Q3 2020 Genuine Parts Co Earnings Call
Good day, ladies and gentlemen, welcome to the genuine parts company third quarter 2020 earnings Conference call.
Today's call is being recorded.
This time, all participants are in a listen only mode.
Fortunate of exercise will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
At this time I would like to turn the conference over to sit Jones Senior Vice President Investor Relations. Please go ahead, Sir good morning, and thank you for joining us today for the genuine parts company third quarter 2020 conference call with me.
With me today are bolt on and do our chairman and Chief Executive Officer, Carol Yancey, our he VP and Chief Financial Officer.
As a reminder, today's conference call and webcast. Please go to slide 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 may be referred to during today's discussion of our results as reported under generally accepted accounting principles.
A reconciliation of these measures is provided in the earnings press release issued this morning.
Which is also posted in the investors section of our website.
Today's call May also have all forward looking statements regarding the company and its businesses.
Company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest FCC filing, including this mornings 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, you Richard discontinued operations for all periods presented.
Now I'll turn the call over Paul for his remarks.
Thank you said and good morning, everyone welcome to our third quarter 2020 earnings Conference call.
We appreciate you joining us today, and hope youre, staying safe and well.
During the quarter, we remain focused on our top priorities which include.
Ensuring the continued health and safety of our employees customers suppliers and communities in which we operate.
Execution of our strategic initiatives and cost actions for our global automotive and industrial segments.
To deliver customer value operational efficiencies and strong financial results.
Management of our working capital to drive strong free cash flow and pay down debt to further strengthen our financial position and enhance liquidity.
Effective capital deployment, including strategic Reinvestments in the business.
Pain, a consistent dividend to our shareholders and the repayment of debt as appropriate.
And finally, we also advanced our E S Ci initiatives with the release of our 2020 corporate sustainability report.
Carl and I look forward to covering our progress in each of these areas today and then taking your questions.
Our teams continue to execute with agility through the third quarter aggressively managing each of our operations for the challenges of COVID-19.
We are proud of their hard work and commitment to operational excellence.
While also providing first class customer service.
Through the quarter, we engage with our teams at every level and resumed field visits to connect with our employees customers and suppliers.
We can tell you first hand that through the adaptability and successful execution of our passionate and talented associates we.
We are fully operational in prepared with comprehensive readiness plans.
I had a second wave begin to materially affect our businesses.
So a big thank you to our 50000 plus team members across our global footprint.
Upon the divestiture of our business products group in June we entered the third quarter focused on driving profitable growth and productivity initiatives for our streamlined portfolio of our automotive and industrial business segments.
As you may recall exiting non core operations is one of several key steps in the transformation of the company.
In addition, we are also investing in higher return businesses to further expand and strengthen our core.
Moving onto our financial results, we achieved a strong financial performance in the third quarter that reflects the resiliency of our businesses and the benefits of our strategic growth initiatives and cost actions taken across our operations.
Total sales for the third quarter were 4.4 billion up 1%, excluding the impact of divestitures.
This was a significant improvement from the 10% sales decline in the second quarter due to the impact of COVID-19.
Total operating margin was 9% or 100 basis point improvement from last year achieved through solid progress in both gross margin and EPS DNA dry.
Driving margin expansion in each of our automotive and industrial businesses.
Adjusted net income was 237 million and adjusted earnings per share was $1.63 up 17%.
Our cost savings plan announced in October of 2019 has generated significant savings across the organization in 2020.
Through the first nine months, we have already achieved our 100 million cost savings target for the full year.
In addition cost actions in response to COVID-19 further boosted our operating results.
Looking ahead, we remain focused on finding additional cost savings to further improve our cost structure and long term profitability.
Let me mention one example of the many initiatives to improve our operational efficiency and customer service levels.
We were excited to open our newest B.U.S. automotive distribution center in Nashville, Tennessee, just last month.
Nashville is a 325000 square foot distribution center equipped with systems inefficiencies to enable high productivity and the service of over 300, plus Napa stores.
By bringing this facility online will be able to close or consolidate smaller less productive dcs and the Napa network.
The opening of Nashville, and consolidation of these operations has gone smoothly. Despite the impact of COVID-19.
We would like to thank our operations team for their great work on this important project.
We will continue to make additional supply chain investments in the years to come.
We also improved our working capital enhanced our liquidity, while generating another quarter a substantial cash flows.
Turning to our business segments automotive represented 68% of total sales in the third quarter and industrial was 32% of total sales.
By geography, 76% of revenues are attributable to North America.
14% to Europe, and 10% Australasia.
Total sales for the global Automotive group were 3 billion, a 6% increase from last year and improved sequentially from the 10% decrease in the second quarter.
Comp sales also turned positive up 2.2% compared to a 12.6% decrease in Q2.
A solid automotive recovery on the topline with a consistent growth pattern in each month through the quarter helped us to deliver 100 basis point improvement in operating margin.
