Genuine Parts Co

NYSE:GPC

Earnings Call Transcript 2020-Q3

[Operator]

Good day, ladies and gentlemen, welcome to the Genuine Parts Company Third Quarter 2020 Earnings Conference Call. Today's conference call is being recorded. [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.

[Sidney Jones, executive]

Good morning, and thank you for joining us today for the Genuine Parts Company Third Quarter 2020 Conference Call. With me today are Paul Donahue, our Chairman and Chief Executive Officer; and Carol Yancey, our EVP and Chief Financial Officer.

As a reminder, today's conference call and webcast include a slide presentation that can be found on the Genuine Parts Company Investor Relations website.

Before we begin this morning, please be advised that this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results as reported under generally accepted accounting principles. A reconciliation of these measures is provided in the earnings press release issued this morning, which is also posted in the Investors section of our website.

Today's call may also involve forward-looking statements regarding the company and its businesses. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings, including this morning's press release. The company assumes no obligation to update any forward-looking statements made during this call. Finally, please note that we've accounted for the business product segment, S.P. Richards, as discontinued operations for all periods presented.

Now I'll turn the call over to Paul for his remarks.

[Paul Donahue, executive]

Thank you, Sid, and good morning, everyone. Welcome to our third quarter 2020 earnings conference call. We appreciate you joining us today and hope you are staying safe and well. During the quarter, we remain focused on our top priorities, which include ensuring the continued health and safety of our employees, customers, suppliers and communities in which we operate. Execution of our strategic initiatives and cost actions for our global automotive and industrial segments to deliver customer value, operational efficiencies and strong financial results. Management of our working capital to drive strong free cash flow and pay down debt to further strengthen our financial position and enhanced liquidity. Effective capital deployment, including strategic reinvestments in the business, paying a consistent system dividend to our shareholders and the repayment of debt as appropriate. And finally, we also advanced our ESG initiatives with the release of our 2020 corporate sustainability report.

Carol and I look forward to covering our progress in each of these areas today and then taking your questions. Our teams continue to execute with agility through the third quarter, aggressively managing each of our operations through the challenges of COVID-19. We are proud of their hard work and commitment to operational excellence, which has required effective measures to maintain a safe work environment while also providing first-class customer service. Through the quarter, we engaged with our teams at every level and resumed field visits to connect with our employees, customers and suppliers.

We can tell you firsthand that through the adaptability and successful execution of our passionate and talented associates, we are fully operational and prepared with comprehensive readiness plans should a second wave begin to materially affect our businesses. So a big thank you to our 50,000-plus team members across our global footprint.

Upon the divestiture of our Business Products Group in June, we entered the third quarter focused on driving profitable growth and productivity initiatives for our streamlined portfolio of our automotive and industrial business segment. As you may recall, exiting non-core operations is one of several key steps in the transformation of the company. In addition, we are also investing in higher-return businesses to further expand and strengthen our core.

Moving on to our financial results. We achieved a strong financial performance in the third quarter that reflects the resiliency of our businesses and the benefits of our strategic growth initiatives and cost actions taken across our operations. Total sales for the third quarter were $4.4 billion, up 1%, excluding the impact of divestitures. This was a significant improvement from the 10% sales decline in the second quarter due to the impact of COVID-19.

Total operating margin was 9%, a 100 basis point improvement from last year, achieved through solid progress in both gross margin and SG&A, driving margin expansion in each of our automotive and industrial businesses. Adjusted net income was $237 million and adjusted earnings per share was $1.63, up 17%. Our cost savings plan announced in October of 2019 has generated significant savings across the organization in 2020. Through the first 9 months, we have already achieved our $100 million cost savings target for the full year.

In addition, cost actions and response to COVID-19 further boosted our operating results. Looking ahead, we remain focused on finding additional cost savings to further improve our cost structure and long-term profitability.

Let me mention one example of the many initiatives to improve our operational efficiencies and customer service levels. We were excited to open our newest U.S. automotive distribution center in Nashville, Tennessee, just last month. Nashville is a 325,000 square foot distribution center equipped with systems and efficiencies to enable high productivity and the service of over 300-plus NAPA stores. By bringing this facility online, we'll be able to close or consolidate smaller, less productive DCs in the NAPA network. The opening of Nashville and consolidation of these operations has gone smoothly despite the impact of COVID-19.

