Q2 2021 Genuine Parts Co Earnings Call
Good day, ladies and gentlemen, welcome to the genuine parts company second quarter 2021 earnings Conference call. Today's call is being recorded and all lines have been placed on mute.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
At this time I'd like to turn the conference over to Sid Jones Senior Vice President of Investor Relations. Please go ahead Sir.
Good morning, and thank you for joining us today for the genuine parts company second quarter 2021 earnings Conference call with me today are Paul Donahue, Our chairman and Chief Executive Officer will Stengel, our president and Carol Yancey, Our executive Vice President and Chief Financial Officer.
As a reminder, today's conference call and webcast includes a slide presentation, which can be found on the genuine parts company Investor Relations website.
Please be advised this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results as reported under generally accepted accounting principles.
A reconciliation of these measures is provided in the earnings release issued this morning, which is also posted in the investors section of our website.
Today's call May involve forward looking statements regarding the company and its businesses the company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest SEC filings, including this morning's press release the.
The company assumes no obligation to update any forward looking statements made during this call.
Now I'll turn the call over to Paul for his remarks.
Thank you Seth and good morning, welcome to our second quarter 2021 earnings Conference call.
We appreciate you joining us today, we're pleased to report a terrific financial performance driven by the consistent execution of our strategic priorities and the ongoing recovery on the global markets and.
In summary, the quarter was highlighted by continued strong sales trends, which we believe led to market share gains.
Gross margin gains and improved operational efficiencies that drove margin expansion and record quarterly earnings.
And the effective deployment of capital for growth and productivity investments bolt on acquisitions, the dividend and share repurchases.
Taking a look at our second quarter financial results total sales were $4.8 billion up 25% from last year and improved sequentially from plus 9% in the first quarter.
For your additional perspective, our second quarter sales were 12% higher net in Q2.2019.
Gross margin was also strong representing our 15th consecutive quarterly increase and we further improved our productivity with the ongoing execution of our expense initiatives.
As a result.
Segment profit increased 35% and our segment margin improved 65 basis points to 9.2%.
Which represents our strongest margin in 2 decades.
Adjusted net income was $253 million and adjusted diluted earnings per share were $1.74 up 32%.
Total sales for global automotive were a record $3.2 billion, a 28% increase from 2020 and up 15% from the second quarter of 2019.
And marks the first quarter and our 93 year history with auto sales exceeding the 3 billion Mark.
On a comp basis sales were up 21% and on a 2 year Scott stack comp sales were up 8.5%.
Our comp sales in the second quarter were driven by double digit year over year comp sales in each of our automotive operations.
Automotive segment profit margin improved to 9.1% up 30 basis points from 2020, and an increase of 90 basis points from 2019.
This expansion was supported by strong operating results across all of our operations.
The automotive recovery reflects our focus on key growth initiatives as well as several market tailwind and.
These include the.
The broad economic recovery and strengthening consumer demand.
<unk> weather trends.
Inflation and our ability to pass along price increases to our customers find.
Finally, solid industry fundamentals, which have been further accelerated by a surge in used car market and improving miles driven.
While these market tail wins are encouraging we also see continued headwinds, which we continue to closely monitor. These would include the spread of the Delta Corona virus variant and its potential impact on the global economy.
Global supply chain disruptions.
Ongoing labor shortages in our operations.
And the impact of inflation on our cost such as wages and freight.
Turning next to our regional highlights our GPC teammates in Europe built on their excellent start to the year, achieving the strongest sales growth amongst our operations with comp sales up 34%.
Each country posted substantial sales growth, while our UK team continues to outperform.
The positive momentum in Europe reflects improving market conditions and favorable weather trends.
As well as our focus on key sales initiatives inventory availability and excellent customer service.
In particular, we have seen exceptional results from our key accounts gardeners and the ongoing expansion and rollout of the Napa brand.
In our Asia Pac business sales were in line with the mid to high Teen comps. We have had in this market now for 4 consecutive quarters.
Our sales sales outperformed retail, although both customer segments posted strong growth.
The Rep co and Napa brands performed well and collectively are capturing market share.
The Napa the Napa network continues to build and we have now more than 50 Napa locations operating across Australia, and New Zealand. In addition to our 400 plus Rep co stores.
In North America comp sales increased 20% in the U S.
And were up 12% in Canada, where lockdowns in key markets, such as Quebec, and Ontario have been headwinds for several quarters now.
Sales in the U S were driven by strong growth in both the commercial and retail segments with Difm's sales outperforming DIY for the first time since before the pandemic began to take hold in Q1 of 2020.
A strengthening commercial sales environment is significant for us as it accounts for 80% of our total U S automotive revenue.
The strong recovery in the commercial sector contributed to record average daily sales volume on our U S automotive business in June.
Our sales drivers by product category include brakes tools and equipment and under car, which all outperformed.
