Genuine Parts Q2 2022 Earnings Call Transcript

Presentation

[Operator]

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Second Quarter 202 Earnings Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Sid Jones, Senior Vice President, Investor Relations. Please go ahead, sir.

[Sid Jones, Senior Vice President of Investor Relations at Genuine Parts]

Good morning, and thank you for joining us today for the Genuine Parts Company Second Quarter 2022 Earnings Conference Call. With me today are Paul Donahue, our Chairman and Chief Executive Officer; Will Stengel, our President; and Bert Nappier, our Executive Vice President and Chief Financial Officer. As a reminder, today's conference call and webcast includes a slide presentation that 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 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 filing, 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.

[Paul D. Donahue, Chairman and Chief Executive Officer at Genuine Parts]

Thank you, Sid, and good morning. Welcome to our second quarter 2022 earnings conference call. As Sid mentioned, I'm here with Will as well as Bert, who is on his first earnings call as CFO. Welcome to the call, Bert. We are pleased to report continued strong results from Genuine Parts Company in the second quarter of 2022. The GPC team had another record quarter, consisting of double-digit sales and earnings increases and a steady cadence of continued growth throughout April, May and June. Total sales were $5.6 billion, up 17%. And adjusted earnings per share was $2.20, up 26% from last year. We continue to benefit from the resiliency of our automotive and industrial businesses and the strategic mix of our operations.

We would like to thank our 53,000 talented GPC teammates for their exceptional work and commitment to excellence. A few highlights in the quarter include another quarterly sales record for GPC, and our Automotive and Industrial segment; segment operating margin expansion in both segments and for GPC overall; record quarterly earnings and double-digit EPS growth for the eighth consecutive quarter; and strong cash flow generation and the further strengthening of our balance sheet. We continue to execute our key strategic initiatives to deliver market share gains and drive positive momentum in our top and bottom line results despite ongoing macroeconomic pressures. Our teams are doing an excellent job of navigating supply chain disruptions, enabling our business with the product we need to serve our customers and capture market share.

For example, we are investing in our businesses to enhance forecast accuracy for product demand, improve fill rates and optimize our network footprint. Our size and global scale continue to be an advantage as we work to have the right part in the right place at the right time. Likewise, our pricing strategies have proven valuable and substantially offsetting product inflation and rising freight costs. Our M&A strategy has also been effective. As you will hear from Will, the accelerated integration of KDG has been executed with a high degree of precision and has had a meaningful impact on our industrial performance. In addition, our global automotive teams have been active with ongoing strategic bolt-on acquisitions, such as the addition of Knoll, which rounds out our national footprint in Germany, the largest economy in Europe.

We continue to explore a healthy pipeline of acquisition targets and M&A remains an important part of our global growth strategy. Additionally, we are benefiting from ongoing initiatives such as accelerating the rollout of the NAPA brand or international markets as well as further investing in B2B and B2C omnichannel enhancements to both our catalog data and technology platforms. We also continue to upgrade our pricing and product category management strategies, to further extend our leadership positions in the global automotive and industrial markets. As we look at the operating environment more broadly, our automotive and industrial business are benefiting from several tailwinds.

The continued increase in miles driven and the average age of vehicles, limited new car inventory and elevated used car prices are supporting demand in the automotive aftermarket and driving continued strength in the DIFM segment. In industrial, PMI continues to signal manufacturing expansion, and industrial production showed gains again in the second quarter, representing the eighth consecutive quarter of growth. We are closely monitoring potential consumer headwinds, including the effect of historically high inflation and its impact on gas prices, freight and wages. However, we will stay focused on our strategic initiatives and remain agile in the execution of our business on a day-to-day basis. The enthusiasm and momentum in our business was on full display last week when for the first time in seven years, we hosted our 2022 NAPA Expo in Las Vegas.

This gathering brought together more than 15,000 global attendees, including NAPA AutoCare customers, independent NAPA store owners, NAPA store managers, key suppliers, and leaders across our operations. It was an extraordinary event packed with seminars, insights, business building strategies and an extensive trade show featuring our global suppliers and key business partners. We took the opportunity to introduce our new NAPA brand campaign, Get Up & Go, and you could feel the positive energy and excitement for the future of NAPA and the automotive aftermarket overall. The biggest takeaway is that the NAPA team in the U.S. and across the globe is well positioned for the future. During the quarter, we also had the opportunity to spend time in the field with our Motion leadership team.

We visited our operations and customers across the Midwest and saw firsthand the momentum in our industrial business and the progress of the KDG acquisition. As we mentioned in our last call, we have been active in 2022 building on our commitment to responsible ESG business practices. This has included formalizing our Carbon Emission Reduction strategy as well as driving continued progress in DE&I. We look forward to providing additional details on our progress in these areas later this year as we publish our 2022 Corporate Sustainability Report. So again, we thank each of our GPC teammates for taking great care of our customers and delivering another quarter of record results.

Now I'll turn the call over to Will.

