Genuine Parts Company (GPC) Earnings Call Transcript & Summary

Hey, good afternoon, and welcome to the Jefferies Industrial Conference 2021 Fireside Chat with Genuine Parts. And I'm really happy to welcome Carol Yancey, Executive Vice President and CFO; Randy Breaux, President of Motion Industries, to this event. And I guess, maybe first, just to take a quick second to introduce yourselves. And Carol, I guess, in order, Carol, then Randy, maybe talk about recent highlights as you're seeing, Carol, maybe on a broader GPC standpoint; and Randy, obviously, more with a motion focus. But -- and we're clearly going to have Q&A, and audience participation is great. If you can send us your questions, we'll go through this after the presentation. Carol, just introduction and your thoughts, please.

Thank you, Bret, and welcome to everybody, and we appreciate you joining us today. And it's great to have this opportunity to present virtually for the Jefferies Industrial Conference. So we've got a couple of slides up, and GPC is a global service organization and the distribution of automotive and industrial parts. We operate from a network of more than 10,000 locations. And we are in 14 countries across the U.S., Canada, Mexico, Europe, Australia and New Zealand. We recently released our second quarter earnings on July 22, and we were really pleased to have a really strong financial performance. And it was driven by the consistent execution across our strategic priorities for both our global automotive and industrial markets. So a few highlights from our second quarter. We had continued strong sales trends in both automotive and industrial, which, we believe, drove market share gains. We had our 15th consecutive quarter of gross margin improvement. We had improved operational efficiencies. We had net operating margin expansion. We had record adjusted quarterly earnings, a strong balance sheet and cash flow that provided for effective capital allocation across our priorities, which includes growth and productivity investments, bolt-on acquisitions, the dividend and share repurchases. So as we look ahead, GPC is well positioned to deliver more strong results and gain market share and create value in the long term. So now I'll turn it over to Randy.

Thank you, Carol, and thanks, Bret, for hosting us. Randy Breaux here. I'm the President of the Industrial business for Genuine Parts. I'll give you a little bit of background on Motion Industries. This year is actually our 75th-year anniversary. So we've been in the business a long time. We're very fortunate that we compete in a very large and fragmented industrial marketplace, estimated at roughly $200 billion in North America and Asia Pacific combined. As a market leader, we have less than 5% share. So we do see tremendous opportunities for continued organic and acquisitive growth. We go-to-market with a network of more than 700 distribution centers, branches and service centers combined. And our customers have a broad offering, about 10 million parts for Motion Industries. And we also provide a lot of on-site services. The capabilities we have in these areas really distinguish us from names such as Grainger and Fastenal, but we would more directly compete against those companies like Applied Industrial Technologies. Our products range from bearings and power transmission equipment to hydraulic and pneumatic products, seals, pumps, hoses, industrial supplies and electric motors and automation products. As I mentioned, we sell to a diverse industry group, including equipment and machinery manufacturers, which would be the OEM sector, food and beverage plants, pulp and paper plants, [ signer ] steel and even the automotive industry. Our most recent sector that we've seen tremendous growth in is what we would refer to as the distribution and logistics channel. This would be like the Amazon distribution centers, the Target distribution centers. And we're seeing quite a bit of growth there, providing products that keep these facilities up and running. As Carol said earlier, we've seen real strong growth in 2021 in the industrial economy and the activity at our customers. And we expect this to continue in the quarters ahead. We're focused on several key initiatives that drive profitable growth, our omnichannel build out to accelerate e-commerce growth and drive growth with new customers that we weren't taking care of before, expansion of the industrial services and solutions capabilities that we have. And this include automation, conveyance solutions as well as repair and services. We're very focused on strategic M&A activities. We're also continuing our enhanced pricing and product category management opportunities and in network optimization and automation to really further improve our operating efficiencies and productivities in the facilities that we operate. So we're really excited about the future growth of this core business for GPC. And with that, Bret, I'll turn it back over to you. You're on mute, Bret.

To Carol's original point, that was a very strong quarter you guys just reported. And obviously, I think, we've been trying to think about the business as being somewhat counter to each other with Motion being more procyclical than the automotive business, yes, both really strong. Maybe you both can talk about sort of the macro drivers of the businesses and sort of how you see the trailing 6 or 12 months having played out and maybe the outlook from where we stand today, both for the industrial distribution as well as the automotive space.

Yes. Sure. I'll start with the automotive space and then have Randy speak about industrial. So you're right. I mean there's really very favorable and positive fundamentals. When we think about the automotive aftermarket drivers, we think about the improvement in miles driven, which continue to improve and get stronger. We think about our strong 80%-plus commercial business and the improvement there in sales growth, the growing vehicle fleet and aging fleet and really the strong used car market. And then really, the outsized growth in our international business has really been a spotlight for us, too. And some of the things that have impacted specifically to the U.S. haven't been as much of a factor internationally. So couldn't be more pleased with some of the fundamentals on the automotive aftermarket. Randy?

Yes. On the industrial side, we correlate very well with PMI and industrial production. And we watch these closely. And we've seen that continue to strengthen since 2020. We're very favorable about the outlook for the balance of 2021 and possibly even beyond into 2022.

Yes. And I guess, Randy, to sort of follow-up on your outlook. You commented earlier about where you sort of fit in the food chain. I think over the years, have -- that question comes up a lot, sort of how do you see yourself in the services capabilities that you offer. I think maybe more of your business is almost RFP and contracted as opposed to sort of simple commodity supply. But maybe talk about the heavy industrial applications and sort of how Motion fits into that.