We would like to thank our operations team for their great work on this important project. We will continue to make additional supply chain investments in the years to come. We also improved our working capital, enhanced our liquidity while generating another quarter of substantial cash flows.

Turning to our business segments. Automotive represented 68% of total sales in the third quarter, and industrial was 32% of total sales. By geography, 76% of revenues are attributable to North America, with 14% to Europe and 10% to Australasia. Total sales for the global automotive group were $3 billion, a 6% increase from last year and improved sequentially from the 10% decrease in the second quarter. Comp sales also turned positive, up 2.2% compared to a 12.6% decrease in Q2. A solid automotive recovery on the top line with a consistent growth pattern in each month through the quarter helped us deliver a 100 basis point improvement in operating margin.

In North America, our U.S. automotive sales were down approximately 1%, which has significantly improved from the 12% decrease in the second quarter. Comp sales were down 2.8% and much improved from the 13.8% decrease in Q2. In addition, we were encouraged by an impressive 60 basis point increase in operating margin for U.S. automotive.

In Canada, sales for the third quarter were up 2.6% and improved from a 13% decrease in Q2. Comp sales increased by 0.5% and operating margin was up a strong 200 basis points. So a solid quarter for our Canadian team. Also in North America, sales to our retail customers continue to outperform, up low double digits for the third quarter. While retail sales peaked in July, this customer segment remained solid through the quarter as the persistence of COVID continued to drive outsized DIY growth, although we believe this surge in demand is gradually moderating. We continue to strengthen our retail positioning through ongoing initiatives such as store refreshes, NAPA Rewards programs, targeted promotions and enhanced merchandising and inventories.

In addition, our growing omnichannel capabilities, including the recent addition of 35,000 new SKUs and direct-to-customer shipping from select suppliers, continue to drive exceptional value for the retail customer. This has led to online retail sales at double our 2019 volume. And we expect continued strong omnichannel growth at NAPA in the fourth quarter and beyond.

Moving on to our DIFM business. Sales to commercial accounts were down low single digits in the third quarter, which is much improved from last quarter and an encouraging indicator that consumers are becoming more mobile and getting back out on the road. As miles driven continued their slow recovery, sales trends across each of our customer channels strengthened relative to Q2, with our independent unaffiliated professional repair accounts leading the way and posting positive sales growth.

Looking forward, we expect this customer segment as well as our fleet and government accounts, national accounts and NAPA AutoCare centers to strengthen further in the months ahead. Among these customers, our fleet and government segment remains the most pressured as many of these operations are running at less than capacity due to slower business conditions and/or budgetary constraints. This is especially true for our customers in the energy and airline industries, which have been significantly impacted by the pandemic.

To counter these and other commercial headwinds, our teams are executing on a number of recovery plans designed to optimize NAPA's customer value proposition, sell more parts and gain market share. These plans focus on maximizing the effectiveness of our new sales structure, improvements to key programs such as NAPA AutoCare, enhanced systems and digital capabilities as well as strategic pricing initiatives and improved inventory availability. While our teams made significant progress in the quarter, we expect our focus in these areas and favorable fundamentals to drive meaningful results in the period ahead. Those favorable fundamentals include the growing number of vehicles in the 6- to 12-year aftermarket sweet spot and the recent spike in used car sales, low gas prices and continued improvement in miles driven.

In Europe, aftermarket sales trends had a strong rebound in the third quarter. And our team did a tremendous job of capitalizing on that. Total sales were up an impressive 16%, which has improved from a 3% sales decrease in the second quarter, and comp sales were up a strong 12% compared to last quarter's mid-teen decline. Importantly, this quarter's sales growth, combined with our ongoing cost savings initiatives, drove 140 basis point margin improvement, marking a significant step forward for this group.

In breaking down our overall European performance, we are very pleased that operations in each country recovered with positive sales comps, driven by the broad surge in demand for deferred maintenance and repairs. In addition, the powerful NAPA brand has proven to be an effective growth driver. We have introduced the NAPA brand in the U.K. and France and plan to roll it out in Germany this month. We posted our strongest European sales in the U.K. this past quarter, and NAPA-branded products have grown to represent a low double-digit percentage of total sales in less than 1 year.

