Q1 2026 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the Genuine Parts Company First Quarter 2026 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Tim Walsh, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to Genuine Parts Company's First Quarter 2026 Earnings Call. Joining us on the call today are Will Stengel, Chair-Elect and Chief Executive Officer; and Bert Nappier, Executive Vice President and Chief Financial Officer. In addition to this morning's press release, a supplemental slide presentation can be found on the Investors page of the Genuine Parts Company website.

Today's call is being webcast, and a replay will also be made available on the company's website after the call. Following our prepared remarks, the call will be open for questions. The responses to which will reflect management's views as of today, April 21, 2026. If we're unable to get to your questions, please contact our Investor Relations department. Please be advised this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results as reported under generally accepted accounting principles.

A reconciliation of these measures is provided in the earnings press release. Today's call may also involve forward-looking statements regarding the company and its businesses as defined in the Private Securities Litigation Reform Act of 1995. 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. With that, I'll turn it over to Will.

Thank you, Tim. Good morning, everyone, and thank you for joining our first quarter 2026 earnings call. I want to start this morning by recognizing and thanking our 65,000 teammates around the world for their continued dedication and hard work. Their commitment, expertise and focus are the foundation of our success as they work every day to deliver parts and solutions to our customers.

This morning, I'll review our first quarter financial results by business segment, followed by an update on our announced plan to separate our Global Automotive and Global Industrial businesses into 2 publicly traded companies. In short, the separation work is on track and progressing well. As we execute our separation plan, our top priorities remain the same: stay focused on key strategic initiatives, operate the business with discipline and deliver excellent service to our customers. During the first quarter, our teams did this well and delivered financial results ahead of our expectations.

The war in the Middle East will require us to remain agile and disciplined in a dynamic global environment. The war is impacting the flow of certain goods across the global supply chain, adding inflationary pressure to certain product and logistics costs and adding incremental uncertainty for customers. Despite the environment, we did not experience a material impact to our financial results during the first quarter. Our teams have demonstrated the ability to manage through temporary economic and geopolitical disruptions in the past.

We have global scale, playbooks and capabilities to deploy as needed. Moments of disruption create opportunities to gain market share and strengthen customer loyalty, especially when we respond with speed, discipline and focus. Bert will share more about how we're thinking about the conflict and the implications for our outlook. Turning to our financial results.

A few highlights for the quarter include: total GPC sales of $6.3 billion, an increase of approximately $400 million, approximately 7% compared to 2025, with sequential improvement in all 3 business segments; continued overall gross margin expansion despite tough year-over-year comparisons driven by strategic pricing and sourcing initiatives; and Global Industrial segment EBITDA margin expansion of 90 basis points or 13.6% of sales. Now looking at our business segments. Total sales for Industrial were $2.3 billion, an increase of over $100 million or up approximately 5% versus the same period in the prior year, with comparable sales up approximately 4%.

During the quarter, the benefit from price inflation was approximately 3%. From a cadence perspective, all 3 months of the quarter saw mid-single-digit average daily sales growth. Motion delivered a strong first quarter with balanced growth across our large corporate account customers as well as with our small- to medium-sized local accounts. We remain cautiously optimistic about the outlook for industrial market conditions.

While we're encouraged by 3 consecutive PMI readings over 50 in the first quarter and solid performance fundamentals, we balance that optimism with geopolitical realities and potential near-term uncertainty. That said, we're confident in Motion's ability to execute in every market environment and leverage its size and scale diverse end markets, extensive product offering and strong customer-centric execution to differentiate it from the market. Looking at the performance across our end markets in the first quarter, we saw growth in 10 of our 14 end markets we track, which is up from 9 in the fourth quarter of 2025 and 3 in the same period of the prior year.

During the quarter, we saw notable growth in food products, automotive, iron and steel, mining and fabricated metals. This growth was slightly offset by softer demand in pulp and paper, lumber and wood and rubber and plastic. Our core MRO business, which accounts for approximately 80% of Motion sales was up over 5% during the quarter. We continue to see an increase in planned outage projects to start the year where customers stop operations to do maintenance and repair work as deferred maintenance needs are being addressed.

Looking at the remaining 20% of Motion sales, which originates from more capital-intensive projects, we saw encouraging sequential improvement in customer activity with sales up approximately 4% during the quarter. Industrial segment EBITDA in the first quarter was $314 million, up approximately 13% and 13.6% of sales which represents a 90 basis point increase from the same period last year. Turning to our automotive segments. Starting with North America Automotive, we saw sequential improvement with total sales for the first quarter, increasing approximately 4.5% and comparable sales growth increasing approximately 2%.

