusted operating and non-operating expenses were 29.2% of sales in the second quarter, an increase of approximately 80 basis points from total expenses in the prior year. As we look at our expenses for the second quarter, we had a mix of factors, including the following. A negative impact of 50 basis points from increased salaries and wages associated with the acquisitions in U.S. Automotive and Europe, particularly from our recent MPEC acquisition. Salaries and wages costs continue to be negatively impacted by mandatory increases in minimum wages in our international businesses. Further, Inflationary cost pressure and renewals of leased facilities and acquisitions drove a negative impact of approximately 30 basis points in rent expense. We experienced a negative impact of approximately 10 basis points from our ongoing investments in technology to modernize our business. Interest expense continues to be a headwind in 2024, driving a negative impact of approximately 10 basis points in our expenses. These items are partially offset by cost savings resulting from our global restructuring program of approximately 10 basis points. We expect the incremental SG&A from acquired businesses to abate over time as we execute on our integration plans and capture synergies. As a reminder, we are just 60 days post-close of our MPEG transaction with an integration that is expected to last approximately 24 months. For the quarter, segment profit margin was 9.9%, down 50 basis points year over year. The decrease in segment profit and segment margin was primarily driven by the softer sales growth environment and associated deleverage on costs. Our second quarter adjusted net income, which excludes non-recurring expenses of $46 million after tax, or $0.33 per diluted share, was $342 million, or $2.44 per diluted share, in line with the same period of the prior year. Of the $62 million of non-recurring expense in the second quarter, approximately $37 million was related to our global restructuring program, and the remaining $25 million was related to the NPEC transaction. Our NPEC transaction costs primarily include impairments of leases and leasehold improvements for facilities we will not use as we integrate the business and capture synergies moving forward. Turning to our cash flows, for the first six months of 2024, we generated $612 million in cash from operations, up 34% year-over-year, and $353 million in free cash flow, which was up 40% from the prior year. Our strong cash flow in the first half of 2024 reflects a long-standing hallmark of GPC, which is delivering robust cash flows through low growth cycles. We closed the second quarter with $2 billion in available liquidity, and our debt to adjusted EBITDA ratio was 1.8 times, which compares to our targeted range of 2 to 2.5 times. In 2024, We have invested approximately $260 million back into the business in the form of capital expenditures, including $143 million in the second quarter. In addition, we have invested $580 million year-to-date in the form of strategic acquisitions, including the acquisition of our largest independent owner, MPEC. With this acquisition, we converted 181 independently owned stores in the Midwest to company-owned, bringing our total company-owned store count to nearly 30% of our U.S. stores. We expect the acquisition to be accretive both before and after we realize synergies as we capture more commercial opportunities, gross margin, and optimize the SG&A of the acquired business. Our global restructuring initiative to better align our cost structure and assets with the current environment remains on track. Year-to-date, we've incurred approximately $120 million of costs related to our restructuring efforts in line with our range of $100 to $200 million. During the second quarter, we realized approximately $10 million of benefit from our restructuring and expect to deliver a benefit of between $20 to $40 million in 2024 and $45 to $90 million on an annualized basis in line with our expectations. Our restructuring efforts are a key element of our work to offset the headwinds of current market conditions and cost inflation across the business. Turning to our outlook, we've updated our views on the remainder of 2024 based on our perspective on current market conditions across the business, most notably for our industrial, European, and U.S. automotive businesses. We now expect the diluted earnings per share, which includes the expenses related to our restructuring efforts, will be in the range of $8.55 to $8.75 compared to our previous outlook of $9.05 to $9.20. We now expect adjusted diluted earnings per share to be in the range of $9.30 to $9.50, up slightly