Genuine Parts Company (GPC) Earnings Call Transcript & Summary

Hi, good morning. It's Greg Melich. I cover the retail broadlines and hardline stocks here for Evercore ISI. It's my pleasure to kick off with our first fireside chat of this year's summit with Genuine Parts Company, a company we've gotten to know and really appreciate covering over the last, well, longer than I want to remember, 10 years plus. So with us today, we have Paul Donahue, the Chairman and CEO; and Will Stengel, the President. I want to hand over to them for some introductory comments, and then we'll get into Q&A. Paul?

Thanks, Greg. It's great to see you. And you're right, we have worked together for a number of years, and it's always great to be a part of the Evercore Summit. I thought, Greg, maybe Will and I just tag team a couple of opening comments on GPC, maybe to bring the group up-to-date with how we've transformed over the past few years. What has not changed is, we're still a global service organization. We specialize in the distribution of both automotive and industrial replacement parts. We've been around a long time, Greg, as you know, we go back to 1928. I'm only the fifth CEO in the company's long history. So we've got really a tremendous legacy of steady and consistent leadership. As you mentioned at the outset, with me today is Will Stengel. Will was named President of the company earlier this year. And we brought Will in as our Chief Transformation Officer a couple of years ago back in 2019, and we're really happy to have Will as a key part of our team. His experience, skill set and his very background has really proved invaluable as we navigated our way both through the pandemic and then the transformation of Genuine Parts Company over the past couple of years. So maybe just a quick look at '21, Greg, before we jump into questions, our expectation is to generate approximately $17.5 billion in total revenues, through a network of about 10,000 locations, 14 different companies, and we employ about 50,000 great associates around the world. As we entered '21, our focus, Greg, perhaps what has changed over the last couple of years, our focus is solely on the faster-growing and really higher-margin automotive and industrial businesses. And this follows several years of portfolio optimization, including the acquisition of AAG, our automotive aftermarket business in Europe, and our expanding industrial footprint in Australasia with the acquisition of Motion Industries Asia Pac. And this came on the -- really on the heels of divesting a couple of businesses that were in the GPC portfolio for a number of years. EIS, our electrical business; and S.P. Richards, our Business Products Group. So before I turn it over to Will for a few comments, Greg, I want to just thank you and the Evercore team for including us in today's agenda. We look forward to the discussion, look forward to some robust Q&A, which I know we'll get into shortly. So Will, maybe a couple of comments from you as well.

Sure. Happy to, Paul. And Greg, as Paul said, thanks for having us. Maybe just a little bit more information on Genuine Parts Company. You know this well, but for those that don't, our Automotive segment represents about 2/3 of the business from a revenue perspective with the balance roughly 1/3 industrial -- in our Industrial segment. GPC is a leader in the automotive aftermarket business. We sell to both commercial and retail customer segments throughout North America, Europe, Australasia. And about 80% of our business is to, what we call, do it for me; the balance 20% to do it yourself. On our industrial side, also a great business. We sell industrial replacement parts and related supplies to over 200,000 MRO and OEM customers in all types of industries, predominantly throughout North America and Australasia. In both instances, these are businesses that have large addressable markets, highly fragmented with attractive opportunities to grow both near and long term. As Paul alluded to, GPC is off to a great start in 2021. We've got automotive sales growth, we've got emerging ongoing industrial recovery, we've got a lot of very tactical and strategic investments and actions around driving operational improvement, which are all helping our profitability. From a capital allocation and balance sheet perspective, we're in a great position to focus on driving profitable growth, growing operating margins, generating strong cash flow. We do that with disciplined capital allocation that has been in place for many, many years around reinvesting in the business, strategic bolt-on M&A, our share repurchases and then our steady and consistent dividend, which we've increased for the 65th consecutive year. So a lot to be excited about here at Genuine Parts Company, and I'm honored and excited to be on the team.

Well, that's a great introduction. I guess I'll start off with the questions really where you framed it, which is the company positioning for growing markets and where you can be more profitable. So could you help us sum up where -- what your total addressable market is today, now that you've made the European acquisitions and you've gone more industrial in Asia Pacific? How do you see that market size opportunity and the potential profitability in those regions?