During the quarter, North America Automotive segment EBITDA was $156 million, up 6% and 6.6% of sales. This represents a 10 basis point increase from the same period last year and a 110 basis point increase from the fourth quarter. The increase year-over-year reflects ongoing strategic initiatives, partially offset from pressure from cost inflation in salary and wages, health care, rent and freight. Within North America, total sales in the U.S. were up approximately 4% for the quarter, with comparable sales up approximately 3% and price contribution of approximately 3%.

Average daily sales were positive in all 3 months, with 2-year stack consistent across the quarter. We continue to see strong sales performance at our company-owned stores. In the first quarter, comparable sales at our company-owned stores increased approximately 5.5%. Independent same-store purchases during the quarter increased approximately 1%.

We remain pleased with our company-owned store initiatives as well as the work we're doing to partner closely and grow with our independent owners. Looking at the comparable sales performance to the end customer, which includes our company-owned sales as well as the sales out to the end customer from our independent stores, the NAPA system delivered sales growth of 4% in the first quarter, up from 2% in the fourth quarter. By customer type, comparable sales to our commercial customers for the quarter were up approximately 5%, while comparable sales to our retail customers increased approximately 1%.

Within commercial, we saw mid-single-digit growth in all 4 customer segments. Across our product categories during the quarter, we saw continued relative strength in our nondiscretionary repair and maintenance and service categories, which were both up mid-single digits. As a reminder, combined, these categories account for approximately 85% of our U.S. business. Discretionary categories sequentially improved in the first quarter and were up low single digits.

Looking at our performance in Canada, our team is executing well despite soft market conditions. Total sales increased approximately 4% in local currency versus the same period last year, with comparable sales down approximately 2%. Trade disputes, tariffs and low consumer confidence over the past few quarters have cumulatively impacted the market environment. However, the Benson acquisition provided a nice tailwind this quarter and we're ahead of our financial and operational target plans.

Moving to our international automotive business. Total sales during the quarter increased approximately 13%, with comparable sales slightly positive. International Automotive segment EBITDA for the quarter was $145 million, up 5% and 9.1% of sales, which represents an 80 basis point decrease from the same period last year. The decrease in EBITDA margin was predominantly driven by ongoing inflationary cost pressures from higher salaries and wages, rent and freight, which was partially offset by our restructuring initiatives and cost actions.

By geography, in Europe, total sales for the quarter increased approximately 1% in local currency, with comparable sales down approximately 0.5%. Overall results for the first quarter sequentially improved from the fourth quarter with improvement across each geography. Despite challenging market conditions, we believe we continue to perform in line or better than the market, driven by strength with key account customers, the NAPA brand offering and accretive bolt-on acquisitions. The investments in supply chain and technology across the region, combined with productivity initiatives position the business well as the market recovers.

Finally, our team in Asia Pac had another solid quarter, with both total sales and comparable sales increasing approximately 4%. Both trade and retail businesses posted solid results during the quarter with retail performance continuing to stand out. Australia and New Zealand are reliant on oil from the Middle East and have recently been impacted by reduced fuel availability, elevated fuel prices and corresponding negative consumer sentiment. Australia has also raised interest rates twice in 2026. Despite a challenging market environment, our in-flight initiatives are working as designed and have translated into impressive relative share gains.

The local team remains energized and action-oriented. Before I turn to an update on the business separation, I'd like to take a moment to recognize and thank Paul Donahue, who will retire from our Board of Directors at our Annual Meeting next week. Paul's retirement from the Board will conclude an exceptional career with GPC, which includes his impactful service as CEO and Chairman. For more than 20 years, Paul played a pivotal role in transforming the company and enhancing our long-term strategic foundation.

While his legacy includes transformational leadership and performance, his most enduring impact is on our culture, which he helped cultivate, evolve and position for the future. He represents the best of who we are at Genuine Parts Company, leading with respect, fostering teamwork and maintaining a deep sense of service to each other and our customers. On behalf of the Board and the entire global organization, I want to deeply thank Paul for his many contributions and years of dedicated service. We wish Paul all the best in retirement and hope he enjoys the well-deserved time with his family and friends.

Before I close, I can provide an update on our announced plan to separate our Global Automotive and Global Industrial businesses into 2 independent public companies. Overall, the announcement has been well received by investors, customers, suppliers and employees. All stakeholders are looking forward to additional details as we advance our planning. To ensure the organization can focus on daily priorities, we've been mindful to create a disciplined, centralized process and operating cadence with our advisers, business units and functional project leaders.