to 2023 at the midpoint of the range. This compares to our previous outlook range of $9.80 to $9.95. Our wider range is reflective of the current macro environment, which has elevated the degree of uncertainty from earlier in 2024, particularly on the trends on the industrial side of the business. Our earnings presentation includes an illustration of the key business drivers impacting our revised outlook for 2024. Let me take a moment and walk through the details of these components starting with sales. We now expect total sales growth in the range of 1% to 3%, down from our previous outlook of 3% to 5%. Included in our outlook is the assumption that the benefit from inflation remains at more normalized levels, contributing less than 1% for both business segments. By business segment, we are now guiding to the following. 1% to 3% total sales growth for the automotive segment with comparable sales growth in the flat to 2% range. And for the industrial segment, we expect total sales growth of flat to 2% with comparable sales growth in the flat to 2% range. Our reduced sales outlook for the year is driven by our updated expectations around market conditions in the second half, which we now see as softer than our previous views and are informed by third-party data as well as the trends we experienced in the second quarter. In addition, we've seen a soft start to July, with disruptions from Hurricane Beryl, a more pronounced industrial shutdown around the July 4th holiday, and impacts from the CrowdStrike outage that began late last week. Within industrial, the lagging industrial production activity remains a headwind for the business. The industrial economy continues to operate in the longest period of contraction, as defined by PMI levels below 50, since the Great Financial Crisis. Our original outlook for 2024 assumed we would see an uplift in manufacturing activity entering the second half of 24 in connection with easing interest rates. We now believe the improvement in the industrial backdrop is going to come much later in 2024 with very little benefit to our revenues for the year as the timing of interest rate cuts, if any, remains unclear. In our European and US automotive business, market conditions continue to moderate as consumers are impacted by a wide range of factors, including inflation, interest rates, and geopolitical election uncertainty. For gross margin, we now expect 40 to 60 basis points of full-year gross margin expansion, primarily driven by our continuous focus on our strategic sourcing and pricing initiatives, as well as benefits from our acquisitions in U.S. automotive not previously included in our outlook. Our outlook assumes that SG&A will deleverage between 50 and 60 basis points, compared to our previous range of 20 to 30 basis points of deleverage. Our revised SG&A outlook takes into consideration our reduced sales outlook, which drives further deleverage, as well as the impact of incremental SG&A from acquisitions in the U.S. automotive business. Our views include the expected benefits from our global restructuring activities. For global automotive segment margin, we now expect to be approximately flat with last year. For 2024, we expect global industrial segment margin to expand by approximately 10 to 20 basis points year over year. And finally, we are targeting corporate expense to be approximately 1.5 to 2% of sales. Turning to a few other items of interest. We are confident in the strength of our cash flows in 2024, and continue to expect cash from operations to be in a range of $1.3 billion to $1.5 billion, with free cash flow of $800 million to $1 billion. For CapEx, we continue to expect approximately $500 million, or 2% of revenue. As we look at 2024, the growth capital we are deploying, which is approximately 55% of our forecast, will drive modernization of our supply chain, including new DCs, partner with technology that enhances our customer experience. As we look at M&A, our global pipeline remains robust, and we will continue to remain disciplined pursuing opportunities that create value, including continuing to pursue our strategy around the mix of company-owned stores at our U.S. automotive business. In closing, we continue to operate in challenging market conditions and are taking actions, including advancing our global restructuring activities to ensure the long-term profitability of the business. We believe the backdrop of lower sales growth is market-driven and not specific to our business, and we are well-positioned once the cycle turns more favorable. We remain confident in the underlying fundamentals of our businesses and will continue to invest with a long-term focus.

