Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Second Quarter 2021 Earnings Conference Call. Today's call is being recorded and all lines are on mute. 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 second quarter 2021 earnings conference call. With me today are Paul Donahue, our Chairman and Chief Executive Officer; Will Stengel, our President; and Carol Yancey, our Executive Vice President and Chief Financial Officer. As a reminder, today's conference call and webcast include a slide presentation which can be found on the Genuine Parts Company Investor Relations website. Please be advised this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results as reported under Generally Accepted Accounting Principles. A reconciliation of these measures is provided in the earnings release issued this morning, which is also posted in the Investors section of our website. Today's call may involve forward-looking statements regarding the Company and its businesses. The Company's actual results could differ materially from any forward-looking statements due to several important factors described in the Company's latest SEC filings, including this morning's press release. The Company assumes no obligation to update any forward-looking statements made during this call. Now, I'll turn the call over to Paul for his remarks.

Thank you, Sid, and good morning. Welcome to our second quarter 2021 earnings conference call. We appreciate you joining us today. We are pleased to report terrific financial performance driven by the consistent execution of our strategic priorities and the ongoing recovery in the global market. In summary, the quarter was highlighted by continued strong sales trends, which we believe led to market share gains, gross margin gains, and improved operational efficiencies that drove margin expansion and record quarterly earnings and the effective deployment of capital for growth and productivity investments, bolt-on acquisitions, the dividend, and share repurchases. Taking a look at our second quarter financial results, total sales were $4.8 billion, up 25% from last year and improved sequentially from plus 9% in the first quarter. For your additional perspective, our second quarter sales were 12% higher than in Q2 2019. Gross margin was also strong, representing our 15th consecutive quarterly increase, and we further improved our productivity with the ongoing execution of expense initiatives. As a result, segment profit increased 35%, and our segment margin improved 65 basis points to 9.2%, which represents our strongest margin in two decades. Adjusted net income was $253 million, and adjusted diluted earnings per share were $1.74, up 32%. Total sales for global automotive were a record $3.2 billion, a 28% increase from 2020, and up 15% from the second quarter of 2019, marking the first quarter in our 93-year history with auto sales exceeding the $3 billion mark. On a comp basis, sales were up 21%, and on a two-year stack, comp sales were up 8.5%. Our comp sales in the second quarter were driven by double-digit year-over-year comp sales in each of our automotive operations. Automotive segment profit margin improved 9.1%, up 30 basis points from 2020 and an increase of 90 basis points from 2019. This expansion was supported by strong operating results across all of our operations. The automotive recovery reflects our focus on key growth initiatives as well as several market tailwinds, including the broad economic recovery and strengthening consumer demand, favorable weather trends, inflation, and our ability to pass along price increases to our customers. Finally, solid industry fundamentals have been further accelerated by a surge in the used car market and improving miles driven. While these market tailwinds are encouraging, we also see continued headwinds that we continue to closely monitor. These would include the spread of the delta coronavirus variant and its potential impact on the global economy, global supply chain disruptions, ongoing labor shortages in our operations, and the impact of inflation on our costs such as wages and freight. Turning next to our regional highlights, our GPC teammates in Europe built an excellent start to the year, achieving the strongest sales growth among our operations with comp sales up 34%. Each country posted substantial sales growth, while our UK team continues to outperform. The positive momentum in Europe reflects improving market conditions, favorable weather trends, and our focus on key sales initiatives, inventory availability, and excellent customer service. In particular, we have seen exceptional results from our key account partners and the ongoing expansion and rollout of the NAPA brand. In our Asia Pacific business, sales were in line with the mid to high teen comps we have had in this market now for four consecutive quarters. Commercial sales outperformed retail, although both customer segments posted strong growth. The Repco and NAPA brands performed well and are collectively capturing market share. The NAPA network continues to build, and we now have more than 50 NAPA locations operating across Australia and New Zealand in addition to our 400-plus Repco stores. In North America, comp sales increased 20% in the U.S. and were up 12% in Canada, where lockdowns in key markets such as Quebec