[Will Stengel, President at Genuine Parts]

Thank you, Paul. Good morning, everyone. I'd also like to thank the global GPC teams as well as our supplier partners for their ongoing commitment to serving our customers. We appreciate the team effort and hard work to deliver great results around the world. During the second quarter, we built on solid momentum and delivered strong results across both our automotive and industrial businesses. Our results were driven by team execution and disciplined focus on strategic initiatives. We continue to align our initiatives around five foundational priorities, including talent and culture, sales effectiveness, technology, supply chain and emerging technology.

We'll highlight select initiative examples as we review the business performance. Turning to the performance details by segment. Total sales for our global Automotive segment were $3.5 billion in the second quarter, an increase of approximately $271 million or 8.5% versus the same period last year. Sales growth was relatively consistent in all three months of the quarter. And on a comparable basis, sales growth for the quarter was plus 8%. Our global teams delivered mid-single-digit to low double-digit comp growth across each of our operations. And as Paul mentioned, the Automotive segment continues to be driven by solid industry fundamentals and focused team execution. Global Automotive segment profit was $323 million, and segment operating margin was 9.3%, representing a 20-basis-point increase from the same period last year.

The improvement in segment profit was driven by strong operating discipline across our operations despite a dynamic environment. During the second quarter, our automotive business experienced slightly higher product cost inflation compared to the mid-single-digit experienced in the first quarter. The pricing environment remains rational, and we're pleased with the ongoing positive impact of our category management initiatives. Looking ahead, we believe current levels of inflation will continue through the second half of 2022. Now turning to an overview of our automotive businesses by geography. In the U.S., automotive sales grew approximately 11% during the quarter, with comparable sales growth of 7%.

Sales were solid across each U.S. region and broadly across product categories with brakes, filters and fluids all posting double-digit increases in the quarter. We continue to be pleased with market share growth with many of our categories. Sales to both commercial and retail customers were positive with low double-digit commercial growth outpacing retail, which moderated to mid-single-digit growth as expected. Our commercial business representing approximately 80% of U.S. auto sales saw broad-based strength across all customer segments. Digital channels across all customers also performed well, with low double-digit sales growth during the second quarter, reflecting continued traction from investments in our omnichannel experience.

Other select U.S. initiative examples to highlight include the rollout of an enhanced PROLink, our B2B digital commerce platform, new sales and marketing programs, including the new NAPA Get Up & Go brand campaign, pricing and sourcing analytics, inventory and forecasting tools and DC productivity initiatives, to name just a few. In Canada, sales grew approximately 16% in local currency during the second quarter. Comparable sales were up 14% and up 26% on a two-year stack, reflective of the continued strength of the reopening of the Canadian market and solid team execution. To highlight an example of emerging technology initiatives, during the second quarter, we officially launched NexDrive in Canada.

Originally launched in Europe in 2020, NexDrive is a program that enables our network of automotive service centers to repair next-generation hybrids and EV vehicles. As part of this program, we partner with our vast service center network to offer product, training, tools and technology. We currently have over 100 NexDrive service centers in the European market, and we're excited to bring this offering to the Canadian market. Our emerging technology council comprised of global strategic partners also continues to help inform and advance our strategies. In Europe, our automotive team delivered a terrific quarter as well despite the dynamic geopolitical environment. Sales in Europe increased 19% in local currency in the second quarter.

Comparable sales increased 7% for the quarter and are up more than 40% on a two-year stack basis. Growth continues to be driven by continued focus on strategic initiatives. Initiative highlights in Europe include new account expansion, continued NAPA rollout within and across the region and technology and supply chain investments. The recent Lausan and Knoll acquisitions in Spain and Germany, respectively, are also exceeding our expectations, and we're encouraged by the opportunities we're working on to capture in these businesses. In the Asia Pac automotive business, sales in the second quarter increased 11% in local currency from last year. Comparable sales were up 8% from last year and up 26% on a two-year stack.

Both commercial and retail sales performed well with Repco and NAPA growth driven by strong execution of complementary customer value propositions and robust demand. Our motorcycle accessories division also performed well, benefiting from ongoing store expansion. In addition, during the second quarter, our Asia Pac team completed the acquisition of STEDI, a leading Australian branded direct-to-consumer distributor of lighting products focused on the 4-wheel drive market. The acquisition creates a differentiated product offering in a multibillion dollar profitable high-growth segment in Australia and New Zealand. Turning to the Global Industrial segment. During the second quarter, total sales at Motion were $2.1 billion, an increase of approximately $547 million or 34.5%.

The sales cadence was consistently strong throughout the quarter, and comparable sales which exclude the benefit of KDG increased 18% versus last year. This marks our fifth consecutive quarter of double-digit comparable growth driven by the strong performance in our North American business. The strength in our North American industrial performance was broad-based with double-digit sales growth across virtually all product categories and major industries served with particular strength coming from equipment and machinery, aggregate and cement and automotive customers. Industrial segment profit was $225 million or 10.6% of sales, a new record for the Industrial segment. This represents a 110-basis-point increase from the same period last year.

