Genuine Parts Company (GPC) Earnings Call Transcript & Summary

Welcome to the Genuine Parts fireside chat for this morning. You guys brought a veritable army of folks with you. We're...

Since living in a new world for 23 years. He had a one-man show. And all of a sudden, we actually got in some resources.

And they realized that you haven't been trustworthy this entire time, they need -- you need backup. So Bert Nappier, Executive Vice President and Chief Financial Officer; Randy Breaux, President of Motion North America; Sid Jones, Senior Vice President, Investor Relations; Tim Walsh, Senior Director of Investor Relations; and Greg Cook, Executive Vice President and CFO of Motion. There's a test later. I think with your prepared remarks about, what, 5, 7 minutes or so, and then it will leave plenty of time for Q&A. So welcome. Welcome each of you. Thank you.

Thanks, Sam. Thanks for having us. It's pleasure for us to be here. I'm going to kick it off. I'm Bert Nappier as Sam said, CFO and EVP for Genuine Parts. I'm new in my role. So I started in May, May 1, taking over from Carol Yancey, our previous CFO, she was in the role for about a decade at Genuine Parts for 30 years. So we have a lot of tenure at this company, as you'll hear from Randy shortly. I thought I'd just give you a quick, quick overview on the company itself. Many of you may be familiar with it. Some of you may not. We operate in 2 businesses. And so when you think about the global Genuine Parts footprint, it's 2 major businesses, a global automotive business; and then, an industrial business. So we split the 2, about 65-35. The automotive business is about 65% of our business. The industrial is 35%. We've got Randy, who's the Head of our Industrial business here today. To give you guys a little bit more in-depth color on that side of the house because we're at an Industrials Conference. And so when you look at our global footprint, I think it's important just to know that we've got a great scale across the globe. We're a very diversified portfolio, $21 billion in total revenue in 17 markets, with more than 50,000 employees. And so really able to leverage scale when we think about our business, we're able to take advantage of markets. When we think about outside of the United States, predominantly in Europe and Australasia. So that's everything kind of south of the Mainland China. And both of those businesses are doing quite well in this environment, along with our U.S. businesses. And so it's an exciting time for me to come into the company as the new guy. I had 17 years at FedEx prior to coming into GPC. So really able to see an energizing business. We've had a really strong first half, looking forward to a good second half of the year but leverage a great scale and scope and size of the business. When you look beyond that and kind of look at the power of this business, and I think we're trying to work on maybe a couple of slides here, but they're not cooperating, so I'll just keep talking a little bit. We've got some major brands that we look at globally. Tim, if you'll flick one more than that. Go back. There you go. Perfect.

I'll stop there.

Look, that's our global footprint in terms of brand. You see the automotive businesses there at the top with the NAPA brand, the Alliance Automotive Group is our European brand Repco is our predominant Australian brand. And then I'll let Randy talk about the Motion business here in a bit as we get into the Q&A. But our Motion business, industrial business is represented with the North American presence and a Motion APAC business. Look, we leverage our scale across many dimensions. And so we've got a lot of things that we can do with our portfolio in terms of talent, being able to share talent across the businesses. Technology is another place where we use the power of One GPC across the business. We're in the distribution of parts. So it's a Genuine Parts Company, we distribute parts both on the industrial and automotive side. And so we leverage capability as well in that space, whether it's working with suppliers and best practices of how we approach our supplier base or technology and capability across supply chain management and distribution networks. So a lot of that ability globally needs to leverage our different kinds of skill sets inside the business in terms of One GPC. When we think about where we've been and kind of some key messages, you can see here on the slide, I won't read them to you, as I said a minute ago, we had an excellent first half of the year. Our second quarter just finished. We had record quarterly results for the second time this year, the eighth consecutive quarter of double-digit EPS growth, record sales performance in both of our businesses and the expansion of our operating margin to a record level at 9.8% for the quarter, which was a 60 basis point improvement year-over-year. So in a tough environment, able to drive some really nice performance for the first half. Eyes wide open on the second half of the year. There's a lot of things going on outside the business, but we stay very focused and bullish on our own execution. As I look ahead to capital allocation, and then I'll turn things over to Randy. Capital allocation, we have been extraordinarily disciplined for our history, 94-year history for this company, very disciplined capital allocation across dividend, M&A, share repurchase and CapEx. So we've got a 66-year consecutive increase in the dividend, which is the second longest running streak in the S&P 500 and we're very proud of that and our return to shareholders. We also stay focused on M&A. We've made a large strategic acquisition in the early part of this year in our industrial business, which I'm sure you'll hear us talk about here shortly, which is off to a great, great start on the integration and a lot of success so far. So we stay thoughtful on M&A. And then CapEx as well. As I said, we've got a lot of opportunity in terms of leveraging the 2 businesses for distribution networks and technology and automation. And that's a nice place to take our capital investment, and then we round out the capital allocation with some share repurchase as it fits our strategy. So with that, I'll turn it over to Randy. I'll let Randy talk a little bit about the industrial highlights, and then we'll turn it back to Sam and we'll get into Q&A.