We increased our internal communication rhythm to provide global updates to ensure teams are informed and managing through change. Our leaders are doing an exceptional job leading and partnering as a global team. As mentioned on our call in February, our automotive and industrial businesses maintain independent operations. Since our work stream has been to refine our initial estimates developed during our strategic review of potential dissynergies and incremental stand-alone costs that will be needed for 2 public companies.

We expect the cost to be manageable and in the range of $100 million to $150 million, essentially in line with our initial estimates. Bert will share additional [indiscernible] his remarks. In addition, there is ongoing work to evaluate and identify leadership, prepare financial matters and organize stand-alone operational plans. We're progressing well and on track with our time line to complete the separation in the first quarter of 2027. In closing, thank you to our customers, owners, suppliers and shareholders for your continued trust and support.

As we look to the second quarter, we're focused to build on the positive momentum as we manage the current market environment. We're prioritizing serving our customers reliably and timely and have a proven and resilient team that positions us well. I want to offer again my sincere thanks to our global GPC teammates for their continued effort and teamwork. I'll now turn the call over to Bert.

Thanks, Will, and good morning, everyone. Our teams delivered in the first quarter with sales in line and profit ahead of expectations. Our results reflect disciplined execution across the organization against evolving market conditions, particularly with the added uncertainties surrounding the conflict in Iran. During the first quarter, adjusted EBITDA was up 5% and adjusted EPS of $1.77 was slightly above prior year.

Our results were driven by higher sales and the benefits from our global restructuring initiatives, partially offset by cost inflation and operating expenses. Our previously communicated headwinds from depreciation and interest expense negatively impacted our earnings by $0.09. This morning, I will review the details of our first quarter results and then share a few comments around our 2026 outlook, which we reaffirm this morning. Then I'll close with additional details on our estimated range of dis-synergies and stand-alone costs of our separation. Before I take you through the details of the quarter, my comments this morning will focus on adjusted results which include nonrecurring costs related to our global restructuring program and costs related to the planned separation of our automotive and industrial businesses.

Collectively, these items totaled $75 million of pretax costs or $56 million after tax. Now let's turn to the details of the first quarter. Total GPC sales increased 6.8%, which included a 240 basis point improvement in comparable sales, a 130 basis point benefit from acquisitions and a 320 basis point benefit from foreign currency. Of note, each of our 3 segments delivered comparable sales growth that sequentially improved from the prior quarter.

Price inflation was up low single digits in each segment, with North American Auto at approximately 3%, international auto at approximately 2%, and industrial at approximately 3%. Our gross margin was 37.3%, an increase of 20 basis points from last year and relatively in line with our expectations. The improvement in our gross margin was primarily driven by the ongoing execution of our strategic pricing and sourcing initiatives, partially offset by the impact of inflation and tariffs on product costs. Our adjusted SG&A as a percentage of sales in the first quarter was 29.4%, an increase of 50 basis points from the prior year.

On an adjusted basis, SG&A grew year-over-year in absolute dollars by approximately $145 million. Foreign currency and acquisitions represented approximately $95 million of the growth year-over-year with foreign currency being the large majority of the increase. The remaining $50 million of core SG&A growth was up 2.9% from the prior year. Within our core SG&A, we experienced higher costs year-over-year in 2 main categories.

Approximately half of the increase was driven by people-related costs associated with our merit increases a year ago and mandatory minimum wage increases outside the U.S. The remaining increase was largely driven by cost inflation in health care, rent and freight. We continue to take actions to adjust our cost structure through our restructuring initiatives. During the quarter, we incurred restructuring costs of $59 million and realized $26 million of cost savings or a benefit of $0.14 per share.

For the quarter, total adjusted EBITDA increased approximately 5% with an adjusted EBITDA margin of 7.9%, down 20 basis points year-over-year. Our EBITDA performance within the 3 business segments includes the following highlights. For the North American Auto segment, EBITDA increased approximately $10 million or 6.3% and with EBITDA margin of 6.6%, up 10 basis points from last year. The primary driver of the increase was higher gross profit, partially offset by approximately $30 million of higher operating costs from cost inflation in people, health care and freight expenses as well as the impact of acquired businesses.

