Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Third Quarter 2023 Earnings Conference Call. Today's call is being recorded. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn the conference over to Tim Walsh, Senior Director of Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to Genuine Parts Company’s third quarter 2023 earnings call. Joining us on the call today are Paul Donahue, Chairman and Chief Executive Officer; Will Stengel, President and Chief Operating Officer; and Bert Nappier, 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 of the Genuine Parts Company website. Following our prepared remarks, the call will be open for questions. If we're unable to get to your questions, please contact our Investor Relations department. Please be advised, this call may include certain non-GAAP financial measures which may be referred to you 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 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. With that, let me turn the call over to, Paul.

Thank you, Tim, and good morning. Welcome to our third quarter 2023 earnings conference call. I'd like to start this morning with a few remarks on our overall performance before turning it over to Will, to cover the highlights of the automotive and industrial businesses. And then, Bert will get into the details of our financial performance, before we open the call to your questions. To recap the third quarter, total GPC sales were $5.8 billion, an increase of 2.6% compared to last year. Total company segment margin was 10.4%, a 70 basis point increase from last year, and diluted earnings per share were $2.49, an increase of 11.7% from adjusted diluted earnings per share in the same quarter last year. I want to take this opportunity to give a call out to our GPC teammates around the globe, as we delivered our 13th consecutive quarter of double-digit EPS growth. Our third quarter results reflect our strong operating discipline and our ability to improve our operating margins and profits despite a more challenging topline environment. Overall, we continue to benefit from solid industry fundamentals in both the automotive and industrial end markets, including rational pricing environments in both segments. In our Global Automotive business, the underlying fundamentals of the aftermarket remain favorable, increasing miles driven, an aging and complex vehicle fleet, and high vehicle prices and financing cost. Within our Global Industrial business, we benefit from a highly diversified portfolio of customers and end markets, with overall growth driven by manufacturing and opportunities with onshoring and reshoring trends. Our automotive and industrial businesses are mostly break fix and non-discretionary in nature. And as a result, we remain focused on offering solutions that support our customers to have the right part, in the right place, at the right time, across both…

Thank you, Paul. Good morning, everyone. I want to start by also thanking the global GPC team for their ongoing commitment to serving our customers. We appreciate the hard work every day to deliver parts and solutions that help keep the world moving. It's great to see the teams work together as one GPC team to deliver customer success. We do this with coordinated focus on our foundational priorities, including talent and culture, sales effectiveness, technology, supply chain, and emerging technology complemented by disciplined M&A strategy. To that end, I'd like to take a moment to specifically recognize the global teams for the progress on our numerous in-flight initiatives around the world. We're executing a broad set of initiatives across our global business and making strong and steady progress. The teams are simultaneously working to evolve the business for the better, while delivering on our day-to-day service commitments to our customers. As we detailed at our Investor Day, we believe we have compelling opportunities to invest back in the business and are excited about the progress and outlook. As Paul mentioned, we have great examples of progress around the world, specific examples range from state-of-the-art distributions centers with automation and next generation technology, enhanced data visibility and analytics capabilities, added talents and expertise, modernize technology platforms to enhance growth and productivity, and much, much more. We know the teams are working hard to execute the body of work, so thank you very much. Now, turning to the details of the business segment results. Before I get into the specifics, I should mention that the third quarter had one less selling day in the U.S. when compared to the third quarter last year. This impacted our total sales and comparable sales growth versus prior year, for both our industrial and automotive…

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Scot Ciccarelli of Truist. Please go ahead.

Good morning, guys. Scot Ciccarelli. I know your Investor Day wasn't all that long ago, but you guys had outlined some margin targets for each of your divisions, and while we've seen great progress on the industrial side. How are you guys thinking about your automotive margin targets given the performance from the last few quarters?