and Ontario have been headwinds for several quarters now. Sales in the U.S. were driven by strong growth in both the commercial and retail segments with DIFM sales outperforming DIY for the first time since before the pandemic began to take hold in Q1 of 2020. The strengthening commercial sales environment is significant for us as it accounts for 80% of our total U.S. automotive revenue. The strong recovery in the commercial sector contributed to record average daily sales volume in our U.S. automotive business in June. Our sales drivers by product category include brakes, tools and equipment, and undercar, which all outperformed. In addition, both retail and commercial ticket and traffic counts were strong for the second consecutive quarter, so another really positive trend. By customer segment, retail sales remained strong throughout the quarter with low double-digit sales growth on top of a healthy sales increase in the second quarter of last year. While the DIY market is pulling back from the highs of 2020, we are optimistic our ongoing investments will create sustainable retail growth. For commercial sales, each of our customer segments posted double-digit growth, which we attribute to the broad automotive recovery and investments in our sales team, our sales programs, and our supply chain among other initiatives. This quarter, our strongest growth was with our major account partners and NAPA AutoCare centers. We were also pleased with the growth in sales to our fleet and government accounts. This was the first quarter of positive year-over-year sales growth for this group since before the pandemic, as they lagged the overall automotive recovery in the U.S. We view this improvement as a meaningful indicator for further growth in the quarters ahead. As the automotive recovery continues, we expect our commercial sales opportunities to outpace retail consistent with the long-term growth outlook for the aftermarket industry. We are confident in our growth strategy and our initiatives to deliver customer value and sell more parts for more cars across our global automotive operations. We also remain focused on enhancing our inventory availability, strengthening our supply chain, and investing in our omni-channel capabilities while expanding our global store footprint to further strengthen our competitive positioning. So now let's discuss the global Industrial Parts Group. Total sales for this group were $1.6 billion, a 20% increase from last year, and up 7% from 2019. Comp sales rose 16% and reflect the fourth consecutive quarter of improving sales trends. A strong sales environment combined with the execution of our operational initiatives drove a 9.5% segment margin, which is up 130 basis points from both 2020 and 2019. The ongoing market recovery over the last 12 months is in line with the strengthening industrial economy and the overall increase in activity we have seen across much of our customer base. The Purchasing Managers Index measured 60.6 in June, reflecting healthy levels of industrial expansion and mirroring trends we have seen throughout the majority of this year. Likewise, industrial production increased by 5.5% in the second quarter representing the fourth consecutive quarter of expansion. Diving deeper into our Q2 sales, we experienced strong sales trends across each of our industries served and our product categories, other than safety supplies, which had extraordinary sales in 2020 due to the pandemic. Several industry sectors stood out as their sales increased by 30% or more over the last year, including equipment and machinery, automotive, aggregate and cement, equipment rental, and oil and gas. Additionally, our newly added fulfillment and logistics industry sector experienced tremendous growth. In the past several years of expanding this segment, we have found our broad offering of products and services fits well with the needs of these customers. To drive this growth, we remain focused on several strategic initiatives, including the build-out of our industrial omnichannel capabilities with solid growth and digital sales via motion.com. Our new inside sales center, which was established in 2019, is generating incremental sales from new Motion customers, and we see room for further growth. The expansion of our services and value-add solutions businesses in areas such as equipment repair, conveyance, and automation have also been significant. Over the last few years, we have made several bolt-on acquisitions to build scale and continue to target additional M&A opportunities to further enhance our capabilities in these key areas, enhanced pricing and product category management strategies to maximize profitable growth, the further optimization and automation of our supply chain network to improve operational productivity while delivering exceptional customer service. We are encouraged by strong financial performance in the second quarter and the positive momentum we see in the overall industrial markets. We believe the Motion team is well-positioned to capitalize on this momentum and enhance our market leadership position. So in summary, each of our businesses did an exceptional job of operating through the quarter, and we couldn't be more proud and grateful for their strong Q2 performance. So now, I'll turn the call over to Will. Will?