Great. Thanks for having us, Sam, and thanks, Bert, and now I'll kick off a little bit about the Industrial business. So I've been in this business for about 42 years now, both on the manufacturing side and on the industrial distribution side, the last 11.5 or so with Motion here. So it's been great to be part of this team. Known Motion for most of my career, because Motion was my largest customer when I was on the manufacturing side. So it was a very easy move over to Motion. I've taken the role as President over the last 4 years, and we've really done a lot to transform this business in the 4 years and how we think and how we go to market. So you're talking about a company with over 75 years of history, in the industrial distribution business. And during that time, we've really grown the business at a pretty good rate over the years, but we've really accelerated that growth in the last few years based on some strategy changes that we've made along the way. We represent about 5% of a $2 billion -- $200 billion market. And the 3 categories that we play most in is really the -- in the power transmission business, the bearing business and the Industrial and safety business, that represents about half of our total business. So when we look at how we grow the business, we're doing it both organically and through acquisition. And we have programs in place to really accelerate the organic growth and expand that market share on an annual basis, finding new customers, attracting new customers and hopefully at higher margins than our existing customers. We also have a pretty aggressive acquisition strategy. And as Bert mentioned, earlier this year, we acquired our #2 competitor, Kaman Corporation, or at the time they were operating as KDG in the marketplace. They were acquired about 2 years before that through -- by a private equity company. We looked at them and said they would be a great fit for Motion. Why? Because they had a culture and a strategy that was very similar to ours, and they had great people in the marketplace. So when we can check all 3 of those boxes, it makes for a great acquisition. As such, we approached the private equity group and we made an offer, and it was a very short amount of time in the due diligence and the close, and they became part of our company on January 3 of this year. And as Bert indicated, we have a very robust integration plan for that business. It represents about $1 billion in revenue, about 1,700 people and a little over 200 locations. So when you combine that with Motion, that puts us at about 9,000 people throughout North America, it gives us roughly 800 locations, 750 to 800 locations presently. We will dial that down a little bit as we continue in the integration process, where we have overlap in facilities. And it just gives us a much broader opportunity to reach customers that we weren't necessarily reaching. Motion specialized primarily in large corporate accounts. About half of our business is tied up in that part of the business and Kaman was looking at smaller accounts, and we can get a little bit more into that in the question-and-answer session. But all in all, it was a great acquisition for us. We've seen solid growth since we came out of the pandemic in 2020, and we expect that to continue into the future as we move through the balance of this year and we look into 2023. And again, we can talk a little bit more about that in the Q&A. But a lot of good going on in Motion right now. And I think that it's a great story for us to tell.

Terrific. With that, I want to be mindful of questions in the room first before I go into the fireside chat questions, any questions that folks have. Okay. If one comes up, just raise your hand. Bert, you've had some time now to settle into your role. FedEx, obviously, another significant logistics player. What sorts of KPIs or financial metrics did FedEx use that perhaps Genuine Parts could -- there's some opportunity there or other things you'd like to implement in the business from your prior experiences?

Sure. Maybe I'll start with the second half of the question first. I think FedEx, you guys know the story of FedEx and then one of the hallmarks of that business is the use of technology and the innovative use of technology across a 40-plus year history. And that's something that I think we have a really significant opportunity to do here at Genuine Parts. And that's not just because I brought it from FedEx. The innovation and technology move at GPC was alive and well long before I showed up. I think we have a really nice opportunity to leverage technology across multiple parts of our business, whether it's when we look at the modernization of distribution centers and supply chains, there's a technology play there. When you look inside the physical aspect of the distribution network, you look inside of a warehouse, there's an opportunity for automation. Randy's team has done a nice job with some of that already. And so technology is a key play for us. We're using technology in our back office as we look at supply chain and inventory optimization, we're using technology to be smarter on the pricing side. And so these analytics and some of the hallmarks of great tech companies are coming through, particularly with the new CIO as well at GPC and the ability to drive the use of technology going forward. That's going to be a big part of our business and something that I had a lot of experience with both in the domestic part of my FedEx experience and then international part of my FedEx experience, integration over there as well. And so we can bring that across and modernize how we look at the business. I think in terms of KPIs, to the first part of your question, we have our focus on the exact right things. I don't think there's anything that a FedEx does that is better than GPC in terms of staying laser focused on KPIs. The things that are important, I think that I look at, as we look at how we run our business on a day-to-day basis would be comp sales is a place we stay focused, gross margin percentage and rate is a place we stay focused, operating margin, whether that's segment profit or operating income, cash flow and ROIC. Those are the places we stay focused. Those were hallmarks of GPC's focus for 94 years. I mean, excellent financial track record, great capital discipline and those don't come without some really sharp focus on the internals. Improvement, to kind of the last part of your question. I think we really should be staying focused on improving all of them. I think we have opportunities on gross margin to continue to expand in that area, operating margin, which I mentioned, we had a nice expansion in operating margin here in the second quarter, and we'll stay focused on that. We expect to expand margin for the full year as we look ahead. And so gross margin, operating margin and then, obviously, free cash flow, these are the places we'll stay very focused.

