Genuine Parts Company (GPC) Earnings Call Transcript & Summary

Good morning, everyone. I am Scot Ciccarelli, senior hardline and retail analyst at RBC. I want to thank everyone again for taking time out of their schedules to dial into day 2 of our virtual consumer conference. I think we had a really productive day yesterday, and we aren't done. We still have a large number of our corporate partners that we're talking to today. We have a series of expert panels still to go. So with us this morning for this session, we have the senior management team of Genuine Parts, including CEO, Paul Donahue; and Sid Jones, Senior VP of Investor Relations. Guys, we really appreciate the time today that you provide to us and our investment partners.

Paul, I think it's hard for all of us to grasp the magnitude of swings that we've seen in business trends for so many companies. Especially for something like auto parts, which at least historically has been an incredibly stable business. And we have heard -- continue to hear, quite frankly, from companies that reported after you that business continue to get a bit better the further away we got from kind of that sharp shelter-in-place process in late March, early April time frame. So I think maybe just to kind of level set the whole group, can you maybe provide some more color regarding the sales trend swings that you saw during your quarter and any commentary that you might want to provide, just given some of the updated comments that came out in advance in auto zone?

Yes. Thanks, Scot, and look, thanks for having us. It's great to be here and appreciate you hosting this virtual conference. I think maybe I should say at the outset, Scot, for those who aren't intimately familiar with GPC and our automotive footprint, we are different from the advances and zones of the world and that we're -- we have a global footprint. So we have 500-plus stores in Australia, New Zealand. We have a couple thousand stores across Europe. And then, of course, our 6,000 NAPA stores here in the U.S. So we have seen varying degrees of swings depending on where we are in the world. I would tell you that in the U.S., much like our competition, as each week has gone by, we are seeing improving trends. So as the states open up as shops open up, we are seeing improving trends in our DIFM business. One thing I would comment on, Scot, is that during the first quarter, our commercial business, our DIFM business -- and again, the difference I should point out with GPC and NAPA versus our competition is we are very, very heavily oriented towards the commercial side. That's 80% of our business. That business did outpace DIY throughout most of the first quarter. We did see that flip in late March to DIY outpacing commercial. And we saw that hold steady through April as well. We think as commercial customers head back out on the highways, which we're seeing as states reopen, DIFM business will return and will be the dominant of the 2 segments.

So in other words, you would expect, let's call it, pent-up demand to kind of get unleashed on that commercial side as all these states open up rather than continue with the trends that you kind of saw through most of March and April?

We do, Scot. Look, the fact that -- it's been interesting. And this is a point in time -- but DIY -- the surge in DIY, perhaps driven by stimulus check. Folks have a lot of time on their hand during their time at home, so they're doing projects on their vehicles. So we've seen a spike in car care. We've seen a spike in other product categories as well. Most recently, now we're seeing a spike in batteries. So jobs that consumers and amateur DIY-ers can perform on their own at home. But the fact is, Scot, just because they're at home and they have stimulus money doesn't mean they're going to be able to go out and do a great job on their 2017 Lexus. That's still going to revert back to the DIFM market. Technology is just way too complicated on today's vehicles, but it will play out. And as folks hit the highways and miles driven trends back up, I do believe we'll see our DIFM business across the entire industry return to a growth mode.

Yes. That all makes sense, by the way, Paul. Any way to potentially size or provide any color regarding the stimulus? Auto zone, as an example, was pretty explicit that as the stimulus checks started to hit, they did see a pretty big surge in business. Is there a way to kind of think about it? They made some parallels to tax refunds, et cetera. I'm just wondering if there's any kind of qualification you can potentially put around that.

So it's difficult for us in North America, Scot, again, because of our heavy, heavy commercial presence. It's -- on the DIY side, again, I think as stimulus monies roll in, folks are spending those monies. We've -- all of our automotive parts stores have been deemed essential, so we've all been open throughout the pandemic. So it's a little more difficult for us to track just because of our commercial footprint. What I would point to, Scot, in a call that we had with our Australian team yesterday, they -- that business in Australia is more retail-dominant than DIFM. Stimulus checks hit Australia from the government as well. We saw an immediate spike in our retail business in Australia, which has maintained all the way through the month of May as well. So no doubt, stimulus funds benefit retail. And we are seeing that take place in Australia. And we are seeing our DIY business grow nicely here in the U.S. as well.

