Genuine Parts Company (GPC) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to the RBC Consumer and Retail Conference. For anybody who does not know me by now, I am Scot Ciccarelli, Senior Hardline Retail Analyst. And with us, for this session, is the senior management team of Genuine Parts Company: Paul Donahue, Chairman and CEO; as well as Will Stengel, President. And guys, thank you very much for spending time with us out of your busy schedules. It's always a pleasure to chat with you guys and get more insights on the company. And I think before we kick off with Q&A, I think, Paul, you want to say a few words.

Yes. Thanks, Scot. And listen, thanks for having us. We appreciate having the opportunity to talk to you and all the folks that are in attendance today virtually. Yes, the Genuine Parts Company has undergone quite a transformation in recent years, and so maybe I'll just kind of walk the folks through a little bit about GPC today. So we're a global service organization. We distribute both automotive and industrial replacement parts in a number of countries around the world. We go all the way back to 1928. We've only had 5 CEOs in our 93-year history. And so we've got a -- we have a tremendous legacy of really steady and consistent leadership through the many, many decades. I'm happy to have Will Stengel with us today. Will is our newly named President of GPC. And we brought Will in a year and a few months ago. He came in as our CTO, Chief Transformation Officer and did a phenomenal job along with all of our business units and really transforming GPC. And Will brings a lot of skills that will serve us very well at GPC. So Scot, as we look at 2021, our plan is to generate sales in excess of $17.5 billion through a network of about 10,000 locations, 14 countries, and we've got about 50,000 terrific associates around the world. Get out of 2020, we entered '21 really 100% focused on growing our higher-margin automotive and industrial businesses. So I mentioned this at the outset, we've really transformed our businesses -- our business. We divested to lower-margin businesses, our office products business as well as our electrical business. We've done some really transformative acquisitions in recent years, which took us into Austria, New Zealand as well as across Europe. And it really has changed the footprint and the face of GPC. So as we look at today, automotive is about 66% of our total revenues. Industrial is about 34%. We are a leader in the automotive aftermarket, certainly around the world, selling under the brands of NAPA and Repco. Our business is certainly focused and skewed towards the DIFM side of the ledger, about 80% of our business. DIFM, 20% DIY. The one thing all these markets have in common is they're fragmented, but they also have great opportunities for both short- and long-term growth. And as we look at our industrial business, we sell under the brand Motion Industries, again, located largely in North America, but we also now have a presence in Australasia. We provide replacement parts and supplies to over 200,000 MRO and OEM customers, again, around North America and Australasia, much like automotive aftermarket, very fragmented and tremendous growth opportunities. We're off to a great start in 2021, seeing big growth in automotive and industrial has really bounced back as well. And as I wrap up my portion here, Scot, and then we'll turn it over to you for some Q&A. We came out of a really tough 2020 as many companies did. But today, GPC is incredibly well-positioned. Our balance sheet has never been stronger, and we've got great strategic plans in place to get after really profitable growth, to continue to generate really strong cash flow, drive shareholder value with our long-held capital allocation strategy, which is share repurchase, strategic bolt-on M&As, reinvest back in the business in the form of CapEx. And then of course, our dividend, which we've now increased for 65 consecutive years. So look, we look forward to a great '21 and beyond. The economy is coming back, which is great to see. It's great to see all the vehicles back out on the road, people getting out and about, which is only going to really bode well what we think is going to be a really breakout and exciting year for Genuine Parts Company. So again, Scot, thank you for having us. We look forward to some robust Q&A, and again, thanks for having us.

Well, after that intro, I got to see if I have any questions left, Paul. So -- and also like you did see improvement, as you mentioned, in auto, especially early in the same quarter on the commercial front, how sustainable do you think those trends are? Is there anything that concerns you about that improvement? Or is it just, look, the economy is opening up and now we get to grow again?