In North America, our U.S. automotive sales were down approximately 1%, which.
Which has significantly improved from the 12% decrease in the second quarter.
Comp sales were down 2.8% and much improved from the 13.8% decrease in Q2.
In addition, we were encouraged by an impressive 60 basis point increase in operating margin for U.S. automotive.
In Canada sales for the third quarter were up 2.6% and improved from a 13% decrease in Q2.
Comp sales increased by 5% and operating margin was up a strong 200 basis points. So what.
So a solid quarter for our Canadian team.
Also in North America sales to our retail customers continued to outperform.
Up low double digits for the third quarter.
While retail sales peaked in July this customer segment remains solid through the quarter as the persistence of coal that continue to drive outsized DIY growth.
Although we believe this surge in demand is gradually moderating.
We continue to strengthen our retail positioning their ongoing initiatives such as store refreshes.
Napa rewards programs targeted promotions and enhanced merchandising and inventories.
In addition, our growing omni channel capabilities, including the recent addition of 35000, new S.K. use and direct to customer shipping from select suppliers continued to drive exceptional value for the retail customer.
This has led to online retail sales at double our 2019 volume.
And we expect continued strong omni channel growth at Napa in the fourth quarter and beyond.
Moving onto our DIFM business sales to commercial accounts were down low single digits in the third quarter, which is much improved from last quarter and an encouraging indicator that consumers are becoming more mobile and getting back out on the road.
As miles driven continue their slow recovery sales.
Sales trends across each of our customer channels strengthen relative to Q2 with.
With our independent unaffiliated professional repair accounts, leading the way and posting positive sales growth.
Looking forward, we expect this customer segment as well as our fleet and government accounts national accounts and Napa Autocare centers to strengthen further in the months ahead.
Among these customers our fleet and government segment remain the most pressured as many of these operations are running at less than capacity due to slower business conditions and or budgetary constraints.
This is especially true for our customers in the energy and airline industries, which have been significantly impacted by the pandemic.
To counter these another commercial headwinds are.
Our teams are executing on a number of recovery plans designed to optimize nap as customer value proposition sell more apart and gain market share.
These plans focused on maximizing the effectiveness of our new sales structure.
Improvements to key programs, such as Napa Autocare any.
Enhanced systems, and digital capabilities, as well as strategic pricing initiatives and improved inventory availability.
While our teams made significant progress in the quarter, we expect our focus in these areas and favorable fundamentals to drive meaningful results in the period ahead.
Those favorable fundamentals include the growing number of vehicles in the six to 12 year aftermarket sweet spot.
And the recent spike in used car sales low gas prices and continued improvement in miles driven.
In Europe aftermarket sales trends had a strong rebound in the third quarter and our team did a tremendous job of capitalizing on that Tony.
Total sales were up an impressive 16%, which is improved from a 3% sales decrease in the second quarter and.
And comp sales were up a strong 12%.
Compared to last quarters mid teen decline.
Importantly, this quarter sales growth combined with our ongoing cost savings initiatives.
Drove 140 basis point margin improvement.
Marking a significant step forward for this group.
In breaking down our overall European performance, we're very pleased that operations in each country recovered with positive sales comps driven by the broad surge in demand for deferred maintenance and repairs.
In addition, the powerful Napa brand has an has proven to be an effective growth driver.
We have introduced the Napa brand in the UK, and France and plan to roll it out in Germany. This month.
We posted our strongest European sales in the UK this past quarter and Napa branded products have grown to represent a low double double digit percentage of total sales.
In less than one year.
As a reminder, we identified the opportunity for private brands in Europe at the time of our initial discussions to acquire a AG back in 2017.
We are encouraged by the quick acceptance of the Napa brand and excited for its growth potential.
Likewise, our focus on driving growth with key existing and new accounts, including the larger national account customers also contributed to our recovery.
So again, just a fantastic job by the team in Europe on both the top and bottom line.
Turning now to our automotive operations in Australia, and New Zealand. This team reported another quarter of exceptional result.
Total sales, increasing 16% and comp sales up strong at plus 15%.
This follows a 4% total sales increase and a 2% core sales increase in the second quarter.
Our strong sales for the quarter reflect a robust sales environment for both the commercial and retail customer segment and the Australasian region and our team is well positioned with a 60% commercial and 40% DIY sales mix.
We are encouraged by the current sales climate, despite ongoing headwinds due to cobot related restrictions in select key markets, such as Melbourne, and the state of Victoria.
To drive this growth our team and Australasia is executing on several growth initiatives.
These include the continued rollout of the Napa brand and new Napa store openings.
Digital enhancements across the B to C and B to B platform.
Strategic pricing and targeted marketing.
These and other initiatives as well as the ongoing cost actions across our operations.
Generated a strong 180 basis point improvement in operating margin for the quarter.
