Genuine Parts Company (GPC) Q3 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Third Quarter 2020 Earnings Conference Call. Today’s call is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] At this time, I would 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 Third Quarter 2020 Conference Call. With me today are Paul Donahue, our Chairman and Chief Executive Officer; and Carol Yancey, our EVP and Chief Financial Officer. As a reminder, today's conference call and webcast include 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 this morning’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. Welcome to our third quarter 2020 earnings conference call. We appreciate you joining us today and hope you are staying safe and well. During the quarter, we remained focused on our top priorities, which include ensuring the continued health and safety of our employees, customers, suppliers, and communities in which we operate; execution of our strategic initiatives and cost actions for our global Automotive and Industrial segments to deliver customer value, operational efficiencies and strong financial results; management of our working capital to drive strong free cash flow and pay down debt to further strengthen our financial position, and enhance liquidity; effective capital deployment, including strategic reinvestments in the business, paying a consistent dividend to our shareholders and the repayment of debt as appropriate; and finally, we also advanced our ESG initiatives with the release of our 2020 Corporate Sustainability Report. Carol and I look forward to covering our progress in each of these areas today, and then taking your questions. Our teams continued to execute with agility through the third quarter, aggressively managing each of our operations through the challenges of COVID-19. We are proud of their hard work and commitment to operational excellence, which has required effective measures to maintain a safe work environment, while also providing first-class customer service. Through the quarter, we engaged with our teams at every level and resumed field visits to connect with our employees, customers and suppliers. We can tell you firsthand that through the adaptability and successful execution of our passionate and talented associates, we are fully operational and prepared with comprehensive readiness plans, should a second wave begin to materially affect our businesses. So, a big thank you to our 50,000-plus team members across our global footprint. Upon the divestiture of our Business Products group in June, we entered the third quarter focused on driving profitable growth and productivity initiatives for our streamlined portfolio of our Automotive and Industrial business segment. As you may recall, exiting non-core operations is one of several key steps in the transformation of the Company. In addition, we are also investing in higher return businesses to further expand and strengthen our core. Moving on to our financial results. We achieved a strong financial performance in the third quarter that reflects the resiliency of our businesses and the benefits of our strategic growth initiatives and cost actions taken across our operations. Total sales for the third quarter were $4.4 billion, up 1% excluding the impact of divestitures. This was a significant improvement from the 10% sales decline in the second quarter, due to the impact of COVID-19. Total operating margin was 9%, a 100 basis-point improvement from last year, achieved through solid progress in both gross margin and SG&A, driving margin expansion in each of our Automotive and Industrial businesses. Adjusted net income was $237 million and adjusted earnings per share was a $1.63, up 17%. Our cost savings plan, announced in October of 2019, has generated significant savings across the organization in 2020. Through the first nine months, we have already achieved our $100 million cost savings target for the full year. In addition, cost actions in response to COVID-19 further boosted our operating results. Looking ahead, we remain focused on finding additional cost savings to further improve our cost structure and long-term profitability. Let me mention one example of the many initiatives to improve our operational efficiencies and customer service levels. We were excited to open our newest U.S. automotive distribution center in Nashville, Tennessee just last month. Nashville is a 325,000 square-foot distribution center, equipped with systems equipped with systems and efficiencies to enable high productivity and the service of over 300-plus NAPA stores. By bringing this facility on line, we'll be able to close or consolidate smaller, less productive DCs in the NAPA network. The opening of Nashville and consolidation of these operations has gone smoothly, despite the impact of COVID-19. We would like to thank our operations team for the great work on this important project. We will continue to make additional supply chain investments in the years to come. We also improved our working capital, enhanced our liquidity, while generating another quarter of substantial cash flows. Turning to our business segments. Automotive represented 68% of total sales in the third quarter and Industrial was 32% of total sales. By geography, 76% of revenues are attributable to North America with 14% to Europe and 10% Australasia. Total sales for the global Automotive Group were $3 billion, a 6% increase from last year, and improved sequentially from the 10% decrease in the second quarter. Comp sales also turned positive, up 2.2%, compared to a 12.6% decrease in Q2. A solid automotive recovery on the top-line with a consistent growth pattern in each month through the quarter helped us deliver a 100 basis-point improvement in operating margin. In North America, our U.S. automotive