Genuine Parts Company (GPC) Earnings Call Transcript & Summary

Good morning, everyone. Thank you again for joining us at Goldman Sachs 27th Annual Global Retailing Conference. This is Kate McShane, Hardlines Broadlines analyst here at Goldman. And it's my pleasure today to introduce Carol Yancey of Genuine Parts Company to conduct our fireside chat. Genuine Parts operates through a network of 10,000 locations throughout North America, Europe and Australasia. This quarter, the company announced its sale of S.P. Richards business as part of their strategy to simplify and optimize their portfolio. As I mentioned, we have Carol Yancey, with us today, who has been Executive Vice President and Chief Financial Officer of Genuine Parts Company since 2013. Carol, thanks so much for joining us today. I'll turn it over to you for some opening comments.

Thank you, Kate, and it's great to be with everyone today, and we really appreciate the interest in and the participation in today's conference. So just a couple of highlights. Kate gave a quick overview, but just as a reminder, so a global service organization and the distribution of automotive replacement parts and industrial parts. We are in 14 countries, and we do operate with these 2 segments for Automotive and Industrial. And that is just leveraging our distribution experience across these segments, the efficiencies, our scale and leverage, our brand and just shared services across the organization. So we've really simplified our portfolio over the last couple of years and are going forward with these 2 pillars with Automotive and Industrial. At the same time, we're very focused on our strong balance sheet, our cash flows and a disciplined capital allocation, which consists of a long history of dividends, which we've increased for 64 consecutive years. So we did release our second quarter earnings, which was a really tough quarter. One of the hardest quarters we've had in the company's 92-year history. Having said that, we were encouraged by the improvement we saw in the quarter, just sequential improvement on the top line. We were encouraged about our cost actions and definitely encouraged about the actions we took on the balance sheet. So we look forward to our long-term fundamentals. And we're turning back to our traditional growth and operating margins that we've had post this pandemic that we're in right now. So with that, I'll turn it back to you, Kate.

Great. Thank you again, Carol. If I could maybe start off with the changes in the portfolio because I know that's been a big focus by the management team. Your model has evolved extensively with the divestment of S.P. Richards, which is the most recent change and Electrical Specialties. And this, combined with international expansion in your core Automotive and Industrial segments. Could you talk through the value proposition of your multi-industry model currently? Is there further opportunity for divestments? Or are you where you need to be?

Yes. So when we think about the divestments that we've had and where we are today, obviously, it was big to go from 4 segments to 2 segments. We've divested about $3 billion in revenues, and we replaced that with about $3 billion in revenues, but those were in stronger growth, higher-margin businesses. So investing in the European automotive aftermarket and the industrial Australasian market were 2 big things for us. We believe now that we're in these 2 segments. That we'll have a number of bolt-on and other acquisition opportunities. As far as other divestitures, I think we'll always look at just sort of the optimizing within those segments, and that may just be underperforming operations or underperforming store groups, but nothing of significance there. And again, that would be complemented by some just strategic bolt-on acquisitions that we would make. So when we think about our Automotive, Industrial businesses, kind of, as I mentioned before, really, the key here is our global presence and the brand strength. Really focused on our scale and our leverage and being able to take the best-in-class of everything we do and whether it's distribution, it's operating, it's digital, it's technology, shared services, it's even integrating acquisitions and really complement that across all of our businesses, and there's just a number of ways that we take our learnings broadly and expand onto other geographies or within our businesses.

If I could follow-up on the acquisition piece. You mentioned bolt-on acquisitions, possibly. Just how are you thinking about acquisitions, though in the content -- sorry, context of the current environment, do you expect or do you see more opportunities to introduce themselves? And do you think there'll be more opportunities international versus domestic?

Yes. So when we think about our acquisition opportunities, we've always targeted 1% to 2% growth through bolt-on acquisitions. And I think historically, we've been a bit above 2% when you look back over 10 years. This year, obviously, we will be much less than that. We did announce 3 small acquisitions in the Industrial space in the last 30 days. So 2 of them were August 1 and one was September 1, and these are in the automation solutions area. So robotics and automation. And again, if you think about -- we're going to invest where we see the growth. So on the Industrial side, again, automation and robotics, a little bit in the fluid power. And there'll be just some bolt-ons that could be in the $10 million to $20 million to $30 million range that we would look to add. On the Automotive side, it would be more in line of store groups. So you would think about geographic infills or it would just be expanding our offerings again on the Automotive side. It would be both domestically and internationally. And we may have, say, roughly $100 million in M&A spend second half this year. Historically, that could be around $400 million. So I would expect that next year, with our strong working capital improvement and our capital allocation that we would get back to something more along those bolt-ons. No big strategic step out, but just sort of targeting the small bolt-ons.

