Q2 2020 Genuine Parts Co Earnings Call
Greetings and welcome to genuine parts second quarter 2020, <unk> earnings Conference call.
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Question and answers that show will follow the formal presentation. If anyone's your acquire operator systems. During the conference. Please press Star zero on your telephone keypad. Please note. This conference is being recorded.
I'll now turn the conference over to your host said Jones Senior Vice President Investor Relations. Thank you you may begin good morning, and thank you for joining us today, the genuine parts company second quarter 2020 conference call.
With me today are pulled Bonnie view, our chairman and Chief Executive Officer, Carol Yancey, Our executive Vice President and Chief Financial Officer.
Today's conference call and webcast are accompanied by why presentation that can be found on the genuine parts company Investor Relations website.
Before we begin this morning. Please be advised that this call may include certain non-GAAP financial measures, which maybe refer to during todays discussion of our result as reported under generally accepted accounting principle.
Reconciliations of these measures is provided in the earnings press release issued this morning, which is also posted any investors section of our website.
Today's call May also have all forward looking statements regarding the company and its businesses.
Companies actual results could differ materially from any forward looking statements due to several important factors described in the Companys latest FCC filings, including today's press release.
The company assumes no obligation to update any forward looking statements made during this call.
Finally, please note that weve accounted for the business product segment.
Richard.
Continued operations for all periods presented.
Now I'll turn the call a couple for his remarks.
Thank you said and good morning, everyone. We appreciate you joining us today first second quarter 2020 earnings conference call.
We hope you are staying safe and enjoying good health.
So do we think about our quarterly performance and long term focus we want to highlight poor keep messages today.
One we are aggressively managing our company's operations during the challenges of Cobot 19.
My managing the short term dynamics, while staying focused on our long term growth initiatives.
This includes rigorous cost management as well as targeted investment.
Successfully positioned G.P.C. and the recovery period and beyond.
Two we delivered strong quarterly results submit the challenging backdrop as we executed on our transformation strategy and omni channel initiatives.
Three with the sale of our business product segment, and our streamlined portfolio.
We're now well positioned to maximize the full potential of our automotive and industrial segment.
Import.
We continue to strengthen our financial position by reducing our debt and generating stronger pre cash flow.
We significantly enhanced our liquidity this quarter and remain an excellent position to deploy capital towards high ROI to be initiatives.
The cobot 19 pandemic continues to impact the world and significant ways, both in our personal lives and from a business an economic perspective.
We remain focused on prioritizing the health and safety of our employees and their families our customers and our suppliers.
We also want to extend another heartfelt. Thank you to the health care providers and first responders on the front lines up our fight against this outbreak for their commitment to the care and protect set of our community.
We are proud of their tireless work by our associates across the global GPC family.
As essential businesses, our operations have generally remained fully operational to fulfill critical customer need.
Which required hard work under incredibly difficult circumstances.
So a big thank you to our 50000 plus team members her port providing exceptional customer service to our partners around the globe.
Working as a team we have executed with agility through the pandemic quickly and effectively adopting new safety protocols to ensure a safe work environment.
And as mentioned last quarter, we have stepped up our communications with our global team and our board to pre EM and prepare for developments as much as possible.
Overall, our intensified approach to managing our operations has enabled us to enhance our balance sheet flexibility achieved meaningful cost savings and advance operational excellence.
During the quarter. We also took steps to advance our E.S.G. initiative and we plan to highlight these many enhancements at our annual sustainability report.
To be issued later this year.
Environmental social and governance best practices are an important priority for GPC.
Amid the ongoing effect of cobot 19, the S element of the GE has been Paramount over the last several months given the social unrest in our country and the world.
At GPC, we have a longstanding corporate commitment to diversity and inclusion and we pledged to be part of an underlying solution to ensuring quality for all.
In addition to our progress and needs areas. We were pleased to announce the sale of our business products operations S.P. Richards on June Thirtyth.
The sale of SBR represents the culmination of a multiyear strategy to optimize our portfolio and simplify our company.
Over the last three years, we have reshaped GPC with several divestitures, including auto Toto.
Yes, and now SPR at its operations in North America.
All in these divested businesses represent approximately 3 billion an annual revenues.
We have essentially exchange for higher return investment in our automotive and industrial segments.
From here, we moved forward with plans to strengthen our focus on sustainable value enhancing growth and productivity initiatives associated with our faster growing higher margin core businesses.
In addition, we will continue to opportunistically expand our global footprint.
Our streamlined portfolio as many notable advantages including scale and volume.
The ability to leverage shared services and global branding.
As well as synergies associated with common business processes system suppliers and talent.
As a more simplified service oriented distribution company, we can better maximize the value and CPC.