sales were down approximately 1%, which is significantly improved from the 12% decrease in the second quarter. Comp sales were down 2.8% and much improved from the 13.8% decrease in Q2. In addition, we were encouraged by an impressive 60 basis-point increase in operating margin for U.S. automotive. In Canada, sales for the third quarter were up 2.6%, and improved from a 13% decrease in Q2. Comp sales increased by 0.5% and operating margin was up a strong 200 basis points. So, a solid quarter for our Canadian team. Also in North America, sales to our retail customers continued to outperform, up low-double-digits for the third quarter. While retail sales peaked in July, this customer segment remained solid through the quarter as the persistence of COVID continued to drive outsized DIY growth, although we believe this surge in demand is gradually moderating. We continue to strengthen our retail positioning through our ongoing initiatives, such as store refreshes, NAPA rewards program, targeted promotions and enhanced merchandising and inventory. In addition, our growing omni-channel capabilities, including the recent addition of 35,000 new SKUs and direct-to-customer shipping from select suppliers continue to drive exceptional value for the retail customer. This has led to online retail sales that doubled our 2019 volume, and we expect continued strong omni-channel growth at NAPA in the fourth quarter and beyond. Moving on to our DIFM business. Sales to commercial accounts were down low-single-digits in the third quarter, which is much improved from last quarter and an encouraging indicator that consumers are becoming more mobile and getting back out on the road. As miles driven continued their slow recovery, sales trends across each of our customer channels strengthened relative to Q2, with our independent unaffiliated professional repair accounts leading the way and posting positive sales growth. Looking forward, we expect this customer segment as well as our fleet and government accounts, national accounts and NAPA auto care centers to strengthen further in the months ahead. Among these customers, our fleet and government segment remained the most pressured, as many of these operations are running at less than capacity due to slower business conditions and/or budgetary constraints. This is especially true for our customers in the energy and airline industries, which have been significantly impacted by the pandemic. To counter these and other commercial headwinds, our teams are executing on a number of recovery plans designed to optimize NAPA's customer value proposition, sell more parts and gain market share. These plans focus on maximizing the effectiveness of our new sales structure, improvements to key programs such as NAPA auto care, enhance systems and digital capabilities, as well as strategic pricing initiatives and improved inventory availability. While our team has made significant progress in the quarter, we expect our focus in these areas and favorable fundamentals to drive meaningful results in the period ahead. Those favorable fundamentals include the growing number of vehicles in the 6 to 12-year aftermarket sweet spot, and the recent spike in new car sales, low gas prices and continued improvement in miles driven. In Europe, aftermarket sales trends had a strong rebound in the third quarter, and our team did a tremendous job of capitalizing on that. Total sales were up an impressive 16%, which is improved from a 3% sales decrease in the second quarter. And comp sales were up a strong 12%, compared to last quarter's mid-teen decline. Importantly, this quarter's sales growth, combined with our ongoing cost savings initiatives, drove a 140 basis-point margin improvement, marking a significant step forward for this group. In breaking down our overall European performance, we are very pleased that operations in each country recovered with positive sales comp, driven by the broad surge in demand for deferred maintenance and repairs. In addition, the powerful NAPA brand has proven to be an effective growth driver. We have introduced the NAPA brand in the UK and France, and plan to roll it out in Germany this month. We posted our strongest European sales in the UK this past quarter, and NAPA branded products have grown to represent a low-double-digit percentage of total sales in less than one year. As a reminder, we identified the opportunity for private brands in Europe at the time of our initial discussions to acquire AAG back in 2017. We are encouraged by the quick acceptance of the NAPA brand and excited for its growth potential. Likewise, our focus on driving growth with key existing and new accounts, including the larger national account customers also contributed to our recovery. So, again, just a fantastic job by the team in Europe on both the top and bottom lines. Turning now to our automotive operations in Australia and New Zealand. This team reported another quarter of exceptional results, with total sales increasing 16% and comp sales up strong at plus 15%. This follows a 4% total sales increase and a 2% core sales increase in the second quarter. Our strong sales for the quarter reflect a robust sales environment for both, the commercial and retail customer segments in the Australasian region, and our team is well-positioned with a 60% commercial and 40% DIY sales mix. We're encouraged by the current sales climate, despite ongoing headwinds due to COVID-related restrictions in select key markets, such as Melbourne, and the state of Victoria. To drive this growth, our team in Australasia is executing on several growth initiatives. These include the continued rollout of the NAPA brand, and new NAPA store openings, digital enhancements across the B2C and B2B platform, strategic pricing and targeted marketing. These and