Q2 2024 Genuine Parts Co Earnings Call
Good day, ladies and gentlemen, welcome to the genuine parts company second quarter 'twenty 'twenty four earnings conference call. At this time all lines are in a listen only mode. Following the presentation you will conduct a question.
And answer session.
Speaker Change: If at any time during this call you require immediate assistance. Please press star zero for the operator.
This call is being recorded on Tuesday July 26 2024 at.
Speaker Change: At this time I would like to turn the conference over to Tim Walsh Senior Director Investor Relations. Please go ahead Sir.
Tim Walsh: Thank you and good morning, everyone welcome to genuine parts company second quarter 2024 earnings call joining us on the call today are will Stengel, President and Chief Executive Officer, and Bert Nappier Executive Vice President and Chief Financial Officer.
In addition to this morning's press release supplemental slide presentation can be found on the investors page of the genuine parts company's web site.
Today's call is being webcast and a replay will also be made available on the company's website after the call.
Following our prepared remarks, the call will be opened for questions. The responses to which will reflect management's views as of today July 23 2024.
If we're unable to get to your questions. Please contact our Investor Relations Department.
Please be advised this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results as reported under generally accepted accounting principles.
A reconciliation of these measures is provided in the earnings press release.
Today's call May also involve forward looking statements regarding the company and its businesses as defined in the private Securities Litigation Reform Act 1995.
The company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest SEC filings, including this morning's press release.
The company assumes no obligation to update any forward looking statements made during this call with that let me turn the call over to will.
Thank you Tim and good morning, everyone welcome to our second quarter 2024 earnings Conference call.
Before we turn to the results of the quarter I'd like to share a few thoughts as part of my transition into the CEO role over the last 45 days.
Will: First and foremost, it's an honor and a privilege to serve as only the sixth CEO and genuine parts company's nearly 100 year history.
D. C has a special culture, which was founded on taking care of our people and offering solutions to our customers efficiently and consistently.
This has served our business incredibly well over the years and will remain a core element of our foundation.
As part of the transition over the last several months I've spent time engaging with our teammates customers and suppliers around the world.
I'll share a few key messages that have come out of those discussions and there are areas of emphasis as we move forward.
First leverage our culture as an advantage.
We have a unique and differentiated culture.
Our global engagement data shows the vast majority of our employees are incredibly proud to work for GPC.
That's a fact of which we are proud of and is a testament to our strong consistent leadership over the years.
We must nurture our culture to extend our unique advantage, but we must also continuously evolve with our customers and our markets.
Second build high performing teams.
Our talent strategies have been intentional as we continuously work to be an employer of choice we.
We have a capable group of leaders around the world that have aligned values and a clear understanding of our shared vision.
But we amplify our impact when we relentlessly build high performing teams throughout the organization, who are energized to work together solve problems and deliver results.
Third capture our exciting opportunities we.
Will: We streamlined GPC to focus on two core businesses with market, leading positions and significant exciting opportunities.
We believe size and scale creates an advantage when we work together as we invest in capabilities and share best practices to solve common challenges, We act faster, we're more efficient and we create value.
Will: Fourth focus and execute our defined plans.
We believe we have the right strategies and initiatives in place.
We've worked together over the last three years to four years as a global organization to understand our opportunities and prioritize the work that we're doing.
We align globally around five key priorities, including talent and culture sales effectiveness technology supply chain and emerging technology complemented by a disciplined acquisition strategy.
This focused approach is not changing.
We are intentional we're disciplined and we're leveraging expertise around the world to reduce complexity improve the customer experience deliver profitable growth and increased productivity.
And lastly play to win and continuously improve.
Thanks to the hard work of our teammates we've made great progress as a company over recent years.
But we're focused on continuous sequential improvement to build on our momentum.
We can't be satisfied with good instead striving to be great always working to be better and faster in all that we do.
Overall, it's fair to say I'm more energized than ever about the opportunities we have as a company and the future for genuine parts company.
I want to thank each of our over 60000 global GPC teammates for their ongoing passion for serving our customers.
In addition to serving our customers every day, our teams are executing and delivering on a broad set of initiatives, while navigating a dynamic and challenging macro environment.
Thank you to all as always for your good hard work.
Now, let's turn to the specifics of our quarterly results.
A few highlights for the second quarter include total GPC sales of $6 billion, which increased approximately 1% versus the same period in the prior year.
And included a tough start to the quarter with particularly weak sales month in April across both segments.
Total company gross margin increased 50 basis points with continued execution of strategic sourcing and pricing initiatives.
And in May we announced the acquisition of motor parts and equipment Corporation, our largest Napa independent owner in the U S. With a network of 181 locations across Illinois, Indiana, Iowa, Michigan, Minnesota and Wisconsin.
It's a great example of our ongoing initiatives to own more Napa stores in priority markets.
Our second quarter results were below our expectations. The variance can be attributed to three key themes weaker.
Weaker than anticipated customer demand in industrial.
Accelerated softness in Europe, and choppy demand in the automotive aftermarket in the U S.
Many factors outside of our control, including higher interest rates geopolitical uncertainty and persistent inflation are driving overall weaker customer demand.
This weaker demand environment and ongoing cost inflation resulted in adjusted earnings flat year over year for the quarter, which Bart will cover in more detail shortly.
Looking at our results by business segment.
During the second quarter total sales for global industrial were $2 2 billion.
A decrease of approximately 1% versus the same period last year and comparable sales were down one 6%.