Thank you, Paul. Good morning everyone. First, let me reiterate Paul's comments to acknowledge the strong performance this quarter. I'd like to personally congratulate the entire global GPC team for their hard work and impressive results. The teams continue to build momentum and execute well. We remain focused on our defined strategic initiatives despite the global uncertainties that continue to impact our operations. We're pleased with the strong sales growth, operating leverage, and cash flow performance this quarter. Last quarter, we outlined our plans to create value as we leveraged GPC global capabilities to simplify and integrate our operations. We do so to improve the customer experience, increase the speed and efficiency of execution, and deliver winning performance. This includes continuous investments to position GPC for near and long-term profitable growth. The key pillars of our investments include talent, sales effectiveness, digital, supply chain, and emerging technologies. Around the globe, the teams executed well against our strategic priorities. For example, on talent, we announced last month that Naveen Krishna joined the company as Chief Information and Digital Officer. Naveen will help lead our strategy and execution for all technology and digital initiatives. He comes to GPC with more than 25 years of technology experience with companies such as Macy's, Home Depot, Target, and FedEx. We're excited to welcome Naveen as we continue to innovate on the customer experience, accelerate the pace of technology execution, and build capabilities that advance our long-term strategy. Other examples of recent talent investments include category management, field sales and services, indirect sourcing, pricing, diversity-equity inclusion, digital data, and inventory leadership, to name a few. Investment in our people is always a priority as we execute our mission to be an employer of choice. To highlight other examples of our initiative momentum and local execution, Paul and I recently had the opportunity to spend time in person with our European teammates, and they showcased great examples of the strategic initiatives and winning team performance. For example, we discussed details of the growth plans for a recent bolt-on investment Winparts, an online leader of automotive parts and accessories. We expect this investment to provide new capabilities and accelerate our European digital vision. We visited a best-in-class distribution facility in the Netherlands that increased operating productivity by approximately 20% over the past few years with automation investments and process excellence initiatives. We received an update on the consolidation of 10 back office shared service centers in France to one national location in France to drive costs and process efficiencies. And we saw firsthand the power and differentiation of the NAPA brand in the local market. Although these are only a few select examples in Europe, in each of our automotive and industrial businesses, we see similar examples of focused strategic execution that are delivering results. We also executed well on our acquisition strategy during the quarter. The M&A environment is active, and we remain disciplined to pursue strategic and value-creating transactions. For example, in addition to Winparts, we completed several other bolt-on acquisitions to deliver growth, add capabilities, and create value. The North American and European automotive teams completed various store acquisitions that increase our position in key strategic geographies and extend existing customer relationships. Our automotive team in Asia-Pac also executed bolt-on strategic acquisitions, including Rare Spares, a market leader in the niche segment of automotive restoration parts and accessories, and PARts DB, a leading cloud-based product and supplier data platform that will enhance our e-commerce and data capabilities. We enter the third quarter with strong momentum as our automotive and industrial markets recover and we execute our plans. We continue to analyze and respond to areas that challenge our daily operations such as COVID-19, inflation, global logistics, and product and labor availability. For example, the global and local procurement teams partner closely with all levels of our suppliers to effectively assess product availability and delivery trends. We have processes in place, backed with data and analytics to create visibility into direct and indirect inflation trends. We utilize GPC scale and relationships, including dedicated GPC resources in Asia, to address our global logistics needs. And we continue to address labor challenges with competitive pay and benefits, flexible work programs, creative incentives to attract talent, a differentiated culture, and compelling career opportunities. We believe our team is well-positioned to remain agile as we focus on what we can control and navigate these macro global headwinds. Overall, we're very pleased with our performance through the first half of the year, and look forward to sharing our continued progress next quarter. I'll now turn the call over to Carol to review the financial details.

