Greetings. Welcome to Genuine Parts Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. I will now turn the conference over to your host, Sid Jones, Senior Vice President of Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining us today for the Genuine Parts Company Second Quarter 2020 Conference Call. With me today are Paul Donahue, our Chairman and Chief Executive Officer; and Carol Yancey, our Executive Vice President and Chief Financial Officer. Today's conference call and webcast are accompanied by a slide presentation that can be found on the Genuine Parts Company, Investor Relations website. Before we begin this morning, please be advised that this call may include certain non-GAAP financial measures which may be referred to during today's discussion of our results as reported under generally accepted accounting principles. A reconciliation of these measures is provided in the earnings press release issued this morning, which is also posted in the Investors section of our website. Today's call may also 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 today's press release. The company assumes no obligation to update any forward-looking statements made during this call. Finally, please note that we've accounted for the Business Products segment, S.P. Richards, as discontinued operations for all periods presented. Now I'll turn the call over to Paul for his remarks.

Thank you, Sid, and good morning, everyone. We appreciate you joining us today for our second quarter 2020 earnings conference call. We hope you are staying safe and enjoying good health. So as we think about our quarterly performance and long-term focus, we want to highlight 4 key messages today. One, we are aggressively managing our company's operations through the challenges of COVID-19 by managing the short-term dynamics while staying focused on our long-term growth initiatives. This includes rigorous cost management as well as targeted investments to successfully position GPC in the recovery period and beyond. Two, we delivered strong quarterly results amid the challenging backdrop as we executed on our transformation strategy and omnichannel initiatives. Three, with the sale of our Business Products segment and our streamlined portfolio, we are now well positioned to maximize the full potential of our automotive and industrial segments. And four, we continue to strengthen our financial position by reducing our debt and generating stronger free cash flow. We significantly enhanced our liquidity this quarter and remain in excellent position to deploy capital towards high ROIC initiatives. The COVID-19 pandemic continues to impact the world in significant ways, both in our personal lives and from a business and economic perspective. We remain focused on prioritizing the health and safety of our employees and their families, our customers and our suppliers. We also want to extend another heartfelt thank you to the health care providers and first responders on the front lines of our fight against this outbreak for their commitment to the care and protection of our communities. We are proud of the tireless work by our associates across the global GPC family. As essential businesses, our operations have generally remained fully operational to fulfill critical customer needs, which required hard work under incredibly…

Thank you, Paul. As mentioned previously, many of our comments, this morning, will focus on adjusted results from continuing operations, which excludes the goodwill impairment charge in transaction, restructuring and other costs and income. Total GPC sales were $3.8 billion in the second quarter, down 14.2% from 2019 or a decline of 10.1% excluding divestitures. We're pleased to report our 11th consecutive increase in quarterly gross margin, which improved to 33.8% on a reported basis, or an adjusted 34.1% compared to 33.3% last year, up 80 basis points. The improvement primarily reflects the favorable impact of divestitures as well as acquisitions of higher gross margin businesses. These items, as well as strategic category management initiatives including pricing and global sourcing actions and favorable product mix shifts, were partially offset by a decrease in supplier incentives due to lower purchasing volumes. The pricing environment remained stable in the second quarter from relatively high levels of inflation in 2019, which were primarily associated with tariffs in our automotive business. So with supplier price increases of 2/10 of 1% for automotive, and 0.5% for industrial thus far in 2020, the total impact of inflation on our second quarter sales was approximately 1% for both segments. Based on the current pricing trends, we expect only minor price inflation through the balance of the year. Our selling, administrative and other expenses were $971 million in the second quarter on an adjusted basis or down 13.8% from last year. This represents 25.4% of sales, which is up slightly from 25.3% last year. The decrease in operating expenses were due primarily to the positive impact of our cost actions implemented thus far in 2020. As mentioned on our last call, our teams continue to execute on initiatives related to our $100 million cost savings plan that was…

Thank you, Carol. We made significant progress in several important areas during the quarter. Our people, portfolio positioning and operational excellence initiatives are driving results and increased confidence at GPC today. To recap the key messages outlined at the beginning of our call, our teams operated well through the challenges of COVID-19, and we continue to prioritize the safety and well-being of our GPC associates and customers while executing on our growth initiatives with speed and agility. Our second quarter financial performance benefited from improving sales trends in automotive, continued gross margin expansion and transformative cost actions. All of these efforts, coupled with our strong balance sheet, puts us in excellent position to continue to deliver operating margin expansion and strong free cash flow. And finally, with the steps taken to simplify and optimize our portfolio, we move forward as a more streamlined organization, focused on our automotive and industrial operations and with a well-defined strategic growth framework intended to maximize growth and value creation for all stakeholders. So despite the economic uncertainty, future impact of COVID-19 and pace of recovery, GPC is well positioned and prepared for the various scenarios that may evolve over the near term. We look forward to executing our strategic plans into 2021 and updating you on our progress. Thank you for your interest in GPC. And with that, we'll turn it back to the operator for your questions.