International Auto segment EBITDA increased $6 million or 4.6% with EBITDA margin of 9.1%, down 80 basis points from the prior year. The decrease in EBITDA margin was primarily driven by a 100 basis point headwind from inflation in salaries and wages, rent and freight. This was partially offset by a 50 basis point tailwind from the benefits of our restructuring and cost actions. Industrial segment EBITDA increased approximately 13%, representing a margin of 13.6%, up 90 basis points year-over-year.

The increase was driven by both gross margin expansion and leverage and operating costs, driven by our global restructuring initiatives, and disciplined cost control. Turning to our cash flows. For the quarter, we generated approximately $64 million in cash from operations. Our cash flow from operations benefited from an improvement in working capital of approximately $200 million, partially offset by payments related to tax planning initiatives.

In the first quarter, we invested approximately $100 million back into the business in the form of capital expenditures as we continue to modernize our supply chain infrastructure and IT systems. We also returned approximately $142 million back to our shareholders in the form of dividends. Now turning to our outlook. As we detailed in our press release this morning, we are reaffirming our outlook for 2026. For the full year, we continue to expect diluted earnings per share, which includes the expenses related to our restructuring efforts to be in the range of $6.10 to $6.60 and adjusted diluted earnings per share to be in the range of $7.50 to $8, up 5% at the midpoint of the range versus 2025. With respect to our outlook, our expectations take into account our performance in the first quarter, which was ahead of our expectations.

However, we have balanced our performance to date against a more prudent view of the second and third quarters, given uncertainty of the conflict in Iran, leaving our expected range of performance for 2026 unchanged. As we consider the shape and timing of our performance in 2026, key themes remain, the market conditions in Europe, the performance of our independent owners in our U.S. NAPA business and the impact from the conflict in Iran, including their duration of any disruptions. We expect near-term cost pressure from the impact of the conflict as we turn into the second quarter and have incorporated those views into our outlook.

As we've previously noted, we continue to expect depreciation and interest expense to be a headwind of approximately $0.30 in 2026 as we continue to invest in the business for growth. With respect to the conflict in Iran, our outlook incorporates updated views across the various elements of our P&L as follows: first, our revenue outlook considers the impact of demand from higher oil and energy prices, which has the potential to drive lower consumer sentiment, miles driven and industrial and manufacturing output. Broadly speaking, during March, when the conflict was in its early stages, consumer behavior across our segments remained fairly resilient.

It's difficult to predict how the conflict will play out but the duration of higher oil and energy costs will be something for us to watch. Our outlook for gross margin reflects anticipated cost increases from our suppliers as they face higher input and shipping costs. We have also considered the cost of adjustments to our own supply chain to mitigate any disruption to inventory availability. Our global teams are working with our supplier and vendor partners to manage any potential increases in a strategic and thoughtful manner.

Broadly, we expect to pass through many of these cost increases. On a consolidated basis, our exposure to products sourced from the Middle East is less than 0.5% of our total purchases. Finally, we have incorporated revised assumptions on operating expenses, including freight and fuel costs. Our freight expense, which represents the cost of moving product to our stores and branches is approximately 3% of our revenue.

While we maintained our guidance, I will reemphasize a few points within our fiscal 2026 outlook, starting with sales. We continue to expect total GPC sales growth in the range of 3% to 5.5%. Our outlook assumes that the market growth will be roughly flat and that the benefit from pricing, including inflation and tariffs will be approximately 2%. Our sales outlook also assumes the benefit from M&A carryover and about 1 point of growth from our strategic initiatives and about 1 point of benefit from foreign exchange.

We continue to expect expenses associated with the transformation activities and cost actions to be in a range of $225 million to $250 million with an anticipated benefit in 2026 of $100 million to $125 million. These expenses do not include any costs associated with the separation of the businesses. Beyond these aspects, the remaining elements of our guidance remain unchanged, including the individual segment sales growth projections as well as gross margin, SG&A, corporate costs, EBITDA, cash flow and capital allocation expectations. The details of these assumptions are included in our earnings presentation on our website.

Before I close, I'd like to add some additional details on the dis-synergies and stand-alone costs of our planned separation. We've done extensive work with our internal team as well as our external advisers, validating our estimates around the incremental run rate dis-synergy costs and stand-alone costs for the new public company. As we have outlined on Slide 11 of our earnings presentation, our estimated range of cost is $100 million to $150 million. This range of cost includes 2 components: first, dis-synergy costs from activities associated with indirect sourcing due to loss of scale and back office and technology functions that will have to be replicated.

