Good day, ladies and gentlemen. Welcome to the Genuine Parts Company, Third Quarter 2021 earnings conference call. This call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Sid Jones, Senior Vice President Investor Relations. Please go ahead, sir.

Good morning. And thank you for joining us today for the Genuine Parts Company, Third Quarter of 2021 Earnings Conference Call. With me today are Paul Donahue, our Chairman and Chief Executive Officer, Will Stengel, our President, and Carol Yancey, our Executive Vice President 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. Please be advised, 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 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. Now, I will turn it over to Paul for his remarks.

Thank you, Sid, and good morning. Welcome to our third quarter 2021 earnings conference call. We are pleased to report strong financial results again this quarter, which reflects the consistent execution of our strategic priorities as the global markets continue to recover. As we size up the business climate and how we are managing through the recovery, we can report the GPC team is generating positive momentum in both our sales and operating results. And we are well positioned for both near and long-term growth. Despite inflationary pressures, our margins reflect the success of our category management initiatives in cost control efforts which have offset these increases. And finally, our strategic efforts with our global supplier partners have prevented significant shortfalls and our overall inventory levels allowing us to deliver quality customer service. Taken a look at our third quarter financial results, total sales were 4.8 billion up 10% from last year and up 11% from Q3 of 2019. We also produced our 16th consecutive quarter of gross margin expansion. And we further improved our productivity and customer service capabilities with the ongoing execution of our operational initiatives. As a result, segment profit increased 14% and our segment margin improved 30 basis points to 9.3%. This represents our strongest margin in 2 decades and confirms our key initiatives are driving meaningful improvements. Net income was 229 million or a $1.59 for diluted share and adjusted net income was 270 million or a $1.88 per share. This is a 15% increase from 2020 and establishes a new record for GPC's quarterly earnings, so just an outstanding job by the GPC team. Total sales for global automotive also set a new record at 3.2 billion for the quarter. This represents an 8% increase from Q3 2020, and a 15% increase from Q3…

Thank you, Paul. Good morning, everyone. First, let me reiterate Paul's comments and acknowledge the continued strong team performance this quarter. It's always a proud moment to have the opportunity to showcase our global teams hard work, relentless customer service, and winning performance. It's a challenging environment and teams have done an exceptional job to adjust and deliver results. We continue to remain focused on our key pillars, including talent, sales effectiveness, digital supply chain, and emerging technology. Teams are executing initiatives well and consider s strategic initiatives a central part of our operating cadence. The teams have rigor around measurement and progress visibility. We measure unique global initiatives and are ahead of our 2021 plan established at the beginning of the year. As we execute our GPC strategic planning process for the upcoming year, we reflect on learn from and refine our priority initiative execution. In addition through the year, we share best practices around the globe for common strategies to help us continuously learn and improve as one GPC team. While our geographies and end markets are diverse, we share similar GPC global initiatives, all designed to deliver profitable growth in excess of market growth, operating leverage, and free cash flow. Despite a challenging environment, we're pleased to see more normal team activities and customer activities starting to be possible in most of our geographies. We recently had the opportunity to meet in person with the U.S. Automotive Executive and Field Management team in Atlanta. We listened to field feedback, shared performance trends, enjoyed team camaraderie, introduced new talent, and collaborated on strategic priorities for the upcoming year. Similarly, approximately 70 of our motion Executive and field leaders from around the country, recently had the chance to meet in person for the first time since early 2020, to…

Thank you. Will, and thanks to everyone for joining us today. We are very pleased with our third quarter financial performance and we look forward to sharing a few additional details with you. Recapping revenues, total GPC sales were 4.8 billion in the third quarter, up 10%. Gross margin improved to 35.5%, an increase of 50 basis points from 35.0%, last year. Our improvement in gross margin was primarily driven by the increase in supplier incentives due to improved volumes and the positive impact of strategic category management initiatives. In the third quarter, we had continued pricing activity with our suppliers as anticipated, resulting in additional product cost inflation. Our team was positioned to address these increases with effective pricing and global sourcing strategies and price inflation improve neutral to gross margin. On a total Company basis, we estimate a 3% inflationary impact on Q3 sales, consisting of 3.5% inflation in global automotive, and 1% to 2% in industrial. Based on current trends, we expect to see additional price inflation in the fourth quarter, and we will utilize our strategies to protect our gross margin as appropriate. Our total adjusted operating and non-operating expenses were 1.35 billion in the third quarter, up 11% from 2020 and at 28% of sales. The increase from last year is due to several factors, including the prior-year benefit of approximately 60 million and temporary savings related to the pandemic. Additionally, our third quarter expenses reflect the increase in variable costs on the 450 million in additional year-over-year sales, as well as cost pressures in areas such as wages, Incentive compensation flight, rent, and health insurance. We continue to execute on our ongoing initiatives to control expenses and improve our operations. While pleased with our progress, thus far, we see room for further improvement in…

Thank you, Carol. As we close out another strong quarter, we are pleased with our progress in driving profitable growth, strong cash flow, and shareholder We attribute the positive momentum in our business to our global team work and disciplined focus across all of our operations. Our team has confidence in the strategic plans we have put in place to capture long-term growth and margin expansion. Our strategic plans combined with an exceptional balance sheet position GPC with the financial strength and flexibility to pursue strategic growth opportunities via investments at organic and acquisitive growth. While also returning capital to shareholders through the dividend and share repurchases. So as we look ahead, we are encouraged to see the impact of the global pandemic subsiding. while the fundamentals of our two global businesses remained rock solid. Our GPC teams around the world are stepping up under challenging circumstances and taking great care of our customers. That we thank you for your interest in GPC. and we thank each of our GPC teammates for their passion, their dedication, and their hard work. So with that, let me turn the call back to the operator for your questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Chris Horvers of JP Morgan, please state your question.

