Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Third Quarter 2020 Earnings Conference Call. Today’s call is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] At this time, I would like to turn the conference over to Sid Jones, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us today for the Genuine Parts Company Third Quarter 2020 Conference Call. With me today are Paul Donahue, our Chairman and Chief Executive Officer; and Carol Yancey, our EVP and Chief Financial Officer. As a reminder, today's conference call and webcast include a slide presentation that can be found on the Genuine Parts Company, Investor Relations website. Before we begin this morning, 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 issued this morning, which is also posted in the Investors section of our website. Today's call may also involve forward-looking statements regarding the Company and its businesses. The Company's actual results could differ materially from any forward-looking statements due to 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 this call. Finally, please note that we've accounted for the Business Products segment, S.P. Richards, as discontinued operations for all periods presented. Now, I'll turn the call over to Paul for his remarks.

Thank you, Sid, and good morning, everyone. Welcome to our third quarter 2020 earnings conference call. We appreciate you joining us today and hope you are staying safe and well. During the quarter, we remained focused on our top priorities, which include ensuring the continued health and safety of our employees, customers, suppliers, and communities in which we operate; execution of our strategic initiatives and cost actions for our global Automotive and Industrial segments to deliver customer value, operational efficiencies and strong financial results; management of our working capital to drive strong free cash flow and pay down debt to further strengthen our financial position, and enhance liquidity; effective capital deployment, including strategic reinvestments in the business, paying a consistent dividend to our shareholders and the repayment of debt as appropriate; and finally, we also advanced our ESG initiatives with the release of our 2020 Corporate Sustainability Report. Carol and I look forward to covering our progress in each of these areas today, and then taking your questions. Our teams continued to execute with agility through the third quarter, aggressively managing each of our operations through the challenges of COVID-19. We are proud of their hard work and commitment to operational excellence, which has required effective measures to maintain a safe work environment, while also providing first-class customer service. Through the quarter, we engaged with our teams at every level and resumed field visits to connect with our employees, customers and suppliers. We can tell you firsthand that through the adaptability and successful execution of our passionate and talented associates, we are fully operational and prepared with comprehensive readiness plans, should a second wave begin to materially affect our businesses. So, a big thank you to our 50,000-plus team members across our global footprint. Upon the divestiture of our Business…

Thank you, Paul. As a reminder, our comments this morning will focus on adjusted results from continuing operations, which exclude transaction, restructuring and other costs and income. Total GPC sales were $4.4 billion in the third quarter, down 3.4% from 2019 or up 1%, excluding divestitures, which is much improved from the 10% decline in the second quarter. We're also pleased to report our 12th consecutive increase in quarterly gross margin, which improved to 35% compared to 33.4% in the third quarter last year. The 160 basis-point improvement primarily reflects the benefit of sales mix shift to higher gross margin operations, positive product mix, especially in industrial. The broad improvement was driven by our focus on strategic category management initiatives in areas such as pricing and global sourcing. The divestiture of EIS last September 30th was also accretive to gross margin performance. These items were partially offset by a decrease in supplier incentives due to lower purchasing volumes. The pricing environment has remained stable thus far in 2020 with limited supplier price increases and very little inflation in our third quarter sales. Based on the current pricing environment, we expect only minor price inflation through the balance of the year. Our selling, administrative and other expenses were $1.1 billion in the third quarter, down 1.7% from last year and representing 26.1% of sales compared to 25.6% last year on an adjusted basis. The decrease in operating expenses reflects the favorable impact of both, our permanent and COVID-related costs actions implemented thus far in 2020, as previously mentioned by Paul. In accordance with our $100 million cost savings plan announced late in 2019, we're pleased to report that we have successfully achieved the $100 million annual target well ahead of schedule. With more than $40 million in savings recognized in the…

Thank you, Carol. Through the continued focus on our top priorities, outlined at the beginning of this call, we were pleased to report a strong financial performance for the quarter. Our results highlight our progress in several key areas, including strengthening sales trends, continued gross margin expansion, transformative cost actions and significant cost savings, operating margin expansion in each of our businesses, and a stronger balance sheet, enhanced liquidity and substantial cash flows. We are excited for the future at GPC, and we look forward to reporting on our progress in the quarters ahead. We thank you for your interest in GPC. And with that, we'll turn it back to the operator for your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Bret Jordan with Jefferies. Please proceed with your questions.