And continued to deliver strong results and long term value.
Now moving onto our financial performance and business update.
We entered the second quarter operating in a sales environment pressured by government mandates to prevent the spread of Cove. It.
Broad shelter in place restrictions and coal Lockdowns in markets, such as Fran and New Zealand's significantly slowed mobility and overall economic activity.
As announced that are made six earnings call April sales were down 30% in automotive and 10% in industrial.
And while the industrial segment remained pressured throughout the quarter and was down 12% in June.
The automotive group had a strong recovery down only 2% in June led by returns the pre cobot sales volume in Europe and Australasia.
Total sales for the second quarter were $3.8 billion down 10.1%, excluding the impact of divestiture with operating margin of 8.6%.
40 basis points.
And adjusted net income at 191 million or $1.32 per share.
We also delivered improvements in working capital and strong cash flows, which Carol will cover later.
We're pleased to report a 40 basis point improvement and our segment operating profit.
This was the significant accomplishment given challenging business conditions.
And a reflection of the strong leadership.
A quick decision, making and disciplined execution demonstrated throughout GPC.
This approach resulted in continued gross margin expansion.
And significant actions to adjust our cost structure.
We are well ahead of our retail cost savings target for 2020.
As we move forward, we expect our teams to maintain that cost discipline and convert many of these temporary expense reduction.
Permanent and sustainable savings.
So now turning to review of our business segments. The global Automotive group had sales of 2.5 billion in the second quarter down, 10.1% from 29 team and representing 65%.
Total company revenues.
As mentioned earlier, we experienced a sharp decline in sales in April followed by a strong recovery in both May and June.
And our North American operations, U.S. automotive sales were down 12% with comp sales down 13.8%.
Despite the challenging topline we were pleased to deliver a 60 basis point improvement and net operating margin.
In Canada total sales were down approximately 13% with comp sales down, 15% and net operating margin up an impressive 400 basis points.
For perspective, both regions showed similar recovery trends throughout the quarter with sales improving from 25% to 30% declines in April to mid single digit declines in June.
For the quarter sales to our retail customers continue to outperform through the pandemic with positive sales growth in the USA and Canada.
The strength and retail reflects the benefit of stimulus funds and other macro trend.
As well as a positive impact of our Omnichannel strategy to create an excellent in store and online customer experience.
As example, we continue to refresh our Napa stores.
Trained our store associates and build on our loyalty program.
While also enhancing our digital tools to grow our DIY business.
Enhanced digital capabilities, such as buy online pickup in store curbside pickup ship to home and deliver from store are driving increased traffic to our website and record online sales in both the USA and Canada.
We expect to benefit from this positive trend in the future through continued expansion of our digital offerings.
Commercial sales remained under pressure as lower demand from our professional shop customers led to declines and hard parts categories, such as brakes chassis ride control and exhaust.
In particular sales to accounts, such as municipalities state governments, and fleet, which commonly distinguish our customer base from the competition, we're especially hard hit.
Overall, we believe the slowdown and commercial sales reflects the decline in miles driven related to covert 19.
However, we are optimistic that miles driven and other growth drivers will improve as consumers get back on the road for both work and personal travel.
Our North American automotive teams have also been busy executing on several transformative initiative.
To streamline their organizations.
These steps included changes in management structure further DC rationalization, a sales reorganization and a continued focus on new delivery strategies and digital tools.
These actions have already generated incremental cost savings and operational productivity as evidenced by our product improved operating margin in both the USA and Canada.
We expect these efforts to continue to add value today and over the long term.
So as we mentioned in our last call. We have worked closely with our independently owned Napa stores on Autocare customers.
To help them benefit from the financial aid available to small businesses.
The vast majority applied for and received PPP assistance.
In light of this support and current business trends, we remain confident in Alaska and financial stability of these key partners.
In Europe, our automotive sales were down approximately 3% in the second quarter, reflecting pressure from cobot, 19, and Lockdowns in France and parts of the UK.
While our operations in Germany, and the Benelux region held up fairly well through the peak of the pandemic.
Brands in the UK drove an approximate 40% total sales decrease for this group in April.
We had a sharp recovery from the loads of April with the reopening of France in May and the UK in June which produced a surge in demand associated with deferred maintenance and repairs.
As a result total sales in Europe were positive in both month with high single digit comp sales growth in June.
The improving business conditions across our operations in Europe are promising.
We look forward to building on the positive sales momentum and expanding our operating margin as we execute on initiatives to drive both top and bottom line in the periods ahead.
We believe our current footprint and the large and fragmented European marketplace.
As an important competitive advantage for us.
In addition, we see growth opportunities in Europe associated with the ongoing rollout of the powerful Napa brand.
