Genuine Parts Company (GPC) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Shareholder Meeting of Genuine Parts Company. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Paul Donahue, Chairman and Chief Executive Officer of Genuine Parts Company. Mr. Donahue, please go ahead.

Thank you. Welcome, shareholders and guests. As mentioned, I'm Paul Donahue, Chairman and CEO of Genuine Parts Company. And I'm joined by Carol Yancey, our EVP and Chief Financial Officer; Will Stengel, our newly appointed President; Sid Jones, our Senior Vice President of Investor Relations; and Jennifer Ellis, our Corporate Secretary. This is the second year we are holding our annual meeting in a virtual format, and we have strived to make the meeting as inclusive as possible by offering our shareholders the same opportunities to participate as provided at our in-person meetings. We appreciate your participation today, and I'll now call the 2021 Annual Shareholder Meeting to order. I'll be serving as the Chairman of the meeting, and Jennifer will be serving as the Secretary. I will now turn the meeting over to Jennifer to cover the agenda for today as well as some procedural instructions regarding the question-and-answer portion of our meeting. Jennifer?

Good morning. I echo Paul's welcome to you, and I appreciate you joining us for our 2021 Annual Meeting. The agenda that will govern the order of business of this meeting should appear on your webcast screen as well as a link to the meeting materials and a link to the rules of conduct for the meeting. The rules of conduct will also govern the question-and-answer session. This morning, we will first hear a brief state of the business update from Paul as well as a financial update from Carol Yancey and GPC's purpose and strategic focus from Will Stengel. We will then move into the formal part of the meeting and review the 3 proposals that appeared in our 2021 proxy as well as the vote count for each of those proposals. We will then adjourn the meeting and move into the question-and-answer portion of our time together. If you are a shareholder and wish to ask a question, you can submit your question at any time on the virtual meeting website. We will address questions as stated in the ground rules of conduct and as time permits during the session. For any questions we might not have time to answer, we will post those questions and answers on the Investor page of our website. The polls for voting and Q&A are open and will close after the presentation of the 3 proposals in our 2021 proxy statement. I would like to advise you that certain statements in today's meeting constitute forward-looking statements that are based on our current market, competitive and regulatory expectations and are subject to risks and uncertainties that could cause actual results to vary materially. Please see our latest Form 10-K and other SEC filings for a discussion of the risks that our businesses face. In today's presentation, we will also use certain non-GAAP financial measures, and we refer you to the reconciliation back to GAAP measures available on the Investor page of our website. Now please let me turn the meeting back over to Paul to provide you a brief state of the business update. Paul?

Thank you, Jennifer. We want to take this opportunity to update our shareholders on the state of the business at Genuine Parts Company and to welcome Will Stengel to our shareholder meeting. In January, we were pleased to promote Will to President. As our Chief Transformation Officer since 2019, Will helped our business units achieve a variety of strategic initiatives and significant cost savings in 2020. Will's exceptional talent, proven leadership and experience make him an excellent choice as our company's president, and we look forward to his future contributions. You will hear from Will later in the call. 2020 was an extraordinary year in every respect. We entered the year with plans to execute on our strategic priorities and continue the positive transformation of our company. But circumstances across the globe changed drastically due to the COVID-19 pandemic. In response, our team moved swiftly to address the health and safety concerns of our employees, customers, suppliers and the communities in which we operate. Through the commitment and sacrifices of our 50,000 GPC associates, we operated through the crisis with an unwavering focus on excellent customer service and the utmost level of care and concern for all our stakeholders. This approach enabled us to enhance balance sheet strength and flexibility, achieve meaningful cost savings and advance operational excellence. And we engaged with many of our key stakeholders to ensure our pathway to ESG best practices aligned with their expectations. We advanced these efforts, as outlined in our 2020 Corporate Sustainability Report and Human Rights Policy. Despite the unprecedented challenges of the pandemic, we remain focused on our strategic growth initiatives and cost actions throughout the year. Notably, we further streamlined our operations with the divestiture of S.P. Richards, our Business Products segment. The GPC team and our automotive and industrial businesses proved resilient and up to the challenges presented by the COVID-19 pandemic. We are extremely proud of their many accomplishments in a difficult year and excited to move forward as a stronger, more agile company. So now here, you can see a snapshot of Genuine Parts Company. GPC is a global service organization engaged in the distribution of automotive and industrial replacement parts. We serve hundreds of thousands of customers from a network of more than 10,000 locations in 14 different countries, and we are more than 50,000 teammates strong. We are the leading global distributor in diversified end markets, with 75% of our business in North America, 15% in Europe and the remaining 10% in Australasia. The GPC team executed on initiatives to deliver customer value, operational efficiencies and strong financial results in 2020. You can see our 2020 highlights here. We ended the year with $16.5 billion of sales and improved gross margin for the fifth consecutive year. We delivered a combined $450 million in expense reductions, and operating profit improved 40 basis points. We also generated a robust $2 billion in cash from operations in 2020, and free cash flow was $1.9 billion. While we selectively scaled back our near-term plans for capital deployment in early April of 2020 in order to conserve cash through COVID-19, we were committed to several key priorities for cash which we believe serve to maximize shareholder value. You can also see that we've repaid $750 million in debt and returned $549 million to shareholders via dividends and share repurchases. We closed the year with $2.9 billion in available liquidity. Carol will provide a summary of our Q1 results shortly. In the 93-year history of the company, GPC has built an excellent track record of success. The organization has evolved as a leading service-oriented distributor with numerous acquisitions and divestitures. We have a history of steady leadership with only 5 CEOs, 8 Presidents and 8 CFOs since 1928. We are extremely proud of GPC's steady and consistent sales and earnings growth. We have delivered 65 consecutive years of dividend increases, which places us among the dividend kings with over 50 years of consecutive increases. And given the unprecedented circumstances in 2020, we have produced a 6% sales compounded annual growth and 7% EBITDA CAGR for the last 10 years. In the last decade, the company continued its transformational journey to position itself for sustained long-term growth. We did this by streamlining our businesses from 4 segments to leading positions in 2 large and fragmented markets, expanding our global presence, creating a transformation office and strengthening our omnichannel shared services platform and data analytics. We entered 2021 focused on our growth initiatives with plans to further expand our operations and market-leading automotive and industrial businesses, while driving efficient and productive cost structure. The future is very bright at Genuine Parts Company. So now I'd like to turn the meeting over to Carol, who will provide more information on our financial position. Carol?