When you think about the cadence of the quarter, I guess NAPA U.S. specifically but also maybe Europe as well, as we came out of the COVID lockdown, could you talk about sort of how businesses either picked up with mobility improving or maybe even softened as stimulus money was spent? And then, I guess, within Europe, talk specifically about the strength you've seen there. Obviously, not as much consumer stimulus in that economy yet seeming to outperform, could you maybe give us some color as to is that share gain that's driving your significant comp or is it just the underlying lift in service demand?

Yes. Thanks, Bret. And let's start with the cadence first, and maybe I'll touch on total Company. In total Company, we were steady throughout the quarter, turning positive. We were pretty much flat in July-August, turned positive in September, total GPC. As we look at automotive again, total automotive, we were consistent throughout the quarter, mid-single-digit all-in July, August and September. Europe, we were really strong in August, but we were double-digit growth in every month and the quarter. And as we look at our turnaround in Europe, I couldn't be more proud of that team over there, Bret. They -- I mean, you guys know what we went through in Q2, most of France was shut down, a good bit of the UK was shut down. And for us, the post that kind of increase that we did in Q3 is strong, and we're seeing it across the board. We're seeing it in every market, which is what's really got us encouraged and we're seeing it across our customer base. So, we saw it in our small independent, unaffiliated shops, but we also saw solid increase with the big national major account. So, do I think we're taking market share in Europe? Perhaps. But, I guess, we'll have to watch that play out. I'd also tell you, Bret, we're really excited about the rollout of our NAPA private label. And I think that really bolstered our sales in the UK this quarter, we're up at 10 different product categories down in the UK. And we're rolling that out in France, and then we'll go into Germany and the Netherlands as well.

You might talk about the margin lift from private label.

Yes. The margin on the private label, Bret, as you know, for our private label, we do generally have a more favorable margin when you look at the all-in and consider the terms that we get and the global tenders that we're doing. But generally, we do have a little bit lower price in Europe on that private label. So, it would be neutral in total to Europe on their gross margin. But, the fact is, we're more dollars and we're expanding our market share. And again, when we look at global tenders, there is a GPC benefit, if you will, when you think about global extended terms and putting more volume through our global suppliers.

And Bret, as I called out in my prepared comments, when we first started talking to the AAG team a few years back, we saw a real opportunity to introduce private brand into our European markets, and it's played out honestly exactly as we had hoped and thought of would. And I'll tell you what I'm most encouraged by is the acceptance and I guess the recognition of the NAPA brand in Europe.

And I guess, a quick follow-up. Could you talk about any regional performance highlights in the U.S.? And then, Carol you talked about inflation moderating. Do you see anything going on in pricing? And I guess maybe more on the DIY side, I think, there were some comments coming out of zone that they and Walmart have become a bit more competitive. Do you see any pricing changes in the market in general?

Yes. Pricing has been really rational, and specific to automotive, we cannot say we've seen much in the way of changes whether it's do-it-for-me or DIY, we've had very minimal price increases through the third quarter, 0.1% in automotive, and we really don't expect much at the end of the year. But again, no supplier price increases and a pretty rational pricing environment.

And Bret as far as the -- your question around regionality, I'm assuming you're talking about the U.S. Much like we saw in the previous quarter, our strongest markets continue to be the Midwest and the mountains. And those two guys are heading are really continuing to do a good job for us, both delivering positive numbers in Q3. Where we're seeing a bit of stress and again, not surprising, the Northeast was down mid-single-digit in the quarter. But I point out, Bret that if you go back to Q2, our Northeastern business, we were down 19% in Q2. We've gone from down 19 to roughly down 4 and change in Q3. Mid Atlantic, similar story, high-double-digit decrease in Q2 to down mid-single-digits in Q3. So, still a bit stressed in those markets. But, what we're encouraged by is just really strong sequential improvement quarter-over-quarter.

Okay. And it sounded like Europe, UK might be the strongest market with France number two.

That is correct. Absolutely.

Our next question comes from the line of Scot Ciccarelli with RBC Capital Markets. Please proceed with your question.

Hi. Good morning. This is Beth Reed on for Scot. Just wondering if you guys could help us better understand the cadence of the recovery in auto. I believe the July trends were running about 6% -- first, I just wondered if you could clarify is that sales or comp. I think it was sales, but if you could clarify. And at that time, where were U.S. comps trending. And then lastly, on the U.S. side, did you see trends improve sequentially throughout each month? And any color in cadence maybe around those metrics can be great.