This year, we have been expanding on the five product categories introduced in 2019.
The rollout of several new product categories.
Including Briggs filtration oil and steering and suspension.
We're also initiating the development of our Omnichannel capabilities in Europe, which will extend the digital platforms already offered in our North American and Australasian operations.
Turning to Australia, New Zealand, we're extremely proud of the exceptional performance from this team in the second quarter.
Total sales were up 4.4% driven by an approximate 2% core sales increase.
With these sales and continued cost savings. This team produced a 300 basis point improvement in net profit margin.
Our team achieved these results despite aggressive steps by the Australian and New Zealand government to prevent the spread of Coven 19.
Would you generally restricted mobility and related demand for auto parts. In fact, these operations have recovered to pre cobot sales volumes driven by strong double digit retail sales growth and solid commercial sales growth in both may and June.
In Australia, New Zealand retail online sales continued to grow at greater than 300% from the pre co bid levels and through our investment in spares box another digital capabilities.
We are prepared for additional online growth in the future.
The execution of key initiatives, such as the rollout of the Napa brand across our trade offering new Napa store openings, and Australia, New Zealand and optimize global sourcing have been important growth drivers for our commercial business.
So as I've said before we're very pleased with our performance in Australasia and expect to further build on this positive momentum.
Turning now to our global industrial parts group total sales were 1.3 billion down 10.2% include excluding the Eas divestiture.
Comp sales in North America were down 16.7% offset by the addition of and then Cowen Australasia as well as other acquisitions with contributed 7% to sales in the quarter.
Despite the challenging industrial climate. This group produced a flat operating margin relative to 2019 and is up slightly for the first six months in 2020.
Looking further at motion industries, a slowdown in sales beginning in mid March continued throughout the quarter.
With mid teen declines in each month.
While we operated in a difficult environment, we had anticipated a lag recovery in India and industries, such as equipment and machinery iron and steel pulp and paper and automotive that played out accordingly with declines in almost every product category and in every industry sector.
Scale, we saw positive trends in the second quarter.
First more of our customers are reopening their plants and returning to work, which we expect to drive improved demand for our core industrial categories, including power transmission hydraulics and convenience among others.
Second our our customers are beginning to relief Capex orders that were on hold for the past several months.
Third leading industrial indicators, such as the purchasing managers index and industrial production.
Wanted to improved industrial activity in June, which we expect to benefit our business in the months ahead.
Additionally, the motion team has been executing on several strategic and transformative initiatives, including the restructuring of their sales organization to optimize their customer coverage and provide for effective remote selling.
This team also enhances our omnichannel capabilities in the quarter with the rollout of a new motion industries website with it which is expected to drive incremental sales with both existing and new customers.
And as in our other businesses. There has been significant focused on aligning motion cost structure to drive meaningful savings and more productive operations.
In Australasia are an encode team is performing well with positive total sales growth in June driven by strong sales in the mining sector.
In addition, this team continues to focus on ongoing initiatives to reduce their cost structure.
The effective in August and then coal will further integrate with our mode with our North American operations and assume the name EMI Asia Pac.
The team will utilize motions branding and new web site and proprietary technology platform to enhance their digital capabilities and drive incremental volume.
Our industrial parts group cells to thousands of customers, representing a diverse cross section of industry sectors.
We continue to expand our products and services in several key areas, including robotics and automation solutions and have plans to bolster our offerings with small bolt on acquisitions before the end of 2020.
So we moved forward confident about capitalizing on these additional growth opportunities for our industrial operations in the quarters ahead.
So thats, our business update and now we'd like to make a few comments on our strategic planning for the future.
We are exciting about the recent addict actions to reshape our portfolio and focused solely on our automotive and industrial business segments.
Both of these businesses have market, leading position and brands and large and fragmented end markets strong long term industry fundamentals and steady 2% to 3% industry growth with consolidation opportunities.
As we execute on our near term initiatives. We have also accelerated our strategic planning process to build on our momentum optimize our readiness for next year and improve our post coated recovery rate.
Our strategic growth framework is intended to build out our global branding strategy and further leverage the Napa and EMI brands.
After more wallet share with existing customers and acquire new customers.
Introduce new products and services.
Innovate and expand on our digital offerings expand our global geographic footprint.
Acquire strategic businesses that complement our existing operations.
And continuously enhance operational excellence and productivity.
We expect to use this framework to focus our teams on driving profitable growth and delivering higher levels of free cash flow and ROI see overtime.
So with that ill hand, it over to Carol could give you a deeper look at our financials for the quarter Carol.
Thank you Paul as mentioned previously many of our comments. This morning, we'll focus on adjusted results from continuing operations, which excludes the goodwill impairment charge and transaction restructuring and other costs and income.