other initiatives as well as the ongoing cost actions across our operations generated a strong 180 basis-point improvement and operating margin for the quarter. So, in summary, we are pleased with the recovery in the aftermarket, and our automotive performance across North America, Europe and Australasia. So, now, let's turn to our results for the global Industrial Parts Group. Total sales for this group were $1.4 billion, down 8.7%, excluding the EIS divestiture. Comp sales were down 9.2%, a significant improvement from the comp sales decline of 16.7% in the second quarter. These sales results as well as our ongoing focus to drive meaningful cost savings and optimizing our distribution network drove an 80 basis-point improvement in net operating margin for the quarter. In North America, our total sales were down 9.7% as compared to a 16.7% decrease in Q2. We saw strengthening trends in industrial indicators over the last several months, and an improving sales cadence in each month of the quarter. Specifically, the ISM PMI, industrial production and capacity utilization have all pointed to increasing industrial activity since we last reported, and we expect these trends to continue in the months ahead. We would also add that as customers reopen their plants, we will capitalize on more onsite sales opportunities. We are also beginning to see an increase in CapEx orders among many of our customers, many of which were deferred due to crisis. So, we see a number of positive signs for the industry ahead. Throughout the pandemic, our team has been executing on our growth strategy to further bolster Motion's leading competitive position in the MRO industry. We are focused on initiatives to expand our industrial services and solutions capabilities, enhance our pricing and category management strategy, and optimize the effectiveness of our Motion Industries website, which we re-launched just last quarter. Each of these initiatives has added value for the Company and our customers. For the quarter, our automation solutions group was our strongest operation, posting high-single-digit growth. We are building out this operation to further support the growing mega trend of plant automation and robotics at our customers. In contrast, the southwest region of the U.S. was our weakest due to the significant impact of COVID on the oil and gas sector in that area of the country. We were also pleased to complete three strategic bolt-on acquisitions in North America during the quarter. Two of these businesses specialize in motion control, and automation products and services, including engineering and application expertise and aluminum extrusion, which complement our growing MI automation solutions group. Our third acquisition expands our hydraulics business at Motion Canada. Combined, these operations, further expand our presence in strategic geographies and overall products and service offerings, and are expected to contribute approximately $35 million to $40 million in annual revenues. So, to summarize our North American industrial performance, we were encouraged by the gradual improvement and sales trends throughout the quarter. Our team also operated well and was very-disciplined in applying their cost control measures, which we believe bodes well for continued progress in the months ahead, as the industrial economy strengthens further. Turning to Australasia, July 1 marked the anniversary of our MI Asia Pac acquisition, and this team delivered a low single-digit sales increase for the quarter. While we continue to benefit from the strength of local mining industry, we are also executing on our new branding strategy and other growth initiatives to drive sales and gain market share. In addition, the MI Asia Pac team is operating well and making excellent progress on key cost reduction and working cap initiatives. Another focus area for GPC has been the advancement of our ESG initiatives. To account for our progress in this important area, we issued our first sustainability report back in 2018, and followed that up with a summary update in 2019. On September 30th, we were pleased to issue our 2020 Sustainability Report. This year's report substantially expands our disclosure across the ESG spectrum, such as human capital and diversity and inclusion, among others. In developing our disclosure, we engaged with our top shareholders to ensure our pathway to ESG best practices, aligned with the expectations of these key stakeholders. We invite you to visit our GPC website to view this report and learn more about our company-wide commitment to ESG. As we move forward through the balance of 2020 and into 2021, our teams will execute on a number of strategic initiatives to build on the positive momentum of the third quarter. These plans and initiatives are grounded in a strategic growth framework, focused on maximizing the value of our Automotive and Industrial business segments and positioning GPC for sustained long-term growth and improved profitability. Key elements of the framework include capturing more wallet share with existing customers and acquiring new customers; introducing new products and services, while innovating our omni-channel strategy and expanding digital offerings; building a global branding strategy to further leverage our powerful NAPA and MI brands, which we have initiated via the rollout of the NAPA brand into Europe and Australasia; and the rebranding of our Inenco Industrial Business to MI Asia Pac; expanding our global geographic footprint, including acquiring strategic bolt-on businesses. And finally, our strategic framework includes ongoing transformation initiative to achieve operational excellence as exemplified by our cost actions and other initiatives. So, now, I'll turn it over to Carol for a deeper review of our financials. Carol?