Thank you, and we will now turn it back to the operator for your questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift your handset before pressing any keys. May we also request for our analysts to keep yourselves from one question and one follow-up. One moment, please, for your first question. Our first question comes from the line of Brett Jordan from Jefferies. Go ahead, please.

Hey, good morning, guys.

Morning, Brett.

Will, your comment about independents expecting more normalized buying behavior in the balance of the year, could you give us, I guess, more color? I think they destocked late in 23 and then bought in pretty well in the beginning of 24. I guess, how do you see the cadence working out?

Yeah, look, we've seen continuous sequential improvement on that topic. As I mentioned in my prepared remarks, all the initiatives that we're working on here in U.S. Automotive are affecting both company-owned and independent-owned stores. And so when we think about inventory strategies, service excellence, those initiatives are all relevant for what we're doing with the independent owners. And we've seen nice sequential improvement through the year. We would expect that to continue through the balance of the year. You know, the math of how that works, I won't get into the specifics, but the tone is good. The relationships are good. The partnership's good. We had a bunch of independent owners into Atlanta just last week, and everyone's got their hand in the huddle and committed to continuing to grow the business and compete in the local markets.

Okay, great. And then on Europe, is there anything notable, I guess, regionally? I mean, France has had some political backdrop, but, I mean, you're talking about sort of softening in that market, but is there anything to attribute it to sort of from a geographic standpoint, or is it just widespread?

It's more widespread than it was probably 90 to 100 days ago. You know, just to be clear, we're really pleased with the European performance. I mean, the business continues to grow and grow profitably. The M&A pipeline is having its effect with very accretive acquisitions. In particular, our Spanish and Portuguese businesses, after their acquisition last year, continue to perform really well. They're a standout. Napa brand is a differentiator as part of that to help us compete in the market. But we've seen some softness earlier in the year in the UK and France. I would say it's moderated growth through the balance of the business. Call it Germany, Benelux, et cetera. But the business is still performing in excess of market, and we think we're winning share. So tougher times, but proud of what the team's executing over there.

Great. Thank you.

Thank you. Our next question comes from the line of Scott Siccarelli from Truist. Go ahead, please.

Good morning, guys. Hi. You guys referenced a few times about your pricing initiatives as providing a boost to gross margins for your auto business. I'm assuming that is code for raising prices. So with that context, at what point do you start to run into competitive pricing issues? especially in an environment where the WDs become more price competitive and one of your public competitors is actively reducing prices?

Yeah, Scott, thanks for the question. You know, I think our pricing strategies are more holistic than just raising prices. And so as we've talked about before, we talk about it through the prism of category management, which is the intersection between not just pricing but also sourcing. And at the SKU level, in some SKUs you're going up, In many others, you're going down as well. And the challenge that we put to the category managers across the business is net-net position us in a better margin profile as we move forward, both on the sourcing and pricing side. So we're being very thoughtful about being competitive in the market on certain categories, and we're balancing that with a lot of very scientific and thoughtful technology work that we've done around data analytics to make sure that we've got visibility down at the local field level to compete and win.

And Scott, this is Bert. I just amplified that a little bit with in the quarter, the gross margin improvement was skewed to the majority aside from acquisitions. So we're seeing a nice benefit from the new acquisitions in U.S. automotive. And just to parse out how we think about this split between sourcing and pricing, where you would have seen a bigger benefit in 2023 from pricing. We're actually drawing most of our benefit this year on the back of the work that Will just described in category management and sourcing. So again, pricing is a complex topic. It's a lot of moving things up and down to be competitive, so I wouldn't just categorize it as we're moving prices up. It's a lot of moving pieces here, but we're also getting this nice benefit from acquisitions as well.

Okay, thanks. And then kind of related to that, when you guys go, you've been on pretty active sequence, trying to acquire some of your independence. When you guys own a store, rather than selling product to an independent on a wholesale relationship, can you give us some generalized color just regarding the sales and the profit dollar contributions once you own that business?

Yeah. So that's one of the benefits of this pivot and strategy. So we see the mix shifting to more company-owned, continue to lean in on the independent owner model as we have in the past. So we'll have this hybrid model going forward, but as we look at isolation of adding more company-owned stores, the benefits come across a few prisms. First, commercially, we'll stop sharing the margin, so we see a difference there in terms of recapturing some of the margin that we were sharing previously, and you're seeing some of that come through in what we've seen in the second quarter here. Secondarily, when you just start at the very top of the house and you think about the commercial transaction itself, we'll have more control over the transaction from the outset. So that means the price in the market will have the ability to adjust and flex the depth and breadth of inventory in the market to be competitive. Some of those things were tension points between the independent owner and us before. And then as you move through the rest of the P&L, we obviously would get benefits from SG&A were able to simplify and streamline the back office. In many cases, the independent owner had their own back office, which we can leverage our own. We'll be able to capture some of the benefits from technology and continuing to drive technology into the stores and create some incremental leverage on some of the supply chain elements as well. Many of these independent owners had their own small stocking and many kind of offsite locations that we obviously wouldn't need. So as you move through the different elements of the P&L, I think we have a lot of goodness there. We bought a great business here in the second quarter with the MPEG business, and we're already seeing benefits of that coming through our P&L. So we're excited about this pivot. The team is doing an outstanding job in terms of integration and execution and bringing these folks on board.