Yes, Scot, Bert. Thanks for the question. Look, I don't think we've changed how we're thinking long-term. We've got two years left on that cycle. And again, as we close out this year, as I mentioned in my prepared remarks, we're looking for Global Automotive segment to be, flat to slightly down. With two years left, it's not unusual to get to a three-year plan a little differently, maybe than you started in March, and when we announced all that, but we still, still feel confident that the levers are there. As we look at the long-term margin expansion, particularly for auto, we got pricing and category management benefits. So, when talk about pricing and sourcing benefits and gross margin expansion. We'll continue to see those levers. And we've got further long-term investments, and that's really how we're thinking about this. We've got some short-term challenges, but a long-term investment around things like supply chain, investments in IT, those remain in early innings. And so, we're really still bullish on the long-term despite some of this near-term choppiness.

Okay. That's, that’s helpful. And then given some of the near-term choppiness, and you guys are obviously implement -- implementing various improvement processes to improve the U.S. auto business. But, the way this business typically works is, once you lose market share, it's kind of hard to get back. So how are you guys thinking about -- can, can you actually -- are you guys thinking that you can call that market share back or, are the changes you're implementing really just kind of patching holes in the ship and stopping incremental share losses? Thanks.

Yes, Scott, it's Will. Let me, let me add a few thoughts. And I'll start by just saying, the U.S. Automotive team, just to be very clear, is working incredibly hard every day to take care of their customers and be easy to deal with, and as you know, better than anyone, what that means for customers is, we got to be in a position to offer them the right quality part in the right place at the right time, and have that transaction be seamless. Once that product is available in the market, we needed to efficiently and quickly speak -- efficient and quick to search for the part and then pull the part and get it to the customer. And so, when you think about what we're working on everyday, we have the opportunities probably to be better in, each part of that. There's no single point of failure that has recently developed. I think this is just a call to action for the team that we need to be better across the board. The good news is, as you started with your question, and our initiatives that we detailed at Investor Day are all focused around these customer needs, and we're making good progress. And while, we might have been disappointed with recent performance, and might indicate that we've given back a little bit of share, we still feel good about what we're working on. We just need to do that body of work with more urgency at a faster pace.

And Scot, I would, I would just add on to that. Look, we've been in this business a long, long time. There's nothing structural, that has shifted or changed in, in our business or in our, in our structure. We know the levers to pull, will hit on them. And trust me, there is a sense of urgency up and down, up and down the organization to get it done. I have no doubt we'll get it done.

Okay. Thank you very much.

The next question comes from Michael Lasser of UBS. Please go ahead.

Good morning. Thank you so much for taking my question. On the U.S. auto business, can you frame how much market share you have locked in the most recent quarter, and how does that compare to the run rate, or is that, is it getting better, or is it getting worse?

And, Michael, can you repeat the last part of that question, you're, you're kind of fading in and out on it.

Sorry, Paul. Sorry.

That’s all right.

Are your share, yes, are your share losses getting better or are they getting worse?

Yes, Michael, I don't think it's getting worse. Listen, I think we're clearly disappointed with the recent performance. And as I said, that plus some of the performance of our credible competitors would indicate we've given back some share over the last couple of quarters. But maybe a few thoughts to elaborate on the whole, share thought, which is -- we've always had strong competition in this profit pool, both large and small. And as I said with Scot, it takes consistent execution everyday to serve those customers. And we just haven't performed to, our expectations in '23. I would tell you we have seen with the supply chain challenges moderating over the last 12 months, some of our smaller competitors have gotten more healthy, as it relates to inventory. And so, we're seeing them, playing from a different place of strength than they were maybe 12 months or 24 months ago. The good news is, is that we play in a huge market. It's very fragmented. And as, Paul said, we know what we need to do to return to a position where we're taking share. But we're not, we're not feeling like it’s getting worse. We've got a good line of sight of what we're working on and taking action as we talked about on the call.