That makes sense. One question I had, just because a lot of your independents operate kind of smaller towns, let's call it, more middle of the country. You basically put your company-owned stores closer to, let's call it, the urban centers, higher-volume areas. And yet, you commented that your own stores were experiencing, kind of like March, April, similar trends to the independents. I guess I'm just curious as to why we wouldn't have seen actually better performance on the independent side. Or did a lot of them end up closing? And you know what, they just didn't -- weren't able to generate business because they were closed.

No. Well, look, the good news is, Scot, our independent owners, for the most part, have remained open throughout the crisis. I can also tell you that we worked hand-in-hand with our independents to ensure they capture their share of the PPP funds that the Fed put out there, so we have not had any of our independents close their doors as a result of the pandemic. Our company stores certainly have in metro areas -- when you look at, certainly, the Northeast where we have a strong presence, the Mid-Atlantic where we have a strong presence, those markets have been challenged. There's just no 2 ways about it. And honestly, in many parts of the Northeast, they remain challenged today. The Midwest, the mountain, as you mentioned, more rural, those areas are performing relatively well compared certainly to the Northeast and Mid-Atlantic.

Got it. Okay. That makes sense. Now you mentioned none of your independents have been forced to kind of close their doors. What else are you doing to, a, help support them? And b, I would assume some of those independents are competing against other smaller competitors just because it's a smaller town, et cetera. Have you heard of or expect any incremental closures or shakeouts from some of those competitors that maybe don't have the lifeline that your independents have?

Yes. That's a great question, Scot. And we do believe there will be opportunities for our independents. We also believe there's going to be incremental opportunities across GPC as well. We've held throughout this crisis, Scot, we're holding weekly global conference calls with all of our leaders around the world, each of them weighing in with where they are in terms of their business, how their business is performing, how their people are holding up, how many positive cases and the like. We held our call yesterday. And I would tell you that it's the first time in, I think, 10 weeks of calls where some of our leaders are now beginning to talk about M&A. And we have effectively shut down M&A as we entered this crisis. But I'm pleased to see that some of our leaders around the world are beginning to ask those questions. So do I believe there's going to be opportunities? Absolutely. Our independent owners today, Scot, as you may know, are well capitalized. They're much larger. We have independent owners who own upwards to 50, 60 stores. So these are big businesses. And we do believe that some of the more well-capitalized owners will have opportunities to acquire perhaps some struggling independents that no doubt will emerge from the pandemic.

Yes. It just seems to me for the, let's call it, the public companies. I kind of view them as the consolidators. There's going to be a lot of incremental, let's call it, consolidation opportunity. So...

We would agree with that.

Got it. Okay. Cool. Let's shift gears a little bit. Everyone's kind of talked about a big spike in e-commerce during the lockdown phase. And we've seen it from all sorts of different retail verticals that always have pretty low penetration level. We've seen it in food. We've even seen it in auto parts directly addressing you. So I guess one of my questions is, would you expect greater e-commerce penetration to be kind of part of the future landscape, like people just start to get comfortable with it? And if so, does that potentially invite incremental competition from your friends in Seattle?

Yes. Okay. That's an interesting question. They're more of my wife's friends than my friends, Scot, because she shops. No. What I would tell you is, look, like probably every other industry, we've seen a significant spike in our online business here, not only in the U.S. but Australasia as well. And fortunately, over the last 3 to 5 years, we've invested heavily in our online initiative. And if you recall, Scot, last year in 2019 and again, timing was key, we acquired the market leader Sparesbox in Australia, the market leader in online auto parts. So I would tell you that our business there is up 3x in Australia. So we think that will continue. I would tell you that the pure online players, our friends in Seattle that you mentioned. Look, they're certainly a worthy competitor, there's no doubt. But I still believe that most consumers will continue to want to walk into stores and talk to a parts professional behind the counter. They just aren't that proficient to understand what parts their car may need, and they want to talk to a parts pro. And we think we have the best in the industry at NAPA. So I think, for sure, digital will grow. But for us, Scot, I would just say, while it's -- we've seen meaningful increases in our digital business as a percentage of our total, it is still a very small percentage. And I think our pure-play automotive competitors would say the same.

So did you -- have you guys rolled out, let's call it, curbside pickup to all of your company-owned stores? Because that seemed to be something that a bunch of your competitors have done, and I guess you had a pretty strong uptake from your -- from their customers?