Thank you, Will. Total GPC sales were $4.8 billion in the second quarter, up 25%. Our gross margin improved to 35.3%, an increase from 33.8% last year or up 120 basis points from an adjusted gross margin of 34.1%. Our improvement in gross margin was primarily driven by the increase in supplier incentives. Although we also continue to benefit from channel and geographical mix shifts, positive product mix, and strategic category management initiatives, including pricing and global sourcing strategies. In the second quarter, there was significant pricing activity with our suppliers resulting in product cost inflation. We were positioned to pass these increases onto our customers, and the impact of price inflation was neutral to gross margin. We estimated a 1.5% impact of inflation in automotive sales for the quarter and a 1% impact in industrial. Based on the current environment, we expect this to increase further through the second half of the year. Our total adjusted operating and non-operating expenses were $1.3 billion in the second quarter, up 28% from last year and 28.1% of sales. The increase from last year reflects the impact of several factors, including the prior year benefit of approximately $150 million in temporary savings related to the pandemic. The balance primarily relates to the increase in variable costs on the $1 billion and additional year-over-year sales. To a lesser extent, we experienced rising cost pressures in areas such as wages, incentive compensation, freight, rents, and health insurance, which we are managing. We also invested in projects associated with our transformation and other initiatives to drive growth and enhanced productivity. Overall, we continue to operate in line with our plans for the year, and we remain focused on gaining additional efficiency in the quarters ahead as you heard from Paul and Will. On a segment basis, our total segment profit in the second quarter was $441 million, up a strong 35%. Our segment profit margin was 9.2% compared to 8.6% last year, a 65 basis point year-over-year improvement and up 100 basis points from 2019. So strong operating results are a reflection of the work we have done to streamline our operations and optimize our portfolio over the last several years. We would add that for the full year, we continue to expect our segment profit margin to improve by 20 to 30 basis points from today, 2020 or 60 to 70 basis points from 2019. This would represent our strongest margin in five years. Our tax rate for the second quarter was 27.2% on an adjusted basis, up from 24.1% last year. The increase in rate primarily reflects a higher UK tax rate, partially offset by stock compensation excess tax benefits. Second quarter net income from continuing operations was $196 million, with diluted earnings per share of $1.36. Our adjusted net income was $253 million or $1.74 per share, which compares to $191 million or $1.32 per share in the prior year, a 32% increase. Turning to our second quarter results by segment; our automotive revenue was $3.2 billion, up 28% from last year. Segment profit was $291 million, up 33% with profit margin improved to 9.1%, up 30 basis points from 2020 and a 90 basis point increase from 2019. We attribute the margin gain to the positive market conditions in our automotive business, and our team's intense focus on the execution of our growth and operating initiatives. We're encouraged by the positive momentum we will carry into the balance of the year. Our industrial sales were $1.6 billion in the quarter, up 20% from 2020. Segment profit of $150 million was up 38% from a year ago and profit margin improved to a strong 9.5%, a 130 basis point increase from both 2020 and 2019. With this strengthening sales environment and continued operational improvement, this group continues to post excellent operating results, and we expect industrial to perform well through the balance of the year. Now let's turn our comments to the balance sheet. At June 30th, our total accounts receivable is up 4%. Despite the strong sales increase, this is primarily due to the additional sale of $300 million in receivables in the second half of 2020. Inventory was up 10%, consistent with our commitment to provide for inventory availability and our accounts payable increased 26%. Our AP to inventory ratio improved to 129% from 112% last year. We remain pleased with our progress in improving our overall working capital position. Our total debt is $2.5 billion, down $700 million or 22% from June of 2020, and down $160 million from December 31, 2020. We closed the second quarter with $2.5 billion in available liquidity, and our total debt to adjusted EBITDA has improved to 1.6 times from 2.9 times last year. Our team has done an excellent job of improving our capital structure over the last year. We continue to generate strong cash flow with another $400 million in cash from operations in the second quarter and $700 million for the six months. For the full year, we expect our earnings growth and working capital to drive $1.2 billion to $1.4 billion in cash from operations and free cash flow of $900 million to $1.1 billion. Our key priorities for cash remain the reinvestment in our businesses through capital expenditures, M&A, dividends, and share repurchases. We have invested $90 million in capital expenditures thus far in the year, and we expect these investments to pick up further in the quarters ahead as we execute on additional investments to drive organic growth and improve efficiencies and productivity in our operations. As Will mentioned earlier, strategic acquisitions remain an important component of our long-term growth strategy. We've used approximately $97 million in cash for acquisitions through the six months. We continue to cultivate a strong pipeline of targeted names and expect to make additional strategic and bolt-on acquisitions to complement both our global automotive and industrial segments as we move forward. Consistent with our longstanding dividend policy, we have also paid a total cash dividend of more than $232 million to our shareholders through the first half of this year. This reflects the 2021 annual dividend of $3.26 per share and represents our 65th consecutive annual increase in the dividend. Finally, as part of our share repurchase program, we have been active with share buybacks since 1994. In the second quarter, we used $184 million to acquire 1.4 million shares. The company is currently authorized to repurchase up to 13 million additional shares, and we expect to remain active in this program in the quarters ahead. Turning to our outlook for 2021, we are updating our full-year guidance previously provided in our earnings release on April 22nd of 2021. In arriving at our updated guidance, we considered several factors including our past performance and recent business trends, current growth plans and strategic initiatives, the potential for foreign exchange fluctuations, inflation, and the global economic outlook. We also consider uncertainties due to the market disruptions caused by COVID-19 and its potential impact on our results. With these factors in mind, we expect total sales for 2021 to be in the range of plus 10% to plus 12%, an increase from our previous guidance of plus 5% to plus 7%. As usual, this excludes the benefit of any unannounced future acquisitions. By business, we are guiding to plus 11% to plus 13% total sales growth for the automotive segment, an increase from plus 5% to plus 7%, and a total sales increase of plus 6% to plus 8% for the industrial segment, an increase from plus 4% to plus 6%. On the earnings side, we are raising our guidance for adjusted diluted earnings per share to a range of $6.20 to $6.35, which is up 18% to 20% from 2020. This represents an increase from our previous guidance of $5.85 to $6.05. We enter the third quarter focused on our initiatives to meet or exceed these targeted results, and we look forward to reporting on our financial performance as we go through the year. Thank you. And I'll now turn it back over to Paul.