So in summary, we are pleased with the recovery in the aftermarket and our automotive performance across North America, Europe and Australasia.
So now, let's turn to our results for the global industrial parts group.
Total sales for this group were 1.4 billion down 8.7%, excluding the asset divestiture.
Comp sales were down 9.2% a signal.
A significant improvement from the comp sales decline of 16.7% in the second quarter.
These sales results as well as our ongoing focus to drive meaningful cost savings.
And optimizing our distribution network.
Drove an 80 basis point improvement and net operating margin for the quarter.
In North America, our total sales were down 9.7% as compared to a 16.7% decrease in Q2.
We saw strengthening trends in industrial indicators over the last several months.
And an improving sales cadence in each month of the quarter.
Specifically, the EPS MPS by industrial production and capacity utilization have.
Have all pointed to and increasing industrial activities since we last reported and.
And we expect these trends to continue in the months ahead.
We would also add that as customers reopen their plant, we will capitalize on more onsite sales opportunities.
We are also beginning to see an increase in Capex orders.
Among many of our customers many of which were deferred deferred through the crisis. So we see.
So we see a number of positive signs for the industry ahead.
Throughout the pandemic our team has been executing on our growth strategy to further bolster motions, leading competitive position in the MRO industry.
We are focused on initiatives to expand our industrial services and solutions capabilities enhance.
Enhance our pricing in category management strategy and optimize the effectiveness of our motion industries website, which.
Which we re launched just last quarter.
Each of these initiatives has added value for the company and our customers.
For the quarter, our automation solutions group was our strongest operation posting high single digit growth.
We are building out this operation to further support the growing Mega trend a plant automation and robotics at our customers.
In contrast, the southwest region of the U.S. was our weakest due to the significant impact of cold, but on the oil and gas sector and that area of the country.
We were also pleased to complete three strategic bolt on acquisitions in North America during the quarter.
Two of these businesses specialize in motion control and automation products and services, including engineering and application expertise and aluminum extrusion, which complement our growing semi automation solutions group.
Our third acquisition expands our hydraulics business at motion Canada.
Combined these operations further expand our presence in strategic geographies and overall products and service offerings and are expected to contribute at a POC approximately $35 million to $40 million in annual revenues.
So to summarize our north American industrial performance, we were encouraged by the gradual improvement in sales trends throughout the quarter.
Our team also operated well and was very disciplined and applying their cost control measures, which we believe bodes well for continued progress in the months ahead as the industrial economy strengthens further.
Turning to Australasia July one marked the anniversary of our EMEA Asia Pac acquisition and.
And this team delivered a low single digit sales increase for the quarter.
While we continue to benefit from the strength of the local mining industry. We're also executing on our new branding strategy and other growth initiatives to drive sales and gain market share and.
In addition, the my Asia Pac team is operating well and making excellent progress on key cost reduction and working cap initiatives.
Another focus area for GPC has been the advancement of our SG initiatives to us.
To account for our progress in this important area, we issued our first sustainability report back in 2018, and followed that up with a summary update in 2019.
On September Thirtyth, we are pleased to issue our 2020 sustainability report.
This year's reported substantially expands our disclosure across the spectrum.
Such as human capital and diversity and inclusion among others.
In developing our disclosure, we engage with our top shareholders to ensure our pathway to SG best practices aligned with the expectations of these key stakeholders.
We invite you to visit our GPC website to view this report and learn more about our company wide commitment to SG.
As we move forward through the balance of 2020 and into 2021, our teams will execute on a number of strategic initiatives to build on the positive momentum of the third quarter.
These plans and initiatives are grounded in a strategic growth freight framework.
Focused on maximizing the value of our automotive and industrial business segments and positioning GPC for sustained long term growth and improved profitability.
Key elements of the framework conclude caps.
Capturing more wallet share with existing customers and acquiring new customers in.
Introducing new products and services, while innovating, our omnichannel strategy and expanding digital offerings.
Building, a global branding strategy to further leverage our powerful Napa and EMI brands, which we have initiated via the rollout of the Napa brand into Europe, and Australasia and the rebranding of our and then co industrial business to EMI Asia Pac.
Expanding our global geographic footprint, including acquiring strategic bolt on businesses and five.
And finally, our strategic framework includes ongoing transformation initiatives to achieve operational excellence as exemplified by our cost actions and other initiatives.
So now I'll turn it over to Carol for a deeper review of our financials Carol.
Thank you Paul as a reminder, our comments this morning will focus on adjusted results from continuing operations, which excludes transaction restructuring and other costs and income.
Total GPC sales were $4.4 billion in the third quarter down 3.4% from 2019 or up 1%, excluding divestitures, which is much improved from the 10% decline in the second quarter.
We're also pleased to report our twelveth consecutive increase in quarterly gross margin, which improved to 35% compared to 33.4% in the third quarter last year.