Okay. If I could pivot now just to focus on your Automotive business, specifically the U.S. Automotive business. The DIFM category in July was still negative for you. We were wondering what you're seeing currently from a demand standpoint?

Yes. So certainly, we're not really able to speak beyond the results that we gave out for July. But I would say, definitely, on a longer-term basis, we do see favorable trends coming back, especially on the do-it-for-me commercial sector. So as we think about reopening in the economies and the coming back to work, we think about the return of miles driven, Kate, you had a great story today talking about driving into the office. So the Labor Day weekend across the south, I'm sure you guys saw in the Northeast, everybody was driving. There seems to be not as much air travel. People are doing those road trips. So getting back to work, reopening the economies, people doing the traveling in their cars, again, all favorable for miles driven. We do think with the sort of the lack of confidence in the economy right now people are holding on to their cars longer. Used car sales are up. The average age is 11.9, when you think about that going up. Those are all, again, favorable for the long-term fundamentals of the do-it-for-me. So just as a reminder, our North American business is 80% do-it-for-me. So we do think that these trends will be favorable as we look ahead.

Okay. Great. And then just in the context of what happened during the months of basically March through June, July. Has anything changed meaningfully in the competitive landscape? And with regards to GPC, specifically some of your same-store sales weakness, how much would you attribute to your exposure to fleet and national accounts?

Yes. So when we think about our activity and our results as we've gone through these times. I mean the first thing I'd point out is our ops in Europe and Australasia really recovered nicely as we came out of Q2. So those -- we had solid growth in both DIY and do-it-for-me and really restoring those businesses back to the pre-COVID pre-pandemic levels. In the U.S., and you're right, the do-it-for-me did lag the DIY recovery. But when you think about our customer mix, so again, the 80% commercial, in that 80%, our fleets, government and national major accounts, as we call them, would be about 40% of that 80%. So our heavy exposure to fleet, government and the municipalities, the national accounts. Again, many of those are tied to tire business. So there's that major accounts, national account regionals tied to the tire business. That will all, again, should come back when the miles driven comes back. But we would say that, again, each month, we saw less of a decline. So really encouraged by the sequential improvement.

Okay. And finally, just kind of one more drilling down on this question. You have your own stores and your independently owned stores. We just wondered if there was a difference in performance between those 2 groups of stores. And then just generally, with independently owned NAPA locations, how are you thinking in terms of helping during the pandemic with PPP assistance and maybe other needs?

Yes. So both -- our company-owned. And again, just as a reminder, we would own about 1,000 stores of our 6,000 in the U.S., and the rest would be independently owned. Very similar trends between both the company-owned and the independent. One bit of differentiator is our company-owned stores are generally in the metropolitan areas that were a bit more impacted by the lockdowns with the independents in the more rural areas and not really a severely locked down. Having said that, we very early on, partnered with a third-party here to work with our independent owners on PPP assistance. So we had nearly 100% of our independent owners all participated in the PPP programs. We didn't have any independent owners shut down, if you will, because of COVID and we work with them through the various phases, and we work closely with our banking partners even to help that along. So actually, even our NAPA AutoCare are intently on garage network, we also work with them as well. And we did webinars, and we continue to just stay close to these store owners and make sure they have the assistance they need.

Okay. And you mentioned in your previous comment that you did see more of a recovery in your Automotive business outside [ and see there ] in the U.S. was there anything fundamentally different about these markets that would have driven the faster recovery?

Yes. So Europe, I would comment on. In Europe, I mean they went earlier into the lockdown and did a very hard severe lockdown and then they came out sooner if you will. So what we point to in early May when France reopened, we could see the activity change immediately. And it wasn't just pent-up it continued May, June, July. We also saw the U.K. reopen in June. And again, you have the pent-up that, that continued on into July as well. So definitely a surge in the deferred maintenance, these cars have been sitting idle. We saw a lot of activity there in Europe. And so -- and then the other thing is we were using our internal initiatives with the NAPA private label in Europe. So we complemented the reopening of the economy with introducing NAPA private label in Europe, which has gone extremely well. And then in Australia and New Zealand, they are more heavily weighted to DIY. So they're 40% DIY, 60% do-it-for-me. And they actually, again, may be a bit more severe on the lockdown and then they reopen, there is one part of Australia, the Melbourne, Victoria state that's still coming out of a more recent lockdown. But quite honestly, that business is still performing well, and they're back to pre-COVID levels. So some of it is just really truly related to how those geographies closed and then reopened.