The improvement is a result of Motion's impressive growth and disciplined operating performance. For the second quarter, inflation in the Industrial segment held in the low single-digit range, consistent with the levels we saw in the first quarter. The pricing environment remains rational, and we do not expect any significant shifts in product inflation in our industrial business through the balance of 2022. Select initiative highlights contributing to the strong performance in the industrial business includes sales programs to capture profitable share of wallet with target accounts, data-driven strategic pricing and sourcing programs, technology investments to enhance the omnichannel experience and inventory productivity and footprint optimization initiatives.

As Paul mentioned, the KDG acquisition has added to the Motion team momentum. The teams are executing well-defined plans with customers, suppliers and teammates to deliver growth and create value as a combined business. To provide a bit more commentary on the recent integration progress, the team successfully onboarded KDG associates to Motion HR programs, accelerated the realignment of functional support teams, integrated systems and accelerated the colocation of overlapping branches. In addition, the team partnered with vendors to improve programs and product availability, utilize cross-functional field teams to sell services across shared customers, harmonize inventory strategies, and rebranded stores under the Motion banner.

All major work streams are at or ahead of plan. We're extremely pleased with the momentum of the integration efforts and excited for the growth opportunities as one Motion team. As we execute on our global initiatives, we complement them with strategic bolt-on acquisitions to capture share in our fragmented markets and create shareholder value. The M&A pipeline continues to be active, and we'll remain disciplined to pursue transactions that advance our strategy, deliver profitable growth and create long-term value. In summary, we had another terrific quarter, which resulted in record sales and profit for Genuine Parts Company.

We acknowledge that the macro environment remains dynamic, but we learned as a team from the challenges presented by the pandemic. We continue to prioritize our customers as we analyze our business indicators, remain agile and strategically invest with discipline in initiatives that extend our global leadership positions. Thank you again to the entire GPC team for an exceptional quarter.

And with that, I'll turn the call over to Bert.

[Bert Nappier, Executive Vice President and Chief Financial Officer at Genuine Parts]

Thank you, Will, and thanks to everyone for joining us today. As Paul and Will have shared, we had an excellent second quarter, and I'm pleased to walk you through the key highlights. Our comments this morning focused primarily on our adjusted quarterly results, which exclude nonrecurring items that I will cover in more detail shortly. Total GPC sales were $5.6 billion in the second quarter, up $819 million or 17.1% from last year. Our increase in total sales reflects an 11.5% increase in comparable sales, including mid-single-digit inflation and an 8.8% contribution from acquisitions. These items were partially offset by a 3.3% unfavorable impact of foreign currency.

Our gross margin was 35%, a 30-basis-point decrease compared to the second quarter last year and in line with our expectations. Our gross margin in the second quarter was negatively impacted by headwinds from anticipated moderation in supplier incentives, foreign currency and the timing of inflation in certain product categories. These headwinds were substantially offset by the ongoing favorable impact of strategic category management initiatives where we continue to leverage our growing global scale. As an example of our strategic initiatives and category management, our teams are utilizing technology, innovative data analytics and AI to forecast supply chain lead times and changes in market demand to ensure optimal inventory levels.

These actions, along with our pricing initiatives, positively impacted our gross margin in the second quarter. For the full year, we expect our gross margin rate to be consistent with 2021 as we are relentlessly managing the impact of product and supplier price increases and our costs. Our total operating and nonoperating expenses, excluding nonrecurring items, were approximately $1.5 billion, up 15% from 2021 and at 27.6% of sales compared to 28.1% of sales in the prior year. We continue to leverage our expenses despite ongoing inflationary pressures across all costs particularly in freight and shipping charges. Our teams remain focused on further reducing expenses and driving operational efficiencies across the business. With our strong performance, segment profit was $548 million, up 24%.

And our segment profit margin was 9.8%, a 60-basis-point increase from last year and up 160 basis points from 2019. With a very challenging operating environment over the past few years, ranging from the pandemic to current inflationary dynamics, we are very proud of the work our teams have done to improve our segment margin over the last three years. As outlined in our earnings release, our second quarter results include two nonrecurring items. The first item relates to the sale of S.P. Richards Real Estate, which generated $140 million in cash proceeds and resulted in a nonrecurring gain of $103 million. The S.P. Richards properties sold this quarter were not divested with that business in 2020, and we are extremely pleased to monetize these assets and reinvest this capital across the GPC portfolio.

In addition, during the second quarter, we incurred approximately $25 million of costs related to our KDG acquisition, including a noncash impairment charge of $17 million for legacy Motion brand names that will no longer be used as a result of the acquisition of KDG. Our second quarter adjusted net income, which excludes $59 million or $0.42 per diluted share in the nonrecurring items I just discussed, was $313 million or $2.20 per diluted share. This compares to adjusted net income of $253 million or $1.74 per diluted share in the prior year, an increase of 26%. This strong growth is indicative of the crisp execution of our initiatives to deliver accelerated growth and profitability. As we turn to our balance sheet, at June 30, our total accounts receivable balances were up 18%, with inventory up 17% and both in line with the increase in sales.

