Genuine Parts Company (GPC) Earnings Call Transcript & Summary

It's my pleasure to introduce Genuine Parts Company. We have with us today Will Stengel, Chairman and Chief Executive Officer; and Bert Nappier, Executive Vice President and Chief Financial Officer and Operating Officer, too, sorry. And Will and Bert, thank you so much for joining us.

Thank you in was great to be here.

So I stumbled over the title because there's been some that sorry about that. And Will, last week, you issued a press release announcing the leadership teams for both the automotive and the industrial businesses, Congratulations.

Thank you.

Can you share a little color around the process for selecting the leadership teams, including the appointment of court as CEO-elect GPC and ultimately, how his operating background board familiarity and leadership approach fit with the go-forward strategy for automotive?

Yes, happy to, and thanks for having us. This is obviously our first opportunity to talk about the announcement. So looking forward to the discussion. We've been working on this for quite some time, as you would expect, and we're thrilled to be able to announce what we did last week. . The way to think about it is we really were solving for or different thoughts. The first and foremost is making sure that we've got the right talent aligned with the right business strategy. So it starts with the business strategy, making sure that we've got the skills and the capabilities of the leadership team aligned to go and execute against that. So that was kind of pillar number one. Pillar number one is what I would call kind of continuity and familiarity where we needed to, especially in this transaction, make sure that on the motion side, we were ready to be the public company right out of the gate. And so that was a pillar #2. IB, what I would say is familiarity, which is how do we make sure that we maintain and sustain the business momentum that we have and the strategic work that we've done over the last 2 to 5 years on both sides of the business. And I think if you look at the announcement, we've solved a lot of those objectives starting obviously with Bert, Bert has been with the business for years. As I've said publicly and certainly internally, Bert plays a bigger role than just the financial officer of the company. And so having him elevate and take on more responsibility on the automotive side fits all of our criteria. And Bert will do a great job taking on more and working with Clark, who I'll talk about here in a second. On the industrial side, similarly, James -- how fantastic talent -- he's been with Motion for over 30 years. He's had every single role in the business. Motion obviously has been an operating division of a public company. And so my public company background kind of partnered up with James and the team, I think, positions us to hit the ground running early on. Court will be a fantastic addition to the team, as you alluded to in your question, he's got all of the things that we need in a leader of the automotive business. He actually has automotive experience. Similar to when I joined Genuine Parts Company, I mean, he's a distribution guy by trade. And so all of the value creation levers associated with anything distribution are relevant. Corta high energy, high passion guy, great followership. He has been in the board room for the last couple of years. So in terms of understanding our strategy, he's very well up to speed. He knows the team, the leadership team respect them and I think he brings a lot of relevant expertise in terms of supply chain and tech and global business and global sourcing and e-commerce and everything in between. So we're thrilled to have them. Both sides of the business are super energized. I would obviously admit that people were waiting for this announcement internally. And I think the clarity that we've provided everybody has created a lot of positive energy. So we're looking forward to closing out the year and then getting started in '27.

Great. Great. So maybe just to drill down a little bit more on that detail. Will, you're going to become Chairman and CEO of Motion following the separation. What excites you most about Motion as a stand-alone company? And how does your prior experience at GPC and HD Supply and in distribution shape your priorities for the business?

Yes. I would say on the last part of your question, I mean, the nice thing about the way in which we've set up these teams is the strategies have really been put in place well before this moment in time. And not only have they been put in place, but we've been working as a collective team on those strategies for multiples of years. So in terms of what it means and a big reveal in terms of change of strategy, I don't see that, as we think about kind of what I'm most excited about at Motion, I would say it's all about growth. And quite frankly, these comments could be for both sides of the business. But the special sauce of motion is just the way in which it interacts with its customers. It's so embedded in the customer operation, and we've got so many great embedded relationships but at the same time, we have so much opportunity to grow that wallet share with existing customers. So we've got a lot of opportunities on organic growth that are exciting. We've got a lot of opportunities from a margin standpoint, driven by pricing and sourcing and we've got some really good opportunities to think about bolt-on M&A to add on top of our growth algorithm. So there's really a lot to like in the Motion business and certainly also on the automotive side.

Yes. And Bert, I have the same question for you on the automotive side. I mean, you have this expanded role now, as Will mentioned. What are some of the key operational and financial priorities you're focused on to ensure just day one readiness and long-term value creation.