The 160 basis point improvement primarily reflects the benefit of sales mix shifts to higher gross margin operations positive product mix, especially in industrial the broad timeframe that was driven by our focus on strategic category management initiatives in areas, such as pricing and global sourcing.
The divestiture of yes last September Thirtyth was also accretive to gross margin performance. These items were partially offset by a decrease in supplier incentives due to lower purchasing volumes.
The pricing environment has remained stable thus far in 2020 with limited supplier price increases and very little inflation in our third quarter sales based on the current pricing environment, We expect only minor price inflation through the balance of the year.
Our selling administrative and other expenses were 1.1 billion in the third quarter down 1.7% from last year, and representing 26.1% of sales compared to 25.6% last year on an adjusted basis.
The decrease in operating expenses reflects the favorable impact of both our permanent and co then related cost actions implemented thus far in 2020 as previously mentioned by Paul.
In accordance with our 100 million dollar cost savings plan announced late in 2019. We are pleased to report that we have successfully achieved the 100 million dollar annual target well ahead of schedule.
With more than 40 million in savings recognized in the third quarter, our permanent expense reductions will.
Total is over $110 million for the nine months.
In addition, our teams have continued to execute on a number of additional savings initiatives in response to COVID-19.
These initiatives contributed approximately 60 million in incremental savings in the third quarter.
So combined we generated approximately $100 million and cost savings during the third quarter, driven by strategic reductions and payroll and facility costs as well as more temporary savings from Carlos reduce travel and entertainment freight changes and other initiatives in response to kind of it.
Looking ahead to the fourth quarter, we will continue to execute on our cost actions and we currently expect to achieve $130 million to $140 million and permanent cost savings for 2020, which will carry over into 2021.
We also expect to generate further savings related to COVID-19, but have less clarity here as these cost savings will moderate as the economic recovery continues and sales volumes increase.
Despite the continued uncertainty we enter the fourth quarter focused on driving grass and aggressively managing our expenses to maximize profitability.
Our total operating and non operating expenses were an adjusted $1.2 billion for the third quarter, reflecting a decrease of 1.5% from last year and comprising 27.9% of sales.
Our total segment profit in the third quarter was $392 million up 9% on a 3% sales decrease.
Excluding divestitures total segment profit increased 13% on a 1% sales increase at our segment profit margin was 9.0% a strong increase of a 100 basis points.
Our tax rate for the third quarter was 23.4% on an adjusted basis.
From 24.9% in the prior year period, due primarily to the benefit of statute related adjustments.
Our net income from continuing operations in the third quarter was 233 million.
With earnings per share of $1.61.
Our adjusted net income was $237 million or $1.63 per se or which compares to $204 million and $1.39 per share in 2019 for a 17% increase.
So now, let's discuss our third quarter results by segment.
Our automotive revenue for the third quarter was 3 billion up 6% from the prior year and sequentially improve from the 10% sales decline last quarter our.
Our segment profit of 266 million was up 20% with a profit margin of 9.0% compared to 8.0% in the third quarter of 2019.
The 100 basis point increase in margin was driven by improved operating results across each of our automotive businesses.
This is a great job by our team and a testament to their continued focus on meaningful cost reductions across our operations.
Our industrial sales were 1.4 billion in the quarter and 18.6% decrease from a year ago.
Excluding the divestiture industrial sales were down approximately 9%, which is a significant improvement from the second quarter.
Our segment profit of 126 million was down 8% from a year ago or up slightly excluding eas and the profit margin was up 80 basis points to 8.9%.
The improved margin for industrial reflects gains in both our north American and Australasian industrial businesses, which was driven by the combination of gross margin expansion and cost savings we have.
We expect to see continued progress in the quarters ahead as the sales environment further recovers.
While these sales trends and operating results are encouraging and reflects a recovery from the lows of the second quarter. We continue to operate an environment of significant uncertainty and cannot reasonably forecast the full impact of Kevin Knight team in the coming months.
As a result, we believe it's prudent to not re establish formal financial guidance at this time.
So now, let's turn to our comments on the balance sheet. Our accounts receivable of 2.0 billion were down 22% from the prior year due primarily to the change in sales and the benefit of an agreement to sell $500 million of receivables to a financial institution earlier this year.
We remain pleased with the quality of our receivables and confident about our collection trends. Although we continue to closely monitor receivables in light of the current business conditions.
Inventory at September Thirtyth was $3.4 billion up 2% from September of last year or essentially flat, excluding the impact of foreign currency.
This is a function of lower purchasing volumes and our continued focus on effective inventory management.
Accounts payable at $4.0 billion up 1% from last year, and a reflection of the change in inventory and the impact of lower purchasing volumes.
At the end of a quarter the ATP to inventory ratio was 118%, which has improved from 112% at June thirtyth.
Our total debt of $2.9 billion is down 15% from 3.4 billion last year and down 10% from the second quarter during.