In addition, both retail and commercial ticket and traffic counts were strong for the second consecutive quarter. So another really positive trend.
By customer segment retail sales remained strong throughout the quarter with low double digit sales growth on top of a healthy sales increase in the second quarter of last year.
While the DIY market is pulling back from the highs of 2020.
We are optimistic our ongoing investments will create sustainable retail growth.
For commercial sales each of our customer segments posted double digit growth, which we attribute to the broad automotive recovery and investments in our sales team our sales programs and our supply chain amongst other initiatives.
This quarter, our strongest growth was with our major accounts partners and Napa auto care centers.
We were also pleased with the growth in sales to our fleet and government accounts.
This was the first quarter of positive year over year sales growth for this group.
Since before the pandemic as they lag the overall automotive recovery in the U S.
We view this improvement as a meaningful indicator for further growth in the quarters ahead.
As the automotive recovery continues we expect our commercial sales opportunities to outpace retail consistent with the long term growth outlook on the aftermarket industry.
We are confident in our growth strategy and our initiatives to deliver customer value and sell more parts for more cars across our global automotive operations.
We also remain focused on enhancing our inventory availability strengthening in our supply chain and investing in our omni channel capabilities, while expanding our global store footprint to further strengthen our competitive positioning.
So now, let's discuss our global industrial parts group.
Total sales for this group were 1.6 billion, a 20% increase from last year and up 7% from 2019.
Comp sales rose, 16% and reflect the fourth consecutive quarter of improving sales trends.
Our strong sales environment combined with the execution of our operational initiatives drove a 9.5% segment margin, which is up 130 basis points from both 2020.
And 2019.
The ongoing market recovery over the last 12 months is in line with the strengthening industrial economy and the overall increase in activity, we have seen across much of our customer base.
The purchasing managers index measured <unk> 66 in June.
<unk> healthy levels of industrial expansion and marrying trends, we have seen throughout the majority of this year.
Likewise industrial production increased by 5.5% in the second quarter, representing the fourth consecutive quarter of expansion.
Diving deeper into our Q2 sales.
We experienced strong sales trends across each of our industries served and our product categories.
Other than safety supplies, which had extraordinary sales in 2020 due to the pandemic.
Several industry sectors stood out as their sales increased by 30% or more over last year, including the equipment and machinery automotive aggregate and cement.
Equipment rental and oil and gas.
In addition, our newly added fulfillment and logistics industry sector experienced tremendous growth.
In the past several years of expanding net segment, we have found our broad offering of products and services fits well with the needs of these customers.
To drive this growth we remain focused on several strategic initiatives, which include the build out of our industrial omni channel capabilities with solid growth in digital sales via motion Dot com.
Our new inside sales center, which was established in 2019 is generating incremental sales from new motion customers and we see room for further growth.
The expansion of our services and value add solutions businesses in areas, such as equipment repair conveyance and automation over.
Over the last few years, we have made several bolt on acquisitions to build scale and continue to target additional M&A opportunities to further enhance our capabilities on these key areas.
Enhanced pricing and product category management strategies to maximize profitable growth.
To further optimization and automation of our supply chain network to improve operational productivity, while delivering exceptional customer service.
We are encouraged by industrial strong financial performance in the second quarter and the positive momentum we see in the overall industrial market.
We believe the motion team is well positioned to capitalize on this momentum and enhance our market leadership position.
So in summary, each of our businesses did an exceptional job of operating through the quarter and we couldnt be more proud and grateful for their strong Q2 performance.
So now I'll turn the call over to Wil well.
Yes.
Thank you Paul Good morning, everyone first let me reiterate Paul's comments to acknowledge the strong performance this quarter.
I'd like to personally congratulate the entire global GPC team for the hard work and impressive results.
Teams continue to build momentum and execute well.
We remain focused on our defined strategic initiatives and despite the global uncertainties that continue to impact our operations. We're pleased with the strong sales growth operating leverage and cash flow performance this quarter.
Last quarter, we outlined our plans to create value as we leverage GPC global capabilities to simplify and integrate our operations.
We do so to improve the customer experience to increase the speed and efficiency of execution and to deliver winning performance.
This includes continuous investments to position <unk> for near and long term profitable growth.
The key pillars of our investments include talent sales effectiveness digital supply chain and emerging technologies.
Around the globe the teams executed well against our strategic priorities. For example on talent, we announced last month that Nebiim Krishna joined the company as Chief information and digital officer.
Levine will help lead our strategy and execution for all technology and digital initiatives.
He comes to GPC with more than 25 years of technology experience with companies such as Macy's home depot target and Fedex.
We're excited to welcome Levine as we continued to innovate on the customer experience accelerate the pace of technology execution and build capabilities that advance our long term strategy.
Other examples of recent talent investments include category management field sales and services indirect sourcing pricing diversity equity inclusion digital data and inventory leadership to name a few <unk>.
