Genuine Parts Company (GPC) Earnings Call Transcript & Summary

My name is Dave Manthey. I'm the senior analyst on the Industrial Distribution team, along with Quinn Fredrickson. And today, we have Genuine Parts Company, which is a global service organization engaged in the distribution of both automotive and industrial replacement parts. To give us a story today, we have my old friend, President, Will Stengel. We also have Greg Cook, who's the Executive Vice President and CFO of Motion, the Motion division of Genuine Parts Company. I'm going to go ahead and turn it over to the management team. I don't see an iPad here, so it's a small room. We'll just go with raise your hand if you have a question, and we can address those after management comments. But welcome, everyone, and I'll go ahead and turn it over to Will Stengel.

Great. Thanks, Dave. Good to see you again. We go way back. So it's always great to be at the Baird Conference. This is one of the best, and we always have it on our calendar to make sure that we're here. So thanks, as always, for having us, and it's always a pleasure to share our story on behalf of 53,000 global employees at Genuine Parts Company. So what we thought we would do is give a few minutes a little bit of background on the business and then answer a few questions with Dave here. So Genuine Parts Company based in Atlanta, Georgia, founded in 1928. An interesting fact about our company, we've had 5 CEOs in that almost 100-year period of time. So that's been an important consistent piece of our culture and the track record and performance of the business over the years. $20-plus billion top line. About $2 billion of EBITDA. You can see we're a global organization. We're in 17 different countries. As Dave mentioned, we have 2 parts of our business. We have our automotive replacement parts business. So we're in the independent aftermarket. So this is existing car stock on the road. We're there to help people fix those cars and get them back on the road. And then we have our industrial replacement part solutions business, which does the same concept for basically the factory floor throughout North America. 10,000 locations. You can see globally, about 25% of our business is international, but the core of our business is based in North America. I'll spend just a few minutes here talking about the automotive business. So the way to think about this is, this is a B2B business. Our customer, 80% of the time, is the repair technician that's working in a repair shop, fixing cars that Mr. or Mrs. Jones is looking to get back out on the road, and we're the solution provider for that repair tech to make sure that they've got the right part to fix that problem at the right price and get that car back on the road. You can see the performance of the business. This is a steady, pretty consistent growing market. It grows about 1% to 2%. It's a $12 billion global organization top line with high single-digit EBITDA rate. And we've got a variety of different types of customers. We highlight a few here. These would be characterized as our major accounts where we have a big national account relationship and then add those local repair shops. We're doing work with the technician. 20% of the time, we're selling product out of the front of our stores. But think about the NAPA organization really as a wholesale distribution business. People call us a retailer, but that's actually a very small part of our business. Our stores are essentially distribution nodes. So 80% of our activity is out of the back of the store going to that repair shop. And as I said, global organization. We're the only global automotive aftermarket player. And you can see about 70% of the automotive is North America, but we do have that presence in Europe and Australia. I'll turn it over to Greg here to give a little bit of perspective on the Motion business. This is a wonderful business and, as I said, represents about 40% of the revenue and a little bit more of that from an EBITDA perspective.