Thank you, Paul. As a reminder, our comments this morning will focus on adjusted results from continuing operations, which exclude transaction, restructuring and other costs and income. Total GPC sales were $4.4 billion in the third quarter, down 3.4% from 2019 or up 1%, excluding divestitures, which is much improved from the 10% decline in the second quarter. We're also pleased to report our 12th consecutive increase in quarterly gross margin, which improved to 35% compared to 33.4% in the third quarter last year. The 160 basis-point improvement primarily reflects the benefit of sales mix shift to higher gross margin operations, positive product mix, especially in industrial. The broad improvement was driven by our focus on strategic category management initiatives in areas such as pricing and global sourcing. The divestiture of EIS last September 30th was also accretive to gross margin performance. These items were partially offset by a decrease in supplier incentives due to lower purchasing volumes. The pricing environment has remained stable thus far in 2020 with limited supplier price increases and very little inflation in our third quarter sales. Based on the current pricing environment, we expect only minor price inflation through the balance of the year. Our selling, administrative and other expenses were $1.1 billion in the third quarter, down 1.7% from last year and representing 26.1% of sales compared to 25.6% last year on an adjusted basis. The decrease in operating expenses reflects the favorable impact of both, our permanent and COVID-related costs actions implemented thus far in 2020, as previously mentioned by Paul. In accordance with our $100 million cost savings plan announced late in 2019, we're pleased to report that we have successfully achieved the $100 million annual target well ahead of schedule. With more than $40 million in savings recognized in the third quarter, our permanent expense reductions totaled over $110 million for the nine months. In addition, our teams have continued to execute on a number of additional savings initiatives in response to COVID-19. These initiatives contributed approximately $60 million in incremental savings in the third quarter. So, combined, we generated approximately $100 million in cost savings during the third quarter, driven by strategic reductions and payroll and facility costs, as well as more temporary savings from furloughs, reduced travel and entertainment, freight changes and other initiatives in response to COVID. Looking ahead to the fourth quarter, we will continue to execute on our cost actions, and we currently expect to achieve $130 million to $140 million in permanent cost savings for 2020, which will carry over into 2021. We also expect to generate further savings related to COVID-19 but have less clarity here, as these cost savings will moderate as the economic recovery continues and sales volumes increase. Despite the continued uncertainty, we enter the fourth quarter focused on driving growth and aggressively managing our expenses to maximize profitability. Our total operating and non-operating expenses were an adjusted $1.2 billion for the third quarter, reflecting a decrease of 1.5% from last year and comprising 27.9% of sales. Our total segment profit in the third quarter was $392 million, up 9% on a 3% sales decrease. Excluding divestitures, total segment profit, increased 13% on a 1% sales increase, and our segment profit margin was 9.0%, a strong increase of 100 basis points. Our tax rate for the third quarter was 23.4% on an adjusted basis, down from 24.9% in the prior year period, due primarily to the benefit of statute related adjustments. Our net income from continuing operations in the third quarter was $233 million with earning per share of a $1.61. Our adjusted net income was $237 million or $1.63 per share, which compares to $204 million and $1.39 per share in 2019 or a 17% increase. So, now, let's discuss our third quarter results by segment. Our Automotive revenue for the third quarter was $3 billion, up 6% from the prior year and sequentially improved from the 10% sales decline last quarter. Our segment profit at $266 million was up 20% with a profit margin of 9.0%, compared to 8.0% in the third quarter of 2019. The 100 basis-point increase in margin was driven by improved operating results across each of our automotive businesses, which was a great job by our teams and a testament to their continued focus on meaningful cost reductions across our operations. Our Industrial sales were $1.4 billion in the quarter, an 18.6% decrease from a year ago. Excluding the EIS divestiture, Industrial sales were down approximately 9%, which is a significant improvement from the second quarter. Our segment profit of $126 million was down 8% from a year ago or up slightly excluding EIS, and the profit margin was up 80 basis points to 8.9%. The improved margin for Industrial reflects gains in both our North American and Australasian industrial businesses, which was driven by the combination of gross margin expansion and cost savings. We expect to see continued progress in the quarters ahead as the sales environment further recovers. While these sales trends and operating results are encouraging and reflect the recovery from the lows of the second quarter, we continue to operate in an environment of significant uncertainty and cannot reasonably forecast the full impact of COVID-19 in the coming months. As a result, we believe it's prudent to not reestablish formal financial guidance at this time. So, now, let's turn to our comments on the balance sheet. Our accounts receivable of $2.0 billion were down 22% from the prior year, due primarily to the change in sales and the benefit of an agreement to sell $500 million of receivables to a financial institution earlier this year. We remain pleased with the quality of our receivables and confident about our collection trends, although we continue to closely monitor receivables in light of the current business conditions. Inventory at September 30th was $3.4 billion, up 2% from September of last year, or essentially flat excluding the impact of foreign currency. This is a function of lower purchasing volumes and our continued focus on effective inventory management. Accounts payable of $4.0 billion is up 1% from last year and a reflection of the change in inventory and the impact of lower purchasing volumes. At the end of our quarter, the AP-to-inventory ratio was 118%, which has improved from 112% at June 30th. Our total debt at $2.9 billion is down 15% from $3.4 billion last year and down 10% from the second quarter. During the third quarter, we further strengthened our liquidity position and we entered October with approximately $2.8 billion in available liquidity, which has improved from our $2.6 billion liquidity at June 30th and $1.1 billion in liquidity at March 31st. For the first nine months of 2020, we generated $1.4 billion in cash from operations, which is up significantly from 2019. This led to strong free cash flows of over $1.3 billion. As a reminder, we modified our near-term capital deployment strategy back in early April to preserve our cash through the duration of COVID-19. However, we remain committed to several key priorities for cash to serve to maximize shareholder value. These priorities are evident in our improved debt leverage of 2.2 times our total debt to adjusted EBITDA, which compares to 2.5 times at the end of the second quarter, and the $4.3 billion in capital deployed across our four key areas in the last three years. These include reinvestments in our businesses via capital expenditures, M&A growth net of divestitures, share repurchases, and the dividend. For 2020, we reduced our initial $300 million in planned capital expenditures to approximately $150 million to $200 million, and we have suspended plans for share purchases through December 31st. While we've also pulled back on acquisition activity, we've made several strategic bolt-on acquisitions this quarter, as Paul mentioned earlier, and we continue to plan for additional M&A that aligns with our growth strategies for the Automotive and Industrial businesses. And finally, we continue to support the dividend which has increased for 64 consecutive years. So, that's our financial update for the third quarter. We've made significant progress in several key areas. We want to thank our teams for their great work and many accomplishments under these tough circumstances. I'll now turn it back over to Paul.