As a reminder, we identified the opportunity for private brands in Europe at the time of our initial discussions to acquire AAG back in 2017. We are encouraged by the quick acceptance of the NAPA brand and excited for its growth potential. Likewise, our focus on driving growth with key existing and new accounts, including the larger national account customers, also contributed to our recovery. So again, just a fantastic job by the team in Europe on both the top and bottom line.

Turning now to our automotive operations in Australia and New Zealand, this team reported another quarter of exceptional results, with total sales increasing 16% and comp sales up strong at plus 15%. This follows a 4% total sales increase and a 2% core sales increase in the second quarter. Our strong sales for the quarter reflect a robust sales environment for both the commercial and retail customer segments in the Australasian region, and our team is well positioned with a 60% commercial and 40% DIY sales mix. We are encouraged by the current sales climate despite ongoing headwinds due to COVID-related restrictions in select key markets, such as Melbourne and the State of Victoria. To drive this growth, our team in Australasia is executing on several growth initiatives. These include the continued rollout of the NAPA brand and new NAPA store openings, digital enhancements across the B2C and B2B platform, strategic pricing and targeted marketing. These and other initiatives as well as the ongoing cost actions across our operations generated a strong 180 basis point improvement in operating margin for the quarter.

So in summary, we are pleased with the recovery in the aftermarket and our automotive performance across North America, Europe and Australasia.

So now let's turn to our results for the global Industrial Parts Group. Total sales for this group were $1.4 billion, down 8.7%, excluding the EIS divestiture. Comp sales were down 9.2%, a significant improvement from the comp sales decline of 16.7% in the second quarter. These sales results as well as our ongoing focus to drive meaningful cost savings and optimizing our distribution network drove an 80 basis point improvement in net operating margin for the quarter.

In North America, our total sales were down 9.7% as compared to a 16.7% decrease in Q2. We saw strengthening trends in industrial indicators over the last several months and an improving sales cadence in each month of the quarter. Specifically, the ISM, PMI, industrial production and capacity utilization, have all pointed to increasing industrial activity since we last reported, and we expect these trends to continue in the months ahead. We would also add that as customers reopen their plant, we will capitalize on more on-site sales opportunities. We are also beginning to see an increase in CapEx orders among many of our customers, many of which were deferred through the crisis. So we see a number of positive signs for the industry ahead.

Throughout the pandemic, our team has been executing on our growth strategy to further bolster Motion's leading competitive position in the MRO industry. We are focused on initiatives to expand our industrial services and solutions capabilities, enhance our pricing and category management strategy and optimize the effectiveness of our Motion Industries website, which we relaunched just last quarter. Each of these initiatives has added value for the company and our customers.

For the quarter, our automation solutions group was our strongest operation, posting high single-digit growth. We are building out this operation to further support the growing megatrend of plant automation and robotics at our customers. In contrast, the Southwest region of the U.S. was our weakest due to the significant impact of COVID on the oil and gas sector in that area of the country.

We were also pleased to complete 3 strategic bolt-on acquisitions in North America during the quarter. Two of these businesses specialize in motion control and automation products and services, including engineering and application expertise and aluminum extrusion, which complement our growing MI automation solutions group. Our third acquisition expands our hydraulics business at Motion Canada. Combined, these operations further expand our presence in strategic geographies and overall products and service offerings and are expected to contribute approximately $35 million to $40 million in annual revenues.

So to summarize our North American industrial performance, we were encouraged by the gradual improvement in sales trends throughout the quarter. Our team also operated well and was very disciplined in applying their cost control measures, which we believe bodes well for continued progress in the months ahead as the industrial economy strengthens further.

Turning to Australasia. July 1 marked the anniversary of our MI Asia Pac acquisition. And this team delivered a low single-digit sales increase for the quarter. While we continue to benefit from the strength of the local mining industry, we are also executing on our new branding strategy and other growth initiatives to drive sales and gain market share. In addition, the MI Asia Pac team is operating well and making excellent progress on key cost reduction and working cap initiatives.