[Operator Instructions]. Our first question is from Bret Jordan with Jefferies.

This is Mark Jordan on for Bret. It looks like the U.S. automotive business has improved from the lows, but it looks like it maybe remains pressured. And I may have missed it in the prepared remarks, but did you provide the July sales trends for the U.S.?

Mark, this is Paul. We did talk about that, but I'll go ahead and touch on it again. Our sales right now -- and we haven't finalized July, but our sales right now in U.S. automotive are positive in the month of July.

Okay. And can you talk about maybe the gap between DIY and DIFM? And maybe when we can expect to see some more improvements in the DIFM segment? I know you mentioned it seems like some of the public sector customers are pressured.

Yes. So as we look at the quarter, Mark, our DIY business was down in April, low single digit and then turned to a positive trend in both May and June. Actually, we're up low double digits in both months, and we're seeing that even strengthen further in July. DIFM was down, I think, close to 25% in the month of April. And was down mid- to high-double digits in above May and June. We are seeing a little bit of a bounce back as we go into July, but it's still trending down a bit. And so as we look at it, Mark, as miles driven begin to bounce back and they will, DIFM is going to bounce back with it. We still firmly believe that our market-leading position in the commercial segment is the place to be, and it best positions NAPA for long-term sustained growth.

Okay. Great. And then can you just talk about maybe some regional trends in the U.S. during the quarter? What regions were strongest and what were weakest?

Yes, sure. So as we've seen in the past couple of quarters, the strongest regions in the quarter were out in the mountain region. So Colorado, Montana, Wyoming, probably the area that was, at that time, least impacted by COVID. The Midwest was strong, again, relatively strong compared to our -- the rest of the results. And then the areas that were hardest hit, I don't think, Mark, will be a surprise to you, the Northeastern part of the country and then really down the Eastern seaboard. I would point out that as we look across the rest of our business, we saw good growth -- really good growth in Australia, despite the fact that New Zealand was in a full lockdown for the better part of 8 weeks. And we saw a real resurgence in Europe, again, despite the fact that both France and the U.K. were in full lockdown for a portion of the quarter.

Our next question is from Michael Montani with Evercore.

Just wanted to ask if I could, on the commercial side. Paul, if you can just remind us the breakdown of the business there between, kind of, NAPA AutoCare now versus the municipal state business and then the core garages, just for a sense of the mix there. And then for some incremental color about how you saw those 3 parts of the commercial segment evolving across the course of the quarter and into July. And then I had a follow-up.

Yes. So Mike, the NAPA AutoCare program, which we have now approximately 17,000 to 18,000 members in our AutoCare program, is a key component of our commercial business as our -- the major account segment. And then you get into fleet government and the like. As you can imagine, and as I think I mentioned in my prepared remarks, the most challenged was our municipality fleet and government business. AutoCare was better than the fleet business. And AutoCare, of our total U.S. automotive business, is close to 20%, give or take. That business was pressured. I would say, Mike, what we are pleased with is that we worked with our AutoCare centers as we did with many of our independent NAPA jobbers to secure PPP funding. We worked very closely with them. So those businesses are financially sound. And as miles driven begins to bounce back, again, we have no doubt that business will bounce back as well.

Great. That was -- the follow-up I had was just around the jobber performance during the quarter. So I'm wondering if you can just update us on how many jobbers you all have now versus a year ago? And then, how have their trends kind of compared to some of the U.S. trends that you called out so helpfully already?

Yes, very consistent in terms of the performance, Mike, and -- with our NAPA jobbers. And certainly, there's outliers as we look around the country. What -- the trends that we're seeing in our -- with our NAPA jobber base is that, certainly, those NAPA jobbers who are larger, better funded, strong entrepreneurs, they're getting bigger and they're acquiring more and more stores, and they're performing just fine. In total, we have approximately 3,000 independent owners that own our 5,000 independent stores. So the bigger owners, again, as I mentioned, we work closely with to ensure they secured PPP funding. And the majority all did and are in financial leader in good shape. And again, as we emerge from the pandemic, cars get back on the road, our jobbers are going to be just fine.

Okay. The last one I have is just around the pricing environment in the market. And there was some good commentary already there from Carol. But just wanted to understand how rational is the space, both in the U.S. and then also in Europe, where you're rolling out the private label offer?