GBC sales were 3.8 billion in the second quarter down, 14.2% from 2019 or a decline of 10.1% excluding divestitures.
We're pleased to report our 11th consecutive increase in quarterly gross margin, which improved to 33.8% on a reported basis.
Or an adjusted 34.1% compared to 33.3% last year up 80 basis points.
The improvement primarily reflects the favorable impact of divestitures as well as acquisitions of higher gross margin businesses.
These items as well as strategic category management initiatives, including pricing and global sourcing actions and favorable product mix shift were partially offset by a decrease in supplier incentives due to lower purchasing volumes.
Pricing environment remains stable in the second quarter from relatively high levels of inflation in 2019, which were primarily associated with tariffs and our automotive business.
So with supplier price increases of two tenths of 1% for automotive.
And one half of 1% for industrial thus far in 2020, the total impact of inflation on our second quarter sales was approximately 1% for both segments.
Based on the current pricing trends, we expect only minor price inflation through the balance of the year.
Our selling administrative and other expenses were 971 million and the second quarter on an adjusted basis or down 13.8% from last year. This represents 25.4% of sales, which is up slightly from 25.3% last year.
The decrease in operating expenses was due primarily to the positive impact of our cost actions implemented thus far in 2020.
As mentioned on our last call. Our teams continue to execute on initiatives related to our 100 million dollar cost savings plan that was announced in 2019.
We're pleased to report that were well ahead of schedule with this plan, having achieved another 40 million in cost savings and the second quarter for a total of $70 million an expense reductions through the six month.
In addition, our teams have been executing on a number of additional initiatives to adjust our cost structure for the changes in business conditions related to cover that 19.
These initiatives contributed more than 150 million, an incremental savings and the second quarter.
So in total we generated approximately 200 million on cost savings during the second quarter, driven by reduced head count and facility rationalization as well as the deferral of merit pay increases management pay redactions furloughs and reduced travel related to the pandemic.
These savings include approximately 40 million and government subsidies received by our international operations.
Looking ahead to the third and fourth quarters, we're on track to so further progress towards our 100 million dollar savings plan and we expect to exceed this target for the full year.
However, we also look for the accelerated cost savings related to cover 19, so pullback as business conditions improve sales volumes increased and government subsidies are reduced.
That said, while the sales environment remains uncertain our focus in the second half of 2020 will be to grow our business, while continuing to aggressively managed expenses and optimize our cost structure.
During the quarter, we reported several adjustments to account for a goodwill impairment charge in our European business.
Restructuring transaction uncovered 19 related costs and again from an insurance proceeds related to a facility fire.
These adjustments were 556 million in total were $13 million accounted for in cost of goods sold and 543 million accounted for as operating and non operating expenses.
In particular, the noncash goodwill impairment charge of $507 million resulted from the ongoing market volatility and the uncertainty in Europe caused by the covet 19 pandemic.
We remain confident and our growth strategy and a long term industry fundamentals in Europe.
With these adjustments in mind total operating a non operating expenses were an adjusted 1.5 billion for the second quarter, reflecting a decrease of 12.3% from last year, comprising 27.5% of sales.
Our total segment profit in the second quarter was 328 million down 10% on a 14% sales decrease.
Excluding divestitures, our title segment profit declined 6% on a 10% sales decreased.
And our segment profit margin was 8.6% compared to 8.2% last year for an increase of 40 basis points.
Our tax rate for the second quarter was 24.1% on an adjusted basis and down slightly from the 24.8% in the prior period.
Our net income from continuing operations in the second quarter reflected a loss of 364 million with earnings per share a loss of $2.52.
Adjusted net income was 191 million or $1.32 per share, which compares to 215 million.
47 per share in 2019, or a 10% decline.
So now let's discuss discuss our second quarter results by segment.
Our automotive revenue for the second quarter with 2.5 billion down 10% from the prior year.
Segment profit of 219 million was down 4.3% with profit margin at 8.8% compared to 8.2% margin in the second quarter 2019.
The improvement in margin primarily reflects solid operating results in our us Canadian and Australasian businesses.
As Paul discussed earlier, this was driven by significant cost reductions and the benefit of government subsidies in our international businesses.
Our industrial sales were 1.3 billion in the quarter at 21% decrease from Q2 2019.
Excluding the Eas divestiture industrial sales were down approximately 10%.
Segment profit of 109 million was down 20% from a year ago or down 10%, excluding eas and their profit margin was flat at 8.2%.
So despite the challenging sales environment throughout the quarter, our industrial teams have done an outstanding job of aligning their cost structure with the demand environment and they continue to operate well.