Thanks, guys. Thanks, guys. Thank you.

Our next question comes from the line of Kate McShane from Goldman Sachs. Go ahead, please.

Hi, good morning. Thanks for taking our questions. We wondered just within DIFM if you're seeing any notable strengths or weaknesses by customer segment and also within automotive if you could talk to product categories that were the strongest and if there was any meaningful change when the warmer weather came in in late June, early July.

Yeah, Kate, thanks for your question. On the customer segment side for commercial, we actually have seen relative strength, as we said in our prepared remarks, in the auto care fleet and other wholesale for us. You know, our headwind continues to be our major account business. And if you look at and decomp major account, there's different pieces inside of that book of business. ranging from regional accounts to the big national guys, to OE dealerships, et cetera. And so there are some customer-specific challenges in that book of business, but I'll tell you there's just as many recent wins, certainly on the regional accounts that we were talking about the other day as a team that we're really excited about that should position as well as we come through the second half of this year and into next year. So we're being really thoughtful in that major account book of business. to make sure that it's a win-win economic relationship for NAPA and the customer. And so we're going to be pretty disciplined as we think about that going forward. From a category standpoint, we have seen some positive trends based on recent weather in all the categories that you would expect. And as I said in my prepared remarks, the inventory progress that we've made through the first half of the year has been quite fruitful, and so those targeted categories, we've seen nice momentum as we go through. So the category managers are really doing a very nice job, and our sales folks out in the field on the commercial side are also being very thoughtful as well.

We're proud of the teams.

Thank you.

Thanks, Kate.

Thank you. We have our next question coming from the line of Chris Horvath from J.B. Morgan. Go ahead, please.

Hi, good morning. It's Christian Carlino on for Chris. So the industrial guide assumes that comps or sales growth accelerates to low single digits in the back half. And understanding you have the extra day phenomenon, just can you speak to what else drives this acceleration? And is there any appetite to start up larger capital projects? Or is it at this point really just break-fix until after the election?

Yeah, Christian, it's Bert. I'll take that one. And maybe as we think about guide, it's just important to refresh on how we thought about the year, when the year started, and then where things have moved. When we started the year, we expected a moderated first half, stronger second half. And a lot of our second half view was based on better industrial production and that being stimulated by interest rates. That model wasn't overly precise, so we didn't have a specific rate cut time to industrial growth or timing of industrial growth, and I think it was more philosophical like many companies about easing interest rates would be supportive of industrial production. As Q2 developed, which included some softer market conditions across industrial, we really have updated our outlook on that side of the house based on that updated view. And we think that with some third-party data, the industrial production activity will continue to lag. It'll still be a headwind for the business as we move here into the third quarter and getting into the fourth quarter as well. We really expected at this point, based on our original view, to enter the second half of the year with some better kind of low single-digit, mid-single-digit growth in motion and in our industrial side of the house. And that's obviously not happening. So we've pushed that out a bit. We operate in this period of PMI that's been down for quite some time. And so now as we look, we think that comes much later in the year in terms of improvement. Again, a function of interest rate cuts, and we all can take our own predictions on those. So Q3, I think we would have parked in our old guidance at somewhere at mid-single digit, exiting the year at high single digit. I think we'll see the rest of this year play out in the low single digit range at best, as we indicated at the top end of our sales guidance. and look for improvement as we move through the back half of the year and into 2025.