When we look at the sales performance for our industrial business. The main headwind remains lagging industrial production activity.
Over the past 20 months manufacturing PMI readings continued to be in the longest period of contraction since the financial crisis in 2009.
As represented by a PMI index below 50.
While we saw positive reading in March during the second quarter. The monthly PMI readings reverted back into contraction territory versus our cautiously optimistic expectation of an improving backdrop coming out of the first quarter.
From a cadence perspective average daily sales were softer in April and relatively flat in May and June.
In addition, the higher interest rate environment, and an election uncertainty as kirby's larger capital spending decisions across our diversified customer base as they remain cautious.
Looking at motions results across its end markets served we're still seeing mixed performance across the board.
Five of our 14 end markets showed positive growth during the second quarter, which was in line with the first quarter with relative strength coming from mining and chemicals offset by weakness in equipment and machinery and fabricated metals and aggregates and cement.
Despite the market softness motions corporate account customer base, which represents approximately 45% of the business continues to perform well and is showing positive growth, which is a true testament to motion strong value proposition.
Additionally, during the second quarter the motion team successfully renewed several key multi year corporate account agreements and remains active with various well defined field sales initiatives.
Industrial segment profit in the second quarter was $277 million down approximately 2% versus prior year and 12, 4% of sales representing an approximate 10 basis point decrease from the same period last year.
Our business in North America performed well despite the softer sales performance, but it was offset by pressure from our business in Australasia, given the challenging local economic environment and cost pressures.
Turning to the global automotive segment sales in the second quarter were $3 7 billion, an increase of 2% with comparable store sales decreasing <unk>, 6%.
During the quarter all of our automotive geographies showed positive sales growth in local currency.
Similar to the first quarter the global automotive sales benefited from inflation remained less than 1% in the second quarter and we expect the same in the back half of the year.
Global automotive segment profit in the second quarter was $314 million down four 7% versus prior year and eight 4% of sales representing a 60 basis point decrease from the same period last year.
Will: Our second quarter results for the global automotive segment reflect pressures from a challenging sales environment across our geographies combined with inflation driving higher cost and outpacing sales growth.
Now, let's turn to our automotive business performance by geography.
Starting in Europe, our team delivered total sales growth of approximately 8% in local currency and comparable sales growth of approximately 1%.
We've seen a broadening and the moderation in demand across our geographies in Europe through the quarter.
We believe this is driven by an incrementally more cautious consumer as well as a reduced sales benefit from inflation, which is also now less than 1%.
Despite this our teams are focused on serving our customers delivering on our strategic initiatives and delivering above market performance.
Will: We're winning share with target key accounts in the Napa brand expansion continues to be a differentiator.
For 2024, we're on track to deliver sales of Napa branded product in excess of $500 million euros above our initial internal target.
Our ongoing bolt on acquisition activity also continues to have a positive impact and create value in Europe.
In Asia Pac automotive business sales in the second quarter increased approximately 3% in local currency with comparable sales growth of 2%.
Will: Similar to last quarter. This performance compares to a high single digit growth in the same period last year.
Sales for both commercial and retail increased in the second quarter with retail showing relative strength.
The macro environment remains challenging in the region, but the teams are executing well to grow in excess of market and take advantage of their industry leading position.
In Canada sales increased 1% in local currency during the second quarter with comparable sales decreased approximately 2%.
Our Canadian team showed sequential improvement from the first quarter, despite ongoing pressure from a more cautious consumer and difficult macro environment.
Will: Sales in automotive and heavy vehicle perform similarly during the quarter with both having slightly positive growth.
In the U S automotive sales increased <unk>, 5% during the second quarter with comparable sales decreasing one 5%.
Will: This represents a slight improvement in our reported results sequentially from the first quarter and was generally in line with our expectations.
As we looked at our sales cadence through the quarter average daily sales growth was pressured in April and then showed solid sequential improvement throughout the remainder of the quarter.
Our overall results also benefited from our <unk> acquisition in May.
Will: From a customer segment perspective sales to our commercial and do it yourself customers were both slightly down during the quarter with commercial outpacing do it yourself.
For commercial fleet and government auto care and other wholesale were all essentially in line, while major accounts underperformed the group driven by continued cautious and consumer as we are seeing elevated levels of deferrals from customers on certain repairs.
For sales into our independent store owners, we saw another quarter of more normalized buying behavior, which is a trend. We believe will continue throughout the balance of the year.
Will: We have active initiatives across our U S automotive business and we are encouraged by the progress and the improvements that they are delivering.
During the second quarter, we saw further improvements in inventory fill rates and stocking levels for specific categories, where we had opportunity.
Additionally, the team continues to elevate the execution in our stores and Dcs, which is driving better customer service metrics.
Will: We're pleased with these results, but we are intensely focused on continuous sequential improvement.
Will: And finally, we're making good progress on our initiative to evolve our operating model at U S automotive to own more stores in selected priority markets.
Our recent acquisitions of independent stores are being integrated into the Napa network with a focus on improved performance and synergy capture.
In parallel we continue to partner with our existing network of independent owners, who play an important role to help us serve our local markets.
Our current slight initiatives are designed to improve growth and operational excellence in both company owned and independently owned stores.
Will: During the second quarter, we acquired 242, Napa stores from our independent owners as well as competitive stores in key markets.
We're leveraging our disciplined integration playbook as we integrate these stores into our own store base.
We will continue to make methodical progress with our strategy of owning more stores in the second half of the year as the pipeline remains active although we don't expect the recent acquisition pace to be linear through the year.
