Genuine Parts Company (GPC) Earnings Call Transcript & Summary

So next up, we have one of the largest aftermarket distributors globally, Genuine Parts. The company generates $1.4 billion EBITDA on $17 billion in revenues in 2020, with 1 -- about $1 billion of that EBITDA in automotive, with 145 million shares at a price of about $1.30, market cap of $1.8 billion and net debt of $1.5 billion. Speaking today, we are lucky enough to have, Chairman and CEO, Paul Donahue; CFO; Carol Yancey; and President, Will Stengel. Thank you, everyone, for joining us. So just to start, everyone here does know the company very well, but if you could just give a brief overview of the 2 segments I just mentioned.

Sure. I'll -- can you hear me okay out there? All right. Great. Well, first off, Mario, thanks for having us again this year. It's always great to be back in Vegas, and it's good to see the industry turn out this morning at the Big Breakfast. Genuine Parts Company, look, we've been around a long time, 93-plus years. We're now in 15 different countries. 2/3 of our business is automotive. 1/3 of our business is in industrial. The automotive business, which is in the majority of those countries I just mentioned, we split between DIFM, it's about 80%; DIY, 20%. We're coming off a great quarter. Sales were up 10%; EPS, up 15%. So a lot of momentum. And I'm pleased to say that's carrying into Q4 as well. Our industrial business, Motion Industries, that's 1/3 of our business, largely in North America, but we're also in Asia Pacific. Again, a great business, a lot of momentum, tend to go with the PMI numbers, but coming off a great quarter in our industrial business, which was up 15% in Q3. So we have divested businesses since we were all together the last time, a couple of years ago here. So GPC looks a lot different than we did just a couple of years ago.

Perfect. And that really leads into my next question. Just could you talk about your portfolio optimization strategy and how you positioned yourself in the automotive business?

Yes. So we really set about optimizing our broad portfolio of companies about 5 years ago, and it took us a while to get to where we ultimately landed today. And so we divested a business products group that had been a part of GPC for decades. We divested an electrical distribution business as well. They were both dilutive to our overall operating margins at GPC. And our ultimate goal was to get to a really 2-business approach, industrial and automotive. A lot of commonalities between the businesses. We share talent. We share expertise. We share systems. And in some cases, we even share distribution centers. So today, our $18 billion in total revenue, again, 2/3 split between automotive and industrial.

Great. And then another question just about overall industry. We've seen some of your big competitors, a couple who present here. They have focused on more -- generating their cash and returning it to shareholders, but you've gone global. And you're this powerhouse of a global distributor. Can you talk about acquisitions and how they play into your transformation and growth strategy?

Yes. I mean, I think I'll comment, and Will can chime in as well. But I think our capital allocation has been very consistent over the company's history. So the capital allocation really focuses around 4 key areas. So the dividend, which we've increased for 65 consecutive years; share buybacks, that we do very consistently, 1 million to 2 million shares a year. We've done it for 25-plus years. You mentioned M&A. We have always been in the acquisition mode, both automotive and industrial, and bolt-ons and also strategic step-out acquisitions. And with fragmented end markets, we've had the opportunity to do that and the balance sheet to do that. And then the final category is CapEx and just reinvesting in our business. So I think in divesting of these businesses, we turned around and reinvested in other businesses, but we feel like it's been the right mix and to be able to continue to add to our portfolio of automotive and industrial and then to add to it globally.

Perfect. And then, Will, welcome.

Thank you.

Thank you for joining us this year. We've talked about disruption in the aftermarket. And you joined as CTO back in 2019. Can you talk about, first of all, kind of what you're seeing in the aftermarket, any disruption changes that are being made, but then also what you kind of thought Genuine Parts could trend towards.