Investment in our people is always a priority as we execute our mission to be an employer of choice.
The highlight other examples of our initiative momentum and local execution, Paul and I recently had the opportunity to spend time in person with our European team mates and they showcased great examples of the strategic initiatives and winning team performance.
For example, we discuss details of the growth plans for our recent bolt on investment when parts and online leader of automotive parts and accessories.
We expect this investment to provide new capabilities and accelerate our European digital vision.
We visited a best in class distribution facility in the Netherlands that increased operating productivity by approximately 20% over the past few years with automation investments and process excellence initiatives.
We received an update on the consolidation of 10 back office shared service centers in France to 1 national location in France to drive cost and process efficiencies and we saw firsthand the power and differentiation of the Napa brand in the local market.
Although these are only a few select examples in Europe in each of our automotive and industrial businesses. We see similar examples of focused strategic execution that are delivering results.
We also executed well on our acquisition strategy during the quarter. The M&A environment is active and we remain disciplined to pursue strategic and value creating transactions.
For example in addition to wind parts, we completed several other bolt on acquisitions to deliver growth add capabilities and create value.
The North American and European automotive teams completed various store acquisitions that increase our position in key strategic geographies and extend existing customer relationships.
Our automotive team in Asia Pac also executed to bolt on strategic acquisitions, including rare spares a market leader in the niche segment of automotive restoration parts and accessories and parts DB, a leading cloud based products and supplier data platform that will enhance our e-commerce and data capabilities.
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We entered the third quarter with strong momentum as our automotive and industrial markets recover and we execute our plans.
We continue to analyze and respond to <unk> areas. The challenge our daily operations, such as Covid, 19, inflation global logistics and product and labor availability.
For example, the global and local procurement teams partnered closely with all levels of our suppliers to effectively assess product availability and delivery trends.
We have processes in place backed with data and analytics to create visibility into direct and indirect inflation trends.
We utilized GPC scale on relationships, including dedicated GPC resources in Asia to address our global logistics needs and we continue to address labor challenges with competitive benefits flexible work programs creative incentives to attract talent, a differentiated culture and compelling.
Career opportunities.
We believe our team is well positioned to remain agile as we focus on what we can control and navigate these macro global headwinds.
Overall, we're very pleased with our performance through the first half of the year and look forward to sharing our continued progress next quarter on.
Now I'll turn the call over to Carol to review the financial details.
Thank you well total GPC sales were $4.8 billion in the second quarter up 25%, our gross margin improved to 35, 3% an increase from 33, 8% last year or up 120 basis points from an adjusted gross margin of 34, 1%.
Our improvement on gross margin was primarily driven by the increase in supplier incentives. Although we also continue to benefit from channel on geographical mix shift positive product mix strategic category management initiatives, including pricing and global sourcing strategies.
And the second quarter, there was significant pricing activity with our suppliers, resulting in product cost inflation, where.
We are positioned to pass these increases onto our customers and the impact on price inflation was neutral to gross margin.
We estimate a 1.5% impact of inflation in automotive sales for the quarter and a 1% impact in industrial.
Based on the current environment, we expect this to increase further through the second half of the year.
Our total adjusted operating and non operating expenses were $1.3 billion on the second quarter up 28% from last year and 28, 1% of sales the increase from last year reflects the impact of several factors, including the prior year benefit of approximately $150 million in Tampa.
Larry savings related to the pandemic.
The balance primarily relates to the increase in variable costs on the $1 billion, an additional year over year sales and to a lesser extent, we experienced rising cost pressures in areas such as wages incentive compensation freight rents and health insurance, which we are managing.
We also invested in projects associated with our transformation and other strategic initiatives to drive growth and enhance productivity.
Overall, we continue to operate in line with our plans for the year and we remain focused on gaining additional efficiency in the quarters ahead as you heard from Paul on well.
On a segment basis, our total segment profit in the second quarter was $441 million up a strong 35%.
Our segment profit margin was 9.2% compared to 8.6% last year at 65 basis point year over year improvement and up a 100 basis points from 2019.
So strong operating result, and a reflection of the work we have done to streamline our operations and optimize our portfolio over the last several years.
We would add that for the full year, we continue to expect our segment profit margin to improve by 20% to 30 basis points from 2020 or 60 to 70 basis points from 2019.
This would represent our strongest margin in 5 years.
Our tax rate for the second quarter was 27, 2% on an adjusted basis.
Up from 24, 1% last year the increase in rate primarily reflects a higher U K tax rate, partially offset by stock compensation excess tax benefits.
Second quarter net income from continuing operations was $196 million with diluted earnings per share of $1.36.
Our adjusted net income was $253 million or $1.74 per share, which compares to $191 million or $1.32 per share in the prior year at 32% increase.
Turning to our second quarter results by segment.
Our automotive revenue was $3.2 billion up 28% from last year.