With all these evolving factors in mind, we moderated our 2020 for outlook for sales and earnings per share.
We believe it's prudent to adjust our expectations for the second half of the year based on the current information available to us, particularly as it pertains to the industrial and European market outlook and Bert will provide further color in a moment.
Bert: While our quarterly results reflect a softer economic backdrop than when anticipated are in flight initiatives and fundamental prospects for our business remain robust.
Within automotive industry fundamentals like miles driven the age of the car park and new and used vehicle prices remain supportive.
We benefit from the fact that <unk> core business serves the commercial customer where many repairs are non discretionary and break fixed in nature.
We like this position as we view the commercial customer as the growth engine of the industry given the increasingly complex vehicle fleet.
Within industrial and our business is well diversified across 14 and growing different end markets that cover a wide range of the manufacturing economy, and we're positioned well to take advantage when economic conditions improved.
Bert: Studying PMI cycles over time, we see a pattern of long periods of attractive growth once the index and flex into an expansion territory.
Motion is highly technical sales expertise and solutions based selling drive deep relationships with our customers and helps to keep their operations functioning effectively every day and in every market cycle.
As the market leader, we believe were well positioned to capitalize on the eventual improvement in the manufacturing economy near and long term as we expand our customer base and grow share of wallet in this fragmented market.
Lastly, before I turn the call over to Bert on behalf of the entire company, it's only fitting that I'd take a moment and extend our gratitude to Paul Donahue not only for his tenure as CEO, but for his many contributions to genuine parts company over his 20 year career.
Bert: Under Paul's leadership as CEO, the company strategically evolved and transformed for the better.
A few highlight accomplishments under Paul's leadership.
Bert: To simplify the GPC business mix to enable strategic focus on our automotive and industrial segments.
Champion the expansion of GPC around the world growing our global footprint from six countries in 2016 to 17 countries in 2024, including the transformational acquisition of AIG in Europe.
He led us through a pandemic and kept our team safe he kept our culture thriving any kept our teams operating to ensure we took care of our customers.
T accelerated strategic investments of over $2 billion in growth capital, including the transformational acquisition of command distribution group.
Extend our industrial leadership position.
Bert: And obviously many other accomplishments.
Altogether since 2016, GPC has grown in sales from $15 billion to.
To approximately $24 billion.
It goes without saying that Paul's positive impact on GPC has been remarkable.
His ability to lead our teammates around the world has been inspiring and he's a tremendous steward of our GPC culture importantly, a good friend to all and we certainly look forward to his continued counsel in his role as executive Chairman.
Speaker Change: Thank you again to the entire GPC team around the world and with that I'll turn the call over to Bert.
Thank you will and thanks to everyone for joining us today.
Our second quarter results were below our expectations as market conditions, including lagging industrial production and weaker demand in our U S automotive and European businesses negatively impacted our performance.
Despite the muted market backdrop, our teams continue to operate with discipline and are making progress on priority strategic investments necessary for the business.
The softer market conditions combined with the impact of inflation and acquired businesses on SG&A resulted in flat adjusted earnings year over year.
With that context, let me take a few moments to comment on more specific details of the quarter along with our updated view on our outlook for the year.
My comments. This morning will focus primarily on adjusted results, which exclude the nonrecurring cost related to our previously announced global restructuring program and transaction costs related to the acquisition of Amtech.
During the second quarter, we incurred a total of $62 million of costs on a pre tax basis or <unk> $46 million after tax related to restructuring efforts and impact integration costs.
As we look at the second quarter total sales were up 8% versus the prior year, reflecting a two 2% contribution from acquisitions.
Partially offset by a 9% decrease in comparable sales and a 5% unfavorable impact of foreign currency and other <unk>.
During the quarter the contribution from inflation was less than 1% in both our automotive and industrial segments in line with our expectations.
For the quarter, our gross margin expanded by 50 basis points from last year, driven in part by the ongoing execution of our strategic sourcing and pricing initiatives.
Our investments in technology and category management capabilities are continuing to deliver positive results in our gross margin performance.
In addition, the acquisitions, we are making in our U S. Automotive business contributed approximately 30 basis points of gross margin expansion in the quarter.
Adjusting for restructuring expenses total adjusted operating and non operating expenses were 29, 2% of sales in the second quarter, an increase of approximately 80 basis points from total expenses in the prior year.
As we look at our expenses for the second quarter, we had a mix of factors, including the following.
A negative impact of 50 basis points from increased salaries and wages associated with the acquisitions in U S automotive in Europe, particularly from our recent <unk> acquisition.
Salaries and wages cost continued to be negatively impacted by mandatory increases in minimum wages and our international businesses.
Further inflationary cost pressure and renewals of leased facilities and acquisitions drove a negative impact of approximately 30 basis points and rent expense.
We experienced a negative impact of approximately 10 basis points from our ongoing investments in technology to modernize our business.
Interest expense continues to be a headwind in 2024, driving a negative impact of approximately 10 basis points and our expenses.
These items were partially offset by cost savings, resulting from our global restructuring program of approximately 10 basis points.
We expect the incremental SG&A from acquired businesses to abate over time as we execute on our integration plans and capture of synergies.
As a reminder, we are just 60 days post close of our <unk> transaction with an integration that is expected to last approximately 24 months.
For the quarter segment profit margin was nine 9% down 50 basis points year over year.
The decrease in segment profit and segment margin was primarily driven by the softer sales growth environment and associated deleverage on costs.
Our second quarter adjusted net income.