And Michael, Michael, I would just add to that, that you really have to break down. I mean, it's a very broad question, when you start thinking about and talking about market share. It's very fragmented industry. Yes, you have the big four, but then you've got you know, independent WDs scattered throughout the country, along with, with others. So, you really got to look category-by-category. And what I'm pleased to see, and I'm encouraged to see is that when I look at specific product categories, product categories that move the needle, for our business, we have made changes, and we have improved our availability and we've improved our supply chain. And I would tell you if we're at fault for anything, it's it took us too long to make those changes. I think we'll touch on that. So, yes, no doubt better days are ahead and the team under Randy's leadership are all over.

It’s just my mic problem. Thank you very much for that. And my follow-up question is [Technical difficult]

Hey, Michael, it's Bert. You're still cutting out pretty, pretty bad. We can't hear you very well. Could you get a look --

So hopefully, that's better.

Oh, yeah, much, much better.

All right. All right. Sorry. But my follow-up question is, some of the share dynamics influenced general parts -- Genuine Parts ability or willingness to do acquisitions in the U.S. auto business right now?

Hi, Michael. It's Bert. And first and foremost, welcome to the, to the universe of coverage for GPC. Thanks for joining, joining us. We appreciate that. I would say no. I mean, look, we look at what we're -- what's happening here, and as Will and Paul have given me some color on, really just as something we're managing through here in the near-term. The great thing about GPC is that we performed pretty well through all cycles. We've had $1.1 billion of cash generated here year-to-date $733 million of free cash flow. We have a tremendously strong balance sheet, and we're improving our margins and growing earnings double-digits despite some softer topline. And so, I think the great thing is that the performance of the business holistically allows us to continue to take advantage of the market including the M&A market and investments in capital expenditures that are great for the business long-term. And so while we may have a little choppiness short-term, it doesn't impact our ability to move, as we need to move, whether it's in U.S. automotive on M&A or the whole portfolio.

Thank you. Sorry for the background.

No worries. Thanks, Michael.

Thanks, Mike.

The next question comes from Greg Melich of Evercore ISI. Please go ahead.

Hi, thanks. Some I'd love to go a little deeper in the trend through the quarter and the exit rate and particularly how, inflation may have impacted that.

Hey, Greg. It’s Bert. I'll talk about inflation first, and then we'll come back to, kind of, our views on guidance and outlook. I think we've talked about this a little bit along the way throughout the course of the year. Inflation has really developed almost exactly as we expected with where we thought we would to begin the year. That's a little bit of a surprise and that we could be, kind of, that consistently, planning and thinking out the way we're thinking about the trends of inflation. We thought they'd moderate through the course of the year and they have. So, we started the year, with a mid-single-digits, moving to low-single-digits in Q2, all up low-single-digits here again in the third quarter. And we expect to finish out the year in low-single-digit. So, really has followed how monetary policy has been implemented around the world and tick down as we expected. One thing to call out on inflation, I think it's important to keep in focus and, Will mentioned it in his prepared remarks, inflation or said differently price, was a significant tailwind in 2022 for the automotive aftermarket. And that's dissipated in 2023, as I just kind of outlined. In particular, in third quarter a year ago, we were looking at inflation and sales at the high-single-digit level for the Global Automotive segment with the U.S. at nearly 10%. And that's a pretty tough comp when you think about low-single-digits for this particular period that we're coming up against. So, I think right now, moving as we expected, we'll close out the year low-single-digits, across the board. In terms of the outlook and how we're thinking about the rest of the year, bringing that up just a level, it'll start at the highest level and then maybe…

Yes. Greg, it's for, U.S. auto cadence of the quarter. It was mixed through the quarter. July was slightly up, as I think we said in our, prepared remarks, August was down low-single-digits, and we exited the quarter with September up low-single-digits. We did call out the NAPA EXPO, year-over-year compare. That event was in July of last year. By the time all the sales had processed, it's probably, it's not scientific probably impacting August. So, if you think about that adjustment, it's probably mid-quarter, mid-to-end of the quarter.