Segment profit was 291 million up 33% with profit margin improved to 9.1% up 30 basis points from 2020, and a 90 basis point increase from 2019.
We attribute the margin gain to the positive market conditions, and our automotive business and our team's intense focus on the execution of our growth and operating initiatives.
We're encouraged by the positive momentum, we will carry into the balance of the year.
Our industrial sales were $1.6 billion in the quarter at 20% from 2020.
Segment profit of $150 million was up 38% from a year ago and profit margin improved to a strong 9.5% a 130 basis point increase from both 2020 and 2019.
So with the strengthening sales environment and continued operational improvement. This group continues to post excellent operating results and we expect industrial to perform well through the balance of the year.
Now, let's turn our comments to the balance sheet at June 30th our total accounts receivable is up 4%. Despite the strong sales increase this is primarily due to the additional sales of $300 million on receivables and the second half of 2020.
Inventory was up 10% consistent with our commitment to provide for inventory availability and our accounts payable increased 26%, our AP to inventory ratio improved to 129% from 112% last year.
We remain pleased with our progress in improving our overall working capital position.
Our total debt is $2.5 billion down $700 million or 22% from June of 2020 and down $160 million from December 31 of 2020.
We closed the second quarter with $2.5 billion in available liquidity and our total debt to adjusted EBITDA has improved to 1.6 times from 2.9 times last year.
Our team has done an excellent job of improving our capital structure over the last year.
We continue to generate strong cash flow with another $400 million on cash from operations in the second quarter and $700 million for the 6 months.
For the full year, we expect our earnings growth and working capital to drive $1.2 billion to $1.4 billion in cash from operations and free cash flow of $900 million to $1.1 billion.
Our key priorities for cash remain the reinvestment in our businesses through capital expenditures M&A, the dividend and share repurchases.
We have invested $90 million on capital expenditures, thus far in the year and we expect these investments to pick up further in the quarters ahead as we execute on additional investments to drive organic growth and improve efficiencies and productivity in our operations.
As will mentioned earlier strategic acquisitions remain an important component of our long term growth strategy.
We've used approximately $97 million in cash for acquisitions through the 6 months and we continue to cultivate a strong pipeline of targeted names and expect to make additional strategic and bolt on acquisitions to complement both our global automotive and industrial segment as we move forward.
Consistent with our longstanding dividend policy. We have also paid a total cash dividend of more than $232 million to our shareholders through the first half of this year net.
This reflects a 2021 annual dividend of $3.26 per share and represents our 60 <unk> consecutive annual increase in the dividend.
Finally, as part of our share repurchase program, we have been active with share buybacks since $19.94 in the second quarter, we used $184 million to acquire 1.4 million shares. The company is currently authorized to repurchase up to 13 million additional shares and we expect to remain active in this pro.
Graham in the quarters ahead.
Turning to our outlook for 2021, we are updating our full year guidance previously provided in our earnings release on April 22nd of 2021.
In arriving at our updated guidance, we considered several factors, including our past performance and recent business trends current growth plans and strategic initiatives the potential for foreign exchange fluctuations inflation and the global economic outlook.
We also considered that considered the continued uncertainties due to the market disruptions such as with COVID-19, and its potential impact on our results.
With these factors in mind, we expect total sales for 2021 to be in the range of plus 10, plus 12% an increase from our previous guidance of plus 5 to plus 7%.
As usual this excludes the benefit of any unannounced future acquisitions.
By business, we are guiding to plus 11% plus 13% total sales growth for the automotive segment, an increase from the plus 5 to plus 7%.
And a total sales increase of plus 6 to plus 8% for the industrial segment and increased from the plus 4 to plus 6%.
On the earnings side, we are raising our guidance for adjusted diluted earnings per share to a range of $6.20 to $6.35.
Which is up 18% to 20% from 2020.
This represents an increase from our previous guidance of $5.85 to $6.5.
We enter the third quarter focused on our initiatives to meet or exceed these targeted results and we look forward to reporting on our financial performance as we go through the year. Thank you and I'll now turn it back over to Paul.
Thank you Carol we are pleased with our progress in capturing profitable growth generating strong cash flow and driving shareholder value.
This quarters, 25% total sales growth reflects the benefits of a strengthening global economy and positive sales environment in both our automotive and industrial businesses.
Importantly, this dual recovery allows us to leverage the full scale of 1 GPC, which we believe creates significant value.
Our team also executed well on produced our 15th consecutive quarter of gross margin expansion.
While further improving our productivity via ongoing expense initiatives.
Our global team network and disciplined focus in these areas enabled us to reported strong operating results and record quarterly earnings.
Our exceptional balance sheet provides us with the financial flexibility to pursue strategic growth opportunities.
Investments in organic and acquisitive growth.
I'll also returning capital to shareholders through the dividend and share repurchases.