Thank you, Carol. We are pleased with our progress in capturing profitable growth, generating strong cash flow, and driving shareholder value. This quarter's 25% total sales growth reflects the benefits of a strengthening global economy and positive sales environment in both our automotive and industrial businesses. Importantly, this dual recovery allows us to leverage the full scale of one GPC, which we believe creates significant value. Our team also executed well and produced our 15th consecutive quarter of gross margin expansion while further improving our productivity via ongoing expense initiatives. Our global team network and disciplined focus in these areas enabled us to report strong operating results and record quarterly earnings. Our exceptional balance sheet provides us with the financial flexibility to pursue strategic growth opportunities, the investments in organic and acquisitive growth while also returning capital to shareholders through the dividends and share repurchases. The GPC team is focused on executing our growth strategy and operational initiatives to further enhance our financial performance in the remainder of 2021 and beyond. We thank you for your interest in GPC, and also thank each of our GPC teammates for their continued dedication, passion, and commitment to being the best in serving all our company's stakeholders. So, with that, let me turn the call back to the operator for your questions.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question.

Thanks. Good morning, everybody.

Good morning, Chris.

Good morning, Chris.

So can you – it looks like, is it fair to say you're just assuming sort of the two-year comp stacks hold in both divisions for the balance of the year and in related to the Motion side, Motion is not yet positive on a two-year basis. What would – what's going to be the inhibitor that would not allow that to pause turn positive on a two-year basis?

Yes, I think, Chris you're spot on. I think Motion is not positive on a two-year stack yet. We are really encouraged by the fundamentals as Paul mentioned and the lag that we see in that business. We're encouraged by the activities going on. We are implying a similar trend for them in the second half, so on a second half, mid-single digit, on a comp basis for them, but that still is just flattish to slightly up on a two-year stack basis. I think on the automotive side, I mean, I think again you're spot on sort of the second half mid-single digit on the automotive comps that we would be a bit higher than that in the U.S. So again, on a two-year stack basis more normal mid-single-digit on a two-year stack basis, so similar to where we are now, but a bit better certainly in U.S. automotive.

Chris, I would add specifically to Motion. We and I think you've alluded to it in the past this recovery that we're seeing in both automotive and industrial. When you look at U.S. manufacturing, our customers are operating at higher run rates. They're accelerating CapEx, plants are returning to full production. If you look at the PMI numbers, you look at industrial production, all is very, very positive. So when you couple that with what we're seeing on capital projects really gaining steam, we're very, very bullish about our industrial business moving forward.

Got it. And then as a follow-up, you talked about record average daily volumes. I think you were referring to U.S. NAPA in the month of June, and you referred to momentum in the business. Maybe can you expand on that a little bit? And within that I think there are a lot of concerns out there on the DIY, DIY is not immaterial. It is 20% of the business. So could you perhaps talk about what you're seeing on the DIY side of the business in the U.S. as well?

Yeah. First, let me just comment on the specific numbers, Chris. So, we wrapped up Q1 with a record sales month for us in March. That momentum carried into Q2. We had a really solid quarter with May, June being our strongest, June being the strongest month and a record month again. As we moved into July, again, pleased to say that that's holding up. So we're really, really encouraged by what we're seeing in U.S. automotive. And specifically to DIY, we're not seeing a pullback in our strong DIY business. We're up low double-digits in Q2, and our two-year stack I think raises well over 20%. So our teams have – as you know, and we've talked about this in the past, we've worked incredibly hard to get our retail footprint in what we believe to be much better selling mode than we've ever been. So could it pull back a little bit with the lack of stimulus money in the economy, it could be. I think we'll see that perhaps in some of the more retail-focused competitors, but we feel good, we feel good about our DIFM business and our DIY business going forward.

Understood. Best of luck.

Yes. Thanks, Chris.

Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.

Hi, is it working this time?

Yes, it is.

Yes, we hear you, Bret.

I have a lot of phone problems on this call today. But I guess a question, did you give us the U.S. NAPA comp against the 2019 second quarter, I might have missed that.

Yes, the U.S. comp two-year stack is mid-single digits.

Okay, great. And then, I guess, a question on the wage inflation that you're seeing, and I guess, a) the transitory, and b) what kind of cost increases are you seeing at the store level?