Likewise, accounts payable increased 14% from 2021, which correlates to the increase in inventory. We continue to generate strong cash flows with $392 million in cash from operations in the second quarter and $791 million for the six months, up 12% from last year. For the full year, we continue to expect cash from operations to be in the $1.5 billion to $1.7 billion range with free cash flow up $1.2 billion to $1.4 billion. We closed the second quarter with $2 billion in available liquidity, and our debt to adjusted EBITDA is 1.8 times. This is slightly below our targeted range of two to 2.5 times and highlights our financial strength and flexibility. The key priorities for capital allocation at GPC remain unchanged.

As a reminder, these included reinvestments in our business through capital expenditures and M&A and the return of capital to our shareholders through dividends and share repurchases. During 2022, we have invested $153 million in capital expenditures, including $75 million in the second quarter and continue to plan for additional strategic investments through the balance of the year. These investments are primarily in technology and projects to further automate and consolidate our distribution networks and drive productivity throughout the business. Beyond capex, during 2022, we have also invested $1.6 billion for acquisition and returned $366 million to shareholders in the form of dividends and share repurchases.

This includes $243 million in cash dividends paid to our shareholders and $123 million in cash to repurchase 943,000 shares. As a reminder, we have increased the annual dividend for 66 consecutive years. Turning to our current outlook for 2022. We are updating our full year guidance previously provided in our first quarter earnings release. We are raising adjusted diluted earnings per share to a range of $7.80 to $7.95, which represents an increase of 13% to 15% from 2021 and up from our previous guidance of $7.70 to $7.85. Our revised EPS guidance includes an incremental headwind of approximately $0.08 due to foreign currency relative to the outlook we provided in April. We expect total sales growth for 2022 to be in the range of 12% to 14%, an increase from 10% to 12% previously.

By business segment, we are guiding to the following: 6% to 8% total sales growth for the Automotive segment, an increase from 5% to 7% previously. The new outlook reflects 6% to 8% comp sales growth, consistent with our previous estimate. For the Industrial segment, we are updating our total sales outlook to 26% to 28%, an increase from our previous outlook of 21% to 23%. The new outlook includes a 9% to 11% comp sales increase, which is up from 5% to 7% previously. We've had an exceptional first half of 2022, boosted by our industrial business and the success of our acquisition of KDG along with solid global automotive results.

Our outlook for the full year reflects our ongoing confidence in our businesses to execute on our strategies despite a dynamic and uncertain external landscape. Our continued strong cash flow generation also provides us with full flexibility to continue to invest in the business and return cash to our shareholders through our dividend. We look forward to reporting on our progress in our third quarter call in October.

Thank you, and we will now turn it back to the operator for your questions.

Questions and Answers

[Operator]

[Operator Instructions] Today's first question comes from Chris Horvers at JPMorgan. Please go ahead.

[Chris Horvers, Analyst at JPMorgan Chase & Co.]

Thanks. Good morning everybody. So a few questions from a top line perspective. So focusing first on the U.S. NAPA business. It's interesting to note that your DIY business was up, some of your peers talked about late spring impacting sort of the start of the quarter. So can you give us a sense if that customer -- how consistent that comp cadence was during the quarter? And then moreover, as you think about quarter-to-date, what are you seeing in the U.S.? Walmart preannounced, I guess, earlier this week, talking about pressures on the low-end consumer. And some other companies have said that as well. So just curious if you're seeing any variation in the DIY side of the business in the U.S.

[Will Stengel, President at Genuine Parts]

Yes, Chris, it's Will here. Let me take a crack, and Bert and Paul jump in, if you have anything to add. So as you alluded to, generally speaking, U.S. automotive combined, do-it-for-me, do-it-yourself, consistent through the quarter on a monthly basis. I would say on the do-it-yourself side, we did see some moderation through the quarter, as we expected, based on year-over-year comparables. I would say that we're not reading into a softness in the customer based on what we're seeing in our data. And so I'm not sure that we have the same takeaway that perhaps some of your traditional retailers are reading through in terms of the health of the consumer.

[Paul D. Donahue, Chairman and Chief Executive Officer at Genuine Parts]

And I would -- Chris, I would just add on to that. You kind of asked about the current quarter. Pleased to report that U.S. automotive continues to be in good shape. The trends we're seeing in July are very similar to what we saw in Q2. So all is positive on the U.S. automotive front.

[Chris Horvers, Analyst at JPMorgan Chase & Co.]

So just to double-click on that a little bit. The DIY moderation was really just anniversarying stimulus from April of last year?

[Will Stengel, President at Genuine Parts]

We agree.

[Chris Horvers, Analyst at JPMorgan Chase & Co.]

And then separately, on the Motion business, Motion is doing incredibly well. One of your peers in the industrial parts distribution business talked about some signs of moderation as they saw the quarter progress and into the current quarter. So curious if you had any comments on that side as well.

[Will Stengel, President at Genuine Parts]

Yes, Chris, we -- similarly, we saw very consistent strength through the quarter. And as Paul alluded to, kind of early looks and commentary around July, we're seeing that continued strength coming out of the quarter as well as we had in our prepared remarks. We saw broad strength across all of our end markets. We saw broad strength across all of our product categories, and we spend a lot of time in the field talking with customers. And I would say the mood is cautious but on the margin, quite positive. We're obviously watching it and cautiously optimistic, but we feel good about what we're seeing in the business.