To complete our view of the segments were pleased that our July sales results reflect improving business conditions and positive momentum across the automotive and industrial businesses relative to the second quarter.
For the month in July we expect our total sales to be flat with the prior year, representing an approximate 6% sales increase for the slightest segment and a 12% sales decrease in the industrial segment.
So while these sales trends are encouraging we continue to operate in an environment of significant significant uncertainty and cannot reasonably forecasts the full impact of covet 19 in the coming months.
As a result, we believe it is prudent to not reestablished our formal financial guidance at this time.
So now, let's turn our comments to the balance sheet. Our accounts receivable of 1.8 billion was down 29.7% from the prior year due in part to the sales decrease for the quarter.
In addition, during the second quarter the company entered into an agreement to sell receivables to financial institution, resulting in a 500 million dollar decline in accounts receivable from last year and serving to further strengthen our cash position. We remain pleased with the quality of our receivables and are confident in our collection trends.
Which we continue to closely monitor in light of the current business conditions.
Our inventory at June Thirtyth, with 3.4 billion down slightly from June of last year due to effective inventory management and reduce purchasing volume offset by the impact of acquisitions.
Accounts payable at 3.7 billion is down 3.5% from last year due to the change in inventory and lower purchasing volumes for the quarter.
At June Thirtyth, our APC to inventory ratio was 112%, which has improved from 110% at March 31st.
Our total data 3.2 billion is down 17% from 3.9 billion in 2019 and has improved 11% from 3.6 billion last quarter.
The cash from the sale of accounts receivable as well as the proceeds from the sale of S.P. Richards, we're used to pay down debt and strengthen our cash position.
At June Thirtyth, we remain in compliance with our debt covenants with total debt to trailing 12 months EBITDA as defined in our credit agreement at 3.2 times compared to 3.4 times at March 31st.
In addition, during the second quarter, we entered into new International credit agreements, which were made available to us increasing our total available credit capacity to 4.8 billion from 4.4 billion at March 31st.
As a result of these actions we entered July with approximately 2.6 billion and available liquidity, which has significantly improved from our $1.1 billion liquidity position at March 30 Onest.
Thus far in 2020, we have generated 921 million and cash from operations, which is up significantly from 2019, our free cash flow is also strong.
While we modified our near term capital deployment strategy in early April to preserve cash during the cold 19 crisis, we remain committed to several key priorities for cash, which we believe serves to maximize shareholder value.
These priorities are evident in the 4.3 billion and capital deployed across four key areas over the last three years.
They include the reinvestment in our businesses through capital expenditures.
M&A growth net of divestitures share repurchases and the dividend.
For 2020, we reduced our initial 300 million and planned capital expenditures to approximately 150 to 200 million.
And we have suspended plans for further share repurchases and acquisitions other than small bolt ons.
We are prepared to adjust these plans as business conditions improve and as we gain confidence and sustained recovery.
Likewise, we will continue to support the dividend, which we have increase for 64 consecutive years.
So thats, our financial update for the second quarter on why that quarter presented many challenges our teams did an amazing work, especially on the cost structure and balance sheet side, we thank them for that and we entered the second half of 2020, well positioned for the future Paul I'll turn it back over to you. Thank you Carol we made significant.
Cross progress in several important areas during the quarter, our people portfolio positioning and operational excellence initiatives are driving results an increased competence at GPC today.
To recap the key messages outlined at the beginning of our call.
Our teams operated well through the challenges of Cobot 19, and we continued to prioritize the safety and well be in of our GPC associates and customers, while executing on our growth initiatives with speed and agility.
Our second quarter financial performance benefited from improving sales trends in automotive.
Continued gross margin expansion and transformative cost actions.
All of these efforts coupled with our strong balance sheet puts us an excellent position to continue to deliver operating margin expansion and strong free cash flow.
Finally, with the steps taken to simplify and optimize our portfolio. We move forward as a more streamlined organization focused on our automotive and industrial operations and with a well defined strategic growth framework.
Intended to maximize growth and value creation for all stakeholders.
So despite the economic uncertainty future impact of cobot, 19 and pace of recovery.
PC is well positioned and prepare for the various scenarios that may evolve over the near term.
We look forward to executing our strategic plans into 2021 and updating you on our progress.
Thank you for your interest in GPC and with that we'll turn it back to the operator for your question.
Thank you if you would like to ask a question. Please press star one is on your telephone keypad a confirmation total indicate your line is in the queue. You May press star too. If you would like to carry move your question from the Q and for participants using Steve for equipment and they've been necessary to pick up your headset before pressing the star.
Our teams. Our first question is from Bret Jordan with Jefferies. Please proceed.
Good morning, This is mark Jordan non for Brett.