Thank you, Carol. Through the continued focus on our top priorities, outlined at the beginning of this call, we were pleased to report a strong financial performance for the quarter. Our results highlight our progress in several key areas, including strengthening sales trends, continued gross margin expansion, transformative cost actions and significant cost savings, operating margin expansion in each of our businesses, and a stronger balance sheet, enhanced liquidity and substantial cash flows. We are excited for the future at GPC, and we look forward to reporting on our progress in the quarters ahead. We thank you for your interest in GPC. And with that, we'll turn it back to the operator for your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Bret Jordan with Jefferies. Please proceed with your questions.

When you think about the cadence of the quarter, I guess NAPA U.S. specifically but also maybe Europe as well, as we came out of the COVID lockdown, could you talk about sort of how businesses either picked up with mobility improving or maybe even softened as stimulus money was spent? And then, I guess, within Europe, talk specifically about the strength you've seen there. Obviously, not as much consumer stimulus in that economy yet seeming to outperform, could you maybe give us some color as to is that share gain that's driving your significant comp or is it just the underlying lift in service demand?

Yes. Thanks, Bret. And let's start with the cadence first, and maybe I'll touch on total Company. In total Company, we were steady throughout the quarter, turning positive. We were pretty much flat in July-August, turned positive in September, total GPC. As we look at automotive again, total automotive, we were consistent throughout the quarter, mid-single-digit all-in July, August and September. Europe, we were really strong in August, but we were double-digit growth in every month and the quarter. And as we look at our turnaround in Europe, I couldn't be more proud of that team over there, Bret. They -- I mean, you guys know what we went through in Q2, most of France was shut down, a good bit of the UK was shut down. And for us, the post that kind of increase that we did in Q3 is strong, and we're seeing it across the board. We're seeing it in every market, which is what's really got us encouraged and we're seeing it across our customer base. So, we saw it in our small independent, unaffiliated shops, but we also saw solid increase with the big national major account. So, do I think we're taking market share in Europe? Perhaps. But, I guess, we'll have to watch that play out. I'd also tell you, Bret, we're really excited about the rollout of our NAPA private label. And I think that really bolstered our sales in the UK this quarter, we're up at 10 different product categories down in the UK. And we're rolling that out in France, and then we'll go into Germany and the Netherlands as well.

You might talk about the margin lift from private label.

Yes. The margin on the private label, Bret, as you know, for our private label, we do generally have a more favorable margin when you look at the all-in and consider the terms that we get and the global tenders that we're doing. But generally, we do have a little bit lower price in Europe on that private label. So, it would be neutral in total to Europe on their gross margin. But, the fact is, we're more dollars and we're expanding our market share. And again, when we look at global tenders, there is a GPC benefit, if you will, when you think about global extended terms and putting more volume through our global suppliers.

And Bret, as I called out in my prepared comments, when we first started talking to the AAG team a few years back, we saw a real opportunity to introduce private brand into our European markets, and it's played out honestly exactly as we had hoped and thought of would. And I'll tell you what I'm most encouraged by is the acceptance and I guess the recognition of the NAPA brand in Europe.

And I guess, a quick follow-up. Could you talk about any regional performance highlights in the U.S.? And then, Carol you talked about inflation moderating. Do you see anything going on in pricing? And I guess maybe more on the DIY side, I think, there were some comments coming out of zone that they and Walmart have become a bit more competitive. Do you see any pricing changes in the market in general?

Yes. Pricing has been really rational, and specific to automotive, we cannot say we've seen much in the way of changes whether it's do-it-for-me or DIY, we've had very minimal price increases through the third quarter, 0.1% in automotive, and we really don't expect much at the end of the year. But again, no supplier price increases and a pretty rational pricing environment.