[Chris Horvers, Analyst at JPMorgan Chase & Co.]

And one last quick follow-on. Obviously, a lot of questions about what's going on in Europe. How is that business holding up as sort of the years played out with the war and energy prices over in that region?

[Paul D. Donahue, Chairman and Chief Executive Officer at Genuine Parts]

Yes, I'll take that, Chris. Our European business continues to be rock solid. We had another really good quarter. I could not be more proud of our European team. And we saw it across all of our markets. We saw really nice sales increase in Germany. Our Netherlands business is strong. Really pleased to see our business in France posting mid-single digits. So all is good there. As you know, we're not in Russia or Ukraine and so not necessarily feeling that impact.

You mentioned the energy issue, Chris, which obviously is getting a lot of press. We're watching it closely. We are not an energy-dependent business. So our DCs, our stores will continue to operate as they always have. So we're watching it. Certainly, we're concerned. We're a little concerned over the potential for some economic challenges. But again, pleased to say really strong quarter by our team, and we're seeing that strength carry over into Q3 as well.

[Chris Horvers, Analyst at JPMorgan Chase & Co.]

Thanks very much. Best of luck.

[Paul D. Donahue, Chairman and Chief Executive Officer at Genuine Parts]

Yes, thank you Chris.

[Operator]

Ladies and gentlemen, our next question comes from Michael Montani with Evercore ISI. Please go ahead.

[Michael Montani, Analyst at Evercore ISI]

Hey good morning. Thanks for taking the question. Just wanted to ask if I could about the sales guidance, which seems to imply to hit the midpoint for the full year, for example, in automotive, 400 to 500 bps of moderation and then a 10-percentage-point plus slowdown for industrial. Just wanted to see if that's kind of more conservatism, if there's something in particular that you're seeing, how we should think about that in light of some of the traction that you've discussed for your initiatives?

[Bert Nappier, Executive Vice President and Chief Financial Officer at Genuine Parts]

I'll take that one. It's Bert. Look, first, I'd just like to thank our teams for the tremendous work so far in the first half, and I'll try to give you some color on the guidance from there. Certainly exceeded our expectations in the first half. The business continues to be very resilient and balanced. But a number of factors were contemplated into how we raised guidance. Obviously, the sales numbers that I provided in my prepared comments, the outperformance in the first half. and the momentum we see in the underlying business, as Paul and Will have talked about, we needed to balance that against the fact that we just can't ignore that there's tightening economic conditions that potentially could impact businesses in the second half.

So we're trying to balance the strength of the first half and our momentum exiting Q2 while being eyes wide open and prudent about what we see out there. And again, we've already talked about a few of these things with inflation, lingering COVID conditions, the geopolitical landscape, ongoing supply chain constraints. So look on the back half guide for sales, our original plan for the year assumes some normalization of growth rates in the second half. And our views are really unchanged on that. When you look at it year ago, the outperformance we had in the second half was quite significant, and we just can't expect to year-for-year repeat of that level of outperformance. So we moderated that a little bit, look at a normalized growth rate in the second half.

As I mentioned in my prepared comments, we do have some FX headwinds that are incremental to our guide in April, about $0.08 as we look at that. But look, we're going to stay focused, look for additional growth opportunities in the second half, stay disciplined on cost and look for efficiency gains. But at the end of the day, we're going to improve operating margin and have operating margin expansion for the full year. And we think that's a pretty good outcome.

[Michael Montani, Analyst at Evercore ISI]

And then if I could follow up just on the cost side, one question, a bit housekeeping, but just how to think about interest expense in light of some of the move up in interest rates. And then secondly, on gross margins, given the strong organic growth and then inorganic increases, kind of why the supplier incentive pressure there would think you guys might have had some incremental benefits going on there?

[Bert Nappier, Executive Vice President and Chief Financial Officer at Genuine Parts]

Yes, I'll take -- I guess I'll take both of those. Look, I think we're really in a positive spot on our capital structure. We're at 1.8 times levered. That's below our range of two to 2.5 times. We have a very strong investment-grade rating. And when you look at our debt structure, it's nearly 100% fixed with some episodic borrowing against our revolver usually intra-month. But when you look at that, I don't see a lot of volatility there. We've got a weighted average interest rate of 2.3%. The only place we've seen a little bit of pressure is in our AR securitization program in operating expenses, but it's still very, very attractive capital source for us and really not anything of consequence to call out there.

In terms of gross margin, back to your question on that, look, we landed at 35% for the quarter. That was in line with our own expectations. The underlying execution from our teams, which has been absolutely tremendous, and core activities around category management and pricing has driven significant margin improvement, as I mentioned in my prepared remarks. Unfortunately, that's a bit hard to see this quarter. We got three big factors masking that. some expected moderation in supplier rebates, as you mentioned, and I'll talk about that here shortly, foreign currency and inflation. When you look at the supplier rebates, those moderated from a year ago.