Another focus area for GPC has been the advancement of our ESG initiatives. To account for our progress in this important area, we issued our first sustainability report back in 2018, and followed that up with a summary update in 2019. On September 30, we were pleased to issue our 2020 sustainability report. This year's report substantially expands our disclosure across the ESG spectrum, such as human capital and diversity and inclusion, among others.

In developing our disclosure, we engaged with our top shareholders to ensure our pathway to ESG best practices aligned with the expectations of these key stakeholders. We invite you to visit our GPC website to view this report and learn more about our company-wide commitment to ESG.

As we move forward through the balance of 2020 and into 2021, our teams will execute on a number of strategic initiatives to build on the positive momentum of the third quarter. These plans and initiatives are grounded in a strategic growth framework focused on maximizing the value of our automotive and industrial business segments and positioning GPC for sustained long-term growth and improved profitability. Key elements of the framework include capturing more wallet share with existing customers and acquiring new customers; introducing new products and services, while innovating our omnichannel strategy and expanding digital offerings; building a global branding strategy to further leverage our powerful NAPA and MI brands, which we have initiated via the rollout of the NAPA brand into Europe and Australasia; and the rebranding of our Inenco industrial business to MI Asia Pac; expanding our global geographic footprint, including acquiring strategic bolt-on businesses.

And finally, our strategic framework includes ongoing transformation initiatives to achieve operational excellence, as exemplified by our cost actions and other initiatives.

So now I'll turn it over to Carol for a deeper review of our financials. Carol?

[Carol Yancey, executive]

Thank you, Paul. As a reminder, our comments this morning will focus on adjusted results from continuing operations, which excludes transaction, restructuring and other costs and income.

Total GPC sales were $4.4 billion in the third quarter, down 3.4% from 2019, or up 1% excluding divestitures, which is much improved from the 10% decline in the second quarter. We're also pleased to report our 12th consecutive increase in quarterly gross margin, which improved to 35% compared to 33.4% in the third quarter last year. The 160 basis point improvement primarily reflects the benefit of sales mix shift to higher gross margin operations, positive product mix, especially in industrial. The broad improvement was driven by our focus on strategic category management initiatives in areas such as pricing and global sourcing.

The divestiture of EIS last September 30 was also accretive to gross margin performance. These items were partially offset by a decrease in supplier incentives due to lower purchasing volumes. The pricing environment has remained stable thus far in 2020 with limited supplier price increases and very little inflation in our third quarter sales. Based on the current pricing environment, we expect only minor price inflation through the balance of the year.

Our selling, administrative and other expenses were $1.1 billion in the third quarter, down 1.7% from last year and representing 26.1% of sales compared to 25.6% last year on an adjusted basis. The decrease in operating expenses reflects the favorable impact of both our permanent and COVID-related cost actions implemented thus far in 2020, as previously mentioned by Paul.

In accordance with our $100 million cost savings plan announced late in 2019, we're pleased to report that we have successfully achieved the $100 million annual target well ahead of schedule. With more than $40 million in savings recognized in the third quarter, our permanent expense reductions will -- totals over $110 million for the 9 months. In addition, our teams have continued to execute on a number of additional savings initiatives in response to COVID-19. These initiatives contributed approximately $60 million in incremental savings in the third quarter.

So combined, we generated approximately $100 million in cost savings during the third quarter, driven by strategic reductions in payroll and facility costs as well as more temporary savings from furloughs, reduced travel and entertainment, freight changes and other initiatives in response to COVID.

Looking ahead to the fourth quarter, we will continue to execute on our cost actions, and we currently expect to achieve $130 million to $140 million in permanent cost savings for 2020, which will carry over into 2021. We also expect to generate further savings related to COVID-19, but have less clarity here as these cost savings will moderate as the economic recovery continues and sales volumes increase.

Despite the continued uncertainty, we entered the fourth quarter focused on driving growth and aggressively managing our expenses to maximize profitability. Our total operating and nonoperating expenses were an adjusted $1.2 billion for the third quarter, reflecting a decrease of 1.5% from last year and comprising 27.9% of sales. Our total segment profit in the third quarter was $392 million, up 9% on a 3% sales decrease. Excluding divestitures, total segment profit increased 13% on a 1% sales increase, and our segment profit margin was 9.0%, a strong increase of 100 basis points.