Stock's had a real nice run rightfully over the past few months or so. Theoretically, that makes M&A potentially more attractive than repo. And I know you -- in your -- when you talked about your priorities in capital allocation, you named repo last. At what point do you think the organization both financially and organizationally would have the ability and capacity to make another reasonably sized deal and where might that occur either in one of the two businesses geographically, what have you?

Sure. Great question. And so look, I mean, the stock has been on a nice run, up 12% year-to-date, which I think is a pretty nice place to be given the environment. And when we look about internally at ideas and whether it's share repurchase or M&A, we really do try to stay very faithful to our very long history of discipline. And so it starts with that look at CapEx, M&A, share repurchase and the dividend. The dividend being a priority. It's been a priority for a very long time. Many times I get the question of as the new CFO, are you going to change the dividend? And I like to say as the new CFO, we're not changing our capital philosophy. So it's important for me to reiterate that point. As I look into the more specifics of your question, Sam, and I look at M&A and where we might look, again, we stay focused on the highest and best use of a dollar. What is the most accretive thing we can do vis-a-vis all the opportunities that come forward from the portfolio. And as we look at M&A, we start with some simple kind of philosophy. And Randy talked about it a little bit, we talk about strategic fit. We talk about does this fit a part of the portfolio where we need to fill a gap, expand the geography, added capability. So that's one criteria. Second criteria is culture. Many of you have been around businesses that have done integration, if the cultures don't work, you can have the best integration plan ever, best financial case ever and it won't make it. And then lastly, the financials and how does that fit across multiple metrics of looking at a deal, more pointedly to where we might look ahead in terms of M&A, we have an active portfolio and continue to have a very active portfolio. We've had a strategic acquisition this year with KDG at the beginning part of the year, that's going very well. As I look to where we might continue to nip and talk and fit things in, the independent owner buyout on the auto side in the U.S. will continue to be an opportunity. But geographically, I would think we'd continue to look at markets in Europe and Asia as places to take advantage of our existing scale. So those opportunities would be interesting. And the industrial side will also continue to be an interesting part of our business. But I'd say in terms of priorities, to be specific, we'd be looking outside the U.S. on the automotive side and then within the industrial space as well.

On the auto side, for now, we'll have a couple of questions there and then we'll get to Motion in a second. Clearly, fuel prices have come off a bit over the past few months. Have you yet seen any change in your, either, DIY or the DIFM auto business as it relates specifically to vehicle miles driven and/or perhaps a little more propensity to spend money on the vehicle with more discretionary income?

Yes. We talked about this on our earnings release a couple of weeks ago as well, and it's a great question because the ledger is so unbalanced in terms of indicators. You look at what's happening externally. We have geopolitical pressure, we have lingering COVID, as things that are headwinds and things -- you have to watch inflation is another place. But then you look at both of our businesses, not just the U.S. auto business, but the other side of the house as well. We have great fundamentals underlying both businesses. Global automotive fundamentals are strong. The average age per car is at 12.2 years, which is a record. That's the fifth consecutive year of increase. Scrap rates are at an all-time low, and miles driven had been hanging in there until I think the most recent June data would say they were down. Historically, and I'm new to the industry. So I say historically with what I've learned in 6 months, but that $4 gas price seemed to be the historic place where miles driven started to abate the other direction, and you've been around a long time. So your head nod is affirmation of my point. We didn't see that when we crossed $4. And we didn't really see it when we crossed $5 and now gas prices have come back down, to your point, Sam. And look, we haven't really seen in the early innings of our third quarter, any abatement, and we said this on our call, of anything related to gas prices coming down, and we didn't really see it when gas prices were going up. I think gas prices coming down in general, helps to start to balance this ledger of factors that might be good for the consumer and continue to give the consumers some more confidence, but that picture is also mixed. So a long answer to your question, do we see anything in the early innings? The answer is kind of consistent with our quarterly comments that, no, we really haven't.

Okay. And once you get through some of the tough DIY comparisons, the commercial versus the, I'll call it, retail DIY business, what -- at an industry-wide basis, which should grow faster and why? And how are you situated as such?

Yes. We think that we're at a -- we start from a place of great strength in that regard to do it -- do-it-for-me space, we think we'll grow faster than the DIY. We've long held that belief and that -- so that's our perspective on that particular view. Our concentration of our business is in that space. And that's why I say we start from a place of great strength with 80% of our business globally concentrated on that part of the market. We think the long term there continues to be driven by -- cars are getting more and more complex and the propensity to want to open the hood of an EV or a more complicated vehicle as we're all driving today lowers, we think. So the complexity of the car part and how it's going to evolve, we think, continues to drive folks to want it to go to the do-it-for-me side of the house. And look, when you open the hood of a Tesla and you start to look at it and you've seen some of that, then you see the resistance to maybe how you want to do that on your own.