Which excludes nonrecurring expenses of $46 million after tax or <unk> 33 per diluted share was $342 million or $2 44 per diluted share in line with the same period of the prior year.
Speaker Change: Of the $62 million of nonrecurring expense in the second quarter, approximately 37 million was related to our global restructuring program and the remaining $25 million was related to the <unk> transaction.
Our amtech transaction costs, primarily include impairments of leases and leasehold improvements for facilities, we will not use as we integrate the business and capture synergies moving forward.
Turning to our cash flows for the first six months of 2024, we generated $612 million in cash from operations up 34% year over year and $353 million in free cash flow, which was up 40% from the prior year or.
Our strong cash flow in the first half of 2024 reflects a longstanding hallmark of GPC, which is delivering robust cash flows through low growth cycles.
We closed the second quarter with $2 billion in available liquidity and our debt to adjusted EBITDA ratio was one eight times, which compares to our targeted range of two to two five times.
In 2024, we've invested approximately $260 million back into the business in the form of capital expenditures, including $143 million in the second quarter.
In addition, we have invested $580 million year to date in the form of strategic acquisitions, including the acquisition of our largest independent owner impact.
With this acquisition we converted <unk>.
181 independently owned stores in the Midwest to company owned bringing our total company owned store count to nearly 30% of our U S stores.
We expect the acquisition to be accretive both before and after we realized synergies as we capture more commercial opportunities gross margin and optimize the SG&A of the acquired business.
Our global restructuring initiative to better align our cost structure and assets with the current environment remains on track.
Speaker Change: Year to date, we've incurred approximately $120 million of costs related to our restructuring efforts in line with our range of $100 million to $200 million.
During the second quarter, we realized approximately $10 million of benefit from our restructuring and expect to deliver a benefit of between $20 million to $40 million in 2024, and $45 to $90 million on an annualized basis in line with our expectations are.
Our restructuring efforts are a key element of our work to offset the headwinds of current market conditions and cost inflation across the business.
Turning to our outlook, we've updated our views on the remainder of 2024 based on our perspective on current market conditions across the business, most notably for our industrial European and U S automotive businesses.
We now expect diluted earnings per share, which includes the expenses related to our restructuring efforts will be in the range of $8 55 to $8 75.
Compared to our previous outlook of $9 five to $9 20.
We now expect adjusted diluted earnings per share to be in the range of $9 30 to $9 50.
Up slightly to 2023 at the midpoint of the range.
This compares to our previous outlook range of $9 80.
To $9 95.
Speaker Change: Our wider range is reflective of the current macro environment, which has elevated the degree of uncertainty from earlier in 2024, particularly on the trends on the industrial side of the business.
Our earnings presentation includes an illustration of the key business drivers impacting our revised outlook for 2024.
Let me take a moment and walk through the details of these components starting with sales.
We now expect total sales growth in the range of 1% to 3% down from our previous outlook of 3% to 5%.
Speaker Change: Included in our outlook is the assumption that the benefit from inflation remains at more normalized levels contributing less than 1% for both business segments.
Speaker Change: By business segment, we are now guiding to the following.
1% to 3% total sales growth for the automotive segment with comparable sales growth in the flat to 2% range.
Speaker Change: And for the industrial segment, we expect total sales growth of flat to 2% with comparable sales growth in the flat to 2% range.
Our reduced sales outlook for the year is driven by our updated expectations around market conditions in the second half, which we announced the a softer than our previous views and are informed by third party data as well as the trends we experienced in the second quarter.
In addition, we've seen a soft start to July with disruptions from hurricane barrel, a more pronounced industrial shutdown around the July 4th holiday and impacts from the crowd strike outage that began late last week.
Within industrial the lagging industrial production activity remains a headwind for the business.
Speaker Change: The industrial economy continues to operate in the longest period of contraction as defined by PMI levels below 50, since the great financial crisis.
Our original outlook for 2024 assumed we would see an uplift in manufacturing activity entering the second half of 'twenty four in connection with easing interest rates.
We now believe the improvement in the industrial backdrop is going to come much later in 2024 with a very little benefit to our revenues for the year as the timing of interest rate cuts if any remains unclear.
And our European and U S automotive business market conditions continue to moderate as consumers are impacted by a wide range of factors, including inflation interest rates and geopolitical election uncertainty.
Speaker Change: For gross margin, we now expect 40 to 60 basis points of full year gross margin expansion, primarily driven by our continuous focus on our strategic sourcing and pricing initiatives.
As well as benefits from our acquisitions in U S. Automotive not previously included in our outlook.
Our outlook assumes that SG&A will deleverage between 50, and 60 basis points compared to our previous range of 20 to 30 basis points of deleverage.
Speaker Change: Our revised SG&A outlook takes into consideration our reduced sales outlook, which drives further deleverage as well as the impact of incremental SG&A from acquisitions in the U S automotive business.
Speaker Change: Our views include the expected benefits from our global restructuring activities.
Our global automotive segment margin, we now expect to be approximately flat with last year.
For 2024, we expect global industrial segment margin to expand by approximately 10 to 20 basis points year over year.
And finally, we are targeting corporate expense to be approximately one 5% to 2% of sales.
Turning to a few other items of interest.
We are confident in the strength of our cash flows in 2024 and continue to expect cash from operations to be in a range of $1 3 billion to $1 5 billion with free cash flow of $800 to $1 billion.
For Capex, we continue to expect approximately $500 million or 2% of revenue.