Yes. Thanks, Will, and thanks to Baird for having the chance to be here. It's great to be able to tell the industrial story. As Will said, Motion, which used to be Motion Industries but we go to market now as Motion, we changed that about a year ago. It's heavily based in North America, about 95% of the business is North America, and then the other 5% in Australasia. But in that 95%, that's the part that I get to work in every day. We have really a go-to-market to B2B. And so customers, we have over 150,000 customers. That will be every little shop, every little factory up to big, obviously, name-brand company factories and operations across North America, as you can imagine. Our business is split. So in terms of raw volume, those big national customers, as we would call them, are going to be running close to 50% of the business volume, and the other 50% is -- are all these other factories across North America. But I think it positions us well as we enjoy a broad industrial base. And obviously, a big chunk of our business is in the U.S. We track over 15 specific industries that are in our top industry list, as you can see on the screen. But really well diversified for us. We are spread across these industries. We connect with all of these factories and these customers at such a direct level because, yes, we will connect with the procurement teams at major corporate headquarters, but we also connect. And really, where the activity happens is at the plant level, a procurement manager, a maintenance manager, an engineer, those are the places where we really connect and have a direct sales relationship. And that's what we call ourselves really value-added salespeople in the industrial space. It's more and more about what ideas can we bring to solve their problems on the factory floor. And that's what we're trying to drive throughout these industries. We're excited about the industries, and we're excited about the diversification we have because as one ebbs, another flows. And we have great things going for us. If we thought about those areas of expansion in industrial markets, it's just encouraging to be where we are, and we've had obviously a great business in '22. And you can see some of the representative, major national account, corporate account customers at the bottom of the screen there. And in terms of what we sell, obviously, we are mostly known-- historically mostly known for bearings and power transmission. So that's the parts that move things in factories, right? So bearings -- we're the largest seller of bearings in the world, and that's all at wholesale level, of course. But then power transmission, motors, pumps, things that move things, and again, anything that helps make the factory work, that's we're into. And that's why we love to help our customers advance how they get things done. So yes, that's an overview. Will?

Yes. Greg is being too humble. The performance of the business has been exceptional. You can see it here on the page. This business is comping over 20%. The acquisition of Kaman Distribution Group, which we executed in January of this year, was a very big strategic investment for us, and we were super excited to do that. That's a case study in putting the leader in the market together with a #3, #4 player and extending that relative advantage in the market, a $6 billion to $8 billion top line business. Next closest player in the market is about $4 billion. There's a couple -- other couple of billion-dollar players. And then after that, super fragmented market. So on both sides of our business, think about these as break/fix businesses. So there's a problem. It's not a price-sensitive business generally. Because as long as you have that widget and you're down at the local level with the relationship and selling that service and that technical solution, you win the order. So I'm super pleased and excited with the momentum that the industrial team is building. Part of the momentum that we're building is, over the last 3-plus years, the team globally has been very focused on making sure that we're focused, which is where do we want to play, where do we need to win and then how do we get there. And you see these 5 pillars. These are consistent across all of our global platforms. And inside of each one of these pillars is a very discrete set of initiatives that will position us to grow profitably in excess of our market growth. Our markets generally in these 2 businesses are low single digits pretty consistently. Our industrial business has a little bit more cyclicality to it. Our automotive business is a pretty steady through-the-cycle grower. And then these efforts deliver growth in excess to that. We talk a lot about talent and culture. It's a big deal at our organization. I personally believe it's a competitive advantage for us. That's a result of the leadership consistency that we've had over almost 100 years, and we're evolving that culture and adding to it. Sales effectiveness is all around, how do we make sure that we've got our selling assets, both digital and traditional, positioned in the most effective and efficient way. Technology is table stakes, not only just to make sure your infrastructure is set, but that you're creating new capabilities and productivity through technology supply chain. We're in distribution. We don't make anything. So to not have a world-class supply chain is unacceptable, and we'll continue to invest in that. And that's a big priority for all distribution businesses. Emerging tech is the concept of making sure that we're in front of big emerging trends, think EV. Interestingly, the facts would suggest that's a massive opportunity for Genuine Parts Company. It's not something that's right around the corner if you look at the data in terms of the penetration of EV on the auto side, but what a lot of people don't appreciate is the opportunity it creates for our industrial business as we think about battery plants and all of the near-shoring activity that's coming back to North America as part of that. And then M&A, we talked a little bit about that. We'll add a point or 2 to our top line from M&A. It's a core capability for our organization. We have a ton of opportunities. Both sides of the house is anywhere from $150 billion to $200 billion market depending on how you calculate. And as I described, lots of fragmentation. We have a playbook. We know how to create value. We typically pay down our purchase price multiples pretty quickly with the value that we bring to acquisitions, and so that's a continued growth lever for us. The results have been really pleasing year-to-date. And over the last couple of years, you can see top line, we recently released earnings a couple of weeks ago, top line plus 18. We saw broad-based strength across the business, including Europe and our international businesses, which I think surprised a bunch of folks, but we continue to see good strength. We're in U.K., France, Germany, Spain, Benelux, Portugal. So we've got pretty good exposure to Europe. That business is holding up surprisingly, but I think it's a testament to the automotive fundamentals, that break/fix demand. Margin expansion continues to be strong. This is a very dynamic market. So any time that you're able to get gross margin and operating profit rate expansion, the teams are doing a really nice job. I think that has to do with some of the initiatives that we put in place but pleased with the progress there, and that's translating into a very nice earnings per share growth. So really pleased with the performance of the business, and we'll keep our head down to keep it going. We updated our guidance here and took it up slightly from our previous call. We're calling for a total top line up a couple of points from what we talked about previously. And our EPS estimates, we moved to $8.05 to $8.15, up from $7.80 to $7.95. The guide and some of the considerations, FX is definitely a consideration and then some of the other pieces of the business that we reflected on when we provided this latest update. So those were some of the prepared remarks. Dave, happy to just have a casual conversation on anything that's on your mind.