The GPC team is focused on executing our growth strategy and operational initiatives to further enhance our financial performance in the remainder of 2021 and beyond.
We thank you for your interest in GPC and also thank each of our GPC teammates for their continued dedication passion and commitment to being the best in serving all our company's stakeholders.
So with that let me turn the call back to the operator for your questions.
Thank you.
At this time will be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
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In order to allow for as many questions as possible. We ask that you limit yourself to 1 question and 1 follow up each.
Our first question comes from the line of Chris <unk> with Jpmorgan. Please proceed with your question.
Thanks, Good morning, everybody.
Good morning, Chris.
So can you it looks like is it fair to say Youre, just assuming sort of a 2 year comp stacks hold in both divisions for the balance of the year.
And related to on the motion side emotions, not yet positive on a 2 year basis.
What would what is going to be the inhibitor that that would not allow that to pause turn positive on a 2 year basis.
Yes, I think Chris you're spot on I think motion is not per.
Positive on it on a 2 year stack yet.
We are really encouraged by the fundamentals as Paul mentioned and you know the lag that we see in that business. We're encouraged by the activities going on we are implying.
Alert trend for them.
Second half.
So on a SEC.
Half mid single digit on a comp basis for them, but that still is is just flattish to slightly up on a 2 year stack basis, and I think on the automotive side I mean, I think again, you're spot on sort of a second half mid single digit on the automotive comps that we would be a bit higher than that in the U S.
So again on a 2 year stack basis more normal mid single digit on a 2 year stack basis. So similar to where we are now, but a bit better certainly in U S automotive.
Chris I would add specifically to motion.
And I think you've alluded to it in the past of this recovery that we're seeing on both the automotive and industrial.
When you look at.
U S manufacturing our customers are operating net higher run rates, they're accelerating capex plans for returning to full production.
You look at the PMI numbers you look at industrial production all is very very positive so.
When you couple that with what we're seeing on capital projects really gaining steam we're we're very very bullish about our industrial business moving forward.
Got it and then.
As a follow up you talked about record.
Average daily volumes, I think you're referring to U S. Napa in the month of June.
You referred to momentum in the business. Maybe you can you can you expand on that a little bit.
That I think theres a lot of concerns out there on the DIY DIY is not immaterial. It is 20 percentage of the business. So could you perhaps talk about what youre seeing on the on the DIY side of the business in the U S as well.
Yes.
Let me just comment on the on the specific.
Numbers, Chris so.
We wrapped up Q1 with a record of.
Sales in line for Us in March.
That momentum carried into Q2, we had a really solid quarter with May June being our strongest June being the strongest month on a record month again.
And then as we moved into it into July again pleased to say that that's that's holding up so.
We're really really encouraged by what we're seeing in U S automotive and specifically to DIY.
We're not seeing a.
Pullback in our strong DIY business, we're up we're up low double digits in Q2, and our 2 year stack I think Chris is well over 20%. So our teams are as you know and we've talked about this in the past we've worked incredibly hard to get our retail.
Footprint.
Sure.
And what we believe to be much better in a much better selling mode than we've ever been so.
Could it pulled back a little bit with the lack of stimulus monies.
Hitting the economy could be I think we will see that but perhaps in some of the more.
Retail focused competitors, but.
Now we feel good we feel good about our <unk> business and our DIY business going forward.
Understood best of luck.
Yes, Thanks, Chris.
Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.
Mr. Jordan Your line is live.
Sorry, our next question comes from the line of Kate Mcshane with Goldman Sachs. Please proceed with your question.
Hi, Good morning, Thanks for taking my question I wanted to follow up on your commentary with regards to inflation that you had mentioned that you'd seen about 150 that sort of inflation in automotive and 100 in the industrial.
That is from just higher product costs versus transportation and labor and how would you categorize this period on inflation versus 2019 with tariffs and the ability to market yet.
Yeah look as we look at our inflation I would tell you first of all on it is a bit unique and unprecedented as it relates to U S. Automotive for inflation, we haven't seen this kind of activity for a decade. If you will and it is as you mentioned, it's sort of <unk>.
Lots of tariffs and that the pace that theyre coming.
Look it is driven by what you said, a combination of raw materials and freight and labor and our teams.
We're very closely from a category management perspective to work with our suppliers to look at commodity tracking on the cost model on the supplier line reviews, and while we don't break out specifically how much is each component.
It's made of teams worked with our suppliers on that.
On the industrial side, it's more normal so I would tell you their inflation is definitely more normal.
So what we do think is that second half will be more active than Q2. So we could see as much as 2 times the second quarter inflation rate in our second half, but again couldn't be happier with the teams in all of our businesses and the work they're doing to pass those through to our <unk>.
Customers and be able to get greater growth gross profit dollars, but maintain our gross margin rate. So we're working hard on that and we are definitely optimistic as we look ahead that will be able to do that again in the second half.