Yes. Well, first and foremost, nice to be here. I think 2 years ago to yesterday was my first day at Genuine Parts Company. I actually had a chance to be here with everyone. So it's been quite a 2 years. I think what I would say is when I joined Genuine Parts Company, part of what attracted me to the opportunity is some of the things that you're alluding to, which is it's a great industry, great potential, great global brand, great culture, but a business that needed to evolve for the next 90 years. And so I think as we look at EV, in particular, and the opportunities that, that presents to Genuine Parts Company, that's a really exciting opportunity. We shouldn't forget that the core of our business for the foreseeable future will be internal combustion engine. So we're going to invest in, make sure we got strategies to do that. But all businesses are changing. Technology is changing. Talent is changing. And I think COVID was an accelerant to all that change. And GPC is in a good spot to take advantage of it.

Great. And since you brought up electric vehicles, it's something we've touched on at this conference, probably a pretty long line until it really impacts the aftermarket. But just what are your thoughts on how electric vehicle will impact Genuine Parts?

Yes. Look, I think you've got to do the work. So I think you got to make sense of the facts. There's a lot of information out there. There's a lot of media out there. So the discipline to understand the facts and develop a perspective on what the future might look like. We think about it really in 2 big buckets. The first is what we call no regrets, things that you know is going to happen sooner rather than later and being very tactical and disciplined about taking action against that. And then you have the longer-term perspective and some different scenarios and placing some bets in a thoughtful way as the market evolves in the future. So while it is a future phenomenon, it's wise, we think, to do work today and bring in talent and make sure that we've got a global game plan to attack the opportunity, which we think is actually an advantage for the GPC footprint, as you described, internationally as a global player.

Right. And it's just because it has been mentioned by 2 other presenters today, just the increasing complexity, that technology and the ability for the aftermarket to meet demand. So one thing maybe that's been brought up today, the right to repair. I know Genuine Parts has been a big part of that conversation in aftermarket. Can you talk about that? And then also what was brought up earlier, just the increasing complexity, that these new parts actually drives aftermarket growth and just your ability to continue to meet that demand.

Yes. I'm happy to start with it, and I'll let Paul can jump in.

Go ahead. I'll jump in. Go ahead.

Yes. I mean, I think when we think about EV, it's more than just electrification. And so as we prioritize some of those bets, we look at connected car, share mobility, ADAS, electrification. So I think you have to have a perspective on all of those topics, and you have to place some bets on it. And I think GPC is doing the work to make sure that we're being really thoughtful in each one of those areas. As you heard from [ Kevin ] across the street earlier this morning, I mean, we are actively involved, thought leadership in the industry. And we're going to get in front of making sure that we influence the industry so that it benefits Genuine Parts Company. So Paul, I don't know if you have any other thoughts.

Yes. A couple of things, Carolina. So look, in terms of right to repair, it's critical for our industry. And again, that was a big topic at this morning's breakfast. So we're participating both with time, talent and money to support the efforts. And it's great to see what's transpired in the state of Massachusetts. We just got to stay behind it. And it's great to see how the industry has really come together. So when you see AutoZone, Advance and O'Reilly's and NAPA all really getting together to drive this initiative, I think we'll be -- ultimately, I think we'll be successful. I'd also mention, you talked about the complexity in today's vehicles, which bodes well for NAPA given that 80% of our business is DIFM. We -- I mean, that is where we really excel. We find that what's critical today is training technicians to be able to work on these cars of the future, right? So we have 25,000 auto repair centers around the world, branded NAPA AutoCare Centers, Repco authorized centers in Australia. So we are close to the techs. We're actually helping train techs today, but we're also helping recruit techs. And we have an apprentice program to help get more techs into the business here in the U.S., which there is today a critical shortage of qualified technicians. So a big initiative for us.

Great. And I think that the do-it-for-me conversation brings us to growth conversation as well. Pretty great comps that we've been seeing from you, 2-year stack of 7% in auto and then your U.S. comps of 9%. Can you just talk more about what's driving that and then also what we should be expecting over the medium to longer term?