Sounds good, and we'll pause periodically if you have any questions. Just let us know, and we can address those as well. I'll kick it off. As far as the -- on the industrial side of the business, in particular, it seems like everyone's talking that things are going really well, not seeing any kind of material slowdown currently. It doesn't look like -- since you raised your guidance, it looks like the numbers are coming through for you as well. Is there anything that you would do or you are doing in anticipation of some kind of slowing that might materialize ahead? And the classic question, what are the first levers you would pull if we did see a slowdown?

Yes. Look, I think we have been pleased with the trends in the business. I got a question on the earnings call that said, where are the areas of softness? And quite frankly, we're seeing really broad-based strength backlogs. I'm thinking, in particular, industrial backlog activity is healthy. The end markets generally are all okay. We look at the latest third-party data and study correlations, et cetera. And so we definitely are more aware than ever on where we could go. We aren't feeling it now. Having said all that, for better, for worse through the pandemic, we learned some real important muscles on how to think about cost. We took over $400 million of cost out of Genuine Parts Company through the pandemic. I joined the organization in 2019, and we created a transformation office that was designed to build a playbook around cost. So that playbook exists, and we are aware and monitoring those levers and going to be super thoughtful at the right time should we need to pull them. But what we're seeing now, we're cautiously optimistic and taking it kind of month-by-month.

Yes, it really seems to be a common theme. Your #1 competitor, there's 27 out of the 30 industries are growing. We just got out to fasten all -- they're seeing continuing growth. And so hopefully, that continues. There are some -- in addition to the short term, there are some of these longer-term trends. You mentioned EV electrification, we heard a lot about the reshoring, near-shoring, those sorts of things. And then -- and also automation. I think every one of these, what I would consider, kind of megatrends or coalescing, and your company addresses them at 1 level or another across the board. Can you talk about those trends?

Sure. Sure. Yes, I'll jump in on. So yes, I agree with you the megatrends. Those are the things we all want to talk about. And the reality is for Motion, for industrial, we are seeing that. We're excited about the EV trend. Will alluded to it a few minutes ago, but the number of factories that are announced in the U.S., it's extremely likely that Motion gets a place in selling every single one of those. So we have great selling relationships with some of the biggest names that you all know every day that are in the EV market, and we have great relationships, some of the names you haven't heard yet. And so we're extremely excited about the growth opportunities, the factories being committed to and expanded and invested in here in the United States, especially. But if I move that to the onshoring, the reshoring, obviously, I can't really guide where the U.S. is going, but we, Motion, we feel it every day. We feel the announcements personally because we hear the announcement, and it's our customer. And so we're in at the ground floor. You're going to build a new factory, we're in there setting up in the parts they're going to use, the parts they're going to replace. Sometimes we can get a chance at some of the first part. So it's real. It's exciting for us. And it gives us that tailwind to help weather what might come. Automation, you've brought up automation. That's a very real thing, and it's a great runway for us. We've invested in great ways in the last 5 years in M&A to build out our automation business. It's over $500 million run rate today and be one of the largest national automation businesses there is. So we're going to keep doing bolt-ons. We'll keep looking for scale there. And I think, too, that customer access that we have, that connectivity that we have to all these factories just puts us in a position where we can bring our engineered solutions. And that's really -- in automation, it's got to be so much more about how do you solve a problem than it is about how do you sell a part. And so we're practicing that kind of connectivity and building the cross-sell. So automation is going to be huge in the next 10 years for North America, and we're well positioned to play in that space.