Okay. Thank you I'm on my follow up question is Jeff.
Around the global supply chain could you remind us if you have any meaningful exposure to Vietnam since that seems to be an area of the world. That's all I'm, having trouble dealing with all the Delta volume right now.
Okay, we have no material exposure to Vietnam.
And Kate I would just add 1 other thing we have our geographic diversification if you will.
Is really great protection for us so whether we have domestic suppliers, we have European suppliers, we have Asian suppliers.
Have the ability to have protection with a broad diversification amongst our geographies and supplier base.
Thank you.
Thank you.
Thank you, ladies and gentlemen, we will go back to the line of Bret Jordan with Jefferies.
He is working on this time.
Yes, it is area Brett.
A lot of phone problems on this call today.
I guess a question did you give us.
<unk> Napa comp against the 19 second quarter I might have missed that.
Yes, the U S comp.
2 year stack is mid single digits.
Okay, Great and then I guess question on on the on the.
The wage inflation that youre seeing in I guess.
<unk> and B, what kind of cost increases are you seeing at the store level.
Yes, Brad I think what we would talk about on the wage inflation again similar to on the inflation on the products side. This is.
A big factor in what we're seeing I mean, all companies are seeing rising costs and inflation certainly in wages and freight freight and as we mentioned some other categories.
Do think when we looked at our SG&A this quarter that our inflation and our SG&A was certainly greater than the products inflation, so more like 2% on our cost and that ended up being about 50% to 60 basis points on our SG&A and we certainly didnt have that in Q1.
1 so we did have that in Q2, but look we're working hard with investments and projects and again weather will mentioned it whether its transformation our strategic investments in productivity, but we do think less inflation in wages stays with US we don't believe it's necessarily transitory for this year.
We're going to continue to work hard on it but we think it stays with us for a bit Hey, Brett I would also add.
I would also add that its a very surgical approach so by geography by job type.
So we've done a lot of really good thinking and analytics to make sure that we're hitting the areas of the business that are most impacted but just wanted to share that perspective.
Okay, Great and then a question on regional performance I think you called out weather is 1 of the positives could you talk about sort of in the U S. On.
Auto market about the highlights on the low lights on maybe the spread in comps between the peak and the valley.
Yes.
On this.
This quarter Brett.
Does was unprecedented with the strong double digit growth we saw across all 6 of our divisions, leading the pack.
For us as our guys up in the up in the northeast.
But they were impacted the most last year. So it does stand to reason a bit but.
Really strong performance on the east going down to the Atlantic.
Also pleased though out west in the Mountain Division. These guys continue to deliver so.
Top to bottom.
The.
The division out of this 6.
<unk>.
Of the 6.
We had a spread anywhere from 25% to 26% on the top end and 20% on the bottom. So all really really strong performance across across the U S.
Okay, great. Thank you Youre welcome Brett.
Thank you. Our next question comes from the line of Greg <unk> with Evercore ISI. Please proceed with your question.
Hi, Thanks.
And really 2 questions I'd start on inflation just to make sure im on getting it right the $1.50.
As in the product Cogs, but then there's also SG&A inflation I guess asked another way what sort of.
Top line benefit or do you expect to see the pass through was a 3% to 4%.
Offset all of the areas of cost inflation that youre getting either yourself or with the jobbers.
Yes, because of our transformation work that we did in some of the cost saving work that we've done we think it's less than 3% that we would have to have.
If you will to pass through but it's definitely this is more specific to U S. Automotive. So we want to make sure that again as we've talked about this product inflation and honestly even to some extent the inflation in wages and whatnot. It is a little more prevalent in U S automotive.
So again, we are able to leverage our cost with less than 3% comp. So that's something that we achieved with our cost savings. So we're just going to keep again, we've got a lot of initiatives in place I want to just remind you, though we still have full year operating margin improvement.
Our full year, we've got that 20 to 30 basis point operating margin improvement. So we still feel good about being able to deliver that this year.
Got it and maybe linked to that on the margin side, you mentioned vendor.
Bonuses, helping or is that more relevant to automotive or industrial.
Yes, actually that's on the gross margin side and so our gross margin improvement in the quarter on the 120 bps about a third of that was volume incentives. That's both on automotive and industrial and it's directly related to the additional $1 billion of revenue that we had and tied to the product purchases.
So about a third of the gross margin was improved volume incentives.
<unk> of it was from mix, we've talked about geographical mix product mix customer mix and then a third is just from our strategic category management initiatives and pricing initiatives.
Again, feeling good about gross margin as we look ahead.
And I'm going to sneak 1 and if I could you said July Paul <unk> was as strong as June is that a lot.
I'm, sorry, Greg that equal in both commercial and for DIY or is 1 sort of taking the lead on that.
Our <unk> business.
Greg as you heard is is very very strong and that goes across.