And Greg, I'll come back and give a little bit more color. You kind of talked about how things are looking as we start and maybe pull that up. As I think about this year on U.S. automotive, the full year, we started out Q1 with a little softer, weather impact there. And as we said in Q2, we really knew that our U.S. automotive business had more potential than we showed, and it's a feeling we continue to echo. Q2 made some new moves with new president. Cost actions to further drive some of the improvement of -- to offset the weakness on the topline. And the Q2 results were really a catalyst for the executive team to walk away and look at the things that were impacting our performance. We'll share those perspectives. But as we look at the fourth quarter with respect to U.S. AG or to the U.S. Automotive business, we know that we've got a tough comp coming up yet again. So, fourth quarter, for U.S. automotive was a 9.6 reported comp sales growth was 6.3. So, we have another fourth tough quarter ahead. And, all things considered, we expect the fourth quarter for them to be in-line with the third quarter.

Got it. And when did inflation peak last year. And maybe you've even brought it out some more like, average unit price, if you think about mix.

Yes. So, our third quarter would have been the highest inflation comp for the year for that business and, Will mentioned that. We've got another tough comp on inflation in the fourth quarter. That's going to be around 8% for the U.S. automotive business. So, the peak would have been Q3, but we still have a tough Q4 comp.

That's great. Thanks, and good luck guys.

Thanks.

We appreciate it.

The next question comes from Christopher Horvers of JP Morgan. Please go ahead.

Hi. Good morning. It's Christian Oberle on for Chris. So, Motion organic trends have had been outperforming the ISM and, and industrial production as the, industrial economy had slowed. So, as you digest, the outsized share deals following the KDG acquisition, do those indicators become more relevant again? And as you look ahead, are there any end markets where there's reasons to believe it should reflect positively or negatively?

Yes, Christian. Thanks for the question. Look, those are two important data points. We monitor and track them closely. And, we've publicly said that it seems whether with KDG or post pandemic that, the correlation was less clear. Having said that, we still look at those indicators, and we've been encouraged obviously by the recent trends in particular industrial production. So, they're certainly part of what we look at as we inform our views of the outlook of the business and, based on those recent inflections, we're cautiously optimistic. There's no specific tie with those metrics to a specific part of our business. I think it's a good representation of the diversity of our business. And so, it's something that we look at in conjunction with customer, vendor feedback, provide different other pieces of internal and external data. But we’re cautiously optimistic based on what we're seeing both in the business and from a third-party data perspective.

Hey, Christian, I would just tag on to what, Will said. We are encouraged. One, we'll mention the industrial production numbers, which we saw nice a lift in September. But we've tracked 14 different indicators in our Motion business. Christian, we saw five of those indicators improve in September. So, categories like, I mean, automotive has continued to be positive food products, DC logistics, equipment leasing, all are trending up, including mining. So, yes, to Will's point have -- has the industrial downturn has had reached a trough. I think if it hasn't, we're darn close. And what we generally find is, as we see the major indices like industrial production begin to bounce back, we generally follow that somewhere 60 to 90 days later, we'll see our business begin to shift. So, again, great team at Motion. They've had a phenomenal year, and, and we're looking forward to better days here in 2024 on the top line for that group.

Got it. That’s very helpful. And as you think about gross margin, are there any one time or unsustainable items in 3Q just given and as you look ahead, you know, vendor allowances have historically driven a fair amount of volatility in 4Q gross margins. So, is there anything to call out there?

Hi Christian, its Bert. Nothing to call out, we had a really clean quarter on gross margin. Nothing related to some of the noise you just mentioned there. I'm super proud of the teams. They've executed at a very high level. So, our expansion of gross margin here in the third quarter of 130 basis points continues to come on the back of the investments we're making in sourcing and pricing.

Got it. Thank you very much and best of luck.

Thank you, Christian.

