Genuine Parts Company (GPC) Earnings Call Transcript & Summary

So next up -- is this working? Next up, we have -- or we are lucky enough to have one of the largest aftermarket and industrial distributors globally. 140 million shares at $130, $18 billion market cap. Net debt of $2.7 billion from an enterprise value of $21 billion. Speaking with us today is CEO, Paul Donahue; COO, Will Stengel; and CFO, Bert Nappier. Gentlemen, thank you for being here. And Paul, if you just have some introductory comments, that will be great. Thank you.

Yes, good morning, everyone. Thanks, Carolina. Thank you, Mario, for having us for the 47th consecutive year. GPC is thrilled to be here. And thank you, Brian, as well. Maybe just a couple of quick comments, Carolina, then we'll get right into Q&A. We announced our third quarter results earlier this month and had another strong quarter, margin expansion, double-digit earnings growth, which was our 13th consecutive quarter of double-digit earnings growth. So, pleased with that. Maybe just a minute on business units. Our Industrial business, we go to market under the Motion brand. Motion just continues to deliver. We did a significant acquisition last year of the #3 player in the market, KDG. They are doing a wonderful job on the profit side. Motion now represents 50% of the profit pool for all of Genuine Parts Company. And the Motion team, Carolina, really transformed that business into more of a solution provider than just a distributor of bearings, belts and hoses. We're really excited with our opportunities to continue to grow that business and take market share. Maybe just a minute on international, and we have our Chairman of our Australian business over here with us, John Moller. International Auto continues to rock along. We're in Europe, we're in Canada, we're in Australasia. That group continues to produce great results. We're the leading player in each one of those markets. And then U.S. automotive, we -- as we reported earlier this month, the numbers in Q3, on the top line, were a bit below our expectations. But we're confident with the near-term actions we've taken. We have new leadership in place, that business will continue to perform well, as it has over the past 98 years. And our long-term strategic initiatives to continue to deliver profitable growth. Our in-place industry fundamentals are strong. So we're expecting a good rebound from the U.S. automotive. So in closing, Carolina, I'd just say, look, we've improved our outlook every quarter this year. We expect to close '23 with double-digit earnings growth, expanded segment margins and mid-single-digit top line growth. So all in all, another solid quarter. And I think what it really illustrates, hopefully, for all of you, is that our model works. Having a global and diversified portfolio is the right thing for Genuine Parts Company. So with that, Carolina, I'll open it up to you for any questions for the group.

Perfect. And Genuine Parts, I think, has presented here for the last 47 years. Since then, you, specific to automotive, has just taken so much share. We've talked a lot about availability today and yesterday. Can you kind of talk about your logistics. 200 DCs, $4.5 billion in inventory, and how that helps you compete in the market? .

Well, sure. I'll take a shot at it. Will, you jump in as well. And I think -- did we introduce all these guys, the CFO; Wills, our President; COO. Yes. Look, we've got -- we're in 17 countries. We've got almost 10,000 stores. We use common suppliers across many of our markets in Europe, Australia, New Zealand, of course, North America. We're 60% automotive now, 40% industrial. When we were up in front of this group in years past, we had 4 different businesses. Today, we are solely focused on global auto, global industrial. We largely play in the DIFM space. That's 80% of our business. And yes. So we've got great scale. We use common suppliers around the world. We're automating a lot of our distribution centers, which is certainly a sound investment, we believe. We share talent across all of our business as well, Carolina. So yes, we're excited about the future opportunities for GPC.

And maybe, Carolina, just to maybe add a little bit more perspective. When we talk about that core customer of Genuine Parts Company, the do-it-for-me customer, think of the technician that's working in a repair shop. And so 80% of our activity, whether we call it a store or a branch or a DC is happening out of the back of those facilities. And those customers need the right part, it needs to be quality, they need it fast. And if you don't have any of those, you generally give the customer an opportunity to look somewhere else. And as Paul talked about, whether it's the supply chain investments that we're making to make sure that our store footprint covers all the markets the way we need it to, whether it's our inventory strategies and our assortment strategies as it relates to the products that we offer, and then all the logistics and local store operations that's getting that product from point A to point B, that's what's really important to the customer, and that's where we've been investing in the business.