We had some heightened supply chain challenges in the prior year that you're all intimately aware of. And those impacted the amounts we received from our suppliers. And so that's abated a bit. If you recall, we had a 40-basis-point margin expansion from those a year ago. And so that's as anticipated, moderated. The great part about that, the flip side of that is we have more inventory to get to our customers, and we've got a better level of availability to be able to drive through to the business. I'll just land that point with, we expect gross margin for the full year to be consistent with 2021. And again, we think that's a great outcome in this very dynamic environment.

[Michael Montani, Analyst at Evercore ISI]

Thank you and good luck.

[Bert Nappier, Executive Vice President and Chief Financial Officer at Genuine Parts]

Thank you, Mike.

[Operator]

And our next question today comes from Liz Suzuki of Bank of America. Please go ahead.

[Liz Suzuki, Analyst at Bank of America]

Great. Thank you. Just on inflation, which is the kind of topic du jour, what do you think pricing and margins could look like when inflation ultimately moves in the other direction? And then if we find ourselves in a deflationary environment, can you hold on to price actions you've taken? Or do you think the competitive environment has changed such that it might get more challenging to keep pricing sticky?

[Bert Nappier, Executive Vice President and Chief Financial Officer at Genuine Parts]

Liz, it's Bert. Look, I'll take that one a bit. Look, the inflationary environment has persisted and is no doubt a tough dynamic out there for everyone, requires very intense focus from everyone, and our teams are doing a great job of managing it and have been able to generally pass along, as you pointed out, price increases to mitigate the impact. Our strategy there has been to protect gross margin rate. So that's our focus. If you look at the downside of that, we wouldn't expect to see the environment pullback on pricing.

Obviously, that would take some time to work through. But we wouldn't see an immediate pullback in the environment. We'll stay competitive on that front and watch the marketplace. But again, I think the bottom line is we wouldn't see a big pullback in terms of pricing or the pricing environment in general. And obviously, cost changes take quite some time to work through the supply chain.

[Liz Suzuki, Analyst at Bank of America]

Great. And just how much of the comp growth in each of your segments do you think will be attributable to inflation or SKU for SKU inflation for the year? And as you look out into next year, do you expect that to moderate?

[Bert Nappier, Executive Vice President and Chief Financial Officer at Genuine Parts]

I think I'll start with the back half of your question and just say for the back half of the year, we really, as Will mentioned in his remarks, expect inflation levels to stay where they are from here for the rest of the year. That's how we contemplated it in our guide. That's a slight uptick from what we saw in the first quarter. And then if you look at it all up for GPC consolidated, we see the impact kind of mid-single digits on the top line. Within the Motion industrial business, that's low single digits on the top line. And then for the auto business globally, we see that in the high single digits on the top line for the rest of the year.

[Liz Suzuki, Analyst at Bank of America]

Great. Thank you.

[Bert Nappier, Executive Vice President and Chief Financial Officer at Genuine Parts]

Of course.

[Operator]

And ladies and gentlemen, our next question today comes from Scot Ciccarelli with Truist Securities. Please go ahead.

[Scot Ciccarelli, Analyst at Truist Securities]

Good morning, guys. Scot Ciccarelli. So just a clarification on that same SKU inflation concept and specifically in the U.S., so are we basically seeing that units are fairly steady or flat with the comp gains coming from rising prices? Or is there another lever in there we have to be cognizant of?

[Bert Nappier, Executive Vice President and Chief Financial Officer at Genuine Parts]

Scot, thanks for the question. It's Bert. I'm on a roll here. I'll keep taking these. Yes, I think the best way to characterize it is how you couched it there. We'd see the environment to flattish in terms of how the U.S. auto business is performing.

[Scot Ciccarelli, Analyst at Truist Securities]

Got it. And then pivot to the European business, once again, we know what our experience in the U.S. has been when you have a spike in gas prices, people tend to often drive less. They need a little less maintenance because there's less wear and tear on the vehicles. Since we have an energy-centric challenge for a lot of countries that you guys are operating in, in Europe, what could become a lot worse in the next, call it, six, nine months? What is your view? And what is your history say regarding those markets? Do they act any differently than what we see in the U.S.? Or is it pretty consistent kind of geography to geography?

[Paul D. Donahue, Chairman and Chief Executive Officer at Genuine Parts]

Scot, this is Paul. I'll take that. Look, the environment we see in Europe in our five years now in that market is very consistent with what we see in the U.S. And look, it's steady. As we've seen in the U.S., the automotive aftermarket is incredibly resilient. If there is a recession, which many are predicting but it remains to be seen, we expect our business to continue to move in a positive direction.

So we're very pleased with our team, with our performance, with our footprint, which excludes Eastern Europe, and with our performance to date, which has been very, very strong. And as you heard in the quarter, Scot, we expanded our footprint first quarter into Spain and certainly expanded our footprint in Germany this past quarter. So we're in a good place with a great team and with a positive outlook for the balance of the year.

[Scot Ciccarelli, Analyst at Truist Securities]

Great. Thanks a lot guys.

