Q3 2024 Genuine Parts Co Earnings Call

In This Article:

Participants

Timothy Walsh; Senior Director of Investor Relations; Genuine Parts Co

William Stengel; President, Chief Executive Officer; Genuine Parts Co

Herbert Nappier; Executive Vice President, Chief Financial Officer; Genuine Parts Co

Kate McShane; Analyst; Goldman Sachs

Scot Ciccarelli; Analyst; Truist Securities

Michael Lasser; Analyst; UBS Securities

Chris Horvers; Analyst; J.P. Morgan

Greg Melich; Analyst; Evercore ISI

Seth Basham; Analyst; Wedbush Securities

Bret Jordan; Analyst; Jefferies

Presentation

Operator

Good day. Ladies and gentlemen, welcome to the Genuine Parts Company third-quarter 2024 earnings conference call. (Operator Instructions) This call is being recorded on Tuesday, October 22, 2024.
I would now like to turn the conference over to Tim Walsh, Senior Director, Investor Relations. Please go ahead, sir.

Timothy Walsh

Thank you and good morning everyone. Welcome to Genuine Parts Company's third quarter 2024 earnings call. Joining us on the call today are Will Stengel, President and Chief Executive Officer; and Bert Nappier, your Executive Vice President and Chief Financial Officer.
In addition to this morning's press release, a supplemental slide presentation can be found on the investors page, the Genuine Parts Company's website.
Today's call is being webcast and a replay will also be made available on the company's website after the call. Following our prepared remarks, the call will be open for questions, the responses to which will reflect management views as of today, October 22, 2024. If we're unable to get to your questions, please contact our Investor Relations department.
Please be advised that this call may include certain non-GAAP financial measures which may be referred to during today's discussion of our results as reported under Generally Accepted Accounting Principles. A reconciliation of these measures is provided in the earnings press release.
Today's call may also involve forward-looking statements regarding the company and its businesses as defined in the Private Securities Litigation Reform Act of 1995.
The company's actual results could differ materially from any forward-looking statements. These are several important factors described in the company's latest sec filings, including this morning's press release. The company assumes no obligation to update any forward-looking statements made during the call.
Now let me turn it over to Will.