Thank you, Paul. Extending on Paul's review of our 2020 highlights, we were pleased to report a strong start to 2021 with the release of our first quarter results last week. A few highlights include total sales of $4.5 billion, up 9%; improved gross margin, up 11%; and our 14th consecutive quarter of gross margin expansion. Our total expenses were also improved, up just 2% on our 9% sales increase, so excellent progress, primarily driven by the favorable impact of our cost savings generated in 2020 as well as ongoing cost control measures and improved leverage on stronger sales growth. Our pretax profit in the first quarter was up a strong 80%, a 180 basis point margin increase from 2020, and our diluted earnings per share was $1.50, up 88%. We continue to operate with a strong balance sheet and ample liquidity and the financial strength to support our growth strategy. We are pleased with our progress in improving our overall working capital position. Our total debt is $2.6 billion at March 31, down $1 billion from last year. And our total debt to adjusted EBITDA has improved to 1.8x from 2.5x last year. Additionally, we closed the first quarter with $2.6 billion in available liquidity. We also continue to generate strong cash flow, generating $300 million in cash from operations in the first quarter. Our key priorities for cash include the reinvestment in our businesses via capital expenditures, M&A, the dividend and share repurchases. Looking forward, we have plans for additional investments in our businesses to drive growth and improve efficiencies and productivity. We continue to expect total capital expenditures of approximately $300 million for the year. Strategic acquisitions remain an important component of our long-term growth strategy. We continue to cultivate a strong pipeline of targeted names, and we expect to make additional strategic bolt-on acquisitions to complement both our global automotive and industrial segments in the months and quarters ahead. We have actively participated in a share repurchase program since 1994. The company is currently authorized to repurchase up to 14.5 million additional shares and intends to resume share repurchases in the months and quarters ahead. The company has paid a cash dividend to shareholders every year since going public in 1928. And our 2021 dividend of $3.26 per share represents our 65th consecutive annual increase in the dividend. So due to our strong results, we revised our full year guidance on our first quarter call, and we entered the second quarter focused on our initiatives to meet or exceed these targeted results. I'll now turn it over to Will.

Thank you, Carol. First, I want to say that I'm incredibly proud to be a part of Genuine Parts Company. The company has an impressive history of success, and it's an honor to be on the GPC leadership team. I'd like to thank Paul and the Board for their vote of confidence. As Paul mentioned, I joined the company in late 2019 as Chief Transformation Officer. Previously, I held executive leadership positions at HD Supply, including time as President and CEO of HD Supply Facilities Maintenance and various other strategy and operating roles. My experience in distribution-related businesses fits well with the GPC portfolio, our business model and strategic initiatives, where consistent profitable growth, operating leverage, strong cash conversion and disciplined capital allocation are all key value drivers, with the dividend an especially important part of the GPC capital allocation strategy. I'm excited about the future potential of Genuine Parts Company. We have leading global brands and long-standing relationships based on reliable customer service and value-added expertise. And our unique culture that is based on a clear set of core values and purpose serves as an important common foundation. GPC is centered on building a world-class service organization, and being the employer of choice, the supplier of choice for all our customers, a valued customer that can demonstrate growth, a good corporate citizen and certainly an investment of choice for all of our shareholders and stakeholders. This long-standing focus is really the core of our success. At GPC, we embrace our responsibility to innovate in ways that also benefit our environment, employees and the communities in which we operate. As Paul mentioned earlier, our ESG practices, including human capital management and diversity and inclusion, are outlined in our 2020 Corporate Sustainability Report, which can be found in the Investor Relations section of the company's website. In addition to forming a Diversity and Inclusion Committee in 2020, the Board of Directors adopted a formal human rights policy, which communicates the company's commitment to upholding human rights in every location in which we operate as well as our expectation that our suppliers, partners and affiliates also respect human rights. Our company-wide commitment to sustainability is integral to our corporate growth strategy. Finally, the strategic actions we took in 2020 accelerated the transformation momentum built over recent years as we work to simplify the business and further define our critical focus areas. The global teams executed well as we navigated the pandemic and demonstrated an ability to act quickly and deliver results. Our strategic actions provided clarity for areas where we want to focus and increase our attention, including profitable organic growth, driving operating productivity through simplification and integration, disciplined and strategic capital deployment and investments in talent to develop and build capabilities. Our diverse businesses proved resilient and built solid momentum as we entered 2021. In my new role, I'm working with Paul and the global leadership team to align resources within our focus areas to execute these initiatives and deliver value as a team. I'm also spending time in our operations and with our customers and suppliers. In addition, we're working to further refine and advance our longer-term strategic road map. We're excited about the numerous potential opportunities that new technologies and emerging trends could present for GPC. As we look to the future, we feel well positioned to execute our strategic priorities to the benefit of all of our stakeholders. I would now like to turn the meeting over to our Secretary and Chairman to conduct the formal part of our shareholder meeting. Jennifer?