[Paul D. Donahue, Chairman and Chief Executive Officer at Genuine Parts]

You bet.

[Operator]

And our next question today comes from Bret Jordan at Jefferies. Please go ahead.

[Bret Jordan, Analyst at Jefferies Financial Group]

Hey, good morning guys.

[Paul D. Donahue, Chairman and Chief Executive Officer at Genuine Parts]

Hey Bret.

[Will Stengel, President at Genuine Parts]

Hey Bret.

[Bret Jordan, Analyst at Jefferies Financial Group]

Could you talk about -- I think you mentioned fill rates improving. But could you talk about sort of where you are on supply chain improvement. And obviously, a year ago, first half of '21, there are a lot of supply constraints. But maybe where are we versus sort of target or normal levels?

[Will Stengel, President at Genuine Parts]

Yes. It's Will here. I'll take that one. So I would characterize global supply chain as stable to slightly improved over the last 100 days. We've seen a moderation in our ocean freight rates. I would say that the ports continue to be more congested than average, in particular on the East Coast now relative to what we saw early in the year on the West Coast. But we're -- the suppliers aren't experiencing problems obtaining vessel space, which is a positive development. Lockdowns are moderating over in Asia, which is a positive development.

And I think for us, as we thought through and work through these developments, we've improved actually how we execute. So we've rebalanced some of our port activity. We've rebalanced some of our supplier geographies, and we're gaining some nice traction there. So the one thing that I would call out is the transport from port to final destination. That is still challenged, whether we're talking rail or freight logistics. But net-net, we're slightly improved relative to where we were 100 days ago.

[Bret Jordan, Analyst at Jefferies Financial Group]

Okay. Great. And I think you talked about the cadence of the quarter from a sales standpoint. Did you say anything interesting regionally? Is there any real dispersion in U.S. auto?

[Will Stengel, President at Genuine Parts]

We saw nice drag down the Eastern half of the United States. One could make the case that fuel prices on the West Coast impacted that given they're so much more elevated relative to the national average. But the Northeast, the Southeast and our Atlantic region showed nice strength through the quarter.

[Bret Jordan, Analyst at Jefferies Financial Group]

Okay. Great. And then final, I guess, any sign of trade down? You talked about stable consumer demand, but is there any kind of a mix shift particularly around the lower end consumer where they're looking for the lower price point option?

[Bert Nappier, Executive Vice President and Chief Financial Officer at Genuine Parts]

Bret, it's Bert. I'll take that one. And look, we're not seeing much evidence of consumers trading down, customers trading down at all. I think the customer has been pretty resilient despite the rising fuel prices and other inflationary pressures. When you look at the auto business, it's nondiscretionary to a large degree. You need to car fix in this environment, particularly with the shortage of new cars and higher used car prices as well. So customers are focusing on availability and service, which is our sweet spot.

And we've got product readily available. The same on the industrial side, we're not seeing a pullback there. The momentum continues, as you saw in our Q2 results. And so we just really continue to focus on, as Will, talked about supply chain, inventory management and having the right product in the right place.

[Bret Jordan, Analyst at Jefferies Financial Group]

Great. Thank you.

[Operator]

And our next question today comes from Daniel Imbro with Stephens Inc. Please go ahead.

[Daniel Imbro, Analyst at Stephens]

Hey good morning. Thanks. I wanted to circle back on the pricing backdrop. Obviously, it's been topical with some of your big peers investing in price. Sounds like you guys aren't really feeling the impact of that yet. I guess, first, is it still true, you guys really aren't feeling any discernible impact? And then, Will, if not using price, you talked through a number of initiatives in your prepared remarks on the auto side. Can you talk about which of those you expect to drive the most share gains or kind of what you guys are leaning into as you look out to next year and get back to share gains, not just recouping some of the underperformance during COVID?

[Will Stengel, President at Genuine Parts]

Yes, Daniel, let me see if I can break down your questions. First piece was, are we seeing any impact from competitive pricing strategies in the market. And I would tell you that we're not seeing an impact from anything that's been announced by competitors as it relates to pricing. The market continues to be rational. And as we've talked a lot about here, we're doing our own strategic work around pricing to be agile and react to the market and super proud of the team there. The second part of your question was which part of our initiative stack is driving share gains near term and recently.

And all of our work around sales force effectiveness, obviously, is turning into nice momentum. The pricing work is turning into nice momentum and all of our technology investments that's improving the customer experience and making us easier to do business with. And while I talk about -- I think your question was U.S. auto-specific, all of those initiatives are relevant as we look around the globe. We have flavors and versions of all of those same initiatives, which I think is contributing to very nice global broad-based strength.

[Daniel Imbro, Analyst at Stephens]

Got it. That's helpful. And then, Paul, maybe a follow-up on the industrial piece. You guys talked about momentum continuing through the second quarter across all of your end markets. Is it still true about half that business is contracted, that you guys have good visibility into the back half of this year? And then just within those end markets and quarter-to-date, are you seeing any signs of weakness among different end markets or any particular concerns you see there?