And Bret as far as the -- your question around regionality, I'm assuming you're talking about the U.S. Much like we saw in the previous quarter, our strongest markets continue to be the Midwest and the mountains. And those two guys are heading are really continuing to do a good job for us, both delivering positive numbers in Q3. Where we're seeing a bit of stress and again, not surprising, the Northeast was down mid-single-digit in the quarter. But I point out, Bret that if you go back to Q2, our Northeastern business, we were down 19% in Q2. We've gone from down 19 to roughly down 4 and change in Q3. Mid Atlantic, similar story, high-double-digit decrease in Q2 to down mid-single-digits in Q3. So, still a bit stressed in those markets. But, what we're encouraged by is just really strong sequential improvement quarter-over-quarter.

Okay. And it sounded like Europe, UK might be the strongest market with France number two.

That is correct. Absolutely.

Our next question comes from the line of Scot Ciccarelli with RBC Capital Markets. Please proceed with your question.

Hi. Good morning. This is Beth Reed on for Scot. Just wondering if you guys could help us better understand the cadence of the recovery in auto. I believe the July trends were running about 6% -- first, I just wondered if you could clarify is that sales or comp. I think it was sales, but if you could clarify. And at that time, where were U.S. comps trending. And then lastly, on the U.S. side, did you see trends improve sequentially throughout each month? And any color in cadence maybe around those metrics can be great.

Yes. So, we’ll double team this one, Beth. But, the first response, I think, you asked, and I’m trying to recount your questions. I think, the first one was around, was the 6% that was mentioned back in Q2, was that comp or total. That was total,, not comp. Okay? So, did that answer that question?

Yes.

Okay. And then, as we look at our automotive business in the quarter it -- again, as I mentioned, our total automotive business was consistent throughout the -- was consistent throughout the quarter, mid-single-digit, and U.S. automotive followed a similar pattern, and it was pretty consistent throughout the quarter.

Okay. So, the U.S. auto comps were down low to mid -- low-single-digit each one?

Correct.

Okay, got it. And then, just one on the Industrial side…

Hey Beth, I would just add to that. That improved in the month of September.

Got it. Thank you. That's helpful.

July -- and you did say, July was flattish. There was -- and again, August, September weren't quite as much as what July was. But in total, it was -- that's our total number.

Got it. Okay. On the Industrial side, just with the negative trends continuing, and as you guys mentioned, some of the industries are starting to improve. How should we think about trends in that segment as we look over the next few quarters?

Yes. So, just a little bit of history on Motion, because we've seen the cyclical times before in the industrial business. We generally lag the industrial indicators. So again, that's consistent with what we're seeing again in these recent quarters. What we are encouraged by, Beth, is we saw sequential improvement throughout the quarter. So, September was the strongest month of Q3. And we do believe that as the economy continues to improve, we'll close that gap between our numbers and then what the industrial indicators are showing. So, our -- the takeaway should be, we anticipate improved demand in the coming months. We're seeing really strong results out of our wood and lumber segments of our business, pulp and paper are good. A lot of that is directly tied to the building industry, which is strong. So, we have no doubt Motion will recover and will be in good shape in the quarters ahead.

Alright. Thank you so much.

You're welcome.

Our next question comes from the line of Chris Horvers with JP Morgan. Please proceed with your question.

Thanks. Good morning, everybody.

Hey, Chris.

I just wanted to follow up on a couple of questions there. First on the Motion side. You talked about September being the strongest month, obviously down 9% comps for the quarter. I guess, how close are you to getting to positive there? And then, could you also size up maybe the exposure to weaker industries, like energy and travel?

Yes. Well, the energy comment, Chris, that's definitely a headwind for us. If you look at our Southwest part of the United States was certainly our weakest market in the country, and that is largely driven by oil and gas. So, that's a definite headwind for us going forward. And in terms of looking out, Chris, look, it's challenging. I mean, there's a lot of uncertainty in the markets. There's no doubt. Our expectation is our Motion business will turn positive in '21. But, I would also tell you, our expectation is that we're going to continue to show sequential improvement. Just as we did from Q2 to Q3, we think Q4 will be an improvement over Q3, and then again, certainly positive in '21.

So, would that mean that like Motion in September was more down, like mid to high single-digit versus high single-digit decline in September?

That is correct.

Got it. Makes sense. And then, in terms of, just to clarify on the U.S. cadence in particular. Did -- it seems like DIY slowed? And do-it-for-me got better. But, that was sort of roughly neutral over the three months. Is that right? Because you also mentioned that September got better. So, I was just trying to reconcile all that did -- kind of put that all together?