Speaker Change: As we look at 2024 the growth capital, we are deploying which is approximately 55% of our forecast will drive modernization of our supply chain, including new <unk> partner with.
Technology that enhances our customer experience.
Speaker Change: As we look at M&A, our global pipeline remains robust and we will continue to remain disciplined pursuing opportunities that create value.
<unk> continuing to pursue our strategy around the mix of company owned stores at our U S automotive business.
In closing.
Speaker Change: We continue to operate in challenging market conditions and are taking actions, including advancing our global restructuring activities to ensure the long term profitability of the business.
Speaker Change: We believe the backdrop of lower sales growth is market, driven and not specific to our business and we are well positioned once the cycle turns more favorable.
We remain confident in the underlying fundamentals of our businesses and we'll continue to invest with a long term focus.
Thank you and we will now turn it back to the operator for your questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone Fine you will hear upfront. Mr. Han has been raised should you wish to decline from the polling process. Please.
Press Star followed by the number too.
You are using a speaker phone please lift your handset before pressing any keith.
Speaker Change: Maybe also request for analysts to keep yourselves from one question and one follow up please.
Please please thank you the question.
Our first question comes from the line of Bret Jordan from Jefferies Go ahead. Please.
Hey, good morning, guys.
Good morning, Brian.
Well your comment about independence expecting more normalized buying behavior in the balance of the year could you give us I guess more color I think they destock late in 'twenty, three and then bought in pretty well in the beginning of 'twenty four I guess, how do you see the cadence working out.
Yes look we've seen continuous sequential improvement on that topic as I mentioned in my prepared remarks, all of the initiatives that we're working on here in U S. Automotive are affecting both company owned and independent owned stores and so when we think about inventory strategy.
Speaker Change: <unk> service excellence those initiatives are all relevant for what we're doing with the independent owners and we've seen nice sequential improvement through the year, we would expect that to continue.
Through the balance of the year, the math of how that works I won't get into the specifics but.
The tone is good the relationships are good the partnership's good we had a bunch of independent owners into Atlanta.
Just last week and everyone's got their hand in the huddle and committed to continuing to grow the business and compete in the local markets.
Okay, Great and then on Europe is there anything notable I guess regionally.
France has had some political backdrop I mean, you are talking about sort of softening in that market, but is there anything to attribute it to sort of from a geographic standpoint or is it just widespread.
It's more widespread than it was probably 90 to 100 days ago.
Just to be clear, we're really pleased with the European performance I mean, the business continues to grow and grow profitably.
The M&A pipeline is having its effect with very accretive acquisitions in particular are Spanish and Portuguese businesses. After their acquisition last year continue to perform really well there a standout.
<unk> brand is a differentiator as part of that to help us compete in the market, but we've seen some softness earlier in the year in the UK and France I would say it's.
Speaker Change: It's moderated growth through the balance of the business call It Germany.
Benelux et cetera, but the business is still performing in excess of market and we think we're winning share so tougher times, but proud of what the teams executed over there.
Great. Thank you.
Thank you.
Our next question comes from the line of Scot Ciccarelli from Keybanc go ahead. Please.
Good morning, guys.
Hi, you guys referenced a few times about your pricing initiatives is providing a boost to gross margins for your auto business.
Assuming that is code for raising prices so with that context at what point do you start to run into competitive pricing issues, especially in an environment, where the WD has become more price competitive and one of your public competitors is actively reducing prices.
Yes, Scott Thanks for the question.
I think our pricing strategies are more holistic than just raising prices.
And so as we've talked about before we talk about it through the prism of category management, which is the intersection between not just pricing, but also sourcing and in some at the SKU level and some skus are going up.
And many others youre going down as well and the challenge that we put to the category managers across the businesses net net.
Position us.
A better margin profile as we move forward, both on the sourcing and pricing side. So.
We're being very thoughtful about being competitive in the market on certain categories, and we're balancing that with <unk>.
A lot of various scientific and thoughtful technology work that we've done around data analytics to make sure that we've got visibility down at the local field level.
And when.
Scott This is Bert I'll, just amplify that a little bit with <unk>.
In the quarter. The gross margin improvement was skewed to the majority side from acquisitions. So we're seeing a nice benefit from the new acquisitions in U S automotive.
And just to parse out how do we think about this split between sourcing and pricing where you would have seen a bigger benefit in 2023 from pricing, we're actually drawing most of our benefit this year.
On the back of the work that will just described in category management and sourcing. So again pricing is a complex topic, it's a lot of moving things up and down to be competitive. So I wouldn't just categorize it as we're moving prices up it's a lot of moving pieces here, but we're also getting this might benefit from acquisitions as well.
Okay. Thanks, and then kind of related to that when you guys go you've been pretty active sequel.
Sequence trying to acquire some of your independence, when you guys own a store rather than selling product to an independent on a wholesale relationship can you give us some generalized color just regarding the sales and gross.
Profit dollar contributions once you own that business.
Yeah. So you know that's one of the benefits of this pivot in strategy. So we see the mix shifting to more company owned continue to lean in on the independent owner model as we have in the past and we'll have this hybrid model going forward, but as we look at isolation of adding more company owned stores.
<unk> come across a few prisms first commercially we will stop sharing the margin. So we see a difference there in terms of recapturing some of the margin that we were sharing previously and youre seeing some of that come through.
And what we've seen in the second quarter here secondarily. When you just start at the very top of the house. When you think about the commercial transaction itself will have more control over the transaction from the outset, so that means the price in the market.