Thank you, Will. We will now begin the formal portion of our shareholder meeting. The Board of Directors has appointed Computershare to serve as our inspector of elections. A list of shareholders as of the record date is available for inspection by shareholders using the registered shareholder list link found on this webcast page. The notice of the meeting and proxy materials were mailed beginning March 2, 2021, to all shareholders as of record, February 22, 2021. As a result, this meeting is being held pursuant to proper notice. We have received proxies representing more than 86% of the roughly 144 million shares of the company's stock that are eligible to vote. This means we have a quorum present, and the meeting is duly constituted and will proceed. Today, we have 3 management proposals for you to consider. They were all discussed in the proxy statement. The first proposal is the election of directors. The following 13 people have been properly nominated by the Board: Ms. Elizabeth Camp, Mr. Richard Cox, Mr. Paul Donahue; Mr. Gary Fayard; Mr. Russ Hardin, Mr. John Holder, Ms. Donna Hyland, Mr. John Johns, Mr. Jean-Jacques Lafont; Mr. Robin Loudermilk, Ms. Wendy Needham, Ms. Juliette Pryor; and Mr. Jenner Wood. I believe Paul would like to now say a few words about our director nominees.

Thank you, Jennifer. And yes, I'd like to briefly comment on our slate of nominees, all of whom are listening in this morning. I'd like to start by welcoming Juliette Pryor as our newest nominee, who was appointed by the Board as the director of the company at our February 2021 Board meeting. Ms. Pryor served as -- serves as General Counsel and Corporate Secretary of Albertsons Company. Ms. Pryor's business background and wealth of expertise in retail, distribution and automotive services as well as her considerable experience in human resources and diversity and inclusion make her a valuable addition to our Board. As part of our ongoing commitment to creating a balanced and effective Board with diverse viewpoints and deep industry expertise, we regularly consider the addition of new directors to infuse new ideas and fresh perspectives to the boardroom. This year's Board nominees represent a wide range of backgrounds and experiences. We believe our diversity of experience, skills and backgrounds contribute to the Board's effectiveness in managing risk and providing sound guidance to management.

Thank you, Paul. The second proposal is an advisory vote to approve executive compensation as disclosed in the company's 2021 proxy statement. The Board recommends a vote for this proposal. The third proposal is the ratification of the selection of the company's independent auditor, Ernst & Young LLP, for fiscal year 2021. The Board recommends a vote for this proposal. I've received the preliminary voting tabulation from Computershare. And based on that tabulation, I am pleased to report that all 13 director nominees on the ballot have been elected with an average of 97% of the votes cast. Each will serve until the next Annual Shareholder Meeting and until their successors are elected and qualified. Proposal 2, the advisory vote on executive compensation, has been approved by 90% of the votes cast. Finally, the ratification of the company's auditor, Ernst & Young LLP, has been approved by 95% of the votes cast.

Thank you, Jennifer. We have now completed the formal portion of the meeting, and the 2021 Annual Shareholder Meeting is now adjourned. We thank you for your participation in our virtual shareholder meeting. So now I'd like to turn the meeting back to Jennifer to begin the question-and-answer portion of our time together. Jennifer?

Thank you, Paul. Welcome to the Q&A portion of the meeting. I will now call on Sid Jones, Senior Vice President of Investor Relations, to see if there are any questions in the queue.

Thanks, Jennifer. There are no shareholder questions at this time. So I'll turn the meeting back to Paul for final remarks.

All right. Well, we'd like to thank all of you for your participation in today's shareholder meeting and for your continued commitment to and investment in Genuine Parts Company. We look forward to seeing you in person around this time again next year. And in the meantime, stay safe and stay well. And again, thank you for joining us today.

This concludes the meeting. You may now disconnect.