Our tax rate for the third quarter was 23.4% on an adjusted basis, down from 24.9% in the prior year period, due primarily to the benefit of statute-related adjustments. Our net income from continuing operations in the third quarter was $233 million, with earnings per share of $1.61. Our adjusted net income was $237 million or $1.63 per share, which compares to $204 million and $1.39 per share in 2019 for a 17% increase.

So now let's discuss our third quarter results by segment. Our Automotive revenue for the third quarter was $3 billion, up 6% from the prior year and sequentially improved from the 10% sales decline last quarter. Our segment profit of $266 million was up 20%, with a profit margin of 9.0% compared to 8.0% in the third quarter of 2019. The 100 basis point increase in margin was driven by improved operating results across each of our automotive businesses, which was a great job by our teams and a testament to their continued focus on meaningful cost reductions across our operations.

Our industrial sales were $1.4 billion in the quarter, an 18.6% decrease from a year ago. Excluding the EIS divestiture, industrial sales were down approximately 9%, which is a significant improvement from the second quarter. Our segment profit of $126 million was down 8% from a year ago or up slightly excluding EIS, and the profit margin was up 80 basis points to 8.9%. The improved margin for industrial reflects gains in both our North American and Australasian industrial businesses, which was driven by the combination of gross margin expansion and cost savings. We expect to see continued progress in the quarters ahead as the sales environment further recovers. While these sales trends and operating results are encouraging and reflect a recovery from the lows of the second quarter, we continue to operate in an environment of significant uncertainty and cannot reasonably forecast the full impact of COVID-19 in the coming months. As a result, we believe it's prudent to not reestablish formal financial guidance at this time.

So now let's turn to our comments on the balance sheet. Our accounts receivable of $2.0 billion were down 22% from the prior year, due primarily to the change in sales and the benefit of an agreement to sell $500 million of receivables to a financial institution earlier this year. We remain pleased with the quality of our receivables and confident about our collection trends, although we continue to closely monitor receivables in light of the current business conditions.

Inventory at September 30 was $3.4 billion, up 2% from September of last year, or essentially flat excluding the impact of foreign currency. This is a function of lower purchasing volumes and our continued focus on effective inventory management. Accounts payable of $4.0 billion is up 1% from last year and a reflection of the change in inventory and the impact of lower purchasing volumes. At the end of our quarter, the AP to inventory ratio was 118%, which has improved from 112% at June 30. Our total debt of $2.9 billion is down 15% from $3.4 billion last year and down 10% from the second quarter.

During the third quarter, we further strengthened our liquidity position and we entered October with approximately $2.8 billion in available liquidity, which has improved from our $2.6 billion liquidity at June 30 and $1.1 billion in liquidity at March 31. For the first 9 months of 2020, we generated $1.4 billion in cash from operations, which is up significantly from 2019. This led to strong free cash flows of over $1.3 billion.

As a reminder, we modified our near-term capital deployment strategy back in early April to preserve our cash through the duration of COVID-19. However, we remain committed to several key priorities for cash to serve to maximize shareholder value. These priorities are evident in our improved debt leverage of 2.2x our total debt to adjusted EBITDA, which compares to 2.5x at the end of the second quarter and the $4.3 billion in capital deployed across our 4 key areas in the last 3 years. These include reinvestments in our businesses via capital expenditures, M&A growth, net of divestitures, share repurchases and the dividend.

For 2020, we reduced our initial $300 million in planned capital expenditures to approximately $150 million to $200 million, and we have suspended plans for share repurchases through December 31. While we've also pulled back on acquisition activity, we've made several strategic bolt-on acquisitions this quarter, as Paul mentioned earlier, and we continue to plan for additional M&A that aligns with our growth strategies for the automotive and industrial businesses. And finally, we continue to support the dividend, which has increased for 64 consecutive years.

So that's our financial update for the third quarter. We've made significant progress in several key areas and we want to thank our teams for their great work and many accomplishments under these tough circumstances. I'll now turn it back over to Paul.

