Genuine Parts Company (GPC) Earnings Call Transcript & Summary

Good morning, and, Will, give me a thumbs-up if you can hear me okay. Terrific. I'm Sam Darkatsh, and on behalf of Raymond James, we'd like to welcome you to the Genuine Parts presentation, ticker GPC. With us today from Genuine is President, Will Stengel; Executive Vice President and CFO, Carol Yancey; President of Motion Industries, Randy Breaux; and Senior Vice President of Investor Relations, Sid Jones. For reference, Genuine Parts is a global service organization distributing both automotive and industrial replacement parts via over 10,000 locations in 14 countries. Genuine's Automotive Parts Group, largely NAPA, distributes replacement parts in North America, Australasia and Europe. Genuine's Industrial Parts Group, largely Motion Industries, distributes replacement parts in North America and Australasia. The format of today's presentation will be as follows. The company will have, perhaps, 5 minutes or so of prepared introductory remarks, followed by a fireside chat Q&A session, which I will host. If you would like to submit a question, you may do so using the Q&A feature in the webinar system. With that, Will, Carol, Randy, Sid, thank you for joining us today, and the floor is yours.

Thanks, Sam. Good morning, everybody, and we really appreciate the opportunity to be together today. And special thanks to all those who worked so hard to organize the logistics for this conference. We obviously wish we could be together in person, but I appreciate everybody's hard work. Perhaps what I'll do, Sam, if it's okay by you, just a quick highlight of the business to build on some of the thoughts that you just articulated and then make a few other comments, and then we'll turn it over to Carol and Randy here. So on this first slide, if we flip the slide, you can see some of the things that you referenced in your opening comments. GPC, as you mentioned, global service organization engaged in the distribution of automotive and industrial replacement parts. We'll do about $18 billion in total revenue this year, split roughly 2/3 automotive, 1/3 industrial with segment profit margins around 9%. As you noted in your comments, we operate from a network of about 10,000 locations in 14 countries across the U.S., Canada, Mexico, U.K., Europe, Australia and New Zealand. Approximately 75% of the business, as you can see here, is based in North America. If we flip to the next page, we call this the Power of One GPC. And for those familiar with the story of GPC over the recent handful of years, GPC has worked really hard to transform its business as we've streamlined operations and optimized the portfolio. This involved divesting several noncore businesses while also expanding and investing in our higher growth and higher-margin automotive and industrial platforms. Today, we're market leaders in these 2 large and fragmented markets, which we estimate to be in excess of $200 billion each, which means we've got leadership positions in markets with less than 10% share and opportunities to continue to grow. Our global businesses, as you can tell from this page, shares the same distribution, operating characteristics and strategies. We have a unique and differentiated culture that we share globally and various other scale benefits across technologies, supplier partnerships, talent and logistics, to name just a few. Together, we call this approach the Power of One GPC. So lots of good things happening here at GPC as we continue to take care of our customers and, importantly, our people, and execute on our strategic initiatives that delivers growth, productivity and cash. So a brief summary of GPC. Maybe now I'll turn it over to Carol for a few thoughts.

Thank you, Will, and great to be with all of you today. So we've had strong financial performance thus far in 2021, and it's driven by our consistent execution of our strategic priority and the global market recovery. So we believe our strong sales trends have produced market share gains, and our 15 consecutive quarters of gross margin expansion and improved operational efficiencies have resulted in operating margin increases both over last year as well as 2019. In addition, we continue to generate strong cash flows through working capital improvement and earnings growth. When we look at our capital allocation, we're effectively allocating our capital across several priorities: capital expenditures for growth and productivity investments, bolt-on acquisitions, dividends and share repurchases. We're actively investing in all these areas to maximize our growth opportunities while also returning capital to our shareholders. So as we look ahead, GPC is well positioned to deliver more strong results, gain market share and create value for our shareholders. Now I'll turn it over to Randy.