We estimate this category to be in a range of $50 million to $75 million, and it would be evenly split between Global Automotive and Global Industrial. The second category is incremental stand-alone costs associated with the design of the new public company and would include: new facilities, personnel, public company functions and costs. We estimate this category to also be in a range of $50 million to $75 million, the vast majority of which would be at Global Industrial. This range of cost does not include onetime costs associated with the separation, such as legal, banking and other professional fees.

Further, it is important to note that this does not include the allocation of current corporate expense at Genuine Parts Company. We will share additional details on our views on the allocation of the existing corporate costs as that work progresses over the coming months. In closing, we are pleased with our first quarter performance and the disciplined execution demonstrated across the organization. As we move forward, we remain focused on running the business effectively while continuing to make steady progress toward our intended separation.

At the same time, we will stay agile and attentive to all market dynamics, including the ongoing conflict in Iran. Above all, we are confident in our teams and their ability to navigate uncertainty while delivering for our customers and our shareholders. Thank you, and we will now turn it back to the operator for your questions.

[Operator Instructions] First, we will hear from Greg Melich at Evercore ISI.

Thanks for all the additional detail. I want to follow up on, I think, Bert, some of your comments about the conflict in Iran and some of the spillover and how it inflects the outlook. I think you mentioned pricing was up low single digits. I think it was [ 3% ] in North American auto and then similar in Industrial and International.

How do you think the increased cost, as you mentioned on freight, you said it would pass through? So do you expect pricing to now for the year be running at that 3%? Or do you think it decelerates equally across the businesses?

Greg, thanks for the question. Look, I think I'll start -- I'll pull it up just a little bit and then come back to the pricing point and maybe give everybody a little bit more color on Q2 when we think about the next 100 days or so. And again, start with pointing back to my prepared remarks on those various elements of the P&L that I outlined where we think the impact comes from, when we think about the conflict, whether it's revenue, cost of goods sold or operating expenses. When we look across the balance of the year, I think we've been pretty prudent and pragmatic.

That balancing, we finished ahead of expectations for Q1 against all these new dynamics we're dealing with the conflict. And so when you think about the forecasting, obviously, we're thinking about your pricing question within that. But I think the biggest variable, which gets to the question you've asked about the duration of pricing for the year is the duration of the disruption itself and the conflict. And obviously, there's a wide range of outcomes and scenarios when we think about this and we've really tried to refine our perspective to the next 100 days because I think that's what we have the best insight to, which is obviously a bit arguable when you think about the strait opening and closing from morning to afternoon or just the point around oil prices, I think in the last 45 days, we've had 6 days of double-digit moves in oil prices with some of those swings at nearly 20%.

So with that backdrop, I think I'll give you just a little bit more precise color on Q2. We expect the impact to the forecast for us to be most pronounced in Q2. And when we've taken all the variables into consideration pricing, cost of goods sold and operating expenses, we see some downside risk that we've incorporated into our guidance of about $10 million to $20 million of EBITDA as the net negative impact of the conflict to the business. And so I'll give you a little bit more color there. The headwind that we see is really the product of both increased cost of goods sold and operating expenses, which will be freight-in, freight-out and fuel, balanced against what we think our assumptions are for pricing benefits that will be likely offset by muted expectations on demand from the environment itself.

So I would say that we think the pricing environment stays more in line with what we see for the full year that I shared in my prepared remarks, split evenly between tariff and just overall inflation. But obviously, this conflict will have a lot to say about how long that lasts. And I think it gets back to the duration of the environment that we face. As I mentioned, we've incorporated all of this, including a very solid first quarter into our reaffirmed guidance for the year.

And as we look beyond updating the guidance this morning. I would just say that April has started steady and helped inform our views. When we look about the rest of the year, I would remind everybody that we do have interest and depreciation headwinds. Those abate in the second half but we also expect the Q2 impact of those 2 items to be roughly in line with the first quarter.

And then finally, I would just say, look, our teams have been here before. We've problem solved. We had the problem solved. And that gives us confidence as we look to our full year guide about our strategic initiatives, the transformation activities we're running, our restructuring actions, which will also build sequentially across the year.

That's great. And for a follow-up, I would love to ask Will, as you're going through this big separation process and -- how do you think it could impact the culture and how do you think about working that through the thinking just bolt-on M&A along the way or even thinking of selling some of the businesses, if that's what makes sense along the way?

Yes, Greg, I think this is a moment where our culture really shines. It's based in team. It's based in hard work. It's based in collaboration.

I referred to the way in which we've set up the project team, it's cross-functional, it's cross-business unit, it's global. We meet every week. So I think the operating rhythm and the way in which we're all working is a perfect reflection of how this company works as a team and has built its culture over 100 years. As I've talked about before, we have a very consistent culture, both geographically and across business units.