William Stengel

Thank you, Tim, and good morning, everyone. Welcome to our third quarter 2024 earnings call. As always, I'd like to start by thanking our global teammates for their hard work serving our customers. And I'd also like to acknowledge all those who were negatively impacted by the devastating hurricanes in the US.
I'm proud of our teams as they rally together to take care of each other and our customers. Our culture shine through with our teammates going above and beyond to navigate the challenge. Taking care of our communities is a pillar of our mission at GPC and we'll continue to support impacted communities through our partners at the American Red Cross.
Let me also welcome Jenn Hulett to GPC. Jenn joined GPC in August as our new Executive Vice President and Chief People Officer, responsible for advancing the company's global talent and culture initiatives. This is a critical area of focus as we continuously strive to be an employer of choice. We look forward to Jenn's many contributions.
Before I get into the results for the quarter, I'd like to take a few moments to provide an update on the business, and share my perspective after nearly six months in the role of CEO. GPC has a great legacy. NAPA will celebrate its 100th anniversary next year.
Motion is a market leading, value added industrial solutions business founded in 1946, and our international automotive businesses in Europe, Asia Pacific, and Canada, have similar long proud histories. Together, GPC is a differentiated business, with compelling opportunities individually and collectively as one GPC team in each of the global markets.
As we serve as we leverage the size, scale, and strength of our company and our fragmented industries, we're intensely focused on evolving the business and leaning into the initiatives around talent and culture, technology, supply chain, and sales effectiveness that we shared in our last Investor Day.
Transformation and investment across all industries is critical as customers' needs and markets continue to evolve at increasing speeds. I'm confident that we're doing the right hard work for GPC's long term benefit as we look to not only extend our existing competitive advantages, but also create new ones.
Most importantly, our legacy has created financial strength, both in terms of our cash flow and our balance sheet, to thoughtfully pursue these actions through business cycles. Our capital allocation discipline is elevated as we work to methodically balance foundational, growth, and innovative investments, across the most attractive and strategic GPC opportunities. In parallel, we're committed to growing our long standing dividend.
We acknowledge that these strategic investments come with near term trade-offs, including higher costs that are amplified by sluggish market conditions and an underlying inflationary cost environment, in turn pressuring results as seen in the third quarter.
We're balancing the medium and long term by offsetting current headwinds with a back to basics customer and operational excellence mindset, which is gaining traction as evidenced by improved internal operating metrics.
We're also managing core operating costs through global restructuring activities, which are on track to deliver the intended impact. And we continuously pursue initiatives to simplify the business and further enhance our productivity.
As we close out 2024 and look ahead to 2025, I want to highlight select examples of actions that reinforce our enthusiasm for GPC's future. At Motion, we continue to extend our value proposition with our customers, with tools, technology and expertise to drive embedded solutions that create value and efficiency for our customers.
Further, our investments in automation to address customers' productivity needs, and mobilizing our technical sales expertise to capitalize on reshoring and near shoring activity present meaningful new opportunities for us.
At our US automotive business, we've invested in inventory to drive better availability by broadening our assortment while simultaneously improving operational productivity. These investments combined with actions to improve our delivery times from stores have strengthened our daily value proposition.
The quality of the NAPA brand is differentiated, and our long standing local relationships, geographic footprint, and expertise, position us to continue to lead in the do it for me segment.
The recently announced refinement to the US automotive operating model will drive greater commercial opportunities in key markets across the US, improving revenue growth and profitability over time. Underpinning these activities are critical investments in technology, that include automation of [DCs] with next generation robotics, enhancements to the customer digital experience, including better search and catalog capabilities, and modernization of our store systems.
These investments will position us to deliver a better customer experience and capture growth moving forward. We're also leveraging 250 world class engineers at our Global Tech Center in Kraków, Poland, to build software for global initiatives, including innovative products with emerging technology.
And finally, by leaning into our one GPC operating philosophy, we're unlocking the synergies that exist between our automotive and industrial businesses globally, with meaningful value creation opportunities ahead as we implement as an example, a re-energized approach to IT collaboration across the globe to simplify and harmonize our operations.
In total, our initiatives are designed to create a better customer experience and generate growth in excess of the market, reduce costs, and deliver attractive returns. All our efforts are at different levels of maturity but all have exciting runway.
Our operating cadence as a global leadership team is designed to challenge ourselves and each other, each day, to be faster, smarter, and better. The decisions to pursue long term investment are difficult in the face of near term market headwinds.
But we believe that these investments will increase the intrinsic value of GPC over time. Our financial results were obviously below our expectations in the third quarter, driven by various market factors that we expect to be temporary in nature. But we are confident that we're doing the right body of work to make the company better.