Thanks for having us again. And I'm just thrilled to have the support of Will Core of the Board in my new role, excited about our opportunities. Will said it best. We both have compelling businesses, and there's a tremendous amount of growth ahead for us. The automotive business starts with a great team. So continue to have the blessing of having a lane in his role with North America, Frank in Europe, Rob leading Asia Pac, and strategies that we put in place almost a year ago. And so in terms of being ready for day 1, I think we're there. We have to execute and continue to carry out 2026, but turn into the separation with a lot of momentum, which is what we have. We're going to be focused on supply chain excellence and investment in supply chain, modernizing our supply chain in the U.S. We've made these investments as many of you know internationally over the last couple of years with changes to DCs in Asia Pac, changes to the DC network in Europe. We now get to harvest that benefit as we turn into 2027 and take all of that learning and apply it in the U.S. now with the team that's ready to deploy the capital. We have a great supply chain team here in the U.S. We've got 2 new DCs coming online this year, 3 more approved. So you'll see us modernize our supply chain in the U.S. because it's important to have the right place, right part at the right time at the right place. Second part, I think, of where we'll be focused is on sales excellence. We have to continue to be competitive in terms of having the right people in the field, the right share of wallet. We have great opportunities with share of wallet inside the U.S. and internationally. And that also drills down into the opportunity that we have with independent owners. And so continuing to drive that benefit we have with that really important part of our network in the U.S. and our operating model. So we'll continue to lean in there on sales excellence. And I think the third part of where we'll be focused is on just continuing to run great stores. We've done a good job in the last 2 years of improving the performance of company-owned stores in the U.S. You've seen us go from a negative 0.5% comp 2 years ago to mid-single-digit comps as we started this year. And that's just a culmination of all the work we've done in the U.S. NAPA business in terms of foundation, leadership, inventory availability. And now we actually have that ability to carry that back to the independent owner set and drive further sales excellence there. So we're excited about our opportunities. I'm thrilled to be a part of this business going forward. It's going to be fantastic. We have 2 compelling businesses and great opportunities for everyone.

That's great. Just because if we're getting closer to the planned separation of the 2 businesses, we've passed some critical milestones with the stand-alone audits and the soon-to-be filed Form 10. Can you walk us through the remaining critical items between now and the separation date and what, if anything, could move the timing in either direction and what you're prioritizing over the balance of '26?

Sure. I mean we've had the benefit of this going touch wood here, pretty smoothly all year long. It doesn't mean that there won't be hiccups along the way. We've really divided it into 3 buckets of work and you touched on a few of them there. The first and most important is the separation of the business itself. And so we've got a dedicated team, a PMO team, that's focused on the separation that was important to make sure that the business as usual part, the day-to-day continues to execute. We deliver our numbers and do what we need to do on the day to day. And so that team is dedicated to looking at the contract separation, looking at system separation and rearchitecting process, and that's going extremely well. The second body of work, you touched on it, Kate, with the stand-alone audited motion and the Form 10, all of that is in flight. It's on track. Our filings with the SEC are on track. And we feel really good about where we stand on that front. And then finally, it's just the rest of the capital markets kind of activity. So the capital structure of the businesses, capital allocation, rolling into Investor Days, which are December 8 for automotive, December 9 for Motion here in New York. And that will be the focus in the second half. I don't know that we have anything that I would call out at this point that would move us 1 way or the other from the first quarter. There are certain things that aren't in our control. Obviously, we have an SEC review process to go through. But as I said, we continue to feel really good about that. And we feel good about the work that's being done. So say we're on track. We've had a lot of great announcements through the course of the year with stand-alone costs, dissynergies, all those things, now a leadership announcement, and so we continue to deliver on milestones. And I think that's just a reflection of the progress we're making and how confident we are and where we're headed.

I would just add, of course, the teammates around the world. I mean, we've asked a lot of everybody to go through the separation while running the business and delivering on our customer commitments and I couldn't be more pleased with the work that we've done around the world, while we are doing this work, but making sure that we're not losing focus on taking care of customers. So it starts and ends with that. And so delivering on our commitments, both internally and externally. The first half is something I'm proud that the team has been able to do everybody.

Yes, it's a great point that you've been through this major change while maintaining the great metrics, financial metrics of the business. Bert, I wondered if I could ask you just how you're thinking about the targeted leverage profile and credit rating for each company post the separation?