Yes. So, we’ll double team this one, Beth. But, the first response, I think, you asked, and I’m trying to recount your questions. I think, the first one was around, was the 6% that was mentioned back in Q2, was that comp or total. That was total,, not comp. Okay? So, did that answer that question?

Yes.

Okay. And then, as we look at our automotive business in the quarter it -- again, as I mentioned, our total automotive business was consistent throughout the -- was consistent throughout the quarter, mid-single-digit, and U.S. automotive followed a similar pattern, and it was pretty consistent throughout the quarter.

Okay. So, the U.S. auto comps were down low to mid -- low-single-digit each one?

Correct.

Okay, got it. And then, just one on the Industrial side…

Hey Beth, I would just add to that. That improved in the month of September.

Got it. Thank you. That's helpful.

July -- and you did say, July was flattish. There was -- and again, August, September weren't quite as much as what July was. But in total, it was -- that's our total number.

Got it. Okay. On the Industrial side, just with the negative trends continuing, and as you guys mentioned, some of the industries are starting to improve. How should we think about trends in that segment as we look over the next few quarters?

Yes. So, just a little bit of history on Motion, because we've seen the cyclical times before in the industrial business. We generally lag the industrial indicators. So again, that's consistent with what we're seeing again in these recent quarters. What we are encouraged by, Beth, is we saw sequential improvement throughout the quarter. So, September was the strongest month of Q3. And we do believe that as the economy continues to improve, we'll close that gap between our numbers and then what the industrial indicators are showing. So, our -- the takeaway should be, we anticipate improved demand in the coming months. We're seeing really strong results out of our wood and lumber segments of our business, pulp and paper are good. A lot of that is directly tied to the building industry, which is strong. So, we have no doubt Motion will recover and will be in good shape in the quarters ahead.

Alright. Thank you so much.

You're welcome.

Our next question comes from the line of Chris Horvers with JP Morgan. Please proceed with your question.

Thanks. Good morning, everybody.

Hey, Chris.

I just wanted to follow up on a couple of questions there. First on the Motion side. You talked about September being the strongest month, obviously down 9% comps for the quarter. I guess, how close are you to getting to positive there? And then, could you also size up maybe the exposure to weaker industries, like energy and travel?

Yes. Well, the energy comment, Chris, that's definitely a headwind for us. If you look at our Southwest part of the United States was certainly our weakest market in the country, and that is largely driven by oil and gas. So, that's a definite headwind for us going forward. And in terms of looking out, Chris, look, it's challenging. I mean, there's a lot of uncertainty in the markets. There's no doubt. Our expectation is our Motion business will turn positive in '21. But, I would also tell you, our expectation is that we're going to continue to show sequential improvement. Just as we did from Q2 to Q3, we think Q4 will be an improvement over Q3, and then again, certainly positive in '21.

So, would that mean that like Motion in September was more down, like mid to high single-digit versus high single-digit decline in September?

That is correct.

Got it. Makes sense. And then, in terms of, just to clarify on the U.S. cadence in particular. Did -- it seems like DIY slowed? And do-it-for-me got better. But, that was sort of roughly neutral over the three months. Is that right? Because you also mentioned that September got better. So, I was just trying to reconcile all that did -- kind of put that all together?

Yes. So my, my reference on September, Chris, was in relation to August. September was a better month than what we saw in August. We saw softness in August. And September did improve. Carol mentioned we were flattish in July, and we dipped a bit in September. But again, we're talking just a few basis points from month to month to month. So, not a massive shift. And I'm sorry. I missed -- I forgot the second part of your question, Chris.

So, the second part was really like, it seems like the mixed bag in there as like DIY slowing down. One of your competitors, talked about a drop off in August and into September on DIY. So, I guess, maybe, is that what drove sort of the keeping the relative trend flat over the quarter? And then, any comment on did -- and this is U.S., both questions. Did do-it-for-me -- how close are we to positive in September in commercial?