Thank you, Carol, and good morning. This year, Motion Industries is celebrating our 75th anniversary. So we've been in the business for a long time. We're very fortunate to compete in a very large and fragmented industrial marketplace estimated at approximately $200 billion in North America and Asia Pacific combined. As the market leader, we still have less than 5% market share. So we see tremendous opportunities for both organic and acquisition growth going forward. We go to market with a network of more than 700 branches, distribution centers and service centers, and we provide our customers with a broad offering of over 100 -- sorry, over 10 million parts and an extensive on-site services offering for both -- for our heavy industrial applications. Our capabilities in these areas distinguish us from names such as Grainger and Fastenal, and we would more directly compete with those like Applied Industrial Technologies and [ Command ] Industrial, particularly in North America. Our products range from bearings and power transmission equipment to hydraulics and pneumatics, steels pumps, hoses and more. When you look at our business overall, we sell a diverse industry sector, including equipment and machinery manufacturers, which we would consider to be our OE category, food and beverage plants, pulp and paper, iron and steel and the automotive industries, among others. Our most recent sector that we've added with tremendous growth in the past number of months has been in the distribution and logistics space, where we have deep expertise and good customer base. As Carol said earlier, we've seen strong growth in 2021 with the strengthening industrial economy and more activity in our customers, and we expect this to continue in the quarters ahead. We're focused on several key initiatives to drive profitable growth; our omnichannel build-out to accelerate e-commerce growth and drive growth with new customers; expansion in the industrial services business; and our capabilities, including automation, conveyance and repair. We are working on strategic M&A, and enhanced pricing and product category management is a key area of focus. Network optimization and automation to further improve operating efficiencies and productivity is taking place throughout the business, and we're excited for the future growth of the GPC core business, industrial. So Sam, with that, I'll turn it back to you.

Terrific. Thank you, and you have 5 minutes and just a little bit of change. That was very crisp. This is an industrials conference, and plus we have Randy here. So I think I'm going to focus my questions almost exclusively on Motion Industries, which, frankly, is a business that doesn't get a whole lot of investor attention despite representing about 1/3 of your sales and profits. First question, and this could be for any of you, recognizing you're probably not getting much, if any, valuation credit for this business by the investment community, I guess not to mention the market's usual discounting of companies with portfolio businesses, what's the strategic importance of motion within the overall Genuine Parts portfolio? Maybe it made sense back in the '70s. But why does it make sense within the current umbrella as opposed to being a stand-alone business?

Yes, Sam, it's a great question. And in my comments, I talked a little bit about the evolution of the business over the last 2 or 3 years. And I think that's a testament to our excitement and our belief in the automotive and the industrial, for that matter, segment. We think it's got a great potential, big market opportunity that is addressable today. We've got a strong relative position in the market. We've got a great culture, a great management team, great capabilities, great strategy. And so we think it's got all the things that an investor would like to see when they're putting their money behind a team that can really go out and execute, grow profits and grow profitably. So it's a big part of the business. It's going to be an increasing part of the business as we move forward. And as Randy said, we've got both organic and inorganic opportunities to grow it. And as I said, we leverage the broader GPC scale to share best practices, operating strategies, talent, technology, et cetera, that, when appropriate, the Industrial business leverages to go out and execute.

That leads me perfectly to my next question, which is, is there a realistic path, I'll stress the word realistic, to get the mix closer to 50-50 between auto and industrial, whereby you would, in theory, at least force the market to value the business more tangibly.

I think absolutely, absolutely. Look, we -- as I said, we're at this conference. We love the business. We're going to continue to invest in it. We're going to continue to invest in all of our businesses, but motion's got a great opportunity to continue to be a bigger part of the GPC story. And if it ends up being 50-50, that's a great outcome for us as we think about the broader diversity of the GPC portfolio.

You mentioned, Randy, a $200 billion industry. I think -- and please correct me if I'm wrong, I think the bearings and power transmission part of that might be, what, $25 billion, $30 billion or so. So your -- if I'm accurate, I think your market share there might be, I don't know, 10-or-so percent. Where's the biggest white space opportunity? Is it in your core business where you have significant scale advantages? Is it in the tangential areas? Is it geographic? Where's the biggest white space when you look at that $200 billion market?

So you're correct. I mean when you look at the bearing and power transmission part of the business, our share is considerably higher than our overall share, particularly in North America. So when we look at where the opportunities lie, we're going to be in some of the adjacent categories such as automation, conveyance, process pumps, areas that we've been focused on with some of our investment dollars for M&A. But our core business, we still have plenty of opportunity to gain more market share and wallet share from existing customers and new customers. So that's been our focus. It is a fairly fragmented business that we have here. So our competition, there's no lack of it, be it from other national players, some regional players and plenty of small independent players.