Our major account business, which has really really bounce back strong our auto care Napa Auto care business is really strong what we're really pleased with Greg is our government and fleet business, which has lagged.
Behind our auto care and major account recovery of that business has bounced back with high single digit growth. So.
<unk> really continues to carry the load, which by the way we fully expected as as the economy bounce back as miles driven really began to ramp back up or there's so much pent up demand out there our garages are as busy.
As we have seen them in quite some time. So <unk> continues to carry the weight and we think as as we've seen in recent years.
<unk> is going to continue to be really strong.
Great well good luck to everyone have a great 1 day thanks, Greg.
Thank you. Our next question comes from the line of Seth Basham with Wedbush Securities. Please proceed with your question.
Sure.
Thanks, a lot and good morning, I guess my first question is around on a global supply chain challenges that you and most are facing do you feel like you're missing sales because you're out of stock on certain products or product categories.
Look.
Here's what I would say Seth.
We're all we're all dealing with supply chain issues all of our peers are well documented as you said.
Our primary challenges, it's not in the industrial business, it's not in our international business, It's primarily a U S automotive business issue, which is.
Just as a reminder, about a third of our overall.
I've got a tremendous amount of confidence on our global sourcing team and we're we're very confident they're doing everything they can I would I would tell you said that at this time being being a global player having the size and scale that we have.
We do believe that we're getting as good of supply as anybody in the automotive aftermarket and our team is working incredibly hard to ensure that that remains the case are we missing sales here and there you would have.
You would certainly have to believe we are but we also believe that day.
That will come back and and our suppliers. We think it's transitory we know it's transitory they'll get it together and we fully expect that to come back.
Probably later in the second half.
Could even could even carry a bit into 'twenty 2.
That's helpful color and then thinking about your guidance and the implied.
Operating margin for the balance of the year. It seems like youre expecting incremental margin to not be quite as strong going forward with a very strong improvement in your sales outlook on that limited improvement in your margin outlook is there a reason for that that you could help us understand.
Yes look I think our implied margin outlook for the rest of the year, the full year and compared to what we had last quarter it would be similar.
We are and again, we have considered some other factors as we've talked about inflation on our cost, but we've considered the strong growth. We've considered the stronger top line and I think when you look at our margin improvement.
The 2 year basis. When you go back to 2019, having that stronger margin improvement year over year is something that we expect to deliver so I think again we.
Have a little bit of cautiousness as we look ahead, but it still improved margin for 2020 and on a 2 year basis at 70 to 80 basis points for 2019.
Got it thank you very much thanks Pat.
Thank you. Our next question comes from the line of Liz Suzuki with Bank of America. Please proceed with your question.
Great. Thank you just I guess on.
We have now lapsed the periods last year that were most severely impacted which specific customer groups or regions. Do you think are still running below normalized levels are still being negatively impacted by the pandemic.
Well great.
Great question I would tell you that.
I mentioned earlier are great.
Bounce back in our major account business, our auto care business fleet and government debt.
That segment, while up high single digits in the quarter.
It's still trending a bit behind.
Some of some of the other categories. So that I guess that would be the 1 that I would call out but.
It's hard.
It's hard to call out our team when they are built to deliver on our high single digit increase in net product cat are in that customer category.
Yeah fair enough is that the same.
In the case of the industrial group what do you think are the customer groups that are still pretty far below normalized levels are still have the most potential room for recovery, yes, so on the industrial side.
If you look at the 1 area, where we were.
<unk> a bit year over year was in the safety type products, but if I look across the industries.
Just about every 1 is is putting up tremendous numbers.
I mentioned equipment and machinery.
As really being strong.
New category that we're looking at fulfillment and logistics, which is all distribution center related is really strong we've had some challenges on the OE automotive <unk>.
Primarily due to a shortage in the chips.
But that's going to that's going to come back. So again all in all our motion team is performing at an incredibly high level and had a great quarter.
Great. Thank you.
Youre welcome.
Thank you. Our next question comes from the line of Daniel <unk> with Stephens Inc. Please proceed with your question.
Yes. Thanks I appreciate you give me on.
On a go back to the SG&A outlook you touched on apparel.
Things are inflationary and you noted.
That's accelerating but I think you also mentioned some of the deleverage was from investments in specific projects for future transformation can you provide any more color on what that is and then a related question. Obviously you removed a lot of costs last year with the business how has the pace of bringing those costs back then this year relative to your expectations have you been able to.
Keep some of those structural costs out.
Yeah. So when we look at our SG&A and I'll I'll go about it a couple of different ways for the quarter. So this quarter. The comparison to last year was our highest level on temporary cost savings, we had over $150 million.
Cause temporary cost savings last year in Q2 significant portion was government subsidies payroll index and delayed merit increases furloughs. So we knew this would be our toughest quarter on those so thats honestly about half of the increase in the dollar increase in SG&A.