So I'll take a stab at it and let these folks weigh in. The -- look, historical growth that we've always aimed for at GPC is 6% to 8% year after year after year. That's a combination of organic growth, M&A. A little bit of inflation, it will get us to that target more years than not. We have had a great year, a great run in 2021. We don't see that slowing down as we enter Q4. We're investing back in our business. Our AutoCare center business is growing double digit. Our major account business is growing double digit, really excited with our retail business, which has not historically been a big focus for us. It's 20% of our total. But we're seeing really nice outsized growth in retail. Our fleet and government business is coming back. That was kind of the laggard of all the other industries, but that is now coming back strong. So right now, it is a great place to be in the automotive aftermarket. And we think we got a solid run ahead of us, especially when you look at what's happening with used car sales. The lack of new car sales at all is going to play very well for NAPA in the automotive aftermarket.

Great. And I think what we were expecting to see is this do-it-for-me rebound that you have seen and have been [indiscernible] from, but what we were surprised by was the do-it-yourself continued solid growth. Can you just kind of talk to that? What you're seeing? Do you think it's sustainable as we look into the next year or 2?

Well, we do. And partly because -- well, first off, we had a fairly low bar at NAPA when it came to our retail business. But we've brought in a lot of new talent to oversee our merchandising in our stores and in the retail world. So we've upped our game. And I do believe we're outpacing the market. We very quickly jumped on our online initiatives. We've done a number of acquisitions in the online business, which quickly jumped into curbside pickup when the pandemic hit. We're delivering direct to stores now. We've upgraded our electronic catalog. So we've done a lot of things that should continue to enable us to grow that, both sides of the business, DIY and DIFM.

So this is not just COVID-related rebound. It's also a benefit of the strategic initiatives you took over the last couple of years.

Exactly.

Great. And then, of course, we can't not talk about the supply chain at this point. Can you just talk about what you're seeing in supply chain, your ability to get the inventory you need? And any impact from inflation at this point?

Yes. Look, I think like everybody, we're working through supply chain challenges. The good news is there's a high level of discipline and focus on it in the organization. Our global scale actually helps us in this regard. And the way that we study it and think about it is really in 3 buckets. We've got our point of origin. So think about that as kind of product leaving the original destination. Then we have our ocean logistics, and then we have our final destination. And so we break our problem down into those 3 different pieces, and we're attacking in a variety of different ways there. The good news at the point of origin is that demand is great. And so that's a good problem to have. We're starting to see better productivity coming out of the plants. So the product can actually get manufactured. Ocean logistics is still a challenge. Container availability, getting a little bit better. The biggest issue that we have is actually on the third piece, which is the congestion in the port. And so as that works itself out to kind of get product to the final destination, that's going to be the real fix, if you will, for some of the challenges that we're feeling. But the teams are on it. We've got local resources in-country. We've got global resources working on it every single day, and we're working through it.

Right. And you talked about being a global distributor is a benefit. And I think you talked about scale as a benefit in the last call. Can you just talk about your ability to kind of meet these inventory needs over your -- over maybe other competitors or smaller competitors?

Well, if you look at the big global suppliers, if we're not their #1 customer, we're probably top 2. And also with many of those same suppliers, they supply our industrial business as well. So we have been assured, and we have no reason to believe it's not accurate, that if anybody is going to get product, it's going to be GPC and NAPA and Repco and AAG in Europe. So I think it is -- our global scale is a real advantage. That said, I think this supply chain challenge that we're all faced with is -- it's around for a couple of more quarters. We're doing the best we can. I think our manufacturers are doing the best they can. But whether it's labor, container shortages, raw material shortages, we had dinner with one of our top suppliers last night. I got the whole litany of issues, and it's a long list. And -- but there doesn't appear to be a quick fix, unfortunately.

Great. And that is on a shorter-term question, right, we will go through these logistics. The container issue must resolve at some point. Do we then see a margin benefit as we look out into the medium to longer term?