Talk about how important economies of scale are to this business. It's usually absolutely critical from an overall industrial distribution or just the distribution model itself. But I think you're -- what, at least in your core bearings and power transmission market, I think you're maybe twice the size of your nearest competitor. Talk about what the importance of economies of scale from a competitive nature standpoint, please.

Yes. Happy to. In most cases, we're the largest customer for the suppliers out there, and you're correct in your comparison with our closest competitors. So from being the largest out there, we typically get first call, for example, on inventories and whatnot or production runs in these manufacturing plants, which gives us an edge, and that's actually helped us through the pandemic. As businesses return and supply chains tighten, our orders get filled fairly quickly. So the scale has certainly been important to us. It's also helped us outside of North America, as we branched out into Australia and New Zealand, to deal with some of the same suppliers, where they might not be the largest customer in Australia and New Zealand but we certainly are in the U.S. and North America. So that's helped us with some of the supplier base outside of North America as well.

What about barriers to entry? I know -- I cover a bunch of industrial distributors. And there are -- every once in a while, one of the big industrial players will talk about getting into your business. I think Fastenal, as an example, was talking about getting into bearings and power transmission a few months ago with some of the branch formatting changes that they're making. What challenges might either a new entrant or an existing entrant have that would really make it difficult to gain share -- gain material share versus motion?

Great question. And I think what most people have to realize is motion is more of a solutions provider than just a parts -- replacement parts provider. When you look at our business, we are very technically sales competent, meaning that, in most cases, we're on the platform helping to find solutions to the customers' problems not necessarily just reading the part number and replacing the part number. So there's a huge barrier to entry for somebody that doesn't have the technical competencies that our sales force does or the scale, as you mentioned before. Most of the suppliers we deal with are the Tier 1 suppliers in the marketplace that have great brand preference. And some of the smaller competitors who do don't have access to those same products the same way that we have access. So that does provide a moat or a barrier to entry for many of our competitors. And that's particularly true when you look at some of the online competitors. Our selling, we refer to as belly to belly. So we're in the platform of working with the maintenance people on the platform to keep the equipment running. A customer recently told Will and I on our visit, "The best thing about motion is you don't come in to sell me something. You come in to solve my problems." And we couldn't ask for a better testimony from a customer than that.

How should investors track this business? I'm guessing following fabricated metals and heavy machinery and what have you, but I'm just trying to get a sense of how short cycle is it and how would you recommend folks looking at the business externally to track trends.

Well, we track very well with industrial production and PMI. So if you look at those 2 indexes, that's a very good indication of how our business will track. Right now, the OE business didn't come -- it came back quicker than the MRO business, and that's roughly 10% of our total business. So while those companies that participate heavier in the OE section or categories, they came back a little bit faster than we did, but as we get into the mid or late cycle recovery of the recession, that's where we really shine because that's the MRO demand strengths that we fulfill there. When you look at it also, take a look at the heavier industries like the iron and steel, the pulp and paper, the automotive industry, the aggregate and cement. Those are the industry sectors where motion has the largest command of share.

And I guess educate me, what's the typical lag between a customer getting cutting tools first for a production line and then getting the bearings for a conveyor belt or a motor? I'm just trying to get a sense of where you are lag-wise. The -- typically, most of the industrial distributors, or at least the shorter-cycle folks, will say that there's maybe a 4- to 6-month lag between their -- between like ISM, PMI changes and their business. And I'm guessing yours would have an even more of a lag. How should we think about the timing of that?

We typically look at it at about 6 months. And again, what we'll see is the OE market tend to come out of a recession faster than we followed in about 6 months. But conversely, when the industry goes down, we typically lag going down by about 6 months as they continue to make repairs and not buying new equipment. So it's kind of a balance, and we just happen to play on that more MRO side of it and less on the original equipment side of the equation.

Six months after the cutting tool purchase theoretically or 6 months after what you're seeing in PMI?

Well, it depends on the industries. But if you take, for example, a cutting tool, if a plant's running at 100% capacity, that cutting tool may wear out in 2 months, and we're in the game at that point, right? So it just depends on the industry and the cycle that they're in. But when we refer to PMI and industrial production, we have a very tight correlation with both of those, probably more so on the industrial production side because that's a direct influence on our business, whereas PMI is more of a feel on how the purchasing managers think the business is going to look in the future. Industrial production is more realistic and accurate.