[Paul Donahue, executive]

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

[Operator]

[Operator Instructions] Our first question comes from the line of Bret Jordan with Jefferies.

[Bret Jordan, analyst]

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

[Paul Donahue, executive]

Yes. Thanks, Bret. And let's start with the cadence first, and maybe I'll touch on total company. In total company, we were steady throughout the quarter, turning positive. We're pretty much flat in July, August, turned positive in September, total GPC. As we look at automotive, again, total automotive, we were consistent throughout the quarter, mid-single-digit all in July, August and September.

Europe, we were really strong in August, but we were double-digit growth in every month in the quarter. And as we look at our turnaround in Europe, I couldn't be more proud of that team over there, Bret. They -- I mean, you guys know what we went through in Q2. Most of France was shut down. A good bit of the U.K. was shut down. And for us to post that kind of increase that we did in Q3 is strong. And we're seeing it across the board. We're seeing it in every market, which is what's really got us encouraged. And we're seeing it across our customer base. So we saw it in our small independent unaffiliated shops, but we also saw solid increase with the big national major accounts. So do I think we're taking market share in Europe? Perhaps. But I guess we'll have to watch that play out.

I'd also tell you, Bret, we're really excited about the rollout of our NAPA private label. And I think that really bolstered our sales in the U.K. this quarter. We're up to 10 different product categories now in the U.K., and we're rolling that out in France, and then we'll go into Germany and the Netherlands as well.

[Bret Jordan, analyst]

Do you want to talk about the margin lift from private label?

[Carol Yancey, executive]

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

[Paul Donahue, executive]

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

[Bret Jordan, analyst]

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

[Carol Yancey, executive]

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

[Paul Donahue, executive]

And Bret, as far as the -- your question around regionality, and I'm assuming you're talking about the U.S., much like we saw in the previous quarter, our strongest markets continue to be the Midwest and the mountain. And those 2 guys are really continuing to do a good job for us, both delivering positive numbers in Q3. Where we're seeing a bit of stress, and again, not surprising, the Northeast was down mid-single-digit in the quarter. But I'd point out, Bret, that if you go back to Q2, our northeastern business, we were down 19% in Q2. We've gone from down 19% to roughly down 4% and change in Q3. Mid-Atlantic, similar story, high double-digit decrease in Q2 to down mid-single digits in Q3. So still a bit stressed in those markets. But what we're encouraged by is just really strong sequential improvement quarter-over-quarter.

[Bret Jordan, analyst]

Okay. And it sounded like Europe, U.K. might be the strongest market, with France #2.

[Paul Donahue, executive]

That is correct, absolutely.

[Operator]

Our next question comes from the line of Scott Ciccarelli with RBC Capital Markets.

[Beth Reed Pricoli, analyst]

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

[Paul Donahue, executive]

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

[Beth Reed Pricoli, analyst]

Yes.

[Paul Donahue, executive]

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

[Beth Reed Pricoli, analyst]

Okay. So the U.S. auto comps were down low to mid -- low single digits each month?

[Paul Donahue, executive]

Correct.

[Beth Reed Pricoli, analyst]

Okay. Got it. And then just 1 on the industrial side...

[Paul Donahue, executive]

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

[Beth Reed Pricoli, analyst]

Got it. That's helpful.

[Carol Yancey, executive]

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

[Beth Reed Pricoli, analyst]

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

[Paul Donahue, executive]

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

[Operator]

Our next question comes from the line of Chris Horvers with JPMorgan.

[Christopher Horvers, analyst]

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

[Paul Donahue, executive]

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

[Christopher Horvers, analyst]

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

[Paul Donahue, executive]

That is correct.

[Christopher Horvers, analyst]

Got it. Makes sense. And then in terms of -- just to clarify on the U.S. cadence, in particular, did -- it seems like DIY slowed and do it for me got better. And -- but that was sort of roughly neutral over the 3 months. Is that right? Because you also mentioned that September got better. So I was just trying to reconcile all that. How do you put that all together?

[Paul Donahue, executive]

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

[Christopher Horvers, analyst]

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

[Paul Donahue, executive]

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

[Christopher Horvers, analyst]

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

[Paul Donahue, executive]

Yes. Yes. Yes.