Okay. That's helpful. And you mentioned private label as part of the reason why the things were a little bit better. How do you view your private label strategy, especially now in the context of a post-COVID world? What is the private label opportunity still remaining in Europe? How much is private label here in the U.S.? And have you seen a broader acceptance of private label by your commercial customer in particular?

Yes. So in North America, our private label with NAPA is 9% private label. So really, no change there in -- despite being in the pandemic or not, really no change there, continue to have very high acceptance and with over 90% being private label. And when you spoke specifically about Europe, we had -- we knew when we went into Europe that there really wasn't a dominant private label and that there was a real want and need from the customer for that, so we have done 10-plus categories in the U.K. We've now rolled that over to France and Germany. And very quickly, NAPA is the #1 private label in the U.K. We still have further ground to go there. We have had the benefit of global tenders in these areas, working with global suppliers. We're getting very attractive programs with attractive terms. And there's a real interest there. So we will continue to grow the NAPA private label in Europe. And again, there's been a great acceptance. On the Australasia side, it has been more around the storefront. So we have been rolling out all across Australia and New Zealand, NAPA storefronts. And that has been very well accepted, and there's a lot of tie-ins here with the North American business. The real issue is just the private label stands for quality, and it's just the brand, the trust, it's widely known, and it's just something that we've been very successful with. On a smaller scale, on the branding side, we did make the acquisition -- the full acquisition of Inenco in the Industrial business in Australasia last July 1. They actually converted this year just August 1, they converted to Motion Asia Pac. So they're MI Asia Pacific now, and they are rebranding their industrial distribution centers and some of their branch locations. So again, take advantage of the Motion brand. That's meaningful because of the global manufacturing companies that are in Australasia and also in North America. And when they see that Motion name, they know what that means. So on a smaller scale, we're also taking advantage of that Motion name as well.

That's helpful. And then if I could just kind of wrap up the questions around Automotive and then move on. You mentioned stores, opening stores. One of the questions that we received from those listening is just how do you view your opportunity to open more stores in the U.S. specifically. And once that growth does slow more meaningfully, how do you break down your growth between how much you see coming from inflation units and mix?

Yes. So when we think about the acquisition of store opportunities, certainly in the U.S. or North America, there are still a very large number of very independent auto parts stores, regional independent auto part stores. I mean there are numerous times when we go into a city and we talk about who their competitors are and their names we've never heard of. They are not owned by the public company, big 4, if you will. Quite honestly, over time, and especially in times like this, you may see some of those regional independents that become available to be an acquisition opportunity. Maybe they don't have a succession plan, maybe they're not able to invest in the inventory or the technology that they need. So we think they've been more of their shared donors, and we think there may be some acquisition opportunities there. So our team is continuing to look at some of these regional independents. And again, that could be where our sort of M&A bolt-ons come from, both in North America and quite honestly, even in Europe. When we think about our longer term model, when we think about top line growth, we still believe that we would have sort of acquisition or new store growth of 1% to 2% top line. And in normal times, we would expect some kind of pricing or inflation of maybe around 1% going forward. And then that would be -- the rest would be core growth of something around 3% to 4%. So those would still be sort of our long-term outlook for how the top line is made up.

Okay. One question that we just received that I thought would tie in nicely to what you were just talking about was online sales in Automotive, just how much it accelerated during the pandemic? And as your business continues to trend online, how do you see that impacting your Automotive business longer term?

Yes. So I think, again, we have continued to really, if you will, double down our efforts in anything omnichannel and digital. So when I think about our commercial side, on the commercial side, the do-it-for-me investments in omnichannel, make it more seamless and easier for our customer to connect electronically into everything they need electronically. We've done a lot in that area, and we continue to do a lot in that area. On the DIY side, again, making things available, whether it's buy online, pick up in the store or ship to home, next day, ship to home, making sure that our catalog, our websites, have everything that the customer needs gives them options. Again, we're doing a lot in that area. We did see some upsized retail growth. For sure, we saw 2x what we would normally see during these times on the retail side. In Australasia it was something like 300% more than what they normally see. Small dollars, but again, encouraging to see that. So I think a lot of these online, omnichannel, electronic things are here to stay. So we're going to continue to invest and make sure we have what the customer needs and however they want to do business. There's such a big service aspect of it, so the do-it-for-me. They may do everything electronically, but they still want their part in 30 minutes. And so the key is having the availability of inventory and being able to deliver it and get it to them very quickly.