We'll have the ability to adjust and flex the depth and breadth of inventory in the market to be competitive.
Some of those things where tension points between the independent owner and US before and then as you move through the rest of the P&L, We obviously, we get benefits from.
SG&A were able to simplify and streamline the back office in many cases, the independent owner had their own back office, which we can leverage our own.
We'll be able to capture some of the benefits from technology and continuing to drive technology into the stores.
And create some incremental leverage on some of the supply chain elements as well many of these independent owners have their own small stocking and many kind of off site locations that we obviously wouldn't need so as you move through the different elements of the P&L I think we have a lot of goodness there.
We bought a great business here in the second quarter with the <unk> business and we're already seeing benefits of that coming through our P&L. So we're excited about this pivot.
The team is doing an outstanding.
In terms of integration and execution.
Bringing these folks onboard.
Thanks, guys.
Thanks Scott.
Thank you. Our next question comes from the line of Kate Mcshane from Goldman Sachs Go ahead. Please.
Hi, good morning, Thanks for taking our questions.
Katharine Amanda McShane: We wonder if could just within Gis and if youre seeing any notable strengths or weaknesses by customer segment and also within automotive if you could talk to product categories that were the strongest if there was any meaningful change when the warmer weather.
Speaker Change: It came in in late June early July.
Okay. Thanks for your question on <unk>.
Speaker Change: Customer segment side for commercial.
We actually have seen relative strength as we said in our prepared remarks in the auto care fleet and other wholesale for us.
Our headwind continues to be our major account business.
And if you look at an <unk> comp major account theres different pieces inside of that book of business ranging from regional accounts to the big National guys, OE dealerships et cetera, and so there are some customer specific challenges in that book of business, but I will tell you.
There is just as many recent wins certainly on the regional accounts that we were talking about the other day as a team that we're really excited about that should position us well as we come through the second half of this year and into next year. So we're being really thoughtful and that major account book of business to make sure that it's a win win economic relief.
<unk> shipped for Napa and the customer and so we're going to be pretty disciplined as we think about that going forward from a category standpoint.
We have seen.
Some positive trends based on recent weather and all the categories that you would expect.
And as I said in my prepared remarks, the inventory progress that we've made through the first half of the year.
Has.
Been quite fruitful and so those targeted categories. We've seen nice momentum as we go through so the category managers are really doing a <unk>.
Very nice job in our sales folks out in the field on the commercial side are also being very thoughtful as well we're proud of the teams.
Thank you.
Thanks Kate.
Thank you.
We have our next question coming from the line of Chris <unk> from Jpmorgan go ahead. Please.
Hi, Good morning, it's Christian <unk> on for Chris.
The industrial guidance assumes that comps sales growth accelerate to low single digits in the back half and understanding you had the extra day phenomenon just could you speak to what else drives this acceleration in.
Is there any appetite to startup larger capital projects or is it at this point really just break fix until until after the election.
Speaker Change: Yeah, Chris It's Mark I'll take that one and maybe as we think about guide. It's just important to refresh on how we thought about the year when the year started and then where things have moved when.
When we started the year, we expected a moderated first half stronger second half.
Lot of our second half view was based on.
Better industrial production and that being stimulated by interest rates.
Speaker Change: That model wasn't overly precise so we didn't have a specific rate cut time to.
Real growth or timing of industrial growth and I think it was more philosophical like many companies about easing interest rates would be supportive of industrial production as Q2 developed.
Which included some softer market conditions across industrial.
We really have updated our outlook on that side of the house and based on that updated view and we think that with some third party data. The industrial production activity will continue to lag there will still be a headwind for the business as we move here into the third quarter and getting into the fourth quarter as well we really.
<unk> at this point based on our original view to enter the second half of the year with some better kind of low single digit mid single digit growth in motion and in our industrial side of the house and that's obviously not happening so we pushed that out a bit.
We.
Operating in this period of PMI, that's been down for quite some time and so now as we look we think that comes much later in the year in terms of improvement again.
Function of interest rate cuts and we all can take our own predictions on those so.
Q3, I think we would have parked and our old guidance at somewhere at mid single digit exiting the year at high single digit I think we will see the rest of this year play out in the low single digit range at best as we indicated at the top end of our sales guidance.
Speaker Change: And look for improvement as we move through the back half of the year and into 2025.
Christian: Christian I might just add a couple of other thoughts obviously the year over year compares ease in the second half of this year and so as we do the two year stack and kind of year over year compares that's something that we've spent a lot of time thinking about the other thing I would tell you just commercially.
We've had a lot of discussion with the motion business and all the leaders about stepping up the sales intensity of the business and as I suggested in my prepared remarks.
The discussions we're having with our customers.
We are very positive in the sense that they understand our value proposition.
They are great strategic partners, they want to do more business with us and as a result, you're seeing a lot of renewals of corporate accounts.
As well as some sales initiatives that is incremental to existing business. So.
Again, we're working on the right stuff in the motion business, it's a choppy market.
But once we get that sales growth in the customers start spending we're going to be in a great position and Christian just on the specific point about capital projects.
The feedback from the customer is look there's a lot of uncertainty out there high interest rates capital projects at this point aren't must do activities. So we're really seeing some tempering there on that spend and again to Will's point, we're having great wins and renewals with customers and as this interest rate environment I think eases, we will start to see things move.
Got it that's really helpful and just a follow up on <unk> question I guess, what do you think drove the acceleration in U S Napa over the quarter.