So that's part of our special sauce, and I wouldn't expect anything about the work that we're doing in 2026 or our strategy going forward. to change that. And in fact, I would argue that it amplifies the depth and the way in which we work together. So we feel really good about where we are.

Next question will be from Bret Jordan at Jefferies.

Could you give us a little more color on the European backdrop, I guess, or regional performance, competitive landscape, are there stronger and weaker markets over there that should be [indiscernible]?

Yes, happy to, Bret. As I said in the prepared remarks, we were really encouraged -- we saw sequential meaningful sequential improvement versus the fourth quarter in all of our geographies. So we're seeing continued good execution and arguably improving market fundamentals across each of the geographies. We had some nice progress in our Germany business this past quarter.

They're doing a nice job relative to competition, and we continue to show really nice progress in our Iberia platform that has done a lot of work to build its national supply chain, work closely with its vendors. It's accelerating its NAPA brand offering in the market that's new and different in the marketplace. So those are 2 highlights. And as I said, the other markets improved, and we're cautiously optimistic that as we go through 2026, we'll continue to build that momentum.

Great. And then I guess sort of early thoughts on the dividend policy for the [ spincos ]. Obviously, it will be a sort of a different business profile, but how do you think about that capital allocation?

Yes, Bret, look, I think we've got more work to do on capital allocation. We're obviously mindful of the dividend and the importance of that to the various customer base -- or the various shareholder bases. One thing that I would say is that we have -- we've increased the dividend again for 2026. It's an important part of the current GPC capital allocation structure, and it will be going forward as well. I think as we shared a few weeks ago at the conference with Michael, this is a moment in which we'll ensure that the capital allocation strategy of the 2 businesses follows its growth strategy.

And those will be different. And that's a backdrop for why the separation of the businesses make sense. Each business has a different trajectory going forward, both super positive, and we're both -- and we're excited about both. But when we think about it, I think you'll see an automotive business that has a focus on shareholder returns, first and -- first and foremost, and secondarily, probably an indexing towards capital CapEx investments and a little bit of bolt-on M&A.

And when you think about industrial, I think you'll be thinking about a profile of more M&A. It's a little less capital-intensive business, so CapEx as well, but also shareholder returns. So early innings, we're doing that work right now, and we'll continue to progress that work and share thoughts later. But the most important thing will be to continue to focus on shareholder returns and make sure the capital allocation strategies follow the business strategies and in the end, make sure that we stay faithful to our intention to have both companies investment-grade ratings.

Next question will be from Christopher Horvers at JPMorgan.

So I had a couple pricing follow-ups. So first on Section 232, the new steel tariffs, to what extent do you expect that to be inflationary? And I guess, to what degree and is that baked into your guidance as you look to the balance of the year? And then you mentioned potentially pricing through some of the freight costs.

Just wanted to understand is like freight costs that get capitalized into inventory. You passed -- it sounds like you're willing to pass those through, but the periodic costs of domestic freight, is that something that you would anticipate passing through over time? Or is that something more of a TBD, we're going to have to eat that now, figure out the need to pass that into price later?

Yes, Chris, maybe I'll start with -- that's a long question. I'll start with the second part on the current environment with respect to the conflict and how we're thinking about that, and then I'll come back to the Section 232 tariffs. Look, I think this is going to be a steady as it goes kind of environment. We're dealing with something that's incredibly dynamic.

As I mentioned a few minutes ago, just oil prices alone and the volatility changing from day to day. On the freight end, which does get capitalized into inventory, that would be part of our pricing strategy. We'll be thinking about how do we pass that through balanced against our regular playbook on pricing and where we're considering the moves of pricing across markets, geographies, SKUs and what elasticity is out there. I think the consumer has a lot to consider right now.

Customers and consumers have a lot to consider on the pricing front. And we'll have to be thoughtful about this environment on top of overall inflation and then tariffs. When we think about the freight out and so that's the cost that we're incurring to move product inside the U.S. or inside a certain geography from DC to the branch or store. Again, we're having to absorb increases in cost, and that's why I shared the thoughts I shared on the second quarter about those additional downside risks to the business in the near term.

That also will factor in how do we think about pricing on that front as well. I mean all of these things factor into our operating costs and the cost to serve our customers, and we put them first. And so we're being super thoughtful about how do we balance the additional costs we have in the business with what we can push through to price and then how can we be more efficient, which is an important part of our model as well and that we have to control costs. So it's a lot of algebra, it's a lot of 3D chest, when we think about it, but we're also trying to make sure that we put customer first and make sure that we balance all of that across those considerations.