Hey, Christian, I might just add a couple other thoughts. Obviously, the year-over-year compares ease in the second half of this year. And so as you do the two-year stack and kind of year-over-year compares, that's something that we've spent a lot of time thinking about. The other thing I would tell you just commercially, we've had a lot of discussion with the motion business and all the leaders about stepping up the sales intensity of the business. And as I suggested in my prepared remarks, the discussions we're having with our customers are very positive in the sense that they understand our value proposition. They're great strategic partners. They want to do more business with us. And as a result, you're seeing a lot of renewals of corporate accounts as well as some sales initiatives that is incremental to existing business. So, again, we're working on the right stuff in the motion business. It's a choppy market. But once we get that sales growth and the customers start spending, we're going to be in a great position.

And, Christian, just on the specific point about capital projects, I mean, The feedback from the customer is, look, you know, there's a lot of uncertainty out there, high interest rates, capital projects at this point aren't must-do activities. So we're really seeing some tempering there on that spend. And again, to Will's point, you know, we're having great wins and renewals with customers. And as this interest rate environment, I think, eases, we'll start to see things move.

Got it. That's really helpful. And just to follow up on Kate's question, I guess, what do you think drove the acceleration in U.S. NAPA over the quarter? Was it weather that abated as you got into May, or is it starting to lapse some of the early signs of deferral you saw last year? And just any comments on what you're seeing in terms of maintenance deferral? Is that getting worse?

Yeah, I mean, look, I think April, as we've talked about, was super tough. I don't think that was new news for anybody, and so it's all relative. We were kind of working off a low base, and we saw sequential improvement. The initiatives are making a difference. You know, the MPEC acquisition helped build some momentum through the quarter, and the weather did help. That all being said, it's hard to extrapolate the trend out of the second quarter. I think that's some of the challenge with how we're thinking about the guide. July was a little bit choppy, the start of it, based on what Bert articulated. So pleased with the sequential improvement through the second quarter, but trying to make sense of the world and the macro environment that we find ourselves as we come into the second half.

Got it. Thank you very much. Best of luck. Thanks, Christian.

Thank you. Our next question comes from the line of Greg Mellick from Evercore ISI. Go ahead, please.

Hi, thanks. I wanted to follow up on that last point, guys. The start in July is choppy, so it sounds like, was July as bad as April, or is it something between the exit rate of June and April?

Well, Greg, I reserve the right to vote on July since it's not over yet, but... Look, April was a tough month for sure. Will's already articulated that. And as I said in my prepared comments, I think, you know, July has started out with a lot of mixed views. So we've got some disruption from Hurricane Beryl that impacted both of our U.S. businesses on the automotive and motion side. We've had some additional industrial production shut down around the Fourth of July holiday. I think manufacturers are taking advantage. of any slowdown and a holiday to cut a little bit of their own costs and pull back on some costs there. And then obviously we had a crowd strike outage that began late last week, and that's impacted many, many businesses. We were down for a brief part of the day, and Naveen and the teams around the world did an outstanding job of bringing us back up very quickly. So while we've taken care of our own house, Part of the impact of that will continue to be how our customers and down the chain feel that impact across their businesses. So, look, I wouldn't compare April and July just yet. As I said, July is not over. But April certainly was a tough month. And I think the thing that is a challenge for us is just all these different pieces of noise create some lack of clarity into the true trend. Back to Christian's question a minute ago, how do you parse some of this out? And I think these are the things that we're looking at, but feel good about where we are and all the work we're doing.

Yeah, Greg, I would just come over the top on that and emphasize the point that we feel good about the work that we're doing. And the tone of our meetings is positive. Everyone appreciates that it's a tough market, but the specific initiatives at NAPA or Motion or any one of our businesses are is the right body of work. And at some point, hopefully soon, as the market recovers, we'll have a couple of nice tailwinds behind us.