The next question comes from Seth Basham of Wedbush Securities. Please go ahead.

Thanks a lot, and good morning. My question is regarding the pricing strategy in the US Automotive business. Obviously, you've done a great job improving your gross margins there. But what gives you the confidence that your less aggressive pricing is not leading to some market share losses?

Yes, Seth. This is Bert. Look, it's a good question. A thoughtful question. And we don't believe that our work around gross margin has come at the expense of share gains. You all know that price is not generally the leading factor. And driving sales in the aftermarket. It's more about availability and quality as Paul and Will have mentioned this morning. That's a really strategic question. It comes down to pricing strategies that category and SKU level, and the long-standing balance of that against unit growth. We believe the investments we're making in data analytics and pricing tool many of those we showcase at Investor Day have really given us an ability to be even more strategic and flex our strategy up and down, by both category and geography. It allows us to remain competitive, respond to the environment as it moves and stay in line with the market dynamics. So, I think the short answer is no. We don't believe that our work there is impacting, share gains or losses. And we continue to stay focused on driving our gross margin performance, we lifted our expectations for the year, now looking at 50 to 60 basis points of improvement for the full year. I’m pleased with that result.

That's helpful color. And you mentioned responding to market dynamics you know, talked about some of your smaller competitors being better in stock. Last quarter, you talked about weighing the cost and benefits of the major account segment. Can you give us an update on that latter point? How you're thinking about major accounts at this point has become more price competitive there, and if you walked away for any business?

Yes, Seth. You know, I wouldn't say there's a material change in the major accounts part of the business. It continues to be pressured. We've been more disciplined as you alluded to in the way that we're thinking about the business or that piece of the business. It's about 15% to 20% of our commercial business. So, it's not a large, outsized portion of the total business. And as I think we've said before, it's inside of our major account business, there's four or five different even sub verticals. And there's different nuances associated with each one of those verticals. So, we have seen some consolidation in some of the, national players in particular, some of our existing customers that have come to consolidate that's impacted some of the year over year trends, just as they work through some of their acquisition activity. But generally speaking, the business continues to kind of, be at the same level that it was last quarter to slightly down.

Yes, Seth. Just a little additional color on that. We're, -- you know, as we break apart that major account business, which Will alluded to, where we see challenges in some of the big national tire chains. But on the flip side, we're seeing a good growth in our fleet and our government. We're seeing recent growth in the OE dealer segment, which we expect to continue as some of those challenges for that segment continues. So, there's puts and takes, but, again, our team is addressing those issues, and I think we'll see improvements here going forward.

Thank you very much.

The next question comes from Daniel Imbro of Stephens. Please go ahead.

Yep. Hey. Good morning, everybody. Thanks for taking my questions.

Hi, Daniel.

I want to start on the automotive margin. Maybe a follow-up to Scott's question earlier. I think you mentioned you know, pricing and category management as levers to still pull in the coming years. Just curious, as you think about some of the fixes in the auto business, as you expand the new suppliers, does that limit the category management benefit or the NAPA private label offering? And then pricing is good to hear. I guess you kind of answered it in the past question. Can you just talk about the pricing backdrop and the ability to use that as a lever to grow margins again?

Sure. Look, I don't think we've, think anything differently about the longer term, to follow-up on that earlier point. As I said, maybe we'll get there a little bit differently than we expected when we announced everything in March. This year's played out slightly differently, but we have two years ago, and gross margin, opportunities aren't going to be impacted by changes in suppliers. Actually, there are opportunities more than anything as we look continuing to be competitive going to market with our size and scale, looking at some of these opportunities, more globally and through a one GPC prism. So, I don't see those as limitations at all. They actually tend to be more of an opportunity for us. The pricing environment remains rational. We still think there's opportunity there. As I mentioned a few minutes ago, we've got great work and data analytics there that allows us to be flexible and nimble. And we haven't really seen a change in the way the competition is behaving in that space that would change our view on the longer term or the or the short term for that matter.