Any questions out there? If not, I'll build on that. So maybe you can give us a couple of examples of automation. When I think about Motion and businesses like it, I always picture, if you kicked up the front door of a manufacturer, everything that's moving in that factory that doesn't have a name is kind of your domain. And so as we think about automation, what type of solutions would you be looking at? Because another one of these big trends that we're seeing is its productivity, labor productivity, lack of labor, brain drain, aging out of the workforce. I mean, all of these things. Again, could you just comment on those factors?

Yes. Yes. Thank you. That's right on, because on the one hand, if you think the factories of old, you have a mechanical motion. Things are happening by virtue of metal parts, moving gears, that kind of thing. Automation takes and say, I can do this kind of motion on the factory line, on the production line in a smarter way and with intelligence. So you're not only bringing electronics there, but you're bringing actuators and different types of motors. That really changes the whole dynamic of a factory. You're not lubricating parts that are going to wear, and it helps automate. And then you go to -- so that's just an underlying foundational investment of the factors you're making. Then you get to the productivity play. Okay, how do I turn what an employee was moving? They were the mechanical part into an automated part, whether it's an actuator or a pump or a different device. And again, the device has intelligence by virtuous, it's computer connectivity. The investments just are not going there. Yes, we're all -- all factors of today are motivated by bringing down that human capital commitment. But even more so, it's just the replacement of old mechanical style impact. Now on the people side, this is another opportunity that Motion is very excited about. The great factory maintenance workers of today, they're aging out. The knowledge that they are walking out the door with is almost impossible to replace. So the opportunity rests with a provider who can walk in and say, "I know how these systems work together to make your factory production line run or I can help you automate it with automation tools and equipment." That's what's very winsome to our customer base. And that's where we're seeing the pull. We're being pulled into our factories -- customers' factories because their people are aging out.

I'd actually take it a step further, which is, in many instances, a Motion employee sits in the factory, or multiple Motion employees. And so the procurement manager, the engineer is sitting there, and they don't -- the best quote you can hear from a customer is we don't think of Motion as a vendor, we think of them as an extension of our team. And so in all of these factories having that perspective and that expertise to say, look, here's where you should go and, oh, by the way, 5 years ago, when we did this and put this widget in, now we need to do that. I mean that customer understanding and stickiness is something that I think is very unique to Motion's business.

Question?

[indiscernible].

yes. Could you repeat the question?

So the question is you mentioned that customers aren't that price sensitive. And in this world of inflation, have you been able to pass-through inflation. Maybe give a case study of a customer that has a situation in a plant and kind of how we problem solve.

All right. That's right. That's a great scenario. I'd say a couple of things. One, today, especially, this year especially, our factories -- our customers' factories are being run to failure. They're not doing the planned maintenance. We are all -- they're all in the motive, get what you can while you can. And so we're enjoying that demand -- us and our competitors are enjoying that demand for the product, the machine is down, the line is down, get me the part. And so we've been very pleased with our positioning with our inventory, our stock of product. We believe we're probably best positioned on having the products at our factories are calling for better than our peers. So the step 1 to your question is you've got to get the line running. And the price of that bearing, the price of that motor is secondary. It's whether you have it, okay? So -- and then the other part of it is, two, is, yes, in our national account business. Yes, you're going to have the corporate office. Look, I sat years ago as a corporate procurement leader, and I understand you've got to negotiate, you want to negotiate on price. But ultimately, so much of the decision -- we alluded to this a few minutes ago, so much of the decision is at the plant level. And the plant folks who have a relationship with our professional skilled knowledgeable sellers are going to go, yes, that is the right product, and this is what it costs. So the sensitivity, look, there's always price sensitivity. But the reality is the production line at the factory floor is what matters most.