It looks like the U.S. automotive business has improved from from the lows, but it looks like maybe remains pressured.
And I may have missed in the prepared remarks, but did you provide the July sales trends for the us.
Mark This fall we.
We did talk about that but but I'll go ahead and touched on it again, our sales right now.
We haven't finalized July but our sales right now in U.S. automotive are positive in the month of July.
Okay and can you talk about maybe the gap between DIY and DIFM.
And maybe when we can expect to see some more improvements in the DIFM segment. I know you mentioned it seems like some of the public sector customers are pressured.
Yes so.
As we look at the quarter marked our DIY business was down.
In April low single digit and then turn to a positive trend in both May and June actually we're up low double digits in both months and we're seeing that even strengthened further in July.
DIFM was down I think too close to 25% in the month of April and was down mid to high double digits in both May and June we are seeing a little bit of a bounce back as we go into July but it's still.
Trending down a bit and so as we look at a mark as miles driven because.
I will begin to bounce back and and they will.
DIFM is going to is going to bounce back when we still.
Firmly believe.
That our market leading position in the commercial segment.
As a place to be in at best positions Napa for long term sustained growth.
Okay, Great and then can you talk about maybe some regional trends in the U.S. during the quarter what regions were strongest in whatever weakest, yes sure. So as we've seen in the past couple of quarters.
The strongest regions in.
In the quarter were of the mountain region, So, Colorado, Montana, Wyoming, probably the area that was at that time least impacted bye bye.
By coal that the Midwest was strong again.
Relatively strong compared to our.
The rest of the results and then the the areas that were hardest hit I don't think Mark will be a surprise to you the.
Northeastern part of the country, and then really down the eastern seaboard.
I would point out that as we look across.
The rest of our business.
We saw we saw good growth really good growth in Australia.
Despite the fact that New Zealand was in a full locked down for the better part of eight weeks.
And we saw a real resurgence in Europe.
Again, despite the fact that both brands and the UK were in full locked down for a portion of the quarter.
Okay, great. Thank you very much for taking my questions you're welcome.
Our next question is from Michael mortality with Evercore. Please proceed.
Hey, good morning, and thanks for taking the question.
Just just wanted to ask if I could on the commercial side.
Paul If you can just remind us the breakdown of the business there between kind of Napa Autocare now versus the municipal state business and then the core garage is just for a sense of the mix there.
Then for some incremental color about how you saw those three parts of the commercial segment evolving across the course of the quarter an into July.
I had a follow up.
Yes so.
The us Napa Autocare program.
Which we have now approximately 17 to 18000 members in our auto care program is a is a key component.
Of our of our commercial business as are the major account segment and then you get into fleet government.
And the like.
As you can imagine and as I think I mentioned in my prepared remarks. The most challenged was our municipality fleet and government business.
Auto care was was better than than than the fleet business.
And auto care of our total view S. automotive business.
Is close to 20%.
Give or take.
That business was was pressured I would say Mike what what we are pleased with is that we've worked with.
Our autocare centers as we did with many of our independent Napa Jobbers to secure PPP funding, we worked very closely with them. So.
Those those businesses are financially sound Dan.
As miles driven begins to bounce back again, we have no doubt.
That business will bounce back as well.
Great that was the follow up I had was just around the job or performance during the quarter. So I'm wondering if you can just update us on how many jobbers.
Are you all have now versus a year ago, and then how is their trends kind of compared to some of the us trends that you called out.
So hopefully already yes, very consistent in terms of performance, Mike and with our Napa Jobbers Uncertainly, there's outliers.
As we as we look around the country.
What the trends that we're seeing then our with our Napa Jobber base is that certainly the those Napa jobbers, who are larger better funded.
Strong entrepreneur, they're getting bigger and they're acquiring more and more stores.
And they're performing just fine in total we have approximately 3000 independent owners that that own our 5000 independent stores sort of bigger the bigger owners again as I mentioned, we worked closely with to ensure they secured PPP funding.
And the majority all did and are in financial financially, they're in good shape and again as we emerge from the pandemic cars get back on the road our job is going to be just fine.
Okay.
Last one I have is just around the pricing environment in the market you know and there was some good commentary already there from Carol, but just wanted to understand.
How rational is the space both in the US and then also in Europe, where you're rolling out the private label offer.
Yes, well I'll I'll.
Ill give you my viewpoint, then maybe Carol wants to weigh in as well.
Historically.
Mike the.
Certainly here in the US North America.
The pricing.
Atmosphere has been has been very same we generally don't see a big spike because you put breaks on sale in a in a given month. So so we've seen as we have through the years a very.
Normalized pricing.
Atmosphere here in North America, and it's really no different in Europe.