Now, turning to the third quarter. Note that our results include the impacts of two major hurricanes, Beryl and Helene, and the start of the fourth quarter has been affected by Hurricane Milton. For the third quarter, total GPC sales were approximately $6 billion, an increase of 2.5% year-over-year due to the benefits of an extra selling day in the US and acquisitions, particularly in US automotive.
However, continued softness in market conditions across our global geographies negatively impacted our sales growth in the quarter relative to our expectations, with the most pronounced impacts in Europe and our global industrial business.
The weaker demand environment continues to be impacted by interest rates, combined with persistent cost, inflation, and election, and geopolitical uncertainty. These factors are impacting our customers, most notably with tightened budgets and reduced spending for capital projects in our industrial business, and reduced spending in general maintenance and discretionary categories across our automotive segment.
The weak sales environment along with cost pressure and wages and rent expense plus anticipated headwinds from depreciation and interest expense resulted in adjusted earnings being down year over year. Adjusted diluted earnings per share in the third quarter was $1.88, down from $2.49 last year.
Our results for the third quarter missed our expectations. Our outlook in July included anticipated improvements in market conditions in Europe and global industrial activity, neither of which materialized.
Our original expectation for the third quarter included flat industrial sales growth. Actual reported results ended up down low single digits. In Europe, we expected low single digit organic growth. Actual results ended up flat.
The combination of these market headwinds contributed to over $140 million in lower sales in the quarter versus our expectations. Given our results to date and our expectation that these weaker market conditions will likely persist for the balance of the year, we've adjusted our 2024 outlook accordingly.
While many of these factors are outside of our control, we remain focused on controlling what we can and we're confident in eventual market tailwinds. Bert will provide a clear explanation of the impact of hurricanes, variation drivers versus prior year, and our third quarter expectations, as well as our updated outlook in his prepared comments shortly.
Looking at our results by business segment, during the third quarter, total sales for global industrial were $2.2 billion, a decrease of approximately 1% versus the same period last year. And comparable sales were down 2% during the quarter. We had one extra selling day compared to the third quarter of last year which positively impacted total sales growth by approximately 140 basis points.
Looking at the cadence for the quarter, average daily sales were down mid-single digits in July, relatively flat in August, and down mid-single digits in September. Lagging industrial production activity continues to be the main headwind for our industrial business, as we're now in the longest period of contraction for PMI in over 33 years.
While this period of contraction has lasted longer than many expected, history does show us that we typically see a long period of attractive growth once the index inflects into expansion territory. During the third quarter, 3 of our 14 end markets we track showed positive average daily sales growth year-over-year.
We saw relative strength coming from pulp and paper, and our distribution and logistics segment which was offset by weakness in equipment and machinery, lumber and wood and iron and steel. Within industrial, our core MRO business has remained relatively flat year over year, with continued strength across corporate accounts through the year.
However, customer spending related to capital projects which represents approximately 20% of sales has been down mid-single digits versus prior year. We continue to hear from customers considering capital projects that they are pausing not canceling these plans until they have better visibility into the interest rate environment and the outcome of the election in the US.
As the market leader, Motion is well positioned to capitalize on the eventual improvement in the manufacturing economy near and long term, to expand our customer base and profitably grow share of wallet in this highly fragmented market.
As a testament to Motion's value proposition and customer service, Motion has already received Supplier of the Year awards from 6 of its largest 25 customers in 2024, surpassing the total it received in the previous four years combined.
Industrial segment profit in the third quarter was $259 million, down approximately 8% versus prior year and 11.9% of sales, representing an approximate 100 basis point decrease from the same period last year, driven by sales leverage combined with wage inflation and higher depreciation expense.
Turning to the global automotive segment, sales in the third quarter were $3.8 billion an increase of approximately 5%, with comparable store sales up slightly. During the quarter, we had one extra selling day in the US compared to prior year, which positively impacted global automotive sales growth by approximately 90 basis points.
Similar to the first half of the year, the global automotive sales benefit from inflation remain less than 1% in the third quarter, and expect the same in the fourth quarter. Global automotive segment profit in the third quarter was $262 million, down approximately 19% versus prior year, and 6.9% of sales, down from 8.9% of sales in the same period last year.
Our third quarter results for global automotive segment reflect ongoing pressures from a soft sales environment and cost pressures, particularly in Europe and the US.
Now let's turn to our automotive business performance by geography. Starting in Europe, our team delivered total sales growth of approximately 6% in local currency, with comparable sales flat. During the third quarter, overall market growth remains muted, down low single digits, which was consistent with the second quarter.