During the third quarter, we further strengthened our liquidity position and we entered October with approximately $2.8 billion and available liquidity, which has improved from our 2.6 billion liquidity at June 30, EPS and 1.1 billion in liquidity at March 31.
For the first nine months of 2020, we generated $1.4 billion in cash from operations, which is up significantly from 2019.
This led to strong free cash flows of over 1.3 billion.
As a reminder, we modified our near term capital deployment strategy back in early April to preserve our cash through the duration of COVID-19.
However, we remain committed to several key priorities for cash to serve to maximize shareholder value.
These priorities are evident in our improved debt leverage of 2.2 times, our total debt to adjusted EBITDA, which compares to 2.5 times at the end of the second quarter and the $4.3 billion in capital deployed across our four key areas in the last three years.
These include Reinvestments in our businesses via 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 million to $200 million and we have suspended plans for share repurchases through December 31st.
While we have also pulled back on acquisition activity. We've made several strategic bolt on acquisitions. This quarter as Paul mentioned earlier, and we continue to plan for additional M&A that aligns with our growth strategies for the automotive and industrial businesses.
And finally, we continue to support the dividend, which was increased from 64 consecutive years.
So thats our financial update for the third quarter, we've made significant progress in several key areas. We want to thank our team for their great work and many accomplishments under these circumstances ill now.
Now I'll turn it back over to Paul.
Thank you Carol through the continued focus on our top priorities outlined at the beginning of this call. We were pleased to report a strong financial performance for the quarter.
Our results highlight our progress in several key areas, including strengthening sales trends.
Continued gross margin expansion track.
Transformative cost actions and significant cost savings.
Operating margin expansion in each of our businesses and a stronger balance sheet enhanced liquidity and substantial cash flows.
We are excited for the future at GPC and we look forward to reporting on our progress in the quarters ahead.
We thank you for your interest in GPC and with that we'll turn it back to the operator for your questions.
Thank you ladies and gentlemen at this time, we'll be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad a comp.
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Our first question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.
Hey, good morning, guys morning, Brett.
Can you think about the cadence of the quarter I guess now that you ask specifically, but also maybe Europe as well as we came out of the cobot lockdowns.
Could you talk about sort of the how businesses either picked up with mobility, improving or or maybe even softened as stimulus money was spent and.
And then I guess within Europe talk specifically about the strength you've seen there obviously not as much consumer stimulus in in that economy, yet seeming to outperform.
Could you maybe give us some color as to is that share gain that's driving your significant comp or is that just a on.
Underlying lift in that service demand.
Yes, Thanks, Brad and let's start with the the cadence first and I'll, maybe I'll touch on.
Total company and total company, we were we were steady throughout the quarter.
Turning positive we're pretty much flat in July August turned positive in September total DTC as we look at automotive again total automotive we were consistent throughout the quarter mid single digit all in July August and September.
Europe, we were really strong in in August, but we were double digit growth in every month in the quarter and.
You know as we look at our turnaround in Europe, I couldn't be more proud of that team over there Brett. They I mean, you guys know what what we went through in Q2, most of France was shut down a good bit of the UK was shutdown and for us to the post that kind of increase that we did in Q3.
Strong and we're seeing that across the board were CNN in every market, which is what's really got us encouraged and we're seeing it across.
Across our customer base. So we saw it in our our small independent unaffiliated shops, but we also saw solid increase with the big National Major account so.
Do I think were taken market share in Europe, perhaps but I guess, we'll have to watch that watch that play out I'd also tell you Brett. We're we're really excited about the rollout of our our Napa private label and I think that that really bolstered our sales in the UK.
This quarter, we're up to 10 different product categories now in the UK and we're rolling that out in France, and and then we'll go into Germany, and the Netherlands as well.
When I talk about the margin lift from private label.
Yes, the margin on the private label, Brad as you know on for our private label we do.
Generally have more.
More favorable margin when you look at the all in and consider the terms that we get and the global tenders that were doing.
But generally we do have a little bit lower price in Europe on that private label. So it would be.
When it would be neutral in total the Europe on their gross margin, but the fact is we're more dollars and we're expanding our market share and again when we look at global tenders. There is a GPC benefit if you will when you think about global extended terms and putting more volume through our global so.
Pliers and you know Brad as I called out in my prepared comments when we.
When we first started talking to the AG team a few years back we saw a real opportunity.
To introduce private brand into our European markets and it's played out honestly exactly as we had hoped and thought it would and and I'll tell you what I'm. Most encouraged by is the exception.
And and.
And the I guess the recognition of the Napa brand in Europe.
Okay, and I guess, a quick follow up could you talk about any regional performance highlights in the U.S. and then Carol you talked about inflation moderating. It moderating do you see anything going on in pricing and I guess, maybe more on the DIY side I think there were some comments coming out of zone that they in Wal Mart had become a bit more competitive.