So if I break the two apart, Scot, let me hit on automotive first. And as you well know, our automotive growth was not as robust as perhaps some of our publicly traded peers last year. Our makeup is different. Our structure is different, 80% is DIFM, but our DIFM is certainly more geared towards the heavy-duty business, fleet, government, municipality type business. And obviously, that was still under pressure in 2020. What we saw in Q1 and it started really back in Q4, those markets started to come back. And when you couple that with a nice bounce back in our NAPA AutoCare Centers, a nice bounce back in major accounts, strong growth in DIY as well as our online business, it really served us well in Q1, and we think should carry us certainly well through 2021, for sure. Miles driven is picking back up. The fleet is huge. Miles -- I mentioned miles driven picking up the weather, I think, is in our favor, certainly in Q1 with some real cold temperatures. So we feel really good about automotive. On the industrial side, no doubt, Scot, we're coming out of a couple year downturn in the industrial cycle. Manufacturing is cranking back up, and we're seeing it in our numbers. We had a record sales month in March in our industrial business. That has carried forward, and we think we've got a really nice run ahead of us in our industrial business as well. So it's one of those rare times when both industrial and automotive, we believe, are going to see a real nice uptick.

So one of the things I do spend a lot of time trying to talk to investors about is your fleet business, kind of the heavier duty. So it's not an apples-to-apples comparison with the commercial business of some of your public peers. Can you just kind of provide a short background to the audience in terms of why you have so much more exposure there? Is it just kind of the age of the brand or was it a concerted effort, just kind of how the business evolved, et cetera?

I think it's really a combination of all those factors you just mentioned. Scot, we've been at it for 90-plus years. The NAPA brand is so well-entrenched in the DIFM segment. It's -- honestly, I didn't realize, Scot, how iconic that NAPA brand is until we started taking it to other parts of the world. The reception we've got with NAPA in Europe and Australia has been way beyond our expectations. So I really think it's all of the above. And I would tell you that the capabilities that NAPA brings to our customers with our really well-trained expert technicians, the large sales force that we have to assist them in their business, I do believe it gives us a real leg up on our competition. And just for the record, Scot, when we talk about -- I have had this question a couple of times today, can you identify -- so what is the fleet, government and municipality type businesses? We do a tremendous amount of business with the airlines. We do a tremendous amount of business with school districts and buses and as well as municipal, the City of Chicago, City of New York. You can tell based on what happened in 2020, much of that business shut down. It's all now coming back online. And again, that's why we are so enthusiastic about our business prospects here for '21.

So is there a pent-up demand factor that we haven't really maintained our equipment for 6 months, 9 months, whatever it's been, so you actually get, let's call it, a little bit of an overdrive on that segment for a period of time?

No doubt. No doubt. And you really need look no further, Scot, than the battery business of -- so many consumers parked the vehicles in 2020 as they work from home. They went back to crank those vehicles up at the end of '20, and low and behold the batteries were not operational. So we've seen a huge spike in that product category coming out of Q4 into Q1. But we also believe there's going to be pent-up demand because we've seen a solid increase in our brake business. And generally, when our brake business is good, that carries a lot of other product categories along with it. So no doubt there's pent-up demand that, again, we believe, bodes very well for continued growth in this sector.

So one of the other things you mentioned, Paul, was just the difference of a business model that you have relative to some of your public peers, with your independents kind of a wholesale operation along with the retail stores. Do you think that structure actually was a headwind for you during the pandemic because maybe that independent businessman was a little bit more concerned about operating their store, trying to be as aggressive as maybe what some of the public guys have done with their open stores?

It's a great question, Scot, and one that we have thought long and hard about. At the end of the day, what I would tell you is that 90% of our independent owners applied for and captured PPP monies from the government. So our independent owners today are well financed. They are buying inventory or stocks -- or their stores are well stocked, and they're doing quite well. They may have been a little timid when the last March, when liquidity was at the top of mind for everyone. That's a possibility. But I would tell you what we see today is our owners are well-financed. They're aggressive. They're back to capturing market share, and we feel really good about our model going forward.