You're talking about average order size in the hundreds of dollars typically for a manufacturing plant that cost hundreds of thousands of dollars for every x number of minutes this plan is not producing. So to Greg's point, if you have the widget, you can confidently tell them that that's the right widget and get the line back up and running. The difference between $250 versus $300 is a discussion, but it's not the first discussion. And then do you want to comment on kind of what you're seeing from inflation? The industrial business has a little bit less inflation exposure than our automotive that has a much broader global supply chain. But why don't you comment on what you've seen in inflation?

Sure. Yes. Number one, we've had obviously an uptick in inflation during the year where we had a number of years prior to '22, where it was quite minimal. And so that was unusual. We like a modest amount of inflation. It's good for the market. It's good for our business. So the uptick was real, and it's kind of normalizing, kind of flattening out. Now we have fewer calls for new price increases. I think at some level, suppliers realize, too. Some of the suppliers that are -- of ours, some of our biggest, are here in these 3 days. And you'll hear from them, but they are obviously concerned about keeping their factories running in active. So they're, I think, starting to manage what they anticipate trying to push through in price increases. The other part of it is in our business is that we do have very good relationships with our top strategic suppliers, and we go hand-in-hand to the understanding about the price increase is really only effective if we can get it from our customer. And so they know that a healthy motion is a good motion. And so we work very collaboratively about when do price increases drive through. So -- and all of that, to Will's point, moderates the flow of inflation through our numbers.

Another question here.

[indiscernible].

Yes. So the question was, you mentioned that we were best positioned as Motion to get the factory line back up and running and what drives that. I'd start with the relationship and the expertise that's been embedded over the years of working with the customer at the local level. Product breadth is definitely part of that as well. And I think inventory availability is not just do you have a lot to offer, do you have the expertise to actually put the right widget in the right place at the right time. And you do all that consistently and are in that local trust with the relationships. It's a pretty nice formula. Greg, I don't know if you have anything to add.

The only thing I'd add is like with our sellers, of over 1,500 sellers across the United States, for example, it's just where -- that's what's part of what makes us well positioned. And again, with only 5% to 6% market share, there's so much more opportunity. And that's what keeps us motivated every day. But yes, that connectivity, do we have long-standing connections to these factories at the local level drives a lot of opportunity.

All right. Well, in the time we have remaining here, about 1.5 minutes, Will, maybe you could talk about the benefits of having these 2 companies, which there was a lot of similarities, but there's some different. But under one roof, what are the benefits of that? And then along with that, are there parts of the story that -- it seems like a fairly straightforward story with a lot of great secular drivers. Are there parts of the story that are misunderstood today more than others?

Yes. Listen, I think at the end of the day, these are both distribution businesses. If you look at all the initiatives that we're executing, they're all the same. There's no reason that we can't leverage and don't leverage the expertise and share those best practices across. We just had our entire executive team out to an off-site session and walk through exactly that concept to say, where are you in this journey, how do I leverage. The vendor base is actually very similar. The technology needs are very similar. So there's -- all the indirect costs are similar. So there's a lot of advantages to being together. Listen, I think the big takeaway for Genuine Parts Company is it's got an incredibly successful long history. I had somebody say, we just assumed that if you're 100 years old, you're an old sleepy company. And that's not the case. I think COVID and the pandemic was an instigator for change at Genuine Parts Company. And this person said, it feels like a very different company today, and that's thanks to Paul's leadership, the fifth CEO of the company. And we've got incredibly attractive fundamentals, big markets, great leadership positions, great culture. The balance sheet is rock solid. By the way, we've increased our dividend for 66 straight years. And we want to be known not just as a dividend company, but also an aggressive growth organization that does that through organic and very thoughtful M&A work. So it's a very compelling story. I've been with the organization for 3 years. I feel very lucky to be part of it, and I think the future is really bright.

Sounds good. All right. Will, Greg, thank you very much.

Thank you.

Thank you.