So there are good thoughts. I think we've thoughtfully incorporated them into our views. And that's why we see the conflict as a near-term net negative. When I think about Section 232, we're managing this just like we manage the overall tariff situation.

Our command center is still up and running. Our teams are still focused on it. At this point, we have not seen any additional requests from customers on Section 232. Same thesis here to the extent we started to see those increases from suppliers or request for increases from suppliers, we factor in that into our models for pricing and how we pass that through. Again, our intent would be to pass through where we can.

I would say that the overall tariff environment, I think, has finally found it's at risk of jeopardizing my views. I think it's found its normalized point. We're in a normalized rhythm and cadence. We're heading into the full anniversary of the tariff landscape.

I think the noise has died down largely, and the request that we're seeing coming in from suppliers have become more normal conversations around annual price increases and negotiations versus specific to tariffs. So we'll continue to deal with whatever dynamic comes up tomorrow, but at the same time with respect to Section 232, we haven't seen any material increases. And anything we would see we'd be sure to think about how we pass that through and how we manage the overall cost.

And then staying on the pricing topic, you talked about 3% inflation roughly. You also talked about a gross margin headwind with respect to tariffs. So is it that you're not passing -- and that number lags -- that 3% lags what Zone and O'Reilly have talked about, albeit in line with Advance. So is that gross margin headwind essentially indicative that you're holding back on some of the tariff costs and as a mean to maybe narrow price gaps?

Or are you trying to adjust for prices that are perhaps too high in certain markets and just trying to get back down to normal?

No, I don't think there's anything to see there other than we had a really strong Q1 a year ago, a 120 basis point expansion in gross margin. So we had a tough comp to begin with. The second element would just be that don't forget that the first quarter of last year had no tariff impact. And so for Q1 this year, we're actually carrying all the increases in cost of goods sold with the top line benefit and all of those things are hunting in the low single-digit range.

So when we think about how we've expanded gross margin over the past several quarters, we've had the benefit at moments in time of lags and where we sit in terms of the delta between price and cost. And in this particular quarter, I think they're pretty lined up. And so that created a little bit of attention on expansion to gross margin for the quarter. But nothing concerning from our perspective, in line with our expectations.

And as I -- as we mentioned in my prepared remarks, we've reaffirmed our outlook for the full year, 40 to 60 basis points of gross margin expansion. And that's going to come on this great work we're doing across the business, which is going to build benefits across the course of the year.

Next question will be from Scot Ciccarelli at Truist.

Scot Ciccarelli, two auto-related questions. First, I don't know if you guys are willing to provide anything at this stage, but any more detail around the profitability of your North American company-owned stores versus the independent biz? And then secondly, kind of on a related basis, where do you think company-owned profit -- company-owned store profitability can go over time, just given what we can see from some of your biggest competitors?

Yes, Scot, on the first one, I hope you can appreciate, I'm not sure we prefer to disclose that level of detail on the profitability. On the second question, maybe we won't talk with specific numbers, but I can tell you with a lot of empirical data behind it as you think about our 2025 strategic review, obviously, we spent a lot of time looking at what we call our entitlement in all of our businesses, but in particular, in our automotive business, and it's really compelling. And it's a material improvement in the business. The exciting part about it is, we've got best-in-class examples that are already at the level of entitlement.

And so it's not pie in the sky in the sense that we've got to go out and do something unnatural. We have to get all of our opportunities up to best-in-class. And I think we'll bring that to life in the Investor Day to put some numbers around it. But we're excited about the work we're doing and the sequential improvement in company-owned stores is the early days work of executing that road map and that playbook to get the best of breed to teach the others and work with the others to get to that level.

So more to come on it. It's a good question. It's a fair question. I would note, we are a B2B business.

So we are different than your traditional retailers. So we'll have our own benchmark for what we view as entitlement and best of breed that might potentially look different than a traditional retailer.

Can I just ask a follow-up, given the lack of information on the first question there. What are you hearing just in terms of your conversations with your independents, given their appetite for inventory and given some of the cost pressures that they've been under with the interest expense related to inventory?

We had a -- I should mention, we had 20 of our largest owners here in the U.S. in the Atlanta headquarters 2, 3 weeks ago and the tone and the discussions are very positive and optimistic, honestly, sequentially improved, as you saw in our results, which I think reflects the cautious optimism as we go through 2026. Alain Masse and the NAPA team here in the States, part of his expertise and his experience working with independent owners is playing out as we thought. There's really good alignment in terms of the priorities of the business and the investments we're making in the business on behalf of the independent owners.