So regarding kind of that and the lockdowns that we had and how scary it was for anybody, especially I would think a small business operator, have you seen any permanent closures whether it's your own independents? You said most of them are well-financed, I don't know if that's true of all of them or the commercial customers that they're all serving?

Maybe touching on the independent owners first, Scot, we saw very -- look, we have turnover every year. We have independent owners who age out, don't have a good succession plan, so we either end up buying a store or selling the store to another independent owner. So we did see a little bit of that, but that's fairly common year-to-year. There were very few that I would say, went out of business or sold their store directly tied to the pandemic. And for the reason I mentioned earlier, most to all of them and I would say 90% plus, with the assistance of GPC, applied for and captured PPP money. So the independent owners are in fine shape. On the kind of up and down the street garage, it's not -- we didn't see anything too significant. I'm probably not as in tune with that as much as I am with our own independent owners. But I'm sure some shops, probably difficult to weather the storm, especially as so many consumers parked their cars. But I would tell you when I look at our NAPA AutoCare Center business right now, who are all independent-owned shops, and when I look at our major account business right now, they are in -- they are going full speed ahead. They're doing quite well.

Well, that also is really encouraging. One of the questions I've gotten a lot recently, it's just kind of interesting how it's kind of catalyzed. But why has NAPA and GPC pursued more of an international opportunity when you see that the other public companies are trying to expand more aggressively in the U.S.?

Yes. And we get that question often ourselves, Scot. First off, I would say, look, we have 6,000 stores across the U.S. So unlike some of our U.S. competitors, publicly-traded competitors, we did not have geographical voids to expand in the Northeast or to expand on the West Coast. Our footprint has been well built out for many, many years, not only in the U.S. but in Canada as well. So a number of years back, we had a long-standing relationship with Repco in Australia, a great company, 500-stores strong. They approached us -- gosh, now it's probably going on close to 10 years ago. We had an opportunity to get in business with and partner with the #1 brand in Australasia. Those opportunities don't come along too often, so we jumped into it. And I would tell you, Scot, that over the last decade, that has been one of our best-performing businesses in our entire portfolio. That acquisition and the success of that acquisition led us to really pursue AAG in Europe, which is the #2 player across Europe. We knew we could be successful. We knew needed global scale and a global footprint. And so we partnered up with AAG now 3-plus years ago. And again, that has proven to be a really, really solid acquisition. And ultimately, what it's done for us, Scot, it has given us that scale, that buying leverage because when you think of the big players in the automotive aftermarket, it's Bosch, it's Schaeffler, it's SKF, it's Gates. These are all major, major -- most of them European players, and they're all big, big global players. So with most now, we are, if not their largest customers besides the OEs, we're certainly #1 or #2.

That's interesting. And let's stick with that concept for a second because that is one of my questions. We've continued to hear about product shortages across virtually every retail vertical. Whether it's sporting goods, electronics, even in auto parts, How would you assess the supply and your inventory situation now? And is it getting better? Is it getting worse? Because we have heard of a number of supply challenges within your sector as well.

I'm going to let Will jump in here. I would tell you, Scot, it has been a challenge primarily in U.S. automotive. Our industrial business has not seen the same type of challenges we've seen in U.S. automotive. I would also tell you that our international automotive businesses have not suffered quite like U.S. automotive. It's been a few quarters now. It's a little bit of a -- it seems like we get one supplier out of the ditch and then another one falls in. But Will, why don't you provide a little bit more color?

Yes, Scot, I would just add, just from a global supply chain perspective, I mean, we're facing a lot of the challenges that I think many of the players that you referenced are in terms of capacity of ocean freight, container availability, congestion in ports. So not only is the vendor base having their challenges, but even if the product were to be available, the logistics of moving that product around the globe continues to be something that we work through. So I would say on the margin, it's getting better. But we've got a lot of work in front of us to do to keep our eye on the ball to make sure that we're in a good position for the second half and coming into next year.