Yes. We have, Scot. And not only in our company stores, but many of our independents have rolled out curbside pickup as well. What's interesting is -- and we've been out and about a bit is that, again, many of our customers who perhaps would take advantage of curbside pickup in most -- whether they're picking up groceries or what have you, they still want to walk through that front door of the NAPA store and talk to a parts pro, but we do offer it. And what I would tell you is we've seen a real acceleration in our buy online, pick up in store. We've seen that grow. We've seen -- our inventory has expanded and offering available shipping, and we're shipping direct to home as well. We've expanded the number of our fulfillment centers that can deliver next day to any part of the U.S. So look, it's, again, a point in time, Scot, where we're learning. And we'll be better for having gone through this. We will learn from it. Our omnichannel will be stronger, not only here, but Asia Pac as well. And one thing I would tell you, Scot, is that in Europe, while we do not have a meaningful digital presence today, our team, as part of their recovery plan, is -- has now put that in their sights to look at their digital opportunities going forward in Europe.

Well, that's a good parlay into some of your European operations. I guess I have 2 questions about it. So even -- well before kind of the COVID impact, the European operation was, let's call it, on the softer performance side. I guess what I'm wondering is can you, a, help us understand what you think was -- really drove that now with hindsight as a little bit better view? And then b, do you potentially think there was investments you needed to make in that business that maybe you didn't realize you needed to make when you first purchased it?

Yes. So going back a bit, Scot, I would tell you that we got off to a great start in our first full year with the Alliance Automotive Group acquisition in Europe and had a really strong 2018. We -- our team was intact. We were bullish going into 2019 and then really many factors which were out of our control, like the general economic slowdown across Europe. We had the Brexit disruption in the U.K. We had tremendous social unrest in France. All of those factors led to a softer performance in 2019 than certainly we were expecting or we're hopeful for. So 2019, the first 3 quarters were a challenge. No doubt. Fourth quarter was much better for us. And we entered 2020 quite bullish about our opportunities in Europe. Had a better January and February, off to a good start. And then, of course, the pandemic hit Europe and hit France, our largest market, sooner than it hit the U.S. So we saw, really, business come to a screeching halt in the second half of March. In terms of your question around investments and infrastructure, Scot. Look, we did a tremendous amount of due diligence before we acquired that business. So we've not been surprised at all by what we have acquired in Europe. Are there investments to make? Absolutely. Digital being one as we just talked about. We think digital will present us an opportunity. And whether we do that via organic greenfield investments or an acquisition as we did in Australia to give us a leg up, that's the strategy we're working through right now. But make no mistake, Scot, longer term, we remain bullish on the automotive aftermarket in Europe.

Got it. Okay. Why don't we shift gears, just in the interest of time, to the industrial business. And I guess that business actually held up fairly well in the first quarter, but then continued to kind of slide, if you will, in April. I guess is there -- has that kind of pattern continued through May, if you can speak to that? And then are you concerned at all that you may actually see a delayed impact from the demand shock on your industrial sales? Because you know what, you're really going to see it on -- I would think your business would be affected on some sort of lag basis versus actual industrial activity.

Yes. And that's accurate, Scot. And I -- and look, I'm glad you asked a question about industrial. Many times, we -- that's a business that gets overlooked at Genuine Parts Company. But it's a great business. And as we've said, we've had a great performance out of that team. We've had 8 consecutive quarters of operating margin improvement in our industrial business. And what we saw, Scot, in the first quarter, that business held up better as the pandemic took hold. It held up better than the automotive side. So our comp sales were down very low single digits in the first quarter. Our total sales were actually up in large part due to our acquisition in Australia of Inenco. But as we entered April -- and I think we commented during the call that we saw our North American comps fall to mid-teens declines in April. That pattern has continued somewhat in May. But what we're seeing now, Scot, as -- factories begin to reopen. So the big 3 automakers are reopening. We're seeing many of our factories get cranked back up. That business will rebound. Will it lag automotive? It could. And we've seen that in past recessions. The numbers we track, Scot, and I think always a good barometer for our industrial business are the ISM, PMI numbers and industrial production. And as that ramps back up, we'll see our industrial business perform as expected.

So how would you compare, Paul, kind of the industrial market today versus '08, '09? Because I remember '08, '09 was pretty rough for your industrial business. You had pretty big hits, a, to the revenue, b, larger hits just because of the fixed cost deleverage on the operating profit. And I guess what I'm wondering is just theoretically, what kind of pressure -- how do you think those pressures are different than what we saw in '08, '09 for that business?