Was it weather that abated as you got into May or is it starting to lap some of the early signs of a fairly you saw last year and just any comments on.
What youre seeing in terms of maintenance deferral is that is that getting worse, yes.
Look I think April as we've talked about with Super tough.
Christian: I don't think that was new news for anybody and so it's all relative we were kind of working off a low base and we saw sequential improvement.
The initiatives are making a difference.
Tech acquisition helped build some momentum through the quarter.
And the weather did help.
No.
That all being said, it's hard to extrapolate the trend out of the second quarter I think thats some of the challenge with how we're thinking about the guide July was a little bit choppy based at the start of it based on what <unk> articulated so.
Pleased with the sequential improvement through the second quarter.
But trying to make sense of the world and the macro environment that we find ourselves as we come into the second half.
Got it. Thank you very much best of luck.
Thanks Kristen.
Thank you. Our next question comes from the line of Greg <unk> from Evercore ISI go ahead. Please.
Hi, Thanks, I wanted to follow up on that last point you guys see the start in July as choppy. So it sounds like was July as bad as April or is it something between the exit rate of June than April.
Well, Greg I reserve the right to.
Vote on July since it's not over yet but.
Look April was a tough month for Shneur world already articulated that and as I said in my prepared comments I think.
Speaker Change: July has started out with a lot of mixed mixed views. So we've got some disruption from hurricane barrel that impacted both of our U S businesses on the automotive and motion side.
We've had some additional industrial production shutdown around the fourth of July holiday I think manufacturers are taking advantage of any slowdown in our holiday to cut a little bit of their own costs and pulled back on some costs. There and then obviously we had a crowd strike outage that began late last week and Thats impacted many many businesses.
Speaker Change: We were down for a brief part of the day and Nadeem. The teams around the world did an outstanding job of bringing us back up very quickly.
So while we've taken care of our own house part of the impact of that will continue to be how are customers and down the chain feel that field.
Feel that impact across their businesses so.
Speaker Change: Look I wouldn't compare April and July just yet as I said July is not over.
April certainly was a tough month and I think the thing that is a <unk>.
Challenge for US is just this all these different pieces of noise creates some lack of clarity into the true trend back to Christian's question a minute ago. How do you parse some of this out and I think these are the things that we're looking at but feel good about where we are and all the work we're doing yes, Greg I would just come over the top on that and emphasize the point that we feel good about that.
Work that we're doing.
Speaker Change: The tone of our meetings is positive.
I appreciate that it's a tough market, but the specific initiatives at Napa or motion or any one of our businesses.
This is the right the right body of work and.
At some point hopefully soon as the market recovers, we will have a couple of nice tailwind is behind us.
Great and then my follow up is maybe digging a little deeper.
On the consumer environment in the end market have you seen any sort of trade down or deferral of projects are you seeing that we're just consumers are like.
Out of money and I'm, just going to wait on things can you see that in the.
And the data.
We don't see it empirically in the data, but qualitatively we have seen that.
The other challenge that we put to the merchant is making sure that the good better best assortment logic.
Kind of plays in every market condition.
And for every customer and so.
Speaker Change: We've seen some shifting around good better best that's probably the closest data that we can look at to see.
See the psyche of the consumer and then you also anecdotally you do each year that the consumer is if they needed to maybe they only do one kind of phenomenon with most of our big kind of major accounts those discussions are pretty consistent across the landscape. So we're seeing it but I think we're well positioned in the <unk>.
<unk> environment with.
How we're how we're positioning our brands.
Got it and then I guess last on that it sounds like do you think you gained share in the quarter.
Just ex that in both industrial and <unk>.
In auto.
We feel good about what we're doing.
Quarter to quarter, where the first one out of the gate.
Hard to kind of fixate on all things share the feedback that we get qualitatively from the supplier community.
Honestly has never been better and I think that's just a reflection of another data point to support that the work that we're doing is all the right stuff. We just got to keep our head down and keep keep sequentially improving.
Speaker Change: Great. Thanks, and good luck guys. Thanks, Greg.
Thank you we have our next question coming from the line of Michael Lasser from UBS Securities Go ahead. Please.
Good morning. This is Henry Tarr on for Michael Lasser, Thanks, a lot for taking our questions. This morning.
I wanted to ask so assuming third quarter demand looks similar to the second quarter are you anticipating those pressure callouts 50 basis points from increased salaries and wages the leased facilities.
This points.
Are these pretty much going to be pretty consistent in third quarter would you say.
Hey, Henry Thanks for the question I'll talk a little bit about how we see the rest of the year, we've talked about some things already with Greg's question.
Around the start to July so we do have some things that we're managing through here in the months I won't give quarterly guidance, but as we frame the rest of the year, we'll talked about easing topline comps, but when we look at the third quarter, specifically to your point, we will continue to see deleverage.
And in the business for many of those factors and the combination of a lower sales outlook for the rest of the year given that I would tell you that we expect Q3 earnings to be down year over year.
Mostly because we see a lot of this persisting, particularly coming out of the second quarter.
And particularly with the softness on the industrial side of the house with that we would see Q4 being a little stronger on a relative basis, but as you know there's plenty of things to think about in the fourth quarter with holidays and the weather. So I would just say look we've got an elevated degree of uncertainty in how we're forecasting from earlier in the year.
Speaker Change: Particularly on the trends in industrial, but we're giving you all the information we have right now everything we think <unk>.
Including all the other variables that are out there with interest rates and elections and all of that are reflected in our guide.
Great. Thank you.
