Genuine Parts Company (GPC) Q2 2021 Earnings Call Transcript

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Genuine Parts Company (GPC 0.54%)
Q2 2021 Earnings Call
Jul 22, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Second Quarter 2021 Earnings Conference Call [Operator Instructions] At this time, I'd like to turn the conference over to Sid Jones, Senior Vice President of Investor Relations. Please go ahead, sir.

Sidney G. Jones -- Senior Vice President of Investor Relations

Good morning, and thank you for joining us today for the Genuine Parts Company's 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.

Paul D. Donahue -- Chairman and Chief Executive Officer

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 markets. In summary, the quarter was highlighted by, continued strong sales trends, which we believe led to market share gains, gross margin gains, then 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 our 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, and marks 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 to 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 and these include 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, which have been further accelerated by a surge in used car market and improving miles driven.

While these market tailwinds are encouraging, we also see continued headwinds, which 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 cost such as wages and freight.

Turning next to our regional highlights, our GPC teammates in Europe built on their excellent start to the year achieving the strongest sales growth among our operations with comp sales up 34%. Each concrete posted substantial sales growth while our U.K. team continues to outperform. The positive momentum in Europe reflects improving market conditions and favorable weather trends, as well as our focus on key sales initiatives, inventory availability and excellent customer service. In particular, we have seen exceptional results from our key accounts partners and the ongoing expansion and roll out of the NAPA brand.

In our Asia-Pac 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 collectively are capturing market share. The NAPA network continues to build and we have now 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 brake, tools and equipment and under car, 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 lag 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 of 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.

But 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 a 130 basis point 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 marrying 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 last year, including equipment and machinery, automotive, aggregate and cement, equipment rental and oil and gas. In addition, 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, which include the build-out of our Industrial omni-channel capabilities with solid growth in 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. 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 Industrial strong financial performance in the second quarter and the positive momentum we see in the overall industrial market. 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?

William P. Stengel -- President

Thank you, Paul. Good morning everyone, but 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 the hard work an impressive result. The teams continue to build momentum and execute well. We remain focused on our defined strategic initiatives. And 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 plan to create value as we leverage GPC global capabilities to simplify and integrate our operations, we do so to improve the customer experience, to increase the speed and efficiency of execution and to 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 in local execution, Paul and I recently had the opportunity to spend time in person with our European team mates, and they showcased great examples of the strategic initiatives and winning team performance. For example, we discuss 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 the 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 cost and process efficiencies, and we saw first hand 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 focus, 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 two 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 availabilities 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.

Carol Yancey -- Executive Vice President and Chief Financial Officer

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 a 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, 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 on to our customers and the impact of price inflation was neutral to gross margin. We estimate 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 are $1.3 billion in the second quarter, up 28% from last year and 28.1% of sales. The increase in last year reflects the impact of several factors including the prior-year benefit of approximately a $150 million in temporary savings related to the pandemic. The balance primarily relates to the increase in variable costs on the $1 billion in additional year-over-year sales. And to a lesser extent, we experience rising cost pressures in areas such as wages, incentive compensations, freights, rents and health insurance, which we are managing.

We also invested in projects associated with our transformation and other strategic initiatives to drive growth and enhance productivity. So 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 a 100 basis points from 2019.

So strong operating results, and 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 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 our higher U.K. 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. So with the strengthening sales environment and continued operational improvements, 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 of 2020. We closed the second quarter was $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, the 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 these six months and 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 long-standing 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 a 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 22 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 the continued uncertainties due to the market disruptions such as with 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 the plus 5% to plus 7%, and a total sales increase of plus 6% to plus 8% for the Industrial segment an increase from the 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.

Paul D. Donahue -- Chairman and Chief Executive Officer

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 the 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 via investments in organic and acquisitive growth, while also returning capital to shareholders through the dividend 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 teammate for their continued dedication, passion and commitment to be in the best in serving all our company stakeholders.

So with that, let me turn the call back to the operator for your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Chris Horvers with JPMorgan. Please proceed with your question.

Christopher Horvers -- J.P. Morgan -- Analyst

Thanks, good morning everybody.

Carol Yancey -- Executive Vice President and Chief Financial Officer

Good morning.

Paul D. Donahue -- Chairman and Chief Executive Officer

Good morning, Chris.