Yes, Bret. I think, what we would talk about on the wage inflation again similar to on the inflation on the product side this is a big factor in what we're seeing. I mean, all companies are seeing rising costs and inflation, certainly in wages and freight and as we mentioned some other categories. We do think when we looked at our SG&A this quarter that our inflation in our SG&A was certainly greater than the product inflation, so more like 2% in our cost. And that ended up being about 50 to 60 basis points on our SG&A. And we certainly didn't have that in Q1, so we did have that in Q2. But look we're working hard with investments and projects and again weather, Will mentioned it, whether it's transformation or strategic investments in productivity, but we do think this inflation in wages stays with us. We don't believe it's necessarily transitory for this year. We're going to continue to work hard on it, but we think it stays with us for a bit.

Hi, Bret, I would also add that it's a very surgical approach by geography, by job type. So we've done a lot of really good thinking and analytics to make sure that we're hitting the areas of the business that are most impacted, but just want to share that perspective.

Okay, great. And then a question on regional performance, I think you called out weather as one of the positives. Could you talk about sort of in the U.S. auto market, about the highlights and the low lights and maybe the spread in the comp between the peak and the valley?

Yes, this quarter, Bret, was unprecedented with the strong double-digit growth we saw across all six of our divisions leading the pack for us as our guys up in the Northeast. But they were impacted the most last year. So it does stand to reason a bit, but really strong performance in the East, going down to the Atlantic. Also pleased though out West in the mountain division, these guys continue to deliver. So top to bottom, the division out of the sixth, we had a spread anywhere from 25% to 26% on the top end and 20% on the bottom, so all really, really strong performance across the U.S.

Okay, great. Thank you.

You're welcome, Bret.

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

Hi, thanks. I have really two questions. Let's start on inflation just to make sure I'm getting this right. The 150 is in the product COGS, but then there is also SG&A inflation. I guess, ask another way, what sort of top-line benefit or do you expect to see indeed the pass-through? Is it 3% or 4% to offset all the areas of costs inflation that you're getting either yourself or with the jobbers?

Yes. Look because of our transformation work that we did and some of the cost-saving work that we've done, we think it's less than 3% that we would have to have if you will to pass through. But it's – definitely this is more specific to U.S. automotive. So we want to make sure that again as we've talked about this product inflation and honestly even to a same extent the inflation and wages and whatnot, it is a little more prevalent in U.S. automotive. So again, we are able to leverage our costs with less than 3% comp. So that's something that we achieved with our cost savings. So we're just going to keep again, we've got a lot of initiatives in place. I want to just remind you though we still have full-year operating margin improvement, in our full year we've got the 20 to 30 basis points operating margin improvement. So we still feel good about being able to deliver that this year.

Got it. And then maybe linked to that on the margin side, you mentioned vendor bonuses helping. Is that more relevant to automotive or industrial?

Yes, actually that's on the gross margin side. And so our gross margin improvement in the quarter, the 120 bps, about a third of that was volume incentives. That's both on automotive and industrial, and it's directly related to the additional billion dollars of revenue that we had and tied to the product purchases. So about a third of the gross margin was improved by volume incentives, a third of it was from mix, we've talked about geographical mix, product mix, customer mix, and then a third is just from our strategic category management initiatives and pricing initiatives. So again, feeling good about gross margin as we look ahead.

And I'm going to sneak one, if I could. You said July call was as strong as June, is that…

July – go ahead, I'm sorry, Greg.

Is that equal in both commercial and for DIY? Or is one sort of taking the lead on that?

Yes, our DIFM business, Greg, as you heard, is very, very strong and that goes across our major account business, which has really, really bounced back strong. Our AutoCare – NAPA AutoCare business has really strong. What we're really pleased with Greg is our government in fleet business, which has lagged behind our AutoCare and major account recovery. That business has bounced back with high single-digit growth. So DIFM really continues to carry the load, which by the way we fully expected as the economy bounced back as miles driven really began to ramp back up. Our – there's so much pent-up demand out there. Our garages are as busy as we have seen them in quite some time. So DIFM continues to carry the weight. We think as we have seen in recent years, DIFM is going to continue to be really strong.

That's great. Well, good luck everyone. Have a great one.

Okay. Thanks, Greg.

Thank you.

Thank you. Our next question comes from the line of Seth Basham with Wedbush Securities. Please proceed with your question.