Yes. So I'll tackle that one, Greg. As we look at our primary markets, which include across North America and Europe and now Asia Pac, so 14 different countries, we estimate our global -- the places we play today at about $200 billion. And if you look at any one of the individual markets, we have less than 10% market share. So I would tell you that we think we have and should have tremendous opportunities to grow in all of those markets that we compete. And we've got many, many initiatives to continue to gain market share, and perhaps we'll touch on those here as we go on through the day. But our model here in the U.S. is both an automotive aftermarket as well as industrial. Europe is purely automotive. And then, of course, Asia Pac, as I mentioned earlier, we go to market both on the automotive aftermarket as well as the industrial MRO business.

Got it. And if you maybe go and put it that way in those regions, what is your -- clearly, your biggest share position is in U.S. automotive. And that's -- maybe describe what the share trends have been there during COVID and now coming out. I mean there is a lot of DIY strength that isn't necessarily your value that is now shifting back to Pro. So maybe describe there how you can get the share back that you may have lost last year, at least optically?

Yes. And Greg, look, 2020, and God forbid, we should ever experience a 2020 again, it was a very unusual year in that we did see a significant shift from what has traditionally been a DIFM-heavy marketplace to a more DIY segment. And look, what we saw great coming out of the pandemic, people park their cars, work from home, many of them had an influx of disposable cash. So they did DIY-type projects on their vehicles as it sat in the driveway. We do believe that was a transitory situation, and it's playing out in '21. So you mentioned share loss. We don't really believe we lost any significant share, Greg. But look, there was a shift from DIFM to DIY. That was transitory. And as we've moved into '21, and we certainly saw it in our first quarter results, and I believe it will continue to play out during the course of the year, that shift has moved back to DIFM. And that business for us really has rebounded strongly. So whether it's NAPA AutoCare Centers, our major account business or even just the up and down the street garages, have all seen a significant lift as people have returned to the roads, miles driven are picking back up and the vehicle fleet is as old as it's ever been.

Got it. So that -- you're seeing that trend play out in terms of consumer stickiness, getting back to normal on the road. Maybe one question we get a lot that you have a unique perspective on, given that you have a global business, is the move to electric vehicles and new powertrains and how that's affecting the aftermarket. Do you have any thoughts to help frame us -- frame that for us? Is there a real risk that as we go more EV, that the aftermarket starts to shrink given that electric vehicles seem to need maybe 30% fewer parts or any signs of that?

Yes. So maybe we'll tag team that, Greg. I would -- look, I would start the discussion out with, by no means are we at GPC putting our head in the sand to believe that EVs are decades and decades away. We do believe it's going to be a while yet. And I think some of the events of the past week with some of the EV, start-up EVs perhaps support that, that it's going to be a slow startup. But with that said, we are, with our global footprint, embarking on a number of initiatives to ensure, Greg, that when that shift happens from an internal combustion-dominated aftermarket to perhaps more EVs, our position at GPC and NAPA will be a leader in the EV aftermarket as we are in the internal combustion engine. But Will, maybe you can touch on a few of our EV initiatives that we're looking at across GPC.

Happy to. Greg, and I think you alluded to it, while it might not be right around the corner, we think that we should be doing really good deep work around what we need to be doing today to get in front of the trends. And so I think that starts with having a perspective of the data. Our house view, if you will, is for the U.S., in particular, the vehicles in operation, we estimate EVs will be less than 10% penetrated by 2030. And so there's a lot of information out there to consume. But step one that the global teams have been working through is developing a perspective of what is the trajectory and what is the range of outcomes as we look forward by market, by product, et cetera. We have to tackle the problem in a variety of different ways, looking at the future customer needs, looking at the products, looking at the evolution of the vendor base. The beauty of our business is that we have the global penetration and so emerging trends coming out of geographies that are further along in the journey are providing insights back to other teams that then can get translated into action, if appropriate. For example, we have a global team session -- working session tomorrow with representation from around the globe, specifically on this topic, to look at the facts, look at initiatives that are in flight from around the globe and translating best practices. So we're doing work. We think we've got some time, but we're going to make sure that we have action and strategies in place to, as Paul said, be in a leading winning position as the market evolves.

That's great. So some things in the hopper there. I guess sticking on sales, a couple of things I want to bring up, and then we'll get to profitability. The industry, I'm old enough to remember when we had regular price increases. Those sort of went away the last decade. And then I think it was when the Chinese tariffs came in a few years ago, the industry seemed to have maybe 3% inflation, give or take, at retail. Then it went back to maybe 1%, 1.5% last year. What's your outlook for inflation, especially given all of the rising costs that I think everybody is seeing, I imagine you are as well, in so many parts of the business?