Do you see any pricing changes in the market in general.
Yeah, Mike price pricing has been really rationale and specific to automotive and we cannot say we've seen much in the way of changes whether its do it for me or D. I Y we've had very minimal price increases through the third quarter on 0.1% in automotive and we really don't expect much.
At the end of the year, but again no supplier price increases on a pretty rational pricing environment and Brett as far as the your question around Regionality and I'm, assuming you're talking about the us much like we saw in the previous quarter, our strongest markets continue to be the Midwest.
In the mountain.
And those two guys. Our heads are really continuing to do a good job for us both delivering positive numbers in Q3 were where were seeing.
It's a bit of stress and again not surprising the northeast.
Was down mid single digits in the quarter, but I'd point out.
Brett that if you go back to Q2, our northeastern business were down 19% in Q2.
We have gone from down 19 to roughly down four and change in Q3 mid Atlantic similar story.
Hi, double digit decrease in Q2 two down.
Mid single digits in Q3, so still a bit stressed in those markets, but what we're encouraged by is just really strong sequential improvement quarter over quarter.
Okay that sounds like Europe, UK might be the strongest market with France number to that is that is correct absolutely.
Okay, great. Thank you.
Thank you.
Our next question comes from the line of Scott cigarettes with RBC capital markets. Please proceed with your question.
Hi, Good morning. This is best read on for Scott.
Just wondering if you guys could help us better understand the cadence of the recovery in auto I believe July trends are running about 6% I'm sorry, I just wanted to clarify that sales our comp I think it was sales, but if you could just clarify.
At that time, where where are you as comps trending and then lastly on the U.S. side did you see trends improved sequentially throughout each month and any color on cadence you get around those metrics can be great.
Yes.
So so we'll double team this one but the first response I think you asked.
And I'm trying to recount your your questions I think the first was around was the 6% that was mentioned back in Q2 was that copper total that was total not comp.
Okay.
Did that answer that question.
Yes.
Okay, and then as we look at our automotive business.
In the quarter.
It again.
Again as I mentioned, our total automotive business was consistent.
Throughout that was was consistent throughout the quarter of mid single digit and U.S. automotive followed a similar pattern.
And it was pretty consistent throughout the quarter.
Okay. So do you have other comps are down low to mid single low single digit each month.
Correct.
Okay got it.
And then just one on the industrial gas I would I would just add to that that in that improved.
That improved in the month of September.
Got it. Thank you that's okay, Oh, yes, yes, Yes July you did say it July was flattish and there was an end again.
On August September.
Quite us as much as what July was but in total it was that's our total number.
Got it okay.
On the industrial side.
With the negative trends continuing and as you guys mentioned some of the entities are starting to improve how should we think about trends in that segment as we look over the next few quarters.
Yes, so just just a little bit of history on motion as because we've seen the sales.
The cyclical.
Time before in the industrial business, we generally lag the industrial indicators. So again, that's consistent with what we're seeing again.
In these recent quarters, what we are encouraged by Beth as we saw sequential improvement.
Throughout the quarter. So September was the strongest month of Q3.
And we do believe that as the economy continues to improve.
We'll close that gap between our numbers and then what the industrial indicators.
Our showing so are the takeaway should be we anticipate improved demand in the coming months, we're seeing we're seeing really strong results out of our wood and lumber.
Segments of our business pulp and paper are good thats a lot of that is directly tied to the building industry, which is strong so.
We have no doubt motion motion will Rick will recover and we'll be in good shape in the quarters ahead.
All right. Thank you so much you're welcome.
Yes.
Our next question comes from the line of Chris Horvers with JP Morgan. Please proceed with your question.
Thanks, Good morning, everybody congrats to just wanted to.
Follow up on a couple of questions. There first on on the motion side, you talked about September being the strongest month, obviously down 9% comps for the quarter I guess, how how close are you to getting to positive there.
And then could you also size up maybe the exposure to the weaker industries like energy and travel.
Yes, well the energy comment.
Comment, Chris Thats definitely a headwind for us if you look at our our southwest part of the United States with our well certainly our weakest market in the country and that is largely driven by by oil and gas. So thats a definite headwind for us going forward.
And in terms of looking.
Looking out Chris is look it's challenging I mean, it's so theres a lot of uncertainty in the markets. There is no doubt our expectation is our motion business will turn positive.
In 21, but I would say.
But I would also tell you our expectation is that we are going to continue to show sequential improvement just as we did from Q2 to Q3, we think Q4 will will be an improvement over Q3, and then again turning positive in 21.
So would that mean that like motion in September as you know more down like mid to high single digit versus the high single I think high single digit as Kirk to that line in September that is correct.
Got it.
Makes sense and then in terms of just to clarify on the the U.S. cadence in particular.
Did you know it seems like DIY slowdown and do it for me guys that are high and but that was sort of roughly neutral over the three months.