Yes. I think, look, what we've seen -- I mean, we -- I don't know that we've seen times like this with the inflationary environment that we've been in. But having said that, our team has done an amazing job being able to navigate through the inflation that we've received and being able to pass that through, and pricing stayed very rational. This inflation has been neutral to our gross margin. And in fact, we've been able to show improvement in our gross margin for 16 quarters, and we don't have a reason to think we don't continue that. We don't see prices just rolling back when these things go away. I mean we saw this with tariffs. And again, industrial is more normal inflation. So that just stays. We don't see it rolling back. But at the same time, we have been able to pick up a couple of points in margin with a lot of our initiatives, both on the buy side, the sourcing side, category management. So despite what's going on, and even if it does get better, we think we still see margin opportunity upside, especially coming through all of our initiatives.

Great. And since you talked about the pricing, I think you talked about pricing on the call. Can you just talk about what you've been able to raise in prices and then why -- how you're able to do that over maybe another distributor or retail industry?

Yes. I mean, again, I think what we saw in Q3, the inflation that we saw was 3% on our top line, and that was a little more pronounced with North American automotive, a little more normal in the international and in the industrial. We think Q4 will be a bit more than that. But again, even looking out ahead, those will continue to kind of roll into next year. But with our teams being able to, again, navigate through a lot of our initiatives, those -- I mean, and you see this in every industry. People are raising prices. The demand is there. And if we can get the product in and pass along the price -- we are not a price is the top item on the list. We need to be price competitive. But price is usually down a few. We got to have the right part in the right place at the right time, and it's really more about that.

Great. And I think we have a question from the audience.

No. I was just going to ask about fill rates at Motion, but it's not the fill rates of the customers in terms of your delivering inventory. You have a large amount -- number of potential acquisitions in Motion. Can you kind of talk about where they are? Are they -- you followed the geographic footprint of the auto industry? Are you still focusing on the domestic Motion type opportunities that are significant?

Yes. Thanks, Mario. We love our industrial business. We don't get to talk about it much. It's 1/3 of overall GPC. They are having a phenomenal year. We've got a great team there. We're now in Australia, New Zealand, Singapore, Indonesia. As we look at our M&A strategy at Motion, we're looking both North America as well as Asia Pac. And we -- but we're also looking at opportunities within certain segments. So automation is an area that we've done a number of bolt-ons in recent years. Conveyance, one of our biggest growth areas right now is all things related to distribution centers, not surprising, right? With the big jump in all things e-commerce, DCs are going up. So we're big into all Conveyance-type products. So Motion's had a great run. And we like the space, and we want to continue to grow that business, both organically and through M&A.

Using that same acquisition mindset in the automotive, some of your dealers or distribution from retailers are franchises, and everything changes all the time. Any particular dynamic we should be thinking about with regards to turnover among your franchise?

Yes. So we don't call them franchises. There are...

I'm sorry. I'm thinking of McDonald's and Wendy's. And...

Yes. Yes. Yes. No. And look, technically, they're not a franchise, but we have 5,000 independently owned stores. I would tell you, Mario, these guys, coming out of the pandemic, most of them were recipients of PPP monies. And they are -- many are flushed with cash, and they're buying a lot of parts. They wish they could buy more parts if we had them. But our independent owner base right now is as strong as I have seen them in a number of years. Now there is always that churn we get every year, where a gentleman or a lady has built a great business. They don't have kids. They don't have a succession plan. So we'll go in. We are ultimately their succession plan. So we'll go in and take over the stores and run them. And our teams do a great job of working through that transition. But we have the benefit of seeing both sides. So in North America, we have the model of independents and company-owned. In Australia and New Zealand, we're all company-owned. And both worked very well. Our Australian, New Zealand business, we have 500-plus stores growing, despite being in full lockdown most of this year, growing close to double digit this year.

Great. And then since you mentioned, we don't talk about Motion that often, but we touched on it. What was impressive was this quarter's margin, especially in such an inflationary environment and when we look at your competitors? Can you just talk about how you were able to do that?