Yes. Well, I'll give you my viewpoint. And maybe Carol wants to weigh in as well. Historically, Mike, the -- certainly here in the U.S., North America, the pricing atmosphere has been very same. We -- you generally don't see a big spike because you put brakes on sale in a given month. So we've seen, as we have through the years, a very normalized pricing atmosphere here in North America. And it's really no different in Europe. There's a few big competitors, one who also reported this morning. And so again, the pricing atmosphere there is solid as well. Did you have anything, Carol, you'd add?

Yes, Mike, just as a reminder, the inflation that we have had really related to the tariff back a year, 18 months ago, so we've anniversaried those tariffs. And as we go into second half, we really don't foresee at this point -- and again, there's a lot of uncertainty in the second half, we don't foresee much in the way of price increases and inflation. Having said that, and you guys saw our 11th consecutive quarter of gross margin increases, we're really driving that through a lot of our strategic category management. And whether that's global tenders or global sourcing or pricing initiatives, that's really how we're hanging on to the gross margin improvement that we have.

Our next question is from Christopher Horvers with JPMorgan.

It's Christian on for Chris. I know you mentioned the municipalities, sales in municipalities as a big differentiator versus your competitors. I'm just trying to think with -- given O'Reilly's positive DIFM commentary yesterday, what would you say is the rest of the delta to your competitors? Would it be more on the geography mix front, given you have some more stores in the Northeast was hit particularly hard? Or was it more of a market share issue?

Well, well, we don't believe it's a market share issue. I'll just make that comment right upfront, Christian. We -- look, they had strong results, which -- congrats to the guys in green. What -- the way we look at that is it's just further indication of the opportunities that we've got for growth in the aftermarket despite the pandemic that we're all operating in, and it bodes well for us over time. As we see what's occurred in this quarter, certainly, the surge in DIY, there's a lot of stimulus dollars out there. There's a lot of folks who have a lot of time on their hand. We still believe, as I mentioned earlier, the place to be in this -- in the automotive aftermarket is in the commercial segment, and we think that will hold up well for us in the long run. As we look at our competition, and it's certainly in the big 4. And I'll just remind you, Christian, the big 4 represent about 35% of the industry, maybe 35% to 40%. Our model is different. We're 80% DIFM and just 20% on the DIY side. So we're a different model than what our competitors are. And I would point out that in the month of July, we are seeing our DIFM business begin to recover and come back. And we do firmly believe that as miles driven come back, that we'll continue to see improvement in our DIFM business.

Makes sense. That's very helpful. And then could you also -- I don't know if you've mentioned it in the call, but could you size out the $150 million in incremental savings from initiatives, the reduced headcounts, management pay reductions for low in the rest of that group?

Yes. So the $100 million of cost savings that we introduced last year, Q4, and we mentioned that we were on track for that, we achieved $40 million in Q2 giving us $70 million year-to-date. We'll actually be ahead of plan on that. And those are permanent cost savings, probably 75% to 80% payroll-related, related to our BRP and some other facility consolidations and we're looking at other areas as well. The incremental in Q2 cost savings that we talked about really related to mitigating the impact of COVID-19. We put those in place, and we were pleased to see the results in the quarter. Many of those are temporary, about 60% to 65% is payroll-related. We had government subsidies in there, some freight. Of course, travel and entertainment, rent. We're working hard to see what we can make permanent. But as we said before, many of those are temporary. So delaying merit increases, some of the voluntary and involuntary furloughs, things like that. But knowing we're also looking at further structural changes. So we hope to have some of those permanent. But we do expect those to pull back in the second half. But no, we're going to be ahead of plan on the $100 million cost savings that is permanent.

Our next question is from Daniel Imbro with Stephens Inc.

Paul, not to beat a dead horse. But just one, as we think about the DIFM recovery for the industry and for you guys, you mentioned miles driven mounting back being the biggest driver. There's a lot of uncertainty here, but curious, given your experience, are you assuming that we get back 100% of miles driven? Or is there going to be some kind of lingering impact from work from home, less commuting, anything like that, like what do you think kind of your outlook or your -- like you guys' outlook would be for what "normal" looks like into 2021?

Yes. Yes, Daniel. So what the new normal looks like is anybody's guess at this point. But look, we -- as we look across the automotive aftermarket, and I look at the fundamentals that we have with the average age of the vehicle now moving up to 11.9 years, gasoline prices are down 20% year-over-year. What we see with folks that are going to be, I think, very reluctant as we've -- as -- to jump back on airplanes and travel either on business or vacation, we believe that more and more folks will be utilizing their vehicles. So look, eventually, we do believe that we'll get back to those miles-driven numbers that we have seen and enjoyed in recent years. But it will most likely take a bit of time. But in the meantime, we're enjoying a nice -- a very nice bump in our retail business, like our competitors are. And we're very pleased with the increases we're seeing outside of the U.S. So I mentioned our business in Australia and New Zealand had just a spectacular quarter. And we've seen a real nice bounce back in Europe as well as they reopen their markets. So all in all, the fundamentals are solid. And we continue to be incredibly bullish about the automotive aftermarket.