Wonderful. And well, I do want to ask you some questions about those investments. But also just another kind of industry question just the supply chain. We've gone through some supply chain headwinds over the past few years. They seem to be abating. Have those supply chain headwinds impacted how you manage the business or anything going forward?

I think the supply chain disruptions that all industries have felt over the last 2 to 3 years has probably forced everybody to reimagine some of the things that they're doing. The good news is that all of our supply chain initiatives in some form or fashion were designed 3, 4, 5 years ago and are perfectly appropriate for what we felt and saw coming through supply chain, in particular around inventory. If you think about the dynamics of the constraints related to available product, that's got implications for who you partner with, the diversification of your supplier base, both geographically and by product, your merchandising strategies, your fulfillment strategies, your inventory stocking strategies as you think about -- I asked for six 2 years ago, but I only got 1. Now I asked for 4, I get 4, do I need 4? So it's that whole level of sophistication and evolution. The good news is a good company and distribution is doing that each and every day anyway. And I think the game has just accelerated coming out of COVID to make people more aware of the things that perhaps didn't work as well as they thought in a market dislocation period.

And well, so prior to your promotion of COO, you were -- you came in as CTO back in 2021. And we -- I think at that point, we realized the conversation of how much technology there really is in this business. Can you expand a little further on some of those investments? And then even to take it a step further, I know you talked about some -- or the industry has talked about some increasing competition from the wholesale distributors. How can a smaller company against some of those investments?

Well, we certainly like our odds, I'll start with that one. Over time, scale matters in distribution, and we're super well-positioned from that perspective and excited about extending that lead. So we believe that, that scale allows you to do things like investing in supply chain and technology. There are amazing opportunities in distribution business in our company as it relates to the application of technology. What's even more exciting is the fact that these industries typically have not been fast-forward as it relates to thinking innovatively about the application of technology. We've got a mix of foundational investments that will simplify and make our business easier to work with, both internally and for our customers. And then we're doing some really exciting things as we look forward, all things AI and other. But those investments have implications for operating productivity, top line growth, sales effectiveness, margin expansion, and as we've talked about externally for some time now, technology is at the core of the vast majority of what we're working on.

Great. And then another strategy question. You mentioned Repco today. I think for -- know that only about 56% of your automotive business now is U.S.-based and you've gone globally. And that's relative to some of the peers that will be presenting today, O'Reilly and AutoZone, who have stayed more local. Can you kind of discuss the strategy to go international and how it's been working?

Yes. So you mentioned Repco. That was really our first major foray outside of North America, Carolina. We bought -- we acquired the Repco business back 2013. We -- as we expand around the world, we look for great companies that have a similar culture, lots of talent, because our intent is not to take U.S. talent and ship to Australia or across Europe. We look for companies that have similar supply chain, supplier groups. The acquisition of Asia Pac which is now $3 billion, we've more than doubled the size of that business over the last 10 years. It's been a great acquisition. We brought some of their people here to the U.S. and we've sent some of our people over there. But it led us to have the confidence to go to Europe back in 2017. So we acquired Alliance Automotive Group in 2017. Again, similar game plan, great culture, great fit, great talent. We brought the scale, the technology and the know-how of Genuine Parts and bundled it all together. That business has now doubled in size in 6 years. And both Asia Pac as well as our European business, and our Canadian business, are having just great years and great results.

Carolina, I might just add, another commonality between all of our strategic moves as it relates to geographies is having the opportunity to being #1 or #2 in the market. And that market, locally and in the aggregate, is large and it's fragmented. And going back to your observation about scale, we will win over time as we invest in the business and leverage that scale, that's point one. Point two, which is an important part of the Genuine Parts Company story is our M&A capabilities. And so we believe that we can create a lot of shareholder value as we roll up and execute bolt-on M&As in these fragmented markets. And we've got a great track record in Australia, a fantastic track record in Europe, up to and including some very strategic and thoughtful recent acquisitions in Spain, which is the fifth or sixth largest car park in Europe. We purchased the largest player in that market. That business was about $100 million in top line, just to give you some perspective as to how fragmented that market is. And inside of 12 months, we added the second largest player, and now we have a very meaningful relative-size advantage in the fifth largest car park in Europe. So couple of good examples to just illustrate the point.