[Paul D. Donahue, Chairman and Chief Executive Officer at Genuine Parts]

No. We -- and you are correct, Daniel, it is about half of our business is under contract and pleased to say we are not seeing any signs of slowdown in our business segments. And certainly, we could call out a few that we're continuing to see accelerate as we go into the second half. So yes, the industrial is performing incredibly well, as you've heard throughout this call.

[Daniel Imbro, Analyst at Stephens]

Got it. I'll leave it there. Best of luck.

[Paul D. Donahue, Chairman and Chief Executive Officer at Genuine Parts]

Thank you.

[Will Stengel, President at Genuine Parts]

Thanks, Daniel.

[Operator]

And today's final question comes from Seth Basham with Wedbush Securities. Please go ahead.

[Seth Basham, Analyst at Wedbush Securities]

Thanks a lot. Good morning, guys. My first question is just around the outlook for especially the U.S. NAPA business, just thinking about the trends in miles driven as gas prices are still very elevated. Do you expect pressure on your business units declining perhaps on a comparable store basis in the U.S. in the back half of the year as we see some of the moderation and key leading indicators for your business?

[Bert Nappier, Executive Vice President and Chief Financial Officer at Genuine Parts]

Seth, it's Bert. I'll take that. Maybe Will have a little -- Will can have a little perspective to add to it as well. But look, I think our guidance assumes that we continue to perform, as Paul said, well in the U.S. auto business. It's a dynamic environment out there. You see gas prices dropping over the last several weeks. So that's a positive in terms of miles driven. We continue to look at that very closely miles driven were up a little over 1% in May, most recent data we've seen.

And so I think the underlying fundamentals remain very robust for that market. You got the average age of a car up for the fifth consecutive year. You've got all-time low scrap rates. You have pent-up demand for travel, I think, across the U.S. in terms of people wanting to get out and take vacations. And so I think the underlying fundamental for the marketplace is there continuing to perform well, and our guide reflects that.

[Paul D. Donahue, Chairman and Chief Executive Officer at Genuine Parts]

I would just add on to that, Seth. Bert mentioned gasoline is coming down, and it's coming down quickly. It's been -- it's down -- I think I heard this morning, $0.17 in the past week. And what we're seeing is an incredibly resilient consumer. We heard from our friends at AAA, 88% of travelers over the July four weekend, which gasoline was well over $5 a gallon in that timeframe. 88% of travelers were on the road in their vehicles. So as always, the automotive aftermarket is incredibly resilient. I think our consumers are pretty resilient. So we're feeling good about our NAPA business in the second half.

[Seth Basham, Analyst at Wedbush Securities]

Got it. And then a follow-up question on a competitive environment and some of the big competitors' price investments, you're not seeing any major impact. But as the supply situation improves for WDs, do you expect that to change the competitive environment at all?

[Will Stengel, President at Genuine Parts]

I don't think we do, Seth.

[Paul D. Donahue, Chairman and Chief Executive Officer at Genuine Parts]

It remains to be seen, Seth. But look, I think the improvements we're seeing in our NAPA business, we saw it firsthand last week, we had 15,000 of our NAPA store owners, AutoCare centers. The positive momentum we have coming out of that conference, some positive momentum that I hear from our teams and our independent owners, our NAPA AutoCare centers, our major accounts. Our guys are in a good place. And I expect that to continue in the second half of the year.

[Will Stengel, President at Genuine Parts]

Seth, I would just -- I would also add, I think this is a market where scale really matters. I think we've talked about that before. And so as product comes into the market, I think your scale and your global relationships make a difference. So we feel like that, that's a nice tailwind for us as we move forward.

[Seth Basham, Analyst at Wedbush Securities]

Good to hear. Thank you very much.

[Will Stengel, President at Genuine Parts]

Okay. Thank you.

[Operator]

And ladies and gentlemen, sorry, no further questions. I'd like to turn the call back over to the management team for any final remarks.

[Paul D. Donahue, Chairman and Chief Executive Officer at Genuine Parts]

Yes. Thanks, Rocco. And to all of our participating analysts out there, thanks for your questions. Thanks for participating. And look, I'd just close with our teams are doing great work. We couldn't be more proud of the results we turned in, in Q2. And as we look ahead to Q3 and the balance of 2022, we continue to believe GPC is really well positioned with the financial strength to continue to support our growth plans. So listen, thanks again for your interest in GPC. Enjoy your summer, and we'll see you in October. Thanks.

[Bert Nappier, Executive Vice President and Chief Financial Officer at Genuine Parts]

Thanks, everyone.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Sid Jones, Senior Vice President of Investor Relations
• Paul D. Donahue, Chairman and Chief Executive Officer
• Will Stengel, President
• Bert Nappier, Executive Vice President and Chief Financial Officer

Analysts

• Chris Horvers, JPMorgan Chase & Co.
• Michael Montani, Evercore ISI
• Liz Suzuki, Bank of America Co.
• Scot Ciccarelli, Truist Securities
• Bret Jordan, Jefferies Financial Group Inc.
• Daniel Imbro, Stephens
• Seth Basham, Wedbush Securities