So for both, I think we've been consistent in saying that we're targeting investment grade for both businesses. We believe we have a strong path to do that. Automotive business, it's important to be investment grade for the supply chain finance program, which many of you are familiar with. . And so we've got all of that work underway right now. We'll be going to the rating agencies later this fall for that conversation and then continue to work on the structure side of it as well. The with that investment-grade rating, I think we'll still have the flexibility to file capital allocations for both sides that follow the business strategy, and this will be the moment that we really, as we've been saying, there's no sacred cows. We're going to make sure that we're setting up and taking the separation at the moment to ensure that, that capital allocation strategy follows the business at. I think you'll see motion lean on organic growth as a very strong, compelling part of their story line. but also that's a space where there's plenty of M&A opportunity. And you'll see, I think, the industrial side of the business focus on M&A as a leading priority for capital allocation, followed by CapEx, it's a little less CapEx intensive than automotive, and then we'll be focused on shareholder returns as well. On the automotive side, I think you'll see us focus on CapEx as the leading kind of priority, particularly when you think about the point I was making a minute ago about modernizing our supply chain in the U.S. We have a great bolt-on M&A track record in Europe. You'll see us continue to lean in there and have opportunities in the U.S. as well and then we'll have our opportunities for shareholder return for the U.S. business as well. So we're going to be true to GPC's roots. We've always been very thoughtful and disciplined about capital allocation. And I think you'll see that as each business separates and shares its investment story, shares its strategic plans and shares the capital structure and allocation at Investor Day in December.

Kate, I missed the chance to welcome Howard Yu, who will be the CFO at Motion, just drafting off of the points that Bert made. We're thrilled to have Howard join the Motion team. Howard brings public company CFO experience and in fact, led a spin coming out of Danaher. So he brings a lot of very deep and relevant expertise around all things capital markets and spin-offs and then capital allocation. So we're thrilled to have him on the team. He started yesterday officially and is listening from Atlanta. So good to have you on the team, Howard.

Great. One thing just because you just mentioned it, brand I might be putting the cart before the horse, but I just wanted to make sure I didn't forget to ask it. Modernizing the supply chain in the U.S. for automotive is a priority for CapEx is what I heard. Do you have line of sight into what that means or what that looks like yet.

Yes, we do actually, and I mentioned this earlier, great supply chain at NAPA in the U.S. And so over time, I think you're going to see us rearchitect our network in a way that makes us more efficient and get parts closer to the customer at the right time. It's a multi-echelon approach. . I think we'll rearchitect it in a way that allows us to be smarter about product returns. It will be smarter about import product, and then it will be smarter about how we deploy the product and the availability into the store network. So you'll see us kind of operate through those 3 different prisms. The one that -- the two that come online this year. One is a returns-oriented DC that came online in August. Second facility comes online later in the fall, that's more core DC focused. And so when we think about that, we're going to be leaning into probably, over time, a net smaller network from where we are today, 6 DCs in North America will probably come down from that, but more efficient and a much deeper use of technology. There's no better time than right now to open a DC with all of the technology that we have available at our fingertips. We actually did what I think is a pretty clever investment just outside of Atlanta, we built a robotics lab where we're actually allowing vendors to test their technology in front of us and compete with each other so that we can take the best-of-breed technology, whether it's robotics or shelf movers into a facility and have that be today's technology and have that ability to compete. And the good news is, I think that we're going to do all of this investment in the U.S. within the cost envelope of CapEx that we've been deploying today. It's just a reallocation for where we've been able to deploy that offshore. We get to deploy it now into the U.S. and have a team that's ready and willing to go execute.

And then back to the separation. Just -- again, I'm jumping around a little bit. But you mentioned M&A might be a little bit more prevalent in -- on the Motion side. But are we talking maybe larger transformative acquisitions or more bolt-on acquisitions?

I think Will have a primary focus on doing bolt-on M&A, certainly, as we get out of the gates. If you actually look at the fragmentation in the market, it would lean towards bolt-on types of deals just by definition of the landscape of the market. So that will be the primary focus, especially as we come out early days. I think we've demonstrated our ability to do bigger deals with the KDG acquisition. So we've got a playbook that flexes based on the opportunity that we see -- we're going to be very disciplined allocators of M&A capital. I think Howard brings that expertise based on his background as well. And we've got some good institutional capabilities around doing smart M&A. We see a really exciting opportunity in M&A, but we also see an equally exciting opportunity in just taking really, really good care of our existing customers, selling more to them, acquiring new customers, investing in our sales folks, being really thoughtful about our multichannel selling approach because that's a really profitable way to grow. So we'll do both and be very thoughtful.

And then a question we still get a lot is just how we should think about the dividend policy of each.

I think that goes back to my capital allocation point from a moment ago. No sacred counts. As we look at capital allocation, we're going to be thoughtful about the competitive base and what competitors do on shareholder returns as we think about each business to be thoughtful about what's needed to invest in the business, whether it's CapEx at U.S. NAPA or it's an M&A opportunity at Motion. But more to come on the specific policy as we get to Investor Day. But again, we're being really, really thoughtful about taking this moment to be sure that we've set the companies up on an individual basis for success and allow them to pursue all the growth opportunities that they have ahead.

Great. Maybe if we can drill now into the individual businesses, starting with Industrial or Motion, what growth opportunities are you focused on capturing regarding data center infrastructure? And how material is it today?