We are, Greg. Certainly, we're not immune to it. And you're right. If you go back over the past decade, we've seen very little inflation in our world. And just, Greg, as we look at growing GPC, we have always looked at a model where we carve out organic growth 3% to 4% every year. We do a little M&A and then, of course, we hope to get a little inflation. As you mentioned, that inflation has largely been absent over the past decade. At the beginning of this year, I think we put a target out there, a range we thought would be in the 1% to 3% inflationary goal target for '21. As we have moved through the year, that is definitely shifting to the high end of that range. So I would tell you right now, in the automotive space at least, we're thinking that it's going to be up in that 3% range for sure. And look, Greg, as we have said many times in this space, a little inflation is not bad for our industry, especially as a distributor. We pass those increases along. The marketplace has largely always been very -- it's been a very sane environment where all of our competitors generally pass along those increases, and we expect 2021 to be no different.

Great. Great answer. Is -- how does that look in industrial? Can you use a similar framework?

So we are seeing the increases coming across on the industrial side as well, not to the extreme that we've seen in the automotive aftermarket, although it is ramping up in industrial as well. I would tell you, Greg, that look, our Motion Industries business has largely been a cyclical business for many, many years. We are now back in one of those up cycles. We have seen nice growth quarter after quarter and a little inflation will also benefit our Motion team. And we think that could very well be in the 1% to 3% range by year-end also.

Got it. Makes a lot of sense. And maybe that's where I transition to the profitability side of it. So you're positioning the business to where you can grow. Right now, there's a lot of rising cost pressures. It seems to be like you want to pass those through. If you look at both auto and industrial and around the world, describe me where the biggest margin upside potential is? And where do you think your -- if you look at the competitive set and the cycle, your margins are, we should assume that they're stable, but the upside is less.

Yes, Greg, I'll take that. And I'll talk about it through the lens of GPC. I mean the recent history, and it's a long recent history, the teams have done a fantastic job around gross margin rate expansion here at the company. And so the sustained positive continual improvement at gross margin level will get more difficult. So as I think about where are the margin upside opportunities, I'd probably go to the SG&A side of the house. And the good news is, we've done a lot of good work in the last 1.5 years, 2 years, 3 years around this topic. We've talked a lot about publicly our $100 million cost savings effort. We overdelivered there as a global organization, order of magnitude $150 million. That would be a good example of structural cost out. While that was a onetime publicly disclosed initiative, I can tell you that, that muscle and initiative will continue on as we move forward. And we've got a lot of opportunities to go attack there. Similarly, we've pulled different levers in response to COVID around SG&A. We publicly disclosed order of magnitude $300 million of both structural and temporary cost savings resulting from actions to respond to COVID. $200 million-or-so of that was around payroll-related expenses, some temporary, some structural. And so working as a global organization to convert temporary to structural is something that the teams are working on. So we've got a lot of in-flight action around SG&A to liberate investment, to invest back in the business and drive further productivity. So I think that's our biggest opportunity as a global organization, is simplifying, integrating, investing in the business to drive productivity, while we continue to do good work on the gross margin line.

And Greg, I would just maybe specific to the numbers, we wrapped up 2020 in the low 8% margin, 8.2% operating margin. Our goal in '21, and it is every year, is to grow our operating margins. But we believe '21, we should be in the 8.5% to 9% operating margin range. And our intent is not to stop there. We think we have potential upside beyond that. And I would tell you, with Will joining our company, transforming the business, we are very, very bullish on the upside of that going forward.

Yes, that's -- I'd like to pivot a little bit on that because I think it ties back into our earlier discussion on the top line. As you do these initiatives on SG&A to drive operating margin higher, how do you think about reinvesting that margin to maybe, I don't know, just reinvesting it in the business, potentially in gross margin or in other business lines or geographies to keep growth up. How do you actually make that decision?

So look, Greg, we've had a capital allocation strategy here in place at GPC for many, many years. And I believe you're very well versed in it, Greg, whether it's our increasing the dividend as we have now for 65 consecutive years, investing back in the business via CapEx, which we had largely parked CapEx investing back into the business in 2020, as well as much of our M&A activity. I would tell you that we have aggressively ramped up both areas in '21 as well as our stock buyback repurchase program, we have ramped back up in '21. So our capital allocation program has really not changed dramatically. You will see it shift a little bit year-to-year. But our goal right now is getting this business back into a significant growth mode. So you will see more M&A activity out of us as well as reinvesting back in the business, whether it's in our supply chain, automation and all things digital related.