Yes. So my, my reference on September, Chris, was in relation to August. September was a better month than what we saw in August. We saw softness in August. And September did improve. Carol mentioned we were flattish in July, and we dipped a bit in September. But again, we're talking just a few basis points from month to month to month. So, not a massive shift. And I'm sorry. I missed -- I forgot the second part of your question, Chris.

So, the second part was really like, it seems like the mixed bag in there as like DIY slowing down. One of your competitors, talked about a drop off in August and into September on DIY. So, I guess, maybe, is that what drove sort of the keeping the relative trend flat over the quarter? And then, any comment on did -- and this is U.S., both questions. Did do-it-for-me -- how close are we to positive in September in commercial?

Yes. So, our DIY business, and you hit it, Chris. I mean, we had a huge July in DIY and we were up close to 20% in July and it moderated a bit through Q3. But, I mean -- I don't think anybody expects the kind of DIY increases that we're seeing across the industry to continue. Certainly, we've benefited as did all of our peer group from the stimulus money to the hit the markets. Our DIFM business was pretty steady throughout the quarter in that low-single-digit range. And again, I would point out Chris, just as I did with some of the regionality, as I did with Motion, those down low-single-digit, those numbers are improved from the high-single-digit declines that we were seeing back in May in June.

Got it, but not -- right, okay. So, but -- so U.S. do-it-for-me was pretty consistent in that down low-single-digit range?

Yes.

Okay. Sorry to belabor that. And then, in terms of -- maybe on the on the margin side, really a two-part question. So, first on the on the gross margin, EIS actually helped you. Can you talk about how much that was? But then, vendor allowances also hurt too. So, at the high level, how much, how are you thinking about the potential to continue to drive expanded gross margins going forward? And then, I have a follow-up on SG&A?

Sure. On the gross margin for the quarter, when you look at our quarterly improvement, I would say this quarter, about a third of that was related to the divestitures. So, two-thirds of our gross margin improvement, like 100 bps is really related to sales mixed shift to higher gross margin operations, specifically our international strong results on automotive, product mix shift, especially in Industrial, and then some of our just pricing and global sourcing initiatives. So, when we look ahead, we do expect to have continued gross margin improvement with a lot of our initiatives that may not be quite at the pace that we've seen. But, we are very encouraged by the gross margin initiatives we have. We've done all that, as you mentioned, with lower volumes. And we have been able to generally offset the lower volume incentives with our lower sales volumes with having our initiatives. So, we’ve anniversaried the EIS divestiture. So, going forward, it will just be the core gross margin improvement.

Got it. Then on the SG&A side, Carol, I guess, how are you -- you take a lot of cost out of the business, how are you thinking about the potential to add back that COVID expense in 2021 from a dollar’s perspective?

Yes. So on the SG&A side, what we're really encouraged by is the $100 million permanent cost savings that roughly -- or $110 million through nine months. We expect to be $130 million to $140 million for the full year. The COVID savings were $150 million in Q2. And as we mentioned before, about $45 million of that was government subsidies. That moderated to about $60 million in Q3, which relates directly to the improved, as Paul's mentioned, improvement in our volumes, extending hours, bringing folks back in, and we said a lot of those were temporary things. But, part of why we have a higher $100 million permanent savings is, we shifted some of those things to permanent. So, we are still -- we will still have some COVID savings in Q4. It'll be probably less than what it is in Q3. But, I can tell you, all of our business units have additional cost actions. As we look ahead, there are further opportunities we think we'll have, especially as it relates to facilities and productivity improvements, and again, some further consolidations in some back office areas. So, we're still excited about the work the transformation team is doing as we look ahead.

Very helpful. Thanks very much.

Thank you, Chris.

Our next question comes from the line of Greg Melich with Evercore ISI. Please proceed with your question.

Hi. Thanks. I have a couple of questions. One, I'd love to follow up. Thanks for all the color around U.S. automotive. Could you just level set us now on the mix of that business between independents, the NAPA auto care group, major accounts and fleet, just given how disparate the performance has been this year?

So, if we look at the business, and as you just described, Greg, our most challenging segment -- and look, I should point out at the outset, our modest difference, okay, I think -- and you've been around long enough, Greg, you know that. Fleet and government is a big segment for us, and that has been our most challenged segment. And I should point out that, mix in that fleet and government, we have our oil and gas, energy business, we have large contracts with municipalities, school bus contracts, we have contracts with the airlines, ground equipment. So, all of that is in that fleet and government. And as you can imagine, Greg, that has been a challenging segment and has continued. It'll come back, and we think it will come back and it will come back strong. Our major account business and our auto care business was down slightly in the quarter as well. Where we saw good growth and we are encouraged is with our what we would really classify as our all other wholesale business, and that is our independent unaffiliated garages. That business held up well. And we are encouraged by that -- by those numbers. And we think we can continue to build on that in Q4 and going forward.