For a follow up I just wanted to ask about.
The increased M&A of company owned stores increased to roughly 30% of mix.
It does.
When we think about M&A.
Contribution sales growth moving forward is that 1% target given at <unk>.
The Investor day in 2023 still kind.
Kind of benchmark to gauge with.
I think so Henry I mean, I think that's a fair fair proxy I mean, obviously it will slip in any given year.
A little higher maybe in a year when we do something like atg.
I think if you are using that for our modeling point I think it's a fair enough.
Proxy, particularly when you look back over the history of GPC over many years. So let's just leave it there and you guys keep using that number as a reasonable proxy.
Great. Thank you so much.
Thank you.
Our next question comes from the line of Seth Basham from Wedbush go ahead.
Thanks, a lot and good morning first congrats on the appointment and CEO role and best wishes to Paul.
Thank you Sir.
My first question is just a follow up to the last one in terms of your Gulf related to acquiring independents, 30% of the mix of stores now I don't know that you have a stated goal necessarily but.
Continued strong acquisitions for the next couple of years.
Yeah look Seth I would tell you that we don't have a stated goal at this point, we're just in the early innings of this pivot.
Made some nice progress here in the second quarter that move up to 30% came on the back of the acquisition of our largest independent owner.
And we're going to continue to be opportunistic as we look at these.
Speaker Change: They are trying to focus on.
Target markets I would tell you those lean a little bit more towards urban areas. The independent owner, we will continue to be an important part of our ecosystem. We have tremendously strong independent owners. They provide us strength in key markets, particularly rural and rural markets. We have deep relationships, we have great scale.
Speaker Change: And good capabilities with all of them and so we'll continue to have that hybrid.
As we think about the March forward I think will be more acquisitive as we move through the course of this year, but that will be based on the timing of these individual discussions, it's a willing buyer and a willing seller.
We've had some good luck here bought a great business with impact.
But it's not a one size fits all.
And we will continue to let that go and come to us as it does.
Maybe just a couple of other points.
I think we said in the script, it's not linear so we started with the largest independent owner.
And transacted, there, but obviously, we have a lot of smaller owners and so building nice momentum, but it's not linear just to make a finer point, where 70 30 ish today three years ago that was more like 2008.
So to help calibrate the last two to three years, we've made really nice progress and we continue to do that being said the independent owner will always have a role in the Napa operating model.
Speaker Change: And we value those relationships and look forward to working with those as we continue to align to went into local markets.
Speaker Change: Got it and can you quantify the benefit to gross margin quarter from independence acquisition and what the benefit is anticipated.
Yes, we said that number was right around 30 basis points above the 50 basis points improvement in gross margin all acquisitions contributed about 30 basis points.
And similar impact for the full year expected.
I didn't I didn't parse out the improvement for the rest of the year, we lifted the guidance for gross margin.
Speaker Change: Primarily on the back of some of that goodness. So I'll, let you guys kind of parse that out how you want but we're not being quite that specific in terms of how we thought about it we know there'll be more benefit coming out of gross margin because of acquisitions, but also because of the great work, we're doing across the business.
Got it and my follow up question is on the major account segment by segment in the U S.
You talked about discipline. There will are you, giving up business, there where you don't see it.
Economical or is the pressure they are more related to elevated levels of deferred maintenance.
I wouldn't say, we're giving up business I would say, we're having active discussions with customers to make sure that we've got a path to have it be a win win.
And as we think about incremental new business, we're bringing another level of perspective to that.
Speaker Change: And defining whats.
What's helpful to the business all of that obviously.
There's trade tradeoffs to all things kind of pursuing new sales and so.
Speaker Change: Each customer has a specific discussion and its own situation and we're just I think focusing a little bit more intently on making sure that we're doing right by the business and our customers.
Got it thank you very much.
Thanks Seth.
Thank you we have time for one more question and our last question will be from Carolina Jolly from Gabelli go ahead. Please.
Alright, Thank you for answering my question.
Congratulations.
Speaker Change: Really great.
<unk>.
Speaker Change: Thanks for that as well.
Thanks Carolyn.
First question is just around the modernization.
You mentioned, including UDC that also require imply.
Inventory.
Currently I think we modernized dcs.
Speaker Change: It's actually probably one in which we optimize inventory not half the stock can add more.
I'll just give you. The example of some of the big projects, where when we look at an Australian DC consolidation of other satellite facilities around it into one same thing happening with two different projects in Europe, and so actually what we're seeing is it gives us a chance to be a little bit smarter and probably not have to be quite broad in different locations.
And concentrated into one and maybe even get a little bit deeper in terms of what we're doing.
They obviously have been designed and put in locations, where they shorten stem times and lead times to get to the distribution network on the ground. That's helpful. As well. So I don't think modernization of supply chain is a net negative for the inventory side of the balance sheet I think it's actually a long term net positive.
<unk>.
Equally when you combine it with some of the other things we're doing with service and then if you look at the motion side of the house of what Theyre doing with the fulfillment centers, we've talked about in the past as well.
Okay. Thank you and then just a quick question do you.
Data on the regional disparity.
No no.
Yes, we had.
<unk> had relative strength call. It in the middle part of the country for the quarter the West Coast East Coast was a little bit challenged relative to the balance of the country, but nothing material that I would suggest as a trend or a commercial challenge.
Speaker Change: Perfect. Thank you. Thanks.
Thanks Carolina Atlanta.
Thank you ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a lovely day.
Yes.
Speaker Change: Okay.
Okay.
Yes.