Christopher Horvers -- J.P. Morgan -- Analyst

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 related to the Motion side, Motion's not yet positive one and two-year basis. What would -- what should be the inhibitor that would not allow that to pos -- turn positive one and two-year basis?

Carol Yancey -- Executive Vice President and Chief Financial Officer

Yeah, 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.

And I think on the automotive side, I mean, I think again you're spot on sort of a second half mid-single digit on the automotive comps, but 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.

Paul D. Donahue -- Chairman and Chief Executive Officer

Hey, Chris. I would add, specifically to Motion. We -- and I think you've alluded to it in the past is, this recovery that we're seeing in both the 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. 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.

Christopher Horvers -- J.P. Morgan -- Analyst

Got it. And then, as a follow-up, you talked about record day -- average daily volumes. I think you're 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 is 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?

Paul D. Donahue -- Chairman and Chief Executive Officer

Yeah. First, let me just comment on the specific numbers, Chris. So we wrapped up Q1, with the 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. And then, 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 are up low-double digits in Q2 and our two-year stack, I think, Chris is 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 -- in a 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. Could be, I think we'll see that, but 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.

Christopher Horvers -- J.P. Morgan -- Analyst

Understood. Best of luck.

Paul D. Donahue -- Chairman and Chief Executive Officer

Yeah. Thanks, Chris.

Operator

Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question. Mr. Jordan, your line is live. Sorry, our next question comes from the line of Kate McShane with Goldman Sachs. Please proceed with your question.

Kate McShane -- Goldman Sachs -- Analyst

Hi, good morning. Thanks for taking my question. I wanted to follow-up on your commentary with regards to inflation that you had mentioned that you've seen about a 150 bps inflation in automotive and a 100 in the industrial. How much of that is from just higher product costs versus transportation and labor? And how would you categorize as period inflation versus 2019 with tariffs and the ability to manage it?

Carol Yancey -- Executive Vice President and Chief Financial Officer

Yeah, look, as we look at our inflation, I would tell you, first of all, it is a bit unique and unprecedented as it relates to U.S. Automotive for inflation. We haven't seen this kind of activity for a decade, if you will, and it is, as you mentioned, is sort of similar to tariffs and the pace that they're coming. Look, it is driven by what you said a combination of raw materials and freight and labor, and our teams work very closely from a category management perspective to work with the suppliers to look at commodity tracking and the cost model and the supplier line reviews.

And while we don't break out specifically how much is each component, trust me the teams work with the suppliers on that. On the industrial side, it's more normal, so I would tell you there inflation is definitely more normal. And so what we do think is that second half will be more active than Q2, so we could see as much as two times the second quarter inflation right in our second half. But again, couldn't be happier with the teams and all of our businesses and the work they're doing to pass those through to our customers and be able to get greater growth gross profit dollars, but maintain our gross margin rate.

So we're working hard on that and we are definitely optimistic as we look ahead that we'll be able to do that again in the second half.

Kate McShane -- Goldman Sachs -- Analyst

Okay, thank you. And then my follow-up question is just around the global supply chain. Could you remind us if you have any meaningful exposure to Vietnam, since that seems to be an area of the world that's having trouble dealing with the delta variant right now?

Paul D. Donahue -- Chairman and Chief Executive Officer

Hey. We have no material exposure to Vietnam.

Kate McShane -- Goldman Sachs -- Analyst

Okay.

Carol Yancey -- Executive Vice President and Chief Financial Officer

Kate, I would just add one other thing. We have our geographic diversification, if you will, is really great protection for us. So whether we have domestic suppliers, we have European suppliers, we have Asian suppliers, we have the ability to have protection with a broad diversification among our geographies and supplier base.

Kate McShane -- Goldman Sachs -- Analyst

Thank you.

Carol Yancey -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Ladies and gentlemen we'll go back to the line of Bret Jordan with Jefferies.

Bret Jordan -- Jefferies -- Analyst

Is it working this time?

Carol Yancey -- Executive Vice President and Chief Financial Officer

Yes, it is.

Paul D. Donahue -- Chairman and Chief Executive Officer

We can hear you, Bret.

Bret Jordan -- Jefferies -- Analyst

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 '19 second quarter? I might have missed that.

Carol Yancey -- Executive Vice President and Chief Financial Officer

Yeah. The U.S. comp two-year stack is mid-single digits.