[Christopher Horvers, analyst]

Okay. Sorry to belabor that. And then in terms of maybe on the margin side, really, a 2-part question. So first, on the gross margin. EIS actually helped you. Can you talk about how much that was? But then vendor allowances also hurt you. So at the high level, how much -- how are you thinking about the potential to continue to drive expanded gross margins going forward? And then I have a follow-up on SG&A.

[Carol Yancey, executive]

Sure. On the gross margin for the quarter, when you look at our quarterly improvement, I would say, this quarter, about 1/3 of that was related to the divestitures. So 2/3 of our gross margin improvement, like 100 bps is really related to sales mix shift to higher gross margin operations, specifically our international strong results on automotive, product mix shift, especially in industrial, and then some of our just pricing and global sourcing initiatives. So when we look ahead, we do expect to have continued gross margin improvement with a lot of our initiatives. It may not be quite at the pace that we've seen, but we are very encouraged by the gross margin initiatives we have. We've done all that, as you mentioned, with lower volumes. And we have been able to generally offset the lower volume incentives with our lower sales volumes with having our initiatives. So we've anniversaried the EIS divestiture. So going forward, it will just be the core gross margin improvement.

[Christopher Horvers, analyst]

Got it. And then on the SG&A side, Carol. I guess, how are you -- I know you've taken a lot of cost out of the business, how are you thinking about the potential to add -- have to add back that COVID expense in 2021 from a dollars perspective?

[Carol Yancey, executive]

Yes. So on the SG&A side, what we're really encouraged by is the $100 million permanent cost savings that roughly are $110 million through 9 months. We expect to be $130 million to $140 million for the full year. The COVID savings were $150 million in Q2. And as we mentioned before, about $45 million of that was government subsidies. That moderated to about $60 million in Q3, which relates directly to the improved, as Paul's mentioned, improvement in our volumes, extending hours, bringing folks back in, and we said a lot of those were temporary things. But part of why we have a higher $100 million permanent savings is we've shifted some of those things to permanent.

So we are still -- we will still have some COVID savings in Q4. It will be probably less than what it is in Q3. But I can tell you, all of our business units have additional cost actions as we look ahead. There are further opportunities we think we'll have, especially as it relates to facilities and productivity improvements and, again, some further consolidations in some back office areas. So we're still excited about the work the transformation team is doing as we look ahead.

[Operator]

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

[Gregory Melich, analyst]

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

[Paul Donahue, executive]

So the -- if we look at the business, and as you just described, Greg, our most challenging segment -- and look, I should point out at the outset, our model is different, okay? I think -- and you've been around long enough, Greg, you know that. Fleet and government is a big segment for us, and that has been our most challenged segment. And I should point out that in -- mixed in that fleet and government, we have our oil and gas energy business, we have large contracts with municipalities, school bus contracts. We have contracts with the airlines, ground equipment. So all of that is in that fleet and government. And as you can imagine, Greg, that has been a challenging segment and has continued. It will come back, and we think it will come back and it will come back strong. Our major account business and our AutoCare business was down slightly in the quarter as well.

Where we saw good growth, and we are encouraged is with our -- what we would really classify as our all other wholesale business, and that is our independent, unaffiliated garages. That business held up well, and we are encouraged by those numbers. And we think we can continue to build on that in Q4 and going forward.

[Gregory Melich, analyst]

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

[Paul Donahue, executive]

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

[Gregory Melich, analyst]

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

[Paul Donahue, executive]

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

[Gregory Melich, analyst]

Great. And then if I could steal one more question there. You brought up an interesting addition of, I think, 35,000 SKUs that would be direct from vendor. Could you just help us frame what that could mean to sales and sort of expanding the business in a more capital effective way? And I also thought I heard you mentioned some pricing or remerchandising actions to help gain some share back. But I wasn't [indiscernible] describe those?

[Paul Donahue, executive]

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

[Gregory Melich, analyst]

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

[Carol Yancey, executive]

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

[Gregory Melich, analyst]

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

[Carol Yancey, executive]

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

[Operator]

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

[Mitchell Ingles, analyst]

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

[Paul Donahue, executive]

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

[Operator]

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

[Carol Yancey, executive]

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

[Operator]

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