The weak economic backdrop in Europe is being driven by an elevated level of deferred maintenance, attributable to real wage declines, unemployment, higher interest rates, and uncertain political and geopolitical situations. In addition, the benefit from same SKU inflation was less than 1%, while the prior year benefit was mid-single digits.
As we look at the economic backdrop in three key European markets, Germany, France, and the UK, higher interest rates continue to negatively impact consumer purchasing power across these three geographies. Furthermore, higher unemployment rates and real wage declines in France and Germany have contributed to softer spending at the consumer level. Collectively, these factors are driving weak consumer confidence across the three markets.
Despite this challenging environment, our team continues to outpace the market growth and win share, driven in part by our initiatives with key accounts and the rollout of the NAPA brand, which is a competitive differentiator.
In the Asia PAC automotive business, sales in the third quarter increased approximately 7% in local currency, with comparable sales growth of 4%. Sales for both commercial and retail increased in the third quarter with continued strength in retail, particularly in Australia.
The macro environment is also challenging in the region, with Australia experiencing the weakest economic growth in nearly three decades, and New Zealand currently is in its second recession in 18 months. However, our teams are executing well, extending our industry leading position, and taking market share.
In Canada, sales increased 1% in local currency during the third quarter with comparable sales decreasing 1%. Our Canadian team continues to perform despite ongoing pressure from a more cautious consumer and difficult macro environment. Sales in automotive and heavy vehicle perform similar in during the quarter, with both having positive growth.
Lastly in the US, automotive sales increased 4% during the third quarter, with comparable sales essentially flat. The extra day versus the same quarter last year positively impacted sales growth by approximately 160 basis points. Our growth was also driven by acquisitions, most notably, the acquisition of MPEC that we completed in May.
The sales results were broadly in line with our expectation, as we believe we're benefiting from the actions that we've detailed over the last few quarters to improve our execution. And we're seeing a positive impact in the marketplace.
Our average daily sales cadence through the quarter was positive in all three months, with July being the softest month. Sales to our commercial customers increased low single digits in the quarter, while sales to do it yourself customers was down mid-single digits.
Within commercial, fleet and government, auto care, and other wholesale were all positive, while major accounts underperform the group but improved sequentially as we remain focused on profitable growth within the major accounts segment.
On a comparable basis, sales from company owned stores were slightly positive, while comparable sales into our independent stores were down slightly. More broadly, for US automotive to provide additional perspective on the cautious consumer, on a year-to-date basis, our non-discretionary repair categories which accounts for approximately 50% of NAPA's business we're up low to mid-single digits.
Our general maintenance categories which represents approximately 35% of our business were flat year over year driven by continued cautious and consumer who's deferring certain service and maintenance related purchases. Discretionary categories representing approximately 15% of the business were down mid-single digits.
We continue to invest in our US automotive business for growth and build on significant improvements in service over the past year. During the quarter, we further invested in inventory, increasing the skew coverage in our company owned stores by approximately 10% while driving further productivity in our DCs, which resulted in a more than 8% increase in our internal DC service metrics.
We're encouraged with the continued progress and have seen a material improvement in our customer service and store delivery metrics. We will obviously continue to stay focused on this important effort. Going forward, we see the commercial customer is the growth engine of our industry, and we benefit from the fact that 80% of NAPA's business serves this segment.
Our continuous improvement on inventory availability, service and product quality position us well to win in the markets that we serve.
Following our successful acquisition of the MPEC business in the second quarter, we completed the acquisition of our next largest owner, Walker Automotive Supply in August, furthering our plan to own more of our stores in strategic priority markets.
We added approximately 70 NAPA stores across North Carolina. Year-to-date, we've made strategic acquisitions of more than 450 NAPA stores from our independent owners as well as competitive stores in key markets, including approximately 160 in the third quarter.
Our store network in the US is now comprised of over 6,000 stores of which approximately 35% are company owned, up from approximately 25% at the end of 2022. Over time, we see a path to bring our network closer to a 50%, 50% mix, with our independent owners continuing to play a critical role in our network.
While our quarterly financial results were below our expectations, we are confident that we are investing in the right areas to better position GPC and we're experiencing traction across numerous efforts. We believe the current market softness is temporary and will eventually serve as a tail end. The long term fundamentals of our industries are attractive and our businesses are well established with leadership positions.
We're balancing near term actions and medium and long term investments, disciplined and consistent investment in our business, particularly during temporary periods of broad weaker industry dynamics will strengthen our leadership positions and earn profitable market share and create value.
In closing, thank you again to our global teams for the leadership and hard work. And with that, I'll turn the call over to Bert.