Bret Jordan -- Jefferies -- Analyst

Okay. Great. And then I guess, question on the wage inflation that you're seeing. And I guess, as A is the transitory and B, what kind of cost increases are you seeing at the store level?

Carol Yancey -- Executive Vice President and Chief Financial Officer

Yeah, Bret. I think 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 and our SG&A was certainly greater than the product inflation. So more like a 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 in projects, and again, whether Will mentioned it, whether it's transformation our 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.

Bret Jordan -- Jefferies -- Analyst

Okay.

William P. Stengel -- President

Hey, Bret, I would also add. I would also add that it's a very surgical approach. So 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 wanted to share that perspective.

Bret Jordan -- Jefferies -- Analyst

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

Paul D. Donahue -- Chairman and Chief Executive Officer

Yeah. They here 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 North-East. 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 six the -- of the six, we had a spread anywhere from 25% to 26% on the top-end and 20% on the bottom. So all really, really strong performances across the U.S.

Bret Jordan -- Jefferies -- Analyst

Okay, great. Thank you.

Paul D. Donahue -- Chairman and Chief Executive Officer

Yeah. You're welcome, Bret.

Operator

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

Greg Melich -- Evercore ISI -- Analyst

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

Carol Yancey -- Executive Vice President and Chief Financial Officer

Yeah, 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 the same extent the inflation in wages and whatnot it is a little more prevalent in U.S. Automotive.

So it's, again, we are able to leverage our costs with less than 3% comps. 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 point operating margin improvement. So we still feel good about being able to deliver that this year.

Greg Melich -- Evercore ISI -- Analyst

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?

Carol Yancey -- Executive Vice President and Chief Financial Officer

Yeah, 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 $1 billion of revenue that we had and tied to the product purchases. So about a third of the gross margin was improved volume incentive, 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.

Greg Melich -- Evercore ISI -- Analyst

And I'm going to sneak one in the end if I could. You said July, power was as strong as June. Is that --

Paul D. Donahue -- Chairman and Chief Executive Officer

A lot -- oh, go ahead. I'm sorry, Greg.

Greg Melich -- Evercore ISI -- Analyst

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

Paul D. Donahue -- Chairman and Chief Executive Officer

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 is 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 bounce back as miles driven really began to ramp back up. There is 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. And we think as we have seen in recent years, DIFM is going to continue to be really strong.

Greg Melich -- Evercore ISI -- Analyst

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

Paul D. Donahue -- Chairman and Chief Executive Officer

Hey, thanks, Greg.

Carol Yancey -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

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

Seth Basham -- Wedbush Securities -- a

Thanks a lot, and good morning. I guess my first question is around some of the 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?

Paul D. Donahue -- Chairman and Chief Executive Officer

Look, here's what I would say, Seth, we're all dealing with supply chain issues. All of our peers are its well documented as you said. Our primary challenge is, it's 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 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.

Are we missing sales here and there? You would have to -- you would certainly 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 carry a bit into '22.

Seth Basham -- Wedbush Securities -- a

That's helpful color. And then 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 the 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?

Carol Yancey -- Executive Vice President and Chief Financial Officer

Yeah, 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 have considered the stronger growth, we've considered the stronger top line.

And 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 its 70 to 80 basis points for 2019.

Seth Basham -- Wedbush Securities -- a

Got it. Thank you very much.

Paul D. Donahue -- Chairman and Chief Executive Officer

Thanks, Seth.

Operator

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

Elizabeth Lane Suzuki -- Bank of America Merrill Lynch -- Analyst

Great, thank you. Just I guess since we've now lapped the periods 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?

Paul D. Donahue -- Chairman and Chief Executive Officer

Well, Liz, great question. I would tell you that I mentioned earlier, our great bounce back in our major account business. Our AutoCare business, fleet and government that segment while up high single-digits in the quarter is still trending a bit behind some of the other categories, so I guess that would be the one that I would call out. But it's hard to call out our team when they're delivering a high single-digit increase in that product or in that customer category.

Elizabeth Lane Suzuki -- Bank of America Merrill Lynch -- Analyst

I mean, fair enough 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? Is there still have the most potential room for recovery?

Paul D. Donahue -- Chairman and Chief Executive Officer

Yeah, so on the Industrial side, if you look at the one area where we were lagging a bit year-over-year was in the safety-type products. But if I look across the industries, just about everyone is putting up tremendous numbers. I mentioned equipment and machinery, as really being strong, a new category that we're looking at 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 come back. So again, all-in-all our Motion team is performing at an incredibly higher level and had a great quarter.