Got it. That's helpful. That dovetails nicely, next question was going to be on Europe. I think the result is a lot better than feared there, and you mentioned a nice snap back into June. I think you said high single-digit organic growth. Can you parse out what you think is driving that level of growth? Is it just how shut down France was? There's a catch-up spend? Or are you gaining incremental market share in those markets? Kind of what's driving that higher level of growth? Because that's still a pretty heavy DIFM market. So I was surprised by that level of bounce back.

Yes. It's incredibly heavy on the DIFM side, Daniel, you're spot on. It's 95%, basically, DIFM. Certainly, a good bit of the bounce back is pent-up demand. But what we are encouraged is that the surge that we saw in June has carried over into the month of July. And as I look at our strategy when we entered Europe 2-plus years ago, we're -- our strategy was launching private label. We're in the throes of launching NAPA, as I mentioned, across all of our markets. We've expanded our footprint into the Netherlands, which is a great market for us. We've expanded our footprint in Germany as well. We've strengthened our management team. We've captured improved payment terms as we've leveraged our relationships with our big global suppliers. We are right on track to deliver on the cost savings that we committed to 3 years ago. And finally, what's exciting as well, Daniel, is that we're in the very early days of developing our online/omnichannel strategy for Europe. And again, we think that will bode well for us as we go forward. So we continue to be very optimistic about our position in that really fragmented market.

Got it. That's helpful. And then last one for me, moving to the industrial side. I think, Paul, you mentioned June trends, leading indicators got better. But Carol, during your remarks, I think you said we're still down 12% in July. So can you maybe help me reconcile those 2 things? It feels like you're more optimistic on the outlook, but near term, things are still pretty pressured. So when do you expect to see those indicators come through? And yes, what's kind of the outlook there for that segment?

Yes. And I appreciate you -- I appreciate the question on industrial, Daniel. It's a really important segment for us. It's a great business that we have at Motion as well as now MI Asia Pac. And I would mention before I go to the U.S., our business in Australia and New Zealand and Southeast Asia, again despite the shutdown in New Zealand, is performing quite well, surpassing our numbers here in the U.S., and we're seeing real strength in the mining sector over in that part of the world. Here in the U.S., what we are seeing an improved trend in July versus what we saw across Q2, we're still down, but we are seeing that trend improve. And what we believe we're going to see happen, Daniel, is that we're seeing right now, factories begin to reopen. Plants are reopening. Some of our big customers are beginning to release CapEx orders that have been on hold. We're seeing the leading indicators, PMI and industrial production showing improved numbers. So look, industrial has lagged the automotive recovery, which we fully expected, we've seen that in the past. But we do believe that we'll see continued improvement in our numbers throughout Q3 as well as Q4 in the industrial segment as factories continue to reopen.

And our final question will be coming from Matt McClintock with Raymond James.

Yes. This is Mitch Ingles, filling in for Matt. So my first question was on your digital investments. Your Sparesbox acquisition last year seems even more timely today, given the leading digital interface and CRM capabilities for the Australian automotive aftermarket. Have you been able to implement these attributes to your other auto regional businesses? Or more broadly speaking, what do you see as a driving force for your digital investments going forward?

Yes. Well, thanks for the question, Mitch. And I appreciate you bringing up our digital initiatives. Sparesbox, as you mentioned, was a great acquisition for us and a very timely acquisition given what's transpired with the pandemic. And in our Australian business, we've seen a 300% lift. We've been -- and what we are doing, Mitch, is utilizing the skill sets that we've acquired at Sparesbox. They're teaming up with our digital team here in North America. And ultimately, we'll be partnering with our teams in Europe to bring much of that expertise to the European market as well. We've -- a couple of things that I would point out that we've launched. I know I talked about curb side pick up, ship to home, buy online, pick up in store. Most of the things that other businesses are doing around the world, we've also improved. And I think one of the real key factors for us is we've improved our search capabilities across all of our businesses. And we've also delivered new apps for product recommendations. So a number of factors that are leading to really solid, solid growth. And we've also, as I mentioned in my prepared remarks, we've improved and enhanced our online initiative at Motion as well. So we're very pleased. We've got a great team on the digital side, and we're very bullish on that segment as we move ahead.

We have reached the end of our question-and-answer session. I would now like to turn the call back over to management for closing remarks.

We'd like to thank you for your participation in today's conference call. We thank you for your interest and support of Genuine Parts Company, and we look forward to updating you on our third quarter results. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.