And if we look at the business, independents and garages, are they now -- are they like half the business or 30% of the business, just -- and fleet and governments may even be down to 20%? Would that be a fair estimate?

Yes. So, think of it this way, Greg. When we look at our -- at those segments, fleet is -- and I'll give you round numbers, 20% to 25%. And then, you've got the -- that unaffiliated independent garage segment is probably 40% to 45% of the total. And I'm sorry, Greg, you asked about our independent owners as well. Can you maybe ask that again, that question?

Yes. I just want to know, just generally speaking, how the independents are doing. So, what percentage of the mix are they now as opposed to company owned stores? And how are they doing? I mean, how many of them got PPP loans? Are they sort of fully back and up to running the way that you want to versus what they were doing in the second quarter?

Yes. It's a great question, Greg. And I'm glad you did ask that. Independent owners are -- they represent roughly 60% of our business. And I'm pleased to say, our guys have been out, we've been out meeting with some of our big independents, really just this week. They're faring well. And I would tell you that in terms of PPP money, the vast majority, and I'm talking probably close to 90%, got PPP money. So, from a cash position, our independents are doing just fine.

Great. And then, if I can, so one more question there. You brought up an interesting addition of 35,000 SKUs. That would be direct from vendor. Could you just help us frame what that could mean to sales and sort of expanding the business in a more capital effective way? And I also thought I heard you mentioned some pricing or re-merchandising actions to help gain some share back. But I was…

So, let's talk about the SKUs that I referenced, the 35,000 SKUs. Think of that Greg as kind of that whole concept around the endless aisle and taking advantage of our great suppliers and their -- the total extent of their catalogue offering. So today, of course, you think of supplier, Greg and I know Dorman well, a great partner of ours for many, many years. They have a very expansive catalog. We don't -- we do not -- we don't catalog all the SKUs that Dorman has available. But, we're certainly now going to make those available online. And we think that's going to -- it's too early to put a number to it, Greg. We really just launched it. But, that would be an example. Another example would be the WeatherTech line. You know that line, of course, great consumer brand. So, we're excited with what we believe that whole kind of endless aisle can do for the NAPA business. And we're going to continue to expand that opportunity going forward.

And I hear some -- I heard pricing was rational, but I also thought I heard there were some certain actions maybe in particular segments.

Yes. So, we were talking about rational pricing and really no supplier price increases in automotive. The actions taking both in our Automotive and our Industrial business are really buy side, sell side type pricing, global sourcing type internal gross margin initiatives. Really again, there are no drastic changes in the pricing environment. We've just gotten much more strategic as it relates to both, retail and commercial pricing in our gross margin efforts.

So, these are, just so I understand, more strategic, meaning that you're lowering prices to the customer or end up getting more merch margin based on how you're mixing it?

No. I mean, Greg, we've had 12 consecutive quarters of gross margin improvement in an environment with lower sales volumes and no inflation and tariffs. And again, we've got pricing, data analytics. We've got investments we've made. Again, we are getting improved gross margin with these initiatives and remaining very competitive. So, the idea is to grow our sales and grow the business. And again, I'm really pleased to see the opportunities and the results that we've gotten in the gross margin area.

That's great. Thanks a lot both of you. Good luck.

Thank you.

Thank you.

Our last person for questions comes from the line of Matt McClintock with Raymond James. Please proceed with your questions.

Hey, everyone. This is Mitch Ingles, filling in for Matt. Thanks for taking my questions. So, most of my questions have already been answered. I just had a quick follow-up on your major accounts group in Automotive. Are these accounts mostly back on line today and purchasing at lower volumes? It sounds like the recovery for Europe for these types of accounts has been relatively solid. Do you expect a similar trend for these accounts in the U.S. in coming months? Any color on the recent trends here would be helpful. Thank you.

Yes. Matt, we -- I'm sorry. We do expect that business to bounce back and it will bounce back as miles driven bounces back. One thing that hasn't really been talked about this morning, even though there's a whole lot more traffic than the roads and people are backed behind the wheel, which we're happy to see. Miles driven in the last couple of months that I've seen preliminary numbers, it's still down close to 10%. So, as that begins to come back and it will come back, the major account business and all of the commercial business will recover. So, yes, no doubt, you mentioned, our European business and we are very pleased with our major account business in the UK and some of the strength that we saw certainly in Q3 in our European business. And we expect -- quite honestly, we expect that to continue well into 2021.

Great. Thanks for the color. And best of luck.

Yes. Thank you.

There are no further questions in the queue. I'd like to turn the call back to management for closing remarks.

We'd like to thank all of you for your participation in today's call, and we look forward to reporting our year-end results in February. Thank you very much for your support of Genuine Parts Company. Have a great day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.