Yeah. Daniel, I would just add the, your question around the NAPA brand and category management. That's all upside. And just as a reminder, I think as we talked at investor day, when we look at category management now, we essentially by product category, we look at our global volume. So that NAPA brand has got strong presence now across Europe, AsiaPac and, of course, North America. So, to me, that's upside for our North American business. As we get into a better position, from a supply and inventory standpoint to really accelerate our growth in a couple of key product categories.

Great. That's helpful. And then just to clarify, Bert, I guess, you said you had one fewer selling day in the quarter. I guess, how did that happen? Was it timing of a holiday and what month did that fall in as we think about the cadency laid out? And then if there any makeup, if there are one more selling day in any quarter coming up, we should be aware of as a model.

So, Dan I missed the very beginning of your question. Can you give that back to me one more time?

You said one fewer selling day. Was it a holiday timing or kind of what drove that. And then what month did it fall into as we think about the cadence you gave us at month-to-month comps?

I'd rather not get into -- get into parsing out the quarter by month. The quarter year over year in the US, for both Motion and for US Automotive was impacted by one day. We'll just leave it there. And then, in fourth quarter, we're going to be flat on operating days.

Got it. Thanks so much.

Our last question comes from Kate McShane of Goldman Sachs. Please go ahead.

Hi. Thanks for taking our question. We had two quick ones. First, is there a way to delineate between the pockets of where inventory is maybe a little light versus some of the execution issues that you highlighted in automotive. And is there a timeline of when inventory availability improves?

Yeah. There is we have great information, on where we've got our opportunities as we've talked about the last 12 to 24 months, investing in analytics, and in particular around inventory analytics has been an area of focus. So, I think that's made us better to know precisely where we have, opportunities. And the opportunities are not just availability, but it's movement. And again, there's nothing – there's not a new thought here. It's just better execution. That's taking the inventory that we have and getting into the right spot at the right time and making sure that you've got enough of the stuff that's moving fast. We've got a lot of visibility into that. And it's an ongoing effort. I mean, we've been working on this topic probably forever. And we're just stepping up our urgency. So, we'll, the teams that are urgent, they're focused on it, and we're going to make progress each and every day.

And Kate, I would just tag out to what Will said. Specific categories that were problematic for us, during the pandemic and even post pandemic, those new programs are rolling out as we speak. So, we would expect to see improvements in those product categories here going forward.

Okay. Thank you. And then our last question is just around the 340-basis point headwind in the quarter. Was that anticipated when you were originally guiding 4% to 6% same store sales in automotive? And if so, what is bringing that original comp guide of 4% to 6% down to 2% to 4%? Is it more what's being anticipated in Q4?

Yeah, Kate, it's Bert. Of course, we knew the expo headwind and the selling day was there. So that wasn't a surprise to us at all. Remember, we don't guide to quarters. So, we weren't thinking about through that – through a Q3 lens. We were thinking about our guidance through the full year. And we, you know, as we guided, thought we would sell through that. And again, we've reaffirmed our top line guide for the year this morning. We did lower the comp guide for automotive. I think that's just being smart, about having to factor in. The slower and softer performance for US Automotive year to date and what it's going to mean for the full year. But at the end of the day, as we thought about expectations, sales recovery didn't progress quite as quickly as we thought in Q3, Will has given you a lot detail around the execution things we're working on. And again, we've reaffirmed our full year top line this morning.

Thank you.

Thanks, Kate.

This concludes our question-and-answer session. I would like to turn the conference back over to Paul Donahue for any closing remarks.

Yeah. Thanks, Andrea. And, just to reiterate, we want to thank all of our teammates around the globe for their efforts, in the quarter and year to date. And, just to let them know how much we appreciate, all they do for the company and for our customers. I'd also like to thank all of you for joining us today and thanks for your combined and your continued interest in Genuine Parts Company. Have a great day.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.