Maybe that -- so that's a -- a little bit more on that. On M&A, what is it? Is it more about capabilities? Is it more about market geographies, real estate? What are you really looking for on that front?

Yes, all of the above, Greg. And I think perhaps since the last time we really sat down and had an in-depth conversation, Greg, perhaps what's changed a little bit is, so today, we have essentially 6 operating units, right? We've got U.S. Automotive, our Canadian Automotive business, our European Automotive business, Australia and New Zealand. So those are our 4 automotive businesses. And then we have the 2 industrial MRO businesses here in North America as well as Asia Pac. They all compete for our M&A spend. So each month, our investment committee gets together, which Will and I are a part of. And of course, you know Carol Yancey, Greg, our CFO. We review every opportunity that those 6 business units present and have available to them. So whether it's a 1-, 2-store bolt-on for NAPA here in the U.S. or perhaps an even more strategic step-out acquisition to expand our footprint in either Australia or Europe, we review every one of those opportunities that comes across. And I would tell you, it's worked out quite well. And I would tell you that we're excited with the many opportunities that we see in every one of our businesses around the world.

So where -- if I try to put together the pieces of those 6 businesses, is -- industrial is not in Europe, is that right?

Correct. Correct.

So that could be a logical area that would be larger. Is there any other piece of the puzzle that's missing geographically, you think about it? Or is there -- so therefore, the rest of it will be kind of bolt-on and...

Yes. So certainly, Greg, historically, we have -- if you look over the past decade, we've done the occasional step-out strategic acquisition like our move into Australia with Repco or our move into Europe with AAG, which both were $1 billion-plus acquisitions. But historically, Greg, where we have really built our business is through bolt-on acquisitions. And that's either to fill in a particular geography where we may not be as strong as we would like or to fill out a particular product category that we see as a significant growth opportunity. And if you look at our Industrial segment, look no further than automation or conveyance products in our Motion business, we see big opportunities to continue to grow those segments.

And you mentioned e-commerce and multichannel before. You've been distributing parts efficiently and productively for 100 years. So I guess, what initiatives can you do in e-commerce and multichannel that are going to have the most impact? And one of the questions we get all the time is, how can e-commerce ever be as profitable as a traditional distribution model? So I'd love to hear, in your guys' words, how we make that happen?

Yes, Greg, it's a great question. And look, it's a big area of focus for GPC as we move forward, drafting off of your comments on M&A. I mean capability, acquisitions, very relevant when we're talking about digital. So whether that's somebody that's already created a head start around data, for example, or the customer experience with a great interface, those are capabilities that lend themselves to M&A. Similarly on the organic growth side and where you're investing in all things digital, it doesn't sound very fancy, but making sure that customer experience is exceptional. So high yield when you're searching for items, great experience around data and visibility into when product gets to you, et cetera. So we've got some investments to make around search, around data and the catalog, around the logistics, around all things digital. So those are very tangible capabilities to build and areas to invest, ultimately driving growth and the customer experience. What I would tell you for our business is, despite the low penetration of "e-commerce" as a percent of total, our economics associated with e-commerce are actually as or better than our core business. And that's largely driven by the way in which our customers interact with us in person, even though they're having a digital experience. So this isn't for our business a situation where you've got some new business model, a marketplace, et cetera, that is a dilutive mixer to your core business. It's all around improving the ways in which we interact with our customers through technology. So that's the area where we're focused.

Greg, I would just -- I would add to that on the automotive side. You really have the 2 segments, right? We started out the conversation today talking about DIFM and DIY. So when you talk about e-commerce and the profitability of e-commerce, look, the more we are electronically attached to our DIFM customers, the better for us because you think about the labor market that we're in today. So the old days in the automotive aftermarket where a customer picks up the phone and calls that counter person to place an order, today, that's being replaced with an electronic relationship where they're simply e-mailing and via e-commerce are we transferring orders over to our stores. So technically, on the B2B side, it's potentially more profitable because we don't need the labor -- as much labor in our stores as we move to an electronic relationship. On the B2C side, of course, whether it's ship to home or pick up at curb or buy online pick up in the store, that's really all new business for us on the DIY side. So really, the 2 different segments on the automotive front.