Is that right. Because you also mentioned that September got better. So I was just trying to reconcile.
All that did.
Yep.
Got it all together, yes. So my my reference on September Chris was in relation to August September was a better month than what we saw in August we saw softness in August.
And September did improve Carol mentioned, we were flattish in July and we dipped a bit in September but again, we're talking.
I'll just.
Just a few basis points from month to month to month, so not not a massive shift.
And I'm, sorry, I missed I forgot the second part of your question Chris.
So the second part was really like it.
It seems like the mix the bag in there is like DIY slowing down one of your competitors you know talked about a drop off in August and into September on T.I., why so I guess, maybe is that what drove sort of the keeping the relative trend flat over the quarter and.
And then any comment on did you and this is U.S.
Both questions did do it for me.
How close are we to positive and timber and.
In commercial yes, so so our DIY business.
And you hit it Chris I mean, we had we had a huge July in D y.
And I mean, we're up I think close to 20% in July and that it moderated a bit through Q3, but but.
But I mean, I don't think anybody expects to kind of be iwai increases that we're seeing across the industry to continue.
Certainly we benefited as did all of our peer group from.
The stimulus money that that hit the market, our DIFM business was pretty steady throughout the quarter in that low single digit.
Range and again I would point out Chris as I did with some of the recent halliday as I did with motion.
You know those those down low single digit those numbers are improved from the high single digit declines that we were seeing back in May and June.
Got it but not right. Okay, so, but so U.S. do it for me it was pretty consistent and not yet down low single digit range, yes. Okay.
Sorry to belabor that and then in terms of the [laughter] in terms of.
Maybe on that on the margin side really to bark.
Two part question. So first on the on the gross margin.
No.
Yes actually helps you can you can you talk about how much that was but then you know vendor allowances also hurt you. So you know what it at a high level how how much.
How much how are you thinking about the potential to continue to drive expanded gross margins going forward and then I have a follow up on that she and I.
Sure on the gross margin for the quarter and when you look at our quarterly improvement I would say this quarter about a third of that was related to the divestitures so too.
So two thirds of our gross margin improvement like 100 beds is really related to sales mix shifts to higher gross margin operations, specifically, our international strong results on automotive product next testing, especially in industrial and then some of our just pricing in global sourcing initiatives.
So when we look ahead, we do expect to have continued gross margin improvement with a lot of our initiatives that may not be quite at the pace that we've seen but we are very encouraged by that gross margin initiatives. We have we've done all that as you mentioned with lower volumes and we have been able to.
Generally offset the lower volume incentives with our lower sales volumes with having our initiatives. So we've anniversary that he I asked divestiture, so going forward and it will just be the core gross margin improvement.
Got it and then on the EPS United States outside Carol I guess, how are you.
You take a lot of cost out of the business. How are you thinking about the potential to add have to add back that cove, it expense and 2021 from a dollars perspective.
Yes, so on the on the EPS DNA side, what were really encouraged by is the $100 million permanent cost savings that roughly a 110 million through nine months.
We expect to be 130 to 140 million for the full year.
The co bids savings were 150 million in Q2, and as we mentioned before about $45 million of that was government subsidies that moderated to about 60 million in Q3, which relates directly to the improved as Paul mentioned improvement in our volume.
On extending hours, bringing folks back in and we sat a lot of that is for a temporary thing, but part of why we have a higher hundred million dollar permanent savings as we shifted some of those things to permanent so.
So we are still we will still have some covance savings in Q4, middleby probably less than what it is in Q3, but I can tell you all of our business units have additional cost actions. As we look ahead. There are further opportunities. We think we'll have especially as it relates to facility.
And productivity improvements and again, some further consolidations and some back office areas. So we're still excited about the work the transformation team is doing as we look ahead.
Very helpful. Thanks, very much and congrats.
Our next question comes from the line of Greg Melich.
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With Evercore ISI. Please proceed with your question.
Hi, Thanks, I have a couple of questions one I'd love to follow up.
Thanks for all the color around us automotive.
Could you just level set us now on the on the mix of that business between independence than that.
The Napa Autocare group major accounts and fleet just given how disparate the performance has been this year.
So.
The if we look at the business in as you just described.
Greg our most challenging segment and look I should point out at the outset.
Our model is different okay, I think you've been around long enough, Greg you know that.
Fleet and government is a big segment for us.
And that has been our most challenged segment and I should point out that in in a mixed in that fleet and government, we have our oil and gas energy business, we have large contracts with municipalities school bus contracts we have.
Contracts with the airlines ground equipment. So all of that is in that fleet and government and as you can imagine Greg that has been a challenging segment.
And has continued it will come back and we think it will come back and it will come back strong.
Our major account business and our Autocare business was down slightly in the in the quarter as well.
Where we saw good growth.