And we're also spending time thinking creatively about different ways to support their inventory investments, and there's more to come on that topic as well. So we're working as well as we've ever worked with our independent owners over the recent years. Obviously, it's been a tough market backdrop for them in all small businesses and part of our strategy today and going forward is to make sure that they're in a position to win in the local markets. And their sales outperformance is encouraging.

And as long as we're all selling out in the markets there, I think the independent owners have a real opportunity to be successful and we're here to support them to be successful in the same. So more to come on it, but a fair question and a good question.

Next question will be from Michael Lasser at UBS.

It's essentially a follow-up on that last topic, which is, is there a trade-off for GPC corporate in the Auto segment where you have to balance the free cash flow generation of the North American auto business versus the top line growth for your independents, meaning you have an opportunity potentially to sacrifice some of the free cash flow generation. If you were to extend more capital or longer terms to your independents? And if that's the case, how is that going to impact the free cash flow generation of a stand-alone auto business?

Michael, it's Bert. I think the short answer to that is it doesn't impact the medium or long-term outlook for cash flow generation for the business. The bottom line is that we've been using our very strong balance sheet for many, many years to support our independent owners whether that's capital programs that we guarantee, that we disclose to support their growth and loans that they need to grow, which gives them access to capital at a more favorable -- at a little bit more favorable rate than they could on their own to payment terms, to deeper investments in inventory to make sure they have the availability.

We've been using the GPC balance sheet long before I got here to support the independent owners, and that's in our run rate. And so I think when we think about how we look ahead to the global automotive business on a stand-alone basis, we'll continue to do that. And as Will just mentioned, we're reimagining even as we speak, how we support independent owners. The independent owner has a -- it's the backbone of this business.

It's how the aftermarket grew up and it will always have a place. We just have to find a way to optimize it in a maximized way and continue to grow together and do the right thing for our customers. And so we're going to continue to do that. I don't think even with some of the new things we're considering, it changes the long-term view on cash generation or how we've used the balance sheet.

We're just going to use it in a different way, and we'll have more to come on that. Look, I think all of these questions build into what will be a very exciting Investor Day for Global Automotive. We'll be talking about the strength of the 2 channels, the company-owned stores, the independent owners and what we can do as we look ahead. And so that's why we're excited.

And that's why I think everyone should be excited about the separation of these 2 businesses and will be 2 great public companies.

Got you. Very helpful. And you also provided some really helpful commentary on sizing the incremental EBITDA impact from all the geopolitical issues, $10 million to $20 million of EBITDA. Putting a couple of points together, you mentioned that April has been steady for the business.

So should we be modeling pretty consistent top line performance in the second quarter with what you experienced in the first quarter and yet take into account this $10 million to $20 million EBITDA hit? And how does that play into your expectations in the back half of the year and how we should be modeling that?

Look, maybe I'll answer that on a core basis, Michael. So don't forget the first quarter had a nice tailwind from currency. I think that's the one element that we've assumed about 1 point of FX growth for the rest of the year. We had 320 basis points of FX tailwind in Q1. So let's not -- let's not everybody run out and remodel on that kind of FX tailwind as we look to the balance of the year.

When I look at core revenue growth for Q2, I think it will be pretty steady. April has started out steady, March was pretty resilient, April a steady start. And April helped inform the downside risk that I shared earlier. But within that, I think the top line will continue to perform.

The things we watch on the top line are the European market conditions, which, as Will mentioned, we're cautiously optimistic have improved from the fourth quarter. They're still muted, but they are improved from the fourth quarter, so we'll continue to watch that. Independent owners had a sequentially improved quarter. We'll continue to stay focused there.

And as I shared earlier, I think when we think about revenue in Q2, we'll have what we think is maybe a little bit more pricing benefit from some of the things that are happening with the costs we're passing on to perhaps more muted demand, and that leaves us neutral in our assumptions. So I'd say, keep the core kind of in line and don't model in a bunch of additional FX tailwind, if that's helpful.

And at this time, we have no other questions registered. I will turn the call over to Mr. Tengel -- Stengel. Please go ahead.

Thank you, everybody, for joining us today. We look forward to updating you on the transaction and our progress as we move through the quarter on the July earnings call. Thanks again for being with us, and thanks for your support. Have a great day.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.