Thanks a lot, and good morning. I guess my first question is around something like global supply chain challenges that you and most are facing. Do you feel like you're missing sales because you're out of stock of certain products or product categories?

Look, here's what I would say that the – we're all dealing with supply chain issues. All of our peers are as well-documented as you said. Our primary challenge is not in the industrial business, it's not in our international business. It's primarily a U.S. automotive business issue, which is just as a reminder about a third of our overall. I've got a tremendous amount of confidence in our global sourcing team and we're very confident they're doing everything they can. I would tell you, Seth, that at this time being a global player having the size and scale that we have, we do believe that that we're getting as good of supply as anybody in the automotive aftermarket, and our team is working incredibly hard to ensure that that remains the case. We're missing sales here and there, you would have to believe we are, but we also believe that that will come back and our suppliers, we think it's transitory. We know it's transitory. They'll get it together. And we fully expect that to come back probably later in the second half could even – could even carry a bit into 2022.

That's helpful color. And I am thinking about your guidance and the implied operating margins for the balance of the year. It seems like you're expecting incremental margins to not be quite as strong going forward with very strong improvement in your sales outlook and limited improvement in your margin outlook. Is there a reason for that that you could help us understand?

Yes. Look, I think our implied margin outlook for the rest of the year, the full year, and compared to what we had last quarter, it would be similar. I mean, we are and again, we have considered some of the factors as we've talked about inflation on our costs, but we'd considered the stronger growth, we've considered the stronger top line. I think when you look at our margin improvement, I mean, it's the two-year basis when you go back to 2019, having that stronger margin improvement year-over-year is something that we expect to deliver. So I think again we have a little bit of cautiousness as we look ahead, but it's still improved margin for 2020 and on a two-year basis it's 70 to 80 basis points for 2019.

Got it. Thank you very much.

Thanks, Seth.

Thank you. Our next question comes from the line of Liz Suzuki with Bank of America. Please proceed with your question.

Great. Thank you. Just I guess, since we've now lapsed a period last year that were most severely impacted, which specific customer groups or regions do you think are still running below normalized levels or are still being negatively impacted by the pandemic?

Great question, Liz. As I mentioned earlier, we've seen a strong rebound in our major account business and our AutoCare business. However, the government segment, while experiencing high-single-digit growth this quarter, is still lagging behind some other categories. So that would be the one I would highlight. Nonetheless, it's challenging to critique our team's performance when they are achieving a high-single-digit increase in that product or customer category.

Yes. I mean, fair enough. Is it the same – in the case of the industrial group, what do you think are the customer groups that are still pretty far below normalized levels? They're still have the most potential room for recovery?

Yes. So on the industrial side, if you look at the one area where we were lagging a bit year-over-year was in safety-type products. But if I look across the industries, just about everyone is putting up tremendous numbers. I've mentioned equipment and machinery as really being strong. A new category that we're looking at is fulfillment and logistics, which is all distribution center related, is really strong. We've had some challenges on the OE automotive primarily due to shortage in the chips. But that's going to – that's going to come back. So again, all in all our motion team is performing at an incredibly high level and had a great quarter.

Great. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Daniel Imbro with Stephens Inc. Please proceed with your question.

Yes. Thanks, I appreciate you giving. I wanted to go back to the SG&A outlook you touched on Carol. I get things are inflationary and you noted that's accelerating, but I think you also mentioned some of the leverage was from investments in specific projects for future transformation. Can you provide any more color on what that is? And then a related question, obviously you removed a lot of costs last year with the business. How has the pace of bringing those costs back been this year relative to your expectations? Have you been able to keep some of those structural costs out?

Yes. So when we look at our SG&A and I'll go about it a couple of different ways for the quarter. So this quarter the comparison to last year was our highest level of temporary cost savings. We had over $150 million costs – temporary cost savings last year in Q2, a significant portion was government subsidies, payroll deduction, delayed merit increases, and furloughs. So we knew this would be our toughest quarter on those. So that's honestly about half of the increase in the dollar increase in SG&A. The increase in variable costs, as I mentioned, I mean, we have incremental $1 billion more in sales. So about a third of the increase was related to bringing back the variable costs to handle the volume. And then the investments in projects, a relatively small amount, but an important amount. So that is investments, Will mentioned some of the productivity improvements we're doing. We've got in our industrial business automation in their warehouses, in our automotive business consolidating facilities and putting in further automation, investments in pricing, and digital initiatives. So that was roughly say 5% of the dollar increase. The balance, about 10% of the dollar increase was the rising cost and inflation. What I would tell you is we have kept the permanent cost savings that we had last year, which ended up being $150 million on a target of $100 million. In bringing back these costs, I mean, we had just a surge in growth. And so you do have to bring in those variable costs. What we didn't really expect was the rising costs and inflation, but thank goodness we did the work we did on the transformation team. And again, we continue to see some investments and projects as we look ahead.