And as Dan we are encouraged is with our what we would really classify as our all other wholesale business and that is our independent unaffiliated garage as that business has held up well and we are encouraged.
By that by those numbers and we think we can continue to build on that.
In Q4 and going forward.
And as if we look at the at the business our independence and garages are they now are they like half the business or 30% of the business just the.
And fleet and governments may even be down to 20% would that be a fair estimate.
Yes, so thanks, Subsys way think of it this way Greg when we look at our.
F. those segments fleet is and I'll give you around numbers, 20% to 25%.
And then you've got the that unaffiliated independent garage segment is probably 40% to 45% of the total.
And I'm sorry, Greg you asked about our independent owners as well can you add maybe EPS that again that question.
Yes, well I just want to know just generally speaking how the independents are doing so on what percentage of the mix or are they now as opposed to company owned stores and how are they doing I mean, how many of them got PPP loans are they.
Are they are they sort of fully back an up to date.
Running the way that that you'd want to versus where they were but yes. It's a great question, Greg and I'm glad you did ask at independent owners are they represent roughly 60% of our of our business and and I'm pleased that our guys have been out we've been out meeting with some of our big independents a real.
Justice, we they're faring well and I would tell you that in terms of.
PPP money.
Vast majority and I'm talking probably close to 90%.
Got PPP money, so from a cash position our independents are doing just fine.
Right and then if I could still one more question. There you brought up an interesting addition of 35000 skews.
That will be direct from vendor or could you just help us frame what that could mean to sales and sort of.
Expanding the business in a in a more capital effective way.
And I also thought I heard you mention some some pricing or re merchandising actions to help gain some share back but.
But I will say.
Yes.
Sure So let's talk about the.
This the skews that I referenced the 35000 SK you think of that Greg is kind of you know that whole concept around the endless aisle.
And taken advantage of our great suppliers and there the total extend up their catalog offering. So today of course, you take a supplier Greg and I know you know dorman well great partner of ours for many many years.
They have a very expansive catalog, we don't we do not.
We don't catalog all the EPS they use that dorman has available, but we're certainly now going to make those available online.
And and we think thats going to it's too early to put a number to it Greg we've really just launched it but but that would be an example, another example would be the weather tax line.
You know that line of course great.
Consumer brand so we're.
So we're excited with what we believe that that whole kind of endless aisle can do for for.
For the Napa business, and we're going to continue to expand that that that opportunity going forward.
And your some pricing I heard pricing is rational, but I also thought I heard there were some certain actions may.
Maybe in particular segments.
Yes. So then we were talking about rational pricing and really no supplier price increases and automotive the actions taking both in our automotive and our industrial business are really buy side sales side type pricing global.
Sourcing type internal gross margin initiatives.
Really again and there are no drastic changes in the pricing environment, we've just gotten much more strategic as it relates to both retail and commercial pricing and our gross margin efforts.
So these are just so I understand more strategic meaning that you're you're lowering prices to the customer or or end up getting more merchant margin based on how your merch mixing it no I mean, Greg we've had 12 consecutive quarters of gross margin improvement and an environment with.
Lower sales volumes and no inflation and then.
Terrorists and again, we've got pricing data analytics, we've got investments Weve made again. These we are getting improved gross margin with these initiatives and remaining very competitive. So the idea is to grow our sales.
And grow the business and again I'm really pleased to see the opportunities and the results that we've gotten in the gross margin area.
That's great. Thanks, a lot both had good luck. Thank you. Thank you.
Our last person for questions coming from the line of Matt Mcclintock with Raymond James. Please proceed with your questions.
Hey, everyone. This is Mitch angles filling in for Matt. Thanks for taking my question.
So most of my questions have already been answered I just had a quick follow up on your major accounts group and automotive are these accounts, mostly back online today and purchasing at lower volumes sounds like the recovery for Europe for these type of accounts have been relatively solid do you expect a similar trend for these accounts in the U.S. and the Commonwealth any color on the recent trends here.
It would be helpful. Thank you, yes, Matt we are I'm, sorry, we do expect.
We do expect that business to bounce back and it will bounce back as miles driven south is back we one thing that hasn't really been talked about this morning.
Even though there is a whole lot more traffic on the roads and and people are back behind the wheel, which were happy to see miles driven.
In the last couple of months that I've seen preliminary numbers are still down close to close to 10% so as that.
As that begins to come back and it will come back the main.
The major account business and all of the commercial business will will will recover so.
Yes, no doubt you mentioned, our European business and we are very pleased with our with our major account business in the UK and some of the strength there.
That we that we saw certainly in Q3 in our European business and we expect quite honestly, we expect that to continue well into 2021.
Great. Thanks for the color guys. Thank you.
There are no further questions in the queue I'd like to turn the call back to management for closing remarks.
We'd like to thank all of you for your participation entertain today's call and we look forward to reporting our year end results in February. Thank you very much for your support of genuine parts company have a great day.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.