There is there's a few big competitors, one who also reported this morning, and so again the pricing atmosphere. There is is solid as well did you have anything currently it might just as a reminder, or the inflation that we have had really.
Related to the tariff back a year 18 months ago, So weve anniversary those Tara and as we go into second half, we really down first see at this point and again, there's a lot of uncertainty in the second half we don't foresee much in the way of price increases and inflation, having said that and you guys are 11.
Consecutive quarter of gross margin increases were really driving that through a lot of our strategic category management and whether Thats global tenders are global sourcing our pricing initiatives, that's really how we're hanging onto the gross margin improvement that we have.
Okay helpful. Thank you and good luck.
Yes.
Our next question is from Christopher.
Leveraged with JP Morgan. Please proceed.
Good morning, its Christian on for Chris.
You mentioned the municipalities sales municipalities are the big differentiator versus your competitors Im just trying to think with given O'reilly is positive DIFM commentary yesterday, what would you say is the rest of the delta to your competitors would it be more more on the geography mix front given you have some more stores in northeastern just hit, particularly hard or is more market share issue.
Well, it's well we don't believe it's a market share issue all I'll, just make that comment right upfront Christian we.
They had they had strong results, which congrats to.
So the guys in green what the way we look at that is it just further indication of the opportunities that we've got for growth in the aftermarket despite.
Despite the pandemic that we're all operating and it bodes well for us over time.
You know as we as we see what's occurred in in this in this quarter certainly the.
The surge in DIY why.
Theres a lot of stimulus dollars out there's a lot of folks with a lot of time on their hand, we still believe as I mentioned earlier the place to be in this in the automotive aftermarket is in the commercial segment and we think that.
We will hold up well for us in the long run as we look at our competition.
And it certainly in the in the Big four and out I'll, just remind you Christian the big four represent about.
About 35% of the of the industry, maybe 35 to 40.
Our model is different where 80%.
Hi, FM and just 20% on the DIY side. So we're a different model then than what our competitors are and I would point out that in the month to July we are seeing our DIFM business began to recover and come back and we do firmly believe that as miles driven.
Come back there will continue.
To see improvement in our DIFM business.
Make sense, that's very helpful. And then on could you also.
You mentioned it in the call, but could you size out the 150 million in incremental savings from initiatives the reduced head counts management pay reductions for alone the rest of that group.
Yes, so the $100 million of cost savings that we introduced last year Q4, and we mentioned that we were on track for that we achieved 40 million in Q2, giving a 70 million year to date will actually be ahead of plan on that and those are permanent cost savings probably 75%.
80% payroll related related to RV RP in some other facility consolidations and we're looking at other areas as well the incremental in Q2 cost savings that we talked about really.
Related to mitigating the impact of Kevin 19, we put those in place.
We were pleased to see the results in the quarter. Many of those are temporary about 60% to 65% as payroll related we had government subsidies and there's some freight horse.
And entertainment rent.
We're working hard to to see what we can make permanent but as we said before many of those are temporary so.
Playing merit increases some of the voluntary and involuntary furloughs things like that but knowing we're also looking at further structural changes. So we hope to have seminars permanent but we do expect those to pull back on the second half, but no. We're going to be ahead of plan on 100 million cost savings that is permanent.
Okay. Thank you for that and that's what that's left this quarter.
Thank you. Thank you.
Our next question is from Danielle of ROE with Stephens Inc. Please proceed.
Yes, Hey, good morning, guys. Thanks for taking my question.
Paul lots of data at horse was one of your thinking whether DIFM recovery for the industry and for you guys. You mentioned miles driven melting bag being the biggest driver theres a lot of uncertainty here, but curious given your experience are you assuming that we get back 100% of miles driven or is there going to be some kind of linger.
The impact from work from home was commuting anything like that like what do you think how to your outlook or you're like you guys outlook would be for what quote unquote normal looks like and just 21.
Yes.
Yes, Danielle so what what the new normal looks like is anybody's guess at this point, but look we as we look across the automotive aftermarket.
And I look at the fundamentals that we have with the average age of the vehicle now moving up to 11.9 years gasoline prices are down 20% year over year.
What we see with.
Folks that are going to be the I think very reluctant as weve as the jump back on airplanes and travel either on business or vacation, we believe that more and more folks will be utilizing their vehicles.
So look I eventually we do believe that we'll get back to.
Those miles driven numbers that we have seen an enjoyed in recent years.
But it will most likely take a bit of time.
But in the meantime, we're enjoying a nice.
A very nice bump in our retail business like our competitors are and.
And we're very pleased with the the increases were seeing outside of the U.S., So that I mentioned.
Our business in Australia, New Zealand had a just a spectacular quarter and we've seen a real nice bounce back in Europe as well.