The increase in variable costs as I mentioned, I mean, we have incremental $1 billion more in sales. So about a third of the increase was related to bringing back the variable cost to handle the volume.
And then the investments in project, a relatively small amount, but an important amount. So that is investments will mention some of the productivity improvements. We're doing we've got in our industrial business automation in their warehouses in our automotive business consolidating facilities and putting in further automation.
On investments in pricing.
And digital initiatives, so that that was roughly say, 5% of the dollar increase and then the remaining amount roughly 10% of the dollar increase was the rising cost and inflation. What I would tell you is we have capped the permanent cost savings that we had last year, which ended up.
Being a $150 million on a target of $100 million and in bringing back. These costs. I mean, we had just a surge in growth and so you do have to bring on those variable cost. What we didn't really expect was the rising costs and inflation, but thank goodness. We did the work we did on the on the transformation team and again, we can.
Continue to see some investments in projects as we look ahead.
Got it that's helpful color and then just a follow up on the M&A, obviously things seem like they're picking up as we hopefully move further away from the pandemic can you talk about what's that where multiples are and maybe by geography. It looks like you bought a little bit kind of across the automotive landscape, but given maybe some of these customers had elevated results last year maybe.
Were weaker on.
Our sellers can bring to the table with reasonable multiples or how hard is it to find a deal that you actually like right now yes.
Yes, it's a great question, Daniel I would say Youre right. The M&A environment is very active.
I would say that.
The market is working through the expectations of sellers. You are you are right in thinking that.
Those expectations are pretty high I think for us the <unk>.
Key takeaway for everybody to hear is the discipline that we have around doing the right deal. So we looked at a lot of deals to do a few.
And do the right ones, where we can create a ton of value. So.
You are right, though we're actively working the pipeline we will continue to work on pipeline, but we're going to stay very disciplined on doing the right deals for ourselves.
Hey, Daniel I'd also mentioned, we're very selective.
And our M&A targets and I think a couple that were called out were.
When parts, which is a.
Online a leading online player in Europe.
It's very targeted we want to further our online presence across our European markets.
And we found a great partner in in wind parts and so more to come on that later, well and I were actually.
In the Netherlands last week, our first international trip in 18 months spent a half day with this group and <unk>.
Very impressive and we think nice upside in the future.
And as a quick related follow up can you disclose what kind of multiples you typically try to pay for these kind of assets in the automotive segment.
We're not going to disclose that at this time.
Thanks Best of luck guys. Thank you.
Thank you.
Last question today comes from the line of David Bellinger with Wolfe Research. Please proceed with your question.
Hey, everybody. Thanks for taking the question here. So I believe you mentioned stronger ticket in U S automotive.
Inflation, but is there anything else behind that on the consumer side that really stands out is it larger ticket repairs shift or older used vehicles anything else, there and just how sustainable can that trend be.
Yes.
David.
We've seen a nice a nice bounce up in our.
Average ticket size and we've been watching that for a number of years, our our ticket count.
Was a little bit of a concern where we saw a bit of a decline in recent years, what we're really excited about.
These past couple of quarters as we're watching both ticket count.
And average ticket size go up and in this past quarter, both were up high single digits. So.
We think that's a long term trend as parts continue to get.
More and more expensive and as repair orders continue.
The average repair order continues to move up so.
Again, we're pleased.
Especially pleased to see our traffic up but also tick it up in both going in the right direction.
Alright, I appreciate that my follow up here.
Yes, David the answer is yes to all of those things I mean again, you've got an extremely tough labor market in the U S. There are labor shortages everywhere and whether its stores its warehouses as delivery drivers. Our teams are working tirelessly and there is additional overtime.
Theres temp help there is contract labor and you don't have 20% increases in volume as Paul mentioned, 2025% increases in volume across these geographies with a labor shortage and so we're doing all we can to take some burdens off our team and to make sure that we can properly service on.
Our customers, but it is.
Our raised raising wages in certain areas in certain categories and I think as we mentioned I mean, it was roughly 50% to 60 basis points. When you look at overall inflation on our SG&A wages being the biggest part in freight beyond the secondary component Hey, David I would also just tag on to that.
To say that and to clarify that.
The issue is primarily in our U S automotive business and and it's in the retail stores.
Roles like delivery drivers.
That are coming a bit under pressure, we're not seeing this.
Type of pressure in our industrial business, nor are we seeing net.
On the international side, so again.
The 1 third of our business U S. Automotive is where we're feeling the impact and primarily in our retail stores delivery drivers those type those type roles.
Yes, yes very.
Very helpful. Thanks, again and best of luck as you go through the back half here. Thank you appreciate it. Thank you.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to management for any final comments.
We'd like to thank you for joining our call today. We appreciate your interest and support of genuine parts company and we look forward to speaking with you on our next call for Q3, Thank you and have a great day.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.