Great. And my follow-up is maybe digging a little deeper on the consumer environment in the end market. Have you seen any sort of a trade down or deferral of projects? Are you seeing that where just consumers are like, you know, I'm out of money and I'm just going to weight on things. Can you see that in the data?

We don't see it empirically in the data, but qualitatively we have seen that. You know, the other challenge that we put to the merchants is making sure that the good, better, best assortment logic kind of plays in every market condition and for every customer. And so we've seen some shifting around good, better, best. That's probably the closest data that we can look at to see the psyche of the consumer. And then you also anecdotally, you do hear that the consumer is, if they needed to, maybe they only do one kind of phenomenon with most of our big kind of major accounts. Those discussions are pretty consistent across the landscape. So we're seeing it, but I think we're well positioned in the market environment with how we're positioning our brands.

Got it. And then I guess last on that, it sounds like, do you think you gained share in the quarter? you know, just X in both industrial and auto?

We feel good about what we're doing. You know, quarter to quarter, we're the first one out of the gate. Hard to kind of fixate on all things share. The feedback that we get qualitatively from the supplier community, honestly, has never been better. And I think that's just a reflection of another data point to support that the work that we're doing is all the right stuff. We just got to keep our head down and Keep sequentially improving.

Great. Thanks, and good luck, guys. Thanks, Gregory.

Thank you. We have our next question coming from the line of Michael Lasser from EBS Securities. Go ahead, please.

Good morning. This is Henry Caron from Michael Lasser. Thanks a lot for taking our questions this morning. I wanted to ask, so assuming third quarter demand looks similar to second quarter demand, Are you anticipating those pressure callouts of 50 basis points from increased salaries and wages, the least facilities at this point? Are these pretty much going to be pretty consistent in third quarter, would you say?

Hey, Henry, thanks for the question. I'll talk a little bit about how we see the rest of the year. You know, we've talked about some things already with Greg's question around the start to July. So we do have some things that we're managing through here in the months. I won't give quarterly guidance, but as we frame the rest of the year, you know, Will talked about easing top line comps. But when we look at the third quarter specifically, to your point, we will continue to see the leverage in the business for many of those factors and the combination of a lower sales outlook for the rest of the year. Given that, I would tell you that we expect Q3 earnings to be down year over year. mostly because we see a lot of this persisting, particularly coming out of the second quarter, and particularly with the softness on the industrial side of the house. With that, we would see Q4 being a little stronger on a relative basis. But as you know, there's plenty of things to think about in the fourth quarter with holidays and the weather. So I would just say, look, we've got an elevated degree of uncertainty in how we're forecasting from earlier in the year, particularly on the trends in industrial. But we're giving you all the information we have right now, everything we think. including all the other variables that are out there with interest rates and elections and all of that are reflected in our guide.

Great. Thank you. And for a follow-up, I just wanted to ask about with the increased M&A of company-owned stores, I think it's increased to roughly 30% of mix. Does, you know, when we think about M&A as a contribution to sales growth moving forward, Is that 1% target given at the investor day in 2023 still a good kind of benchmark to engage with?

I think so, Henry. I mean, I think that's a fair proxy. I mean, obviously, it will fluctuate in any given year, a little higher maybe in a year where we do something like KDG. But I think if you're using that for a modeling point, I think it's a fair enough benchmark. proxy, particularly when you look back over the history of GPC over many years. So let's just leave it there and you guys keep using that number as a reasonable proxy.

Great. Thank you so much.

Thank you. Our next question comes from the line of Seth Basham from Wedbush. Go ahead, please.

Thanks a lot and good morning. First, congratulating appointment CEO, Will, and best wishes to Paul. Thank you, Seth. My first question is just a follow-up to the last one. In terms of your goal related to acquiring independents, 30% of the mix of stores now, I don't know that you have a stated goal necessarily, but do you expect continued strong acquisitions for the next couple of years?