As they as they reopen their market. So all in all the fundamentals are solid and.
And we're continue to be incredibly bullish about the automotive aftermarket.
Got it that's helpful.
Mostly next question was going to be on Europe. Thanks results, a lot better than fear there and you mentioned snap back into June you said high single digit organic growth can you parse out what you think driving that level growth is it just.
How shutdown, France was there is a catch up spend or are you gaining incremental market share and those market.
What's driving that higher level of growth because that's still a pretty heavy DIFM market. So I was surprised by that level about yeah. It's incredibly heavy on the DIFM side, Dan you you're spot on.
95% basically DIFM certainly a good bit of the bounce back is pent up demand.
But what we are encouraged is that the surge that we saw in June as carried over into the month of July and as I look at our strategy. When we entered Europe, two plus years ago, where our strategy was launching private label.
We're in the in the throws of lent launching nap as I mentioned across all of our markets, we've expanded our footprint into the Netherlands, which is.
Great market for us we've expanded our footprint in Germany as well, we've strengthened our management team we've captured.
Improved payment terms as we've leveraged our relationships with our big global suppliers, we're right on track to deliver on the cost savings that we committed to.
Three years ago, and finally, what what's exciting as well Daniel is that we're in a very early days.
Developing our online slash omni channel strategy for Europe, and again, we think that will bode well for us as we go forward. So so we continue to be very optimistic about our physician and that really fragmented market.
Got it was helpful. None last one from me moving to industrial side I think Paul you mentioned June trend, leading indicators got better Carol during your remarks, I think you said, we're still down 12% in July. So can you help me reconcile those two things that feels like you're more optimistic on the outlook, but near term things are still pretty pressure.
So when do you expect to see those indicators come through and yeah, good kind of the outlook there.
Yes and.
And I appreciate too.
I appreciate the question on an industrial Daniel its a really important segment for us its a.
A great business that we haven't motion as well as now EMI Asia Pac and I wouldn't mentioned before I go to us our business in Australia, and New Zealand in Southeast Asia again, despite the shutdown in New Zealand is performing quite well, surpassing our numbers here in the us and we're so.
And real strength in the mining sector over in that part of the world here in the U.S., what we are seeing.
And improve trend in July versus what we saw across Q2.
We're still down.
But we are seeing that trend improve and what we believe we're going to see happened Daniel is that.
We're seeing right now factories begin to reopen plants are reopening.
Some of our big customers are beginning to release the capex orders that have been on hold.
We're seeing the leading indicators PMI and industrial production showing improved numbers. So.
Look industrial has lagged the automotive recovery, which we fully expected we've seen that in the past.
But we do believe that we'll we'll see continued improvement in our numbers throughout Q3 as well as Q4 in the industrial segment as as factories continue to reopen.
Got it. Thanks, so much guys best of luck, yes. Thank you.
And.
Our final question will be coming from that.
Let Raymond James Please proceed.
Yes. This is mid singles filling in for Matt.
As for squeezing me in here. So my first question is on your digital and best growth.
That's fair Bach acquisition last year things, even more timely today, given the leading digital interface with CRM capabilities for the Australia and automotive aftermarket have you been able to implement these attributes your other auto regional businesses or more broadly speaking what do you see as the driving force for your digital investments going forward.
Yes.
Thanks for the question, Mitch and and I appreciate you bring it up our digital initiatives fares box as you mentioned.
He was was a great acquisition for us in a very timely acquisition.
Given whats given what's transpired with the pandemic and and our Australian business, we've seen a 300% lift.
We've been in what we are doing mitchen is utilizing the skill sets that were that we've acquired its fares box there teaming up with our digital team here in North America.
And ultimately will be.
Partnering with our teams in Europe to bring much of that expertise.
To to the European market as well we've.
A couple of things that I would point out that Weve launched I know I've talked about curbside pickup ship to home buy online pickup in store.
Most of the things that other businesses are doing around the world. We've also improved and I think one of the real key factors for us as we've improved our search capabilities.
Across all of our businesses and we've also delivered new new apps for product recommendations. So a number of factors that are that are leading to really solid solid growth and we've also as I mentioned in my prepared remarks.
We have improved and enhanced our online initiative that at motion as well so.
We're very pleased we've got a great team on the digital side and and we're very bullish on that segment as we move ahead.
Great. Thank you for the car and best of luck, Yeah, you're welcome. Thanks for the question.
We have reached the end of our question and answer session I would now like to turn the call back over to management for closing remarks.
We'd like to thank you for your participation in today's conference call. We thank you for your interest and support of genuine parts company and we look forward to updating you on our third quarter results. Thank you.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.