That's a great summary for us. So as it is now, e-commerce can be more profitable because of that efficiency that you're getting. How do you work with your jobbers given the uniqueness of your model, right, with, what was that, I think, 80% of the stores are independently run. And I imagine each one of them, as an independent business person, has a different view as to how to invest. So along these lines, so how do you do carrot and stick, if you will, with all of those members to get them thinking ahead as to how to roll this into their businesses?

Yes. And Greg, you're right. 5,000 of our 6,000 stores here in the U.S. are independently owned, and they do call them independent for a reason, as you referenced. Look, what you -- all you have to do with these -- with our smart, aggressive, well-capitalized entrepreneurial owners is showing profit model and showing them how that electronic relationship with their customers can reduce labor in their stores and make them more profitable. And I would tell you that our -- we work incredibly closely with our independent owners on all things: branding, marketing, IT, product. We worked arm-in-arm with our owners through the pandemic last year to ensure that they captured their fair share of PPP monies. And Greg, I would tell you today that our independent owners are as financially solid as they have been in many, many a year. And they're investing back not only in technology, but in the all-important inventory space as well. So we are quite bullish on our model coming out of the pandemic and are excited for the future.

That's a great summary to hear. And I would say -- and we probably have time for 2 more questions, so I'm going to try and be judicious with it. One, I want to finish on the business. Could you -- you mentioned capital allocation, how you do it. So just to get to some numbers, should we expect CapEx to go up or down the next couple of years as you are repositioning the business, assuming -- just leaving M&A aside for a second, in terms of what you need to do on technology and distribution, supply chain? Should we expect that number to migrate up or down when we're modeling out capital?

So certainly, in '21, you're going to see that number go up, Greg. And that's more of a result of us significantly reducing CapEx in 2020 due to the pandemic. But if you think about it today, Greg, we have just automotive and industrial to invest back in. And those investments, kind of as we touched on, will be in the technology space, but also in the supply chain space. When you look across the NAPA model, for instance, here in the U.S., we still have tremendous opportunities for automation in our distribution facilities. So you'll see more and more investment in '21 and beyond back in our facility. So you'll see CapEx return to more normal levels in '21, that's in that $300 million range. And I think you should see and expect, Greg, that will remain fairly consistent in '22 and beyond.

Perfect. That's what we're looking for. And then the last question that I want to leave it a little bit open, we did this last year, I think, which is, what is the biggest consumer change that we would -- or you would see in your business coming out of COVID? Now we're a year later. So I guess the question is, what surprised you or hasn't as to what's happening in your end markets? And then a year or 2 from now, what's likely to be stickiest? And whatever -- it could be all of a sudden people are going to drive more and miles, whatever it is, that you're seeing that you think could end up sticking around.

Greg, I'll give you a couple, one kind of direct response and then another observation that I think is relevant for most, if not all, companies. So the first one, it's no surprise that digital and technology, the importance of that coming through COVID will be a -- have a lasting impact. And so I think that created an opportunity where we got very focused on where we want to invest, how it's impacting the customer experience and what we need to do around all things digital and technology. So I think that's here to stay, and we're feeling good about where we're headed there. The other thing that I would mention to you, Greg, is maybe a little bit more qualitative, but it's incredibly important, especially for a company like GPC that has such a strong, rich culture, is navigating the remote work, hybrid work environment. And I think that's going to require a lot of strong leadership throughout the organization to find the right balance between being flexible and accommodative to this new world, but also building and growing company culture. And so I think that's a journey that many companies are going to have to figure out over the years to come.

Greg, I'd add 2 more quick ones, and I know we got to run. I think you're going to see and are already seeing people jumping back in their cars and getting on to highways for holidays and vacations. I think it's going to be a while before they're jumping back on buses and subways. So that bodes very well for the automotive aftermarket. And so the other one that I'd mention, Greg, is I think there's been a little bit of a flight to -- from metro areas back into rural areas. That bodes very well for NAPA as our strength is in those rural markets. So really, the combination of those 2, I think, is a trend you're going to see continue for some time and, again, bodes very well for the automotive aftermarket and especially for NAPA and GPC.

Well, that's neat. So we'll end on the densification, which is a trend. I think for us, we thought it may have had about a 50-50 chance of playing out last year, now feels more like 75%, 80%. And it's interesting, you're seeing those trends as well. So look, I want to thank both Paul and Will for joining us. I think we got through a lot in 35 minutes. I know -- I thank everybody for joining the Evercore ISI Summit, and we look forward to doing this again live and in person sooner rather than later. Thanks, Paul.

Look forward to, Greg. Have a great morning. Okay.