Yeah, look, Seth, I would tell you that we don't have a stated goal at this point. You know, we're just in the early innings of this pivot. We've made some nice progress here in the second quarter. You know, that move up to 30% came on the back of the acquisition of our largest independent owner. And we're going to continue to be opportunistic as we look at these. We obviously are trying to focus on target markets. I would tell you those lean a little bit more towards urban areas. The independent owner will continue to be an important part of our ecosystem. We have tremendously strong independent owners. They provide us strength in key markets, particularly in rural markets. They have deep relationships. We have great scale and good capabilities with all of them. And so we'll continue to have that hybrid. As we think about the march forward, I think we'll be more acquisitive as we move through the course of this year. But that will be based on the timing of these individual discussions. It's a willing buyer and a willing seller. And we've had some good luck here. Bought a great business with MPEC. But it's not a one-size-fits-all, and we'll continue to let that go and come to us as it does.

Hey, Seth, maybe just a couple other points. I mean, I think we said in the script it's not linear. So, you know, we started with the largest independent owner and transacted there. But obviously, we have a lot of smaller owners, and so building nice momentum, but it's Not linear, just to make a finer point, you know, we're 70-30-ish today. Three years ago, that was more like 20-80. So to help calibrate the last two to three years, we've made really nice progress, and we continue to do that. That being said, you know, the independent owner will always have a role in the NAPA operating model, and we value those relationships and look forward to working with those as we continue to align to win in the local markets.

Got it. And can you quantify the benefit to gross margin employer from the independence acquisition and what the benefit is anticipated?

Yeah, so that number was right around 30 basis points. So of the 50 basis points improvement in gross margin, all acquisitions contributed about 30 basis points. And similar impact for the full year expected? I didn't parse out the improvement for the rest of the year. We lifted the guidance for gross margin. primarily on the back of some of that goodness. So I'll let you guys kind of parse that out how you want, but we're not being quite that specific in terms of how we thought about it. We know there'll be more benefit coming out of gross margin because of acquisitions, but also because of the great work we're doing across the business.

Got it. And my follow-up question is on the major account segment, the US. You talked about discipline there, Will. Are you giving up business there where you don't see it economical, or is the pressure there more related to elevated levels of maintenance?

I wouldn't say we're giving up business. I would say we're having active discussions with customers to make sure that we've got a path to have it be a win-win. And as we think about incremental new business, we're bringing another level of perspective to that and defining what's helpful to the business. All of that, obviously, There's trade-offs to all things kind of pursuing new sales. And so each customer is a specific discussion and its own situation. And we're just, I think, focusing a little bit more intently on making sure that we're doing right by the business and our customers.

Got it. Thank you very much. Thanks, Seth.

Thank you. We have time for one more question. And our last question will be from Carolina Jolie from Gabelli. Go ahead, please.

Hi, thank you for answering my question. Well, congratulations, and that was a really, really great tribute to you all, so thanks for that as well. Thanks, Carolina. The first question is just around the modernization of the supply chain. You mentioned that also require and imply more inventory.

You know, Carolina, I think as we modernize DCs, it's actually probably one in which we optimize inventory, not have to stock and add more. I'll just give you an example of some of the big projects where when we look at an Australian DC, consolidation of other satellite facilities around it into one, same thing happening with two different projects in Europe. And so actually what we're seeing is it gives us a chance to be a little bit smarter and probably not have to be quite as broad in different locations and concentrated into one and maybe even get a little bit deeper in terms of what we're doing. They obviously have been designed and put in locations where they shorten stem times and lead times to get to the distribution network on the ground. That's helpful as well. So I don't think modernization of supply chain is a net negative for the inventory side of the balance sheet. I think it's actually a long-term net positive. particularly when you combine it with some of the other things we're doing with service. And then if you look at the motion side of the house, what they're doing with the fulfillment centers we've talked about in the past as well.

Thank you. And then just a quick question. Do you date on the regional disparity in

Yeah, we had relative strength, call it in the middle part of the country. For the quarter, the West Coast, East Coast was a little bit challenged relative to the balance of the country, but nothing material that I would suggest is a trend or a commercial challenge. Thank you.

Thanks, Carolina.

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.