Elizabeth Lane Suzuki -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Paul D. Donahue -- Chairman and Chief Executive Officer

You're welcome.

Operator

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

Daniel Imbro -- Stephens Inc. -- Analyst

Yeah, thanks. I appreciate you, giving in. I wanted to go back to the SG&A outlook, you touched on, Carol. I guess, things are inflationary and you noted that's accelerating. But I think you also mentioned some of the deleverage 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 then this year relative to your expectation? Have you been able to keep some of those structural costs out?

Carol Yancey -- Executive Vice President and Chief Financial Officer

Yeah. 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 cost -- temporary cost savings last year in Q2, significant portion was government subsidies, payroll reduction, delayed merit increases 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 cost 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, and then the remaining amount, roughly 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 a $150 million on a target of a $100 million, and 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 cost and inflation, but thank goodness we did the work we did on the transformation team. And again, we continue to see some investments in projects as we look ahead.

Daniel Imbro -- Stephens Inc. -- Analyst

Got it. That's helpful color. And then just a follow-up on the M&A. Obviously things they're picking up, as we hopefully move further away from this pandemic. Can you talk about what seller 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 somewhere 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?

William P. Stengel -- President

Yeah, 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 this year is the discipline that we have around doing the right deal. So we looked 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 to pipeline, we we'll continue to work the pipeline, but we're going to stay very disciplined on doing the right deals for ourselves.

Paul D. Donahue -- Chairman and Chief Executive Officer

Hey, Daniel, I'd also mention, we're very selective and -- in our M&A targets. And I think a couple that were called out were Winparts, which is online, 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, spent a half-day with this group and very impressive. And we think nice upside in the future.

Daniel Imbro -- Stephens Inc. -- Analyst

And just a 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?

William P. Stengel -- President

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

Daniel Imbro -- Stephens Inc. -- Analyst

Okay, thanks. Best of luck, guys.

Paul D. Donahue -- Chairman and Chief Executive Officer

Thank you.

Operator

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

David Bellinger -- Wolfe Research -- Analyst

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? is it larger ticket repair? Is it's a shift or older used vehicles and anything else there? And just how sustainable can that trend be?

Paul D. Donahue -- Chairman and Chief Executive Officer

Yeah. 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, and in this past quarter both were up high single-digits.

So we think that's a long-term trend, as parts continue to get more and more expensive and 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.

David Bellinger -- Wolfe Research -- Analyst

Alright. I appreciate that. 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 over time given worker shortages? Maybe just walk us through what you're seeing and any quantification of higher cost, if you can.

Carol Yancey -- Executive Vice President and Chief Financial Officer

Yeah, 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, its delivery drivers our teams are working tirelessly and there is additional overtime, there is temp help, there is 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, in certain categories. And I think as we mentioned, I mean, it was roughly 50 to 60 basis points when you look at overall inflation on our SG&A, wages being the biggest part and freight being in the secondary component.

Paul D. Donahue -- Chairman and Chief Executive Officer

Hey, David. I would also just tag on to that to say that and to clarify that the issue is primarily in our U.S. Automotive business. And its in the retail stores its role is 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 delivery drivers, those type role.

David Bellinger -- Wolfe Research -- Analyst

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

Paul D. Donahue -- Chairman and Chief Executive Officer

Thank you. Appreciate it.

Carol Yancey -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

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

Carol Yancey -- Executive Vice President and Chief Financial Officer

We'd like to thank you for joining our call today. We appreciate your interest and 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.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Sidney G. Jones -- Senior Vice President of Investor Relations

Paul D. Donahue -- Chairman and Chief Executive Officer

William P. Stengel -- President

Carol Yancey -- Executive Vice President and Chief Financial Officer

Christopher Horvers -- J.P. Morgan -- Analyst

Kate McShane -- Goldman Sachs -- Analyst

Bret Jordan -- Jefferies -- Analyst

Greg Melich -- Evercore ISI -- Analyst

Seth Basham -- Wedbush Securities -- a

Elizabeth Lane Suzuki -- Bank of America Merrill Lynch -- Analyst

Daniel Imbro -- Stephens Inc. -- Analyst

David Bellinger -- Wolfe Research -- Analyst

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