Yes. One -- well, certainly, one thing I would point out, Scot, that is much different with Motion Industries today than where we were 10 years ago, the business is more diversified, and more diversified from both a product standpoint. So today, robotics and automation are a larger portion of the motion business than they ever were back in '08, '09. And we've made some nice acquisitions in that space in recent years. And that's a business that continues to grow even during the pandemic. So we were more diversified, both from a product standpoint, but we're also more diversified from a -- geographical standpoints. So we've seen our business in Australia, New Zealand, Indonesia hold up fairly well in the pandemic. Our mining business, we're very strong in the mines in Indonesia. That business, again, has held up well. So diversification is really what sets us apart, I guess, this go-around and perhaps where we were in '08, '09.

Okay. That's really helpful. I'm going to shift to your Business Products division. You've had, obviously, a couple of years of softer performance. You've tried to, at one point, kind of carve that off and get that broken up. But I guess the question is, how are you thinking about that segment? Is that part of kind of the go-forward operation? Or do you think that eventually kind of becomes part of somebody else down the road?

Well, as you have seen, Scot, in recent quarters, one of our key strategies has been to really optimize the portfolio of businesses across Genuine Parts Company. So we have taken a very critical look at all of our operations, all of our businesses around the world. If they have not, and we believe, cannot meet our financial expectations, we will not hesitate to divest those businesses. So in recent memory, we -- late 2019, early -- I'm sorry, late 2018, early 2019, we divested our electrical business, EIS. We also divested our Business Products Group in Canada, SPR Canada. So we won't hesitate to divest the business if we don't believe there's a good fit. That said, in this space, Scot, in recent years, as you know, we have sought to really diversify away from being a core office products provider. Products like Post-It Notes and furniture and pens and pads and go more towards jan/san categories, safety categories. And we did a number of acquisitions in that space. As luck would have it, that has played out very well for us given the pandemic that we're all experiencing today. So what we've seen in Q1 really is a -- as folks shut down offices and our traditional office supply business suffered, we saw a huge spike in all things safety and jan/san related. So the -- and that's now 47% of our overall business at S.P. Richards. So that offset the decline that we saw in core office supplies. What I would leave you with, Scot, is that, look, we're evaluating all of our options for this business. And I've said it before, and I'll say it again, we continue to evaluate all options. And we will ultimately make the best decision for our GPC shareholders as we look to the future.

I think that's all very, very rational. Before we run out of time here, Paul, one of the things that we know about our investor group is the whole focus on ESG continues to increase. You continue to see more AUM going into ESG-type strategies. So I guess the question for you is, how important is ESG and sustainable to your corporate strategy? And are there any recent initiatives that you'd want to kind of highlight to the investment group?

Yes. Great question, Scot. And look, I would first start out by saying that the business roundtable enacted their new standards for stakeholders, I think, in late '19, early -- earlier in 2019. And it was interesting how they phrased their new approach. What I would tell you that the mission of Genuine Parts Company that was set before I took over as CEO, was set by my predecessor, our mission has always been to be the employer of choice, the supplier of choice, a valued customer, a good corporate citizen and an investment of choice. That has always been at the core for GPC. So we think perhaps we were a bit ahead of our time, but it's been in our DNA for many, many years. That said, we -- in 2020, you'll see we'll relaunch our sustainability report. We'll issue that later this year. It will be certainly more fulsome and more robust, and it will cover more forward-looking initiatives and goals. And it's certainly what we think will be a significant step forward from the inaugural sustainability report that we issued back in 2017, and we updated back in 2018. So many initiatives going on across all of GPC businesses. And as you might imagine, Scot, with our footprint today in Europe and Asia Pac, it's a top-of-mind initiative for all of our shareholders. So we hold it near and dear. And you'll continue to see GPC, I think, lead the way in our respective industries.

Yes. That's fantastic. Well, I think what -- we, unfortunately, are at the end of our time frame. Paul, Sid, thank you very much for your time and your support. And we greatly appreciate the effort and the very succinct and logical explanations across the board here.

Yes. Scot, listen -- yes, thanks, Scot. We appreciate it. Yes. Take care. Bye-bye.

All right. Thanks, guys. See you later. Bye.

Yes.