Got it. That's helpful color. And there's a follow-up on the M&A. Obviously, things seem like they're picking up as we hopefully further away from this pandemic. Can you talk about what cellar multiples are and maybe by geography, it looks like you bought a little bit kind of across the automotive landscape, but given maybe some of these customers had elevated results last year, maybe some were weaker. Are sellers coming to the table with reasonable multiples or how hard is it to find a deal that you actually like right now?

Yes. It's a great question, Daniel. I would say you're right. The M&A environment is very active. I would say that the market is working through the expectations of sellers. You're right in thinking that those expectations are pretty high. I think for us, the key takeaway for everybody to hear is the discipline that we have around doing the right deal. So we look at a lot of deals to do a few and do the right ones, where we can create a ton of value. So you're right though, we're actively working the pipeline. We will continue to work the pipeline, but we're going to stay very disciplined on doing the right deals for ourselves.

Hey, Daniel, I would also mention, we're very selective in our M&A targets and I think a couple that were called out were Winparts, which is a leading online player in Europe, and that's – it's very targeted. We want to further our online presence across our European markets, and we found a great partner in Winparts, and so more to come on that later. Will and I were actually in the Netherlands last week, our first international trip in 18 months, spending a half day with this group and very impressive, and we think nice upside in the future.

And here's the quick related follow-up. Can you disclose what kind of multiples you typically try to pay for these kinds of assets in the automotive segment?

Daniel, we're not going to disclose that at this time.

Okay. Thanks a lot, guys.

Thank you.

Thank you. Our last question today comes from the line of David Bellinger with Wolfe Research. Please proceed with your question.

Hey everybody. Thanks for taking the question here. So I believe you mentioned a stronger ticket in U.S. automotive that's actually due to inflation, but is there anything else behind that on the consumer side that really stands out? Just to give a larger ticket repairs, shift older used vehicles, anything else there and just how sustainable can that trend be?

Yes. David, we've seen a nice bounce up in our average ticket size, and we've been watching that for a number of years. Our ticket count was a little bit of a concern where we saw a bit of a decline in recent years. What we're really excited about these past couple of quarters is we're watching both ticket count and average ticket size go up. In this past quarter, both were up high-single digits. So we think that's a long-term trend as parts continued to get more and more expensive. As repair orders continue – the average repair order continues to move up. So again, we're pleased – especially pleased to see our traffic up, but also ticket up and both going in the right direction.

All right, appreciate that. Then my follow-up here; can you expand upon some of the earlier comments around labor constraints that we're talking about? Are you raising wages in the U.S. NAPA stores and DCs now? Is there more overtime given worker shortages, maybe just walk us through what you're seeing and any quantification of higher costs if you can?

Yes, David, the answer is yes to all those things. I mean, again, you've got an extremely tough labor market in the U.S. There are labor shortages everywhere, and whether it's stores, it's warehouses, it's delivery drivers, our teams are working tirelessly and there is additional overtime, there's temp help, there's contract labor, and you don't have 20% increases in volume. As Paul mentioned, 20%, 25% increases in volume across these geographies with a labor shortage. And so we're doing all we can to take some burdens off our team and to make sure that we can properly service our customers. But it is we are raising wages in certain areas and certain categories. I think as we mentioned, I mean, it was roughly 50 basis points to 60 basis points when you look at overall inflation on our SG&A. Wages being the biggest part and freight being the secondary component.

Hey, David, I would also just tag onto that to say that, and to clarify that the issue is primarily in our U.S. automotive business, and it's in the retail stores, it's roles like delivery drivers that are coming a bit under pressure. We're not seeing this type of pressure in our industrial business, nor are we seeing it much on the international side. So again, the one-third of our business, U.S. automotive is where we're feeling the impact, and primarily in our retail stores and delivery drivers, those type roles.

Yes. Yes. Very helpful. Thanks again, and best of luck as you go through the rest half year.

Thank you. Appreciate it.

Thank you.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any final comments.

We'd like to thank you for joining our call today. We appreciate your interest in support of Genuine Parts Company, and we look forward to speaking with you on our next call for Q3. Thank you, and have a great day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.