Yes. So, our DIY business, and you hit it, Chris. I mean, we had a huge July in DIY and we were up close to 20% in July and it moderated a bit through Q3. But, I mean -- I don't think anybody expects the kind of DIY increases that we're seeing across the industry to continue. Certainly, we've benefited as did all of our peer group from the stimulus money to the hit the markets. Our DIFM business was pretty steady throughout the quarter in that low-single-digit range. And again, I would point out Chris, just as I did with some of the regionality, as I did with Motion, those down low-single-digit, those numbers are improved from the high-single-digit declines that we were seeing back in May in June.

Got it, but not -- right, okay. So, but -- so U.S. do-it-for-me was pretty consistent in that down low-single-digit range?

Yes.

Okay. Sorry to belabor that. And then, in terms of -- maybe on the on the margin side, really a two-part question. So, first on the on the gross margin, EIS actually helped you. Can you talk about how much that was? But then, vendor allowances also hurt too. So, at the high level, how much, how are you thinking about the potential to continue to drive expanded gross margins going forward? And then, I have a follow-up on SG&A?

Sure. On the gross margin for the quarter, when you look at our quarterly improvement, I would say this quarter, about a third of that was related to the divestitures. So, two-thirds of our gross margin improvement, like 100 bps is really related to sales mixed shift to higher gross margin operations, specifically our international strong results on automotive, product mix shift, especially in Industrial, and then some of our just pricing and global sourcing initiatives. So, when we look ahead, we do expect to have continued gross margin improvement with a lot of our initiatives that may not be quite at the pace that we've seen. But, we are very encouraged by the gross margin initiatives we have. We've done all that, as you mentioned, with lower volumes. And we have been able to generally offset the lower volume incentives with our lower sales volumes with having our initiatives. So, we’ve anniversaried the EIS divestiture. So, going forward, it will just be the core gross margin improvement.

Got it. Then on the SG&A side, Carol, I guess, how are you -- you take a lot of cost out of the business, how are you thinking about the potential to add back that COVID expense in 2021 from a dollar’s perspective?

Yes. So on the SG&A side, what we're really encouraged by is the $100 million permanent cost savings that roughly -- or $110 million through nine months. We expect to be $130 million to $140 million for the full year. The COVID savings were $150 million in Q2. And as we mentioned before, about $45 million of that was government subsidies. That moderated to about $60 million in Q3, which relates directly to the improved, as Paul's mentioned, improvement in our volumes, extending hours, bringing folks back in, and we said a lot of those were temporary things. But, part of why we have a higher $100 million permanent savings is, we shifted some of those things to permanent. So, we are still -- we will still have some COVID savings in Q4. It'll be probably less than what it is in Q3. But, I can tell you, all of our business units have additional cost actions. As we look ahead, there are further opportunities we think we'll have, especially as it relates to facilities and productivity improvements, and again, some further consolidations in some back office areas. So, we're still excited about the work the transformation team is doing as we look ahead.

Very helpful. Thanks very much.

Thank you, Chris.

Our next question comes from the line of Greg Melich with Evercore ISI. Please proceed with your question.

Hi. Thanks. I have a couple of questions. One, I'd love to follow up. Thanks for all the color around U.S. automotive. Could you just level set us now on the mix of that business between independents, the NAPA auto care group, major accounts and fleet, just given how disparate the performance has been this year?

So, if we look at the business, and as you just described, Greg, our most challenging segment -- and look, I should point out at the outset, our modest difference, okay, I think -- and you've been around long enough, Greg, you know that. Fleet and government is a big segment for us, and that has been our most challenged segment. And I should point out that, mix in that fleet and government, we have our oil and gas, energy business, we have large contracts with municipalities, school bus contracts, we have contracts with the airlines, ground equipment. So, all of that is in that fleet and government. And as you can imagine, Greg, that has been a challenging segment and has continued. It'll come back, and we think it will come back and it will come back strong. Our major account business and our auto care business was down slightly in the quarter as well. Where we saw good growth and we are encouraged is with our what we would really classify as our all other wholesale business, and that is our independent unaffiliated garages. That business held up well. And we are encouraged by that -- by those numbers. And we think we can continue to build on that in Q4 and going forward.

And if we look at the business, independents and garages, are they now -- are they like half the business or 30% of the business, just -- and fleet and governments may even be down to 20%? Would that be a fair estimate?

Yes. So, think of it this way, Greg. When we look at our -- at those segments, fleet is -- and I'll give you round numbers, 20% to 25%. And then, you've got the -- that unaffiliated independent garage segment is probably 40% to 45% of the total. And I'm sorry, Greg, you asked about our independent owners as well. Can you maybe ask that again, that question?