Sure. We're not a read-a-part-number-and-replace-it type distribution company. A large percentage of our sales require our team to visit with our customers more of a collaborative sale, if you will. We like to call it belly-to-belly selling sometimes, where we're right out in front of the customer, and we're looking for design and application solutions that we can provide. Our sales force, a lot of them are engineered or they're industrial specialists. And they have expertise in areas where we can provide additional value to our customers that they expect and they depend on us for, Bret.

Great. And I guess when you think about the evolution of the distribution model and the role that digital plays in it, both to Motion and maybe, Carol, if you can talk sort of about how you see it across the rest of businesses as well. Maybe talk about digital initiatives and sort of how you see leveraging that strategy.

Yes. Sure. So we launched a new website last year in the middle of a pandemic. And really, it was focused on attracting customers that we weren't doing business with before. So that's been a very good product for us, a very good sales channel for us. It's a way to differentiate ourselves and satisfy all the customers that we can do business with. A lot of our transactions, we call it e-commerce rather than digital, but we're tied into a lot of our customers' ERP systems. So it's very common that they would go to our website, search for a product, and then they would flip over to the direct connection and place the order directly with us. Very important to us, and we'll continue to expand that digital and e-commerce part of our business moving forward.

Yes. And I think, specifically on the automotive side, we continue to talk about our investments in omnichannel and especially during the time, during the pandemic and even more so today. So we're still continuing to build out our digital capabilities and our footprint. So when you think about B2C, I mean, we had a record quarter in Q2 with NAPA online in the U.S. We've had strong growth in retail sales in our Australasian business. B2B, again, really strong improvement there, record quarterly sales for our B2B side on the U.S. automotive side. And again, equally strong for our Australasian business. We also talked about some of the investments we've made on the M&A side in digital offerings. So we talked about PARts DB in Australasia, which is a cloud-based product and supplier data platform. We also talked about in Europe Winparts, which, again, is another investment we made, an online leader in automotive parts and accessories. And so I think, again, our investments will be both organic and inorganic. And I think we continue to make progress on the digital side.

I guess, Carol, in that theme, I -- given the fact you have motion, and you have automotive, largely separate businesses. Are you seeing a lot of synergy as far as sort of sharing best practices across the 2 platforms as you develop digital? Or certainly as you buy in some of these other strategies, can you take their best practices and roll them across the platforms?

Yes, absolutely. And I -- we can give you a couple of examples, but we've always talked about how we will leverage and use best practices across both automotive and industrial and across geographies. And so we quickly took the motion platform here in North America and put it into Australasia. That was a big benefit for us a couple of years ago. We have looked at our digital center of excellence, if you will, broadly. We've got initiatives right now taking some of what we're doing here on digital and working very closely with our team in Europe on their digital offering. I think the other place we do it is in pricing and our pricing technology and data analytics. And so -- and then back office is another great opportunity. We all leverage a lot of the back office, and we recently have an indirect procurement group that's also looking at another areas for us. When you think about freight and our -- some of our indirect spend, if you will, we're using an indirect procurement team to really think about broadly how we can drive the best model for automotive and industrial.

Okay. And I guess maybe sticking with sort of a cutting-edge technology or evolution of the model topic. We talked, I think, last year in this venue about sort of focus on automation in the processes. And maybe could you give us an update on that? And maybe anything else that you sort of see as evolving the process?

Yes. I'll take that one, Bret. The growth in the automation area really relates to the increasing automation we're seeing in our customer base across the board. And they have requests and demands that we're able to serve there. Last year, we announced 2 acquisitions that helped build out our strategy in this space. And we continue to like this business, which is actually performing very well for us and performed well through the pandemic last year. In addition to automation, we're excited to continue expansion in other value-added business areas such as conveyance and repairs. These are services that are very important to our customers. So we really like the solid growth opportunities we see there. Speaking specifically of automation, we actually hired a new leader in that area that started April 1 this year. And he has a background in both manufacturing and distribution. And he's really set us on an even more refined path in the automation space that we really look forward to seeing both inorganic and organic growth as we move forward in that space.

Great. And I guess to some extent, I mean, obviously, you've seen some strong sales, and that has flowed through in very strong margins. And maybe some of the topics we've already touched on have been the drivers or maybe they're not contributing as much yet. Could you talk about really what have been the tailwinds, the margins and maybe the buckets that we've tapped in the last quarter or 3 and then kind of what buckets you see contributing going forward?

Yes. I mean I'll speak broadly, and then I definitely want Randy to chime in on the great job they've done on the gross margin side and the SG&A side. I mean, look, we set about 2 years ago to really take cost out of our SG&A. And we did it at a time before the pandemic. And with the transformation office and a lot of our initiatives, we were really able to permanently lower our cost structure in SG&A. And then we took a lot of additional steps last year on a temporary basis. We've made a lot of investments in productivity improvements. And so all that has been great. We do have some headwinds, if you will, that's coming in the form of inflation in our SG&A, which we've talked a lot about, more so in the U.S., more so in the U.S. labor market and definitely in automotive with labor, payroll and freight. But again, we're glad we took the steps we did, and we're continuing to look at some of our initiatives. We couldn't be happier about the gross margin and specifically, speaking on the automotive side, some of the investments we've made in pricing talent and data scientists and data analytics and pricing software. So we're much more agile in pricing. And then a lot of our global tenders have really paid off and paid us dividends in terms of improvement in gross margin. So again, it's a combination of gross margin improvements on some of the SG&A work that we've done. And I'll let Randy speak a little bit about industrial.