Great. And with all of those roll ups with everything that's been happening, supply chain headwinds, you've still been able to expand margins in that business. One, I think that you've talked about, one strategy you've talked about before is expanding the NAPA brand when you do this. Can you discuss -- kind of integrate that part of the conversation?

Yes, I'll jump on that one. We introduced the NAPA brand in Australia about 5 years ago, with great results, continue to expand. That NAPA brand is iconic. It's known worldwide. We were a little bit more hesitant as to how it might be received across Europe. We first went to the U.K. with the NAPA brand about 3 years ago. Reception was awesome. We've now launched across all of our European markets. We've grown from -- in 3 years, from 0 to EUR 400 million this year. There was a lot of discussion, Carolina, whether Europeans would readily accept what some look at as a private brand. The response has been overwhelming.

Great. And then I think, Brian, could you?

We can't hear you, Brian.

So a follow-up to one of Carolina's questions. But going back to the third quarter results you just recently reported and the weakness you called out in the, I guess, Domestic Auto business. Just help us understand better the dynamic there. I know there's probably multiple factors. But are you seeing something competitively? Is there an internal issue? Is it more of a sector type dynamic that's weighing upon sales growth at this point?

Yes, I'll take it. Definitely multiple of factors. We're not seeing anything competitively different or structurally different in the market. The factors would include things like year-over-year comparisons on 2 dimensions. One is, last year, we had a big selling event that didn't repeat. We had in U.S. automotive 10 percentage points of growth from price that did not repeat. And so -- and then as we talked about on our call, we know that the team can execute at a different level on 3 or 4 different thoughts around inventory availability, that local execution. And so you put that all together, and as Paul started with, it wasn't a quarter that we know that we can do better and the teams are focused on doing that.

Great. And then also since we -- you mentioned the year-over-year comparison on pricing, we did see double-digit pricing over the last 2 years. Can you kind of talk about how your -- the repair shop, but also the end consumer accepted those price changes and why you're able to push through price?

Yes, I'll take that one. I think start at the very top, the industry pricing dynamics continues to remain very rational despite a lot of volatility in dynamic environment over the last 2 years. It's also true that the industry has benefited greatly on the top line from price. So we'll just mention that. Our third quarter, we talked about the comping that we had with U.S. automotive with a 10% -- nearly 10% headwind from inflation. So as you think about all of that, our strategy through the last 2 years has been to protect gross margin rate, and we've done a nice job of that. We stayed flat last year in a pretty dynamic environment. We've done a nice job of expanding this year. I don't think the industry really gives back price over history, and I wouldn't see that going forward. Having said that, Carolina, to your question about the consumer, we certainly are seeing a more cautious consumer as we enter the fourth quarter, and I think, yes, we'll turn into 2024, for a lot of reasons. You've got student loan repayments starting this month that bring on a new dynamic to the balance sheet of the average consumer in the U.S. That's about $10 billion in payments a month that are going out the door. You've got the continued pressure from interest rates, inflation on cost is still pretty persistent at 3%. So when you take that together, we have seen some pressure. Now having said that, I do think our work on margin and what we've done on gross margin allows us to be flexible. We're so much smarter than we've ever been in this space, we talked about that in our Investor Day in March, about being able to be strategic, about moving up and down the scale, and it's SKU by SKU. And so this intelligence and the investment we've made to modernize our pricing and data analytics in the space allows us to think about where we want to respond in different markets and in different products. And that's allowed us to maintain great gross margin growth through the course of this year. We raised our forecast for the rest of this year. And so we do think that it's a good balance. And we've been able to meet the consumer where they are with our product assortment and allowed us to retain that gross margin rate. And so I think the balance is there and we're very mindful of it on a day-to-day basis. But it is a day-to-day kind of thing when you think about the great strategies that everyone are running in the market.

Great. Dan, did you have a question?