Yes. I just want to know, just generally speaking, how the independents are doing. So, what percentage of the mix are they now as opposed to company owned stores? And how are they doing? I mean, how many of them got PPP loans? Are they sort of fully back and up to running the way that you want to versus what they were doing in the second quarter?

Yes. It's a great question, Greg. And I'm glad you did ask that. Independent owners are -- they represent roughly 60% of our business. And I'm pleased to say, our guys have been out, we've been out meeting with some of our big independents, really just this week. They're faring well. And I would tell you that in terms of PPP money, the vast majority, and I'm talking probably close to 90%, got PPP money. So, from a cash position, our independents are doing just fine.

Great. And then, if I can, so one more question there. You brought up an interesting addition of 35,000 SKUs. That would be direct from vendor. Could you just help us frame what that could mean to sales and sort of expanding the business in a more capital effective way? And I also thought I heard you mentioned some pricing or re-merchandising actions to help gain some share back. But I was…

So, let's talk about the SKUs that I referenced, the 35,000 SKUs. Think of that Greg as kind of that whole concept around the endless aisle and taking advantage of our great suppliers and their -- the total extent of their catalogue offering. So today, of course, you think of supplier, Greg and I know Dorman well, a great partner of ours for many, many years. They have a very expansive catalog. We don't -- we do not -- we don't catalog all the SKUs that Dorman has available. But, we're certainly now going to make those available online. And we think that's going to -- it's too early to put a number to it, Greg. We really just launched it. But, that would be an example. Another example would be the WeatherTech line. You know that line, of course, great consumer brand. So, we're excited with what we believe that whole kind of endless aisle can do for the NAPA business. And we're going to continue to expand that opportunity going forward.

And I hear some -- I heard pricing was rational, but I also thought I heard there were some certain actions maybe in particular segments.

Yes. So, we were talking about rational pricing and really no supplier price increases in automotive. The actions taking both in our Automotive and our Industrial business are really buy side, sell side type pricing, global sourcing type internal gross margin initiatives. Really again, there are no drastic changes in the pricing environment. We've just gotten much more strategic as it relates to both, retail and commercial pricing in our gross margin efforts.

So, these are, just so I understand, more strategic, meaning that you're lowering prices to the customer or end up getting more merch margin based on how you're mixing it?

No. I mean, Greg, we've had 12 consecutive quarters of gross margin improvement in an environment with lower sales volumes and no inflation and tariffs. And again, we've got pricing, data analytics. We've got investments we've made. Again, we are getting improved gross margin with these initiatives and remaining very competitive. So, the idea is to grow our sales and grow the business. And again, I'm really pleased to see the opportunities and the results that we've gotten in the gross margin area.

That's great. Thanks a lot both of you. Good luck.

Thank you.

Thank you.

Our last person for questions comes from the line of Matt McClintock with Raymond James. Please proceed with your questions.

Hey, everyone. This is Mitch Ingles, filling in for Matt. Thanks for taking my questions. So, most of my questions have already been answered. I just had a quick follow-up on your major accounts group in Automotive. Are these accounts mostly back on line today and purchasing at lower volumes? It sounds like the recovery for Europe for these types of accounts has been relatively solid. Do you expect a similar trend for these accounts in the U.S. in coming months? Any color on the recent trends here would be helpful. Thank you.

Yes. Matt, we -- I'm sorry. We do expect that business to bounce back and it will bounce back as miles driven bounces back. One thing that hasn't really been talked about this morning, even though there's a whole lot more traffic than the roads and people are backed behind the wheel, which we're happy to see. Miles driven in the last couple of months that I've seen preliminary numbers, it's still down close to 10%. So, as that begins to come back and it will come back, the major account business and all of the commercial business will recover. So, yes, no doubt, you mentioned, our European business and we are very pleased with our major account business in the UK and some of the strength that we saw certainly in Q3 in our European business. And we expect -- quite honestly, we expect that to continue well into 2021.

Great. Thanks for the color. And best of luck.

Yes. Thank you.

There are no further questions in the queue. I'd like to turn the call back to management for closing remarks.

We'd like to thank all of you for your participation in today's call, and we look forward to reporting our year-end results in February. Thank you very much for your support of Genuine Parts Company. Have a great day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.