Yes. Look, compliments to the industrial team because they have been delivering on margin improvement despite just now kind of getting to a 2-year stack positive comparable growth. They have been driving their margin improvement through gross margin and SG&A. They've put in a lot of initiatives on gross margin. And I think about their e-commerce initiatives, omnichannel initiatives. They set up a lot of different selling initiatives that translated to new accounts that had higher margins. They also put in pricing strategies that really gave them some improvements. And then on the SG&A side, they've been putting automation in their DCs. They've been doing a lot with productivity improvements, kind of optimizing their network and taking cost out. So I would say they've probably been 2/3 gross margin improvement and 1/3 SG&A that has allowed them to have 90 basis point operating margin year-to-date. I think it's, on a 2-year stack, 130 basis points. And we'll probably end there -- end the year that way. And looking ahead, again, no expectation that they don't continue to have improvement.

So Carol is being very modest as our CFO. We -- the operating margins in Q3 were our highest in over 20 years, up 30 basis points. And Carol and our Treasury group, our debt is down $0.5 billion from where we were a year ago. Our balance sheet has never been in a better place. So as we exit out of this pandemic, GPC is -- we're stronger, we're more agile than we've ever been in our history.

Great. So that brings us to 2 questions. I'll go right to the debt question. Where are you kind of in -- within your debt structure? Where are you -- where would your target debt be? And what kind of -- I know we talked about a little bit, the allocation part there.

Sure. Yes.

Yes. So just -- I mean, again, going back to a year ago, we had our leverage -- yes, our debt and our leverage was 1.5 turns greater than what it is today. We have reduced our debt significantly. We've restructured our debt with different types of capital structure that we have now today. So we're sitting at 1.5x adjusted EBITDA. But look, we're comfortable to be in the 2 to 2.5x, 2 to 3x. As you know, we're comfortable to take our leverage up for the right strategic opportunity. And we know with working capital improvements, supply chain financing, improvement in our results, that we can work that number down over time. So the nice thing is we have the flexibility to work within the capital allocation that we talked about earlier. And if the right opportunity comes along, again, we're not uncomfortable to take that number back up. But it's been great progress in the last year to work it down.

Okay. And that brings us to something that we talked about in aftermarket a lot. Just the AP to inventory ratio is almost 130% now. Is that sustainable? Or will we see maybe that drop a little? At any point, does that pressure your suppliers?

Yes. Look, we've gone through this before. I think what we know is we continue to have opportunities. Part of it relates to our European team and the rollout of the NAPA brand, which they're still in the early stages of that. We were over there last week, visiting at their shared service center, and they've centralized accounts payable. They are excited about the supply chain financing programs that they have in Europe. It has been tremendous for them in the last couple of years, and they're not done. Again, they're in early innings. But we take that spend, and we look at it globally. And then as volume continues to come back, we see greater opportunities. So our working capital improvements have been great to see. We do think there's more upside on the AP to inventory. Industrial teams are continuing to work at it, too. And again, we still offer an attractive program for our suppliers. I had somebody come up to me this morning and wanted to talk further about that. So it's still a great opportunity for our suppliers.

Great. So extending those payables has driven a lot of cash. And something you mentioned, just the independents would like more inventory if they could get their hands on it. Can you talk about where your inventory levels are and where you'd want to be maybe?

Yes. I mean, look, we -- it depends by product category and vendor. Our inventory, we have a lot of absolute dollars of inventory by making sure that we've got the right products in the right markets at the right time is kind of the precision that we need. And as I said, there's a range of progress across the vendor base on any given week. And the good news is that, as I said, the dialogues are daily, and we're hopeful that the progress continues through the first part of next year.

Okay. Great. Well, we've run up against time. Thank you so much for being here. Very productive conversation, great results this year. Congratulations, once again. Thanks for being here.

Thanks.

Thanks for having us.

Thank you. Thanks for having us.