Thanks. Good morning, everybody.

Good morning.

My first question is, you talked about September being the best average daily volume in the automotive business and obviously Motion has a very strong two-year acceleration. So can you talk about the potential outcomes on the fourth quarter on the comps in both businesses and given that commentary, would you expect that the two-year trend could accelerate in the fourth quarter on comps?

Well, Chris, first off, thanks for your question. You've hit it when you look across all of our businesses, the quarter the third quarter got stronger as we progressed with September being our strongest month. And what we can tell you is that the trends that we saw in September are carrying over into the month of October. So we're feeling good about where we are. And we certainly feel really good about the projections that we put out there for Q4. So yeah, right now everything is looking pretty solid.

Excellent. And then, Carol, can you diagnose maybe the 50 basis points of gross margin expansion? Some of that -- it was vendor allowance -- some of those vendor allowance, some of those are vendor allowance, some are pricing. How much of that is perhaps not sustainable on the vendor allowance side, and then how does that sort of parlay into your views about Motion's operating margin over time? Thank you.

I Know, look, we couldn't be more proud of the team and the work that was done in gross margin, I really want to give thanks to our procurement teams and all of our teams because there has been a ton of efforts related to gross margin. So when we think about the inflationary impacts and having to deal with that, but honestly our initiatives, category management initiatives, global sourcing, pricing strategy. It was vendor allowances, but quite honestly, in addition to that and especially when you look at the year-to-date numbers, it is the benefit -- the ongoing benefit of all our category management initiatives, which includes pricing and global sourcing. So I think in the quarter you did have more of an impact related to volume incentives. But I think again, taking into account everything and inflation quite honestly was neutral to our rate. So as we look ahead, we're not concerned about gross margin in Q4. And in fact, contemplated in our guidance and our outlook is that we would continue to have a positive impact in Q4, which would have us be positive for the year and then also extremely positive on a 2-year stack basis.

And then on the motion operating margin?

Yeah. The motion operating margin, I think where you see them through the 9 months, which just, again, incredible operating performance for them. And it is both gross margin and expense leverage. And they have really permanently lowered their cost structure, but I think we will see continued improvement in Q4, for the Industrial operating margin and that would give them, sort of an implied 80 to 90 BPS improvement for the full year, which is just outstanding, and again, much stronger than that on a two-year stack basis.

Got it. Thanks so much. And have a great fourth quarter.

Thanks, Chris.

Thank you.

Our next question is from Bret Jordan of Jefferies. Please state your question.

Hey, good morning, guys.

Morning.

Hi, Bret.

You commented about share gains in Automotive and, I guess, as it relates to the U.S-- are you seeing the share shift sort of smaller WDs giving up share or are there real shifts amongst the larger players in the space?

I'll take a shot at that Bret, thanks to your question, it's -- look it's hard to say where we're gaining this year. I can tell you with some of the product category that we look at and the growth that we're seeing in Q3. And on top of a really solid Q2, we have to be up outpacing the general market. But we're also the first one out, Bret, so we'll see what the numbers look like here going forward. Bottom line is, as we all know, the automotive aftermarket is incredibly fragmented. We like where we're at, we like the performance by our NAPA team and they had a terrific quarter and actually had terrific back-to-back quarters. And as I mentioned in the initial question, we're out of the gates in great shape in the month of October, so we expect that to continue. And I would also comment Bret that, we feel the same way about our international automotive businesses in our European team as well as our Asia-Pac team continue to perform at a high level.

And I guess my follow-up question relates to the European team, I guess, what you are saying is you rolled out the NAPA private label program in Europe, is that gaining traction? And maybe you could give us a feeling for how the margin benefit of private label looks over there.

Yeah, I'll touch on the acceptance part, maybe Carol you weigh in on the margins. The acceptance Bret, I have to tell you is beyond our expectation, so much so that we are accelerating our -- the number of product lines. And we're accelerating the pace with which we're rolling those out. So as you look across our European aftermarket business, we really started in the UK and our UK business continues to outperform. And now we've rolled that out into the other market. And I have to tell you it's really surpassed our expectation. So really pleased and I would also say we are rolling it out in Australia and New Zealand as well with similar results.

Yeah. So on the margin standpoint, the product labels, specifically for Europe is neutral to their gross margin rate. Having said that it is favorable from a working capital standpoint, because many of the private label comes with extended terms. So the team has been able to see the benefit of that. And in turn, they're taking their working capital improvements in reinvesting an additional product offerings and additional M&A such as [Indiscernible] that Paul and Will talked about earlier.

What do you say, as a percentage of your inventory mix being private label over there?

We haven't really given that out yet. I mean, it's starting off slow with a number of product lines and we haven't given out a target. It's not going to be something. It's not ever going to be like what you see, certainly in the U.S. but going to a 10% and incremental improvement year-on-year out. I think you can expect that.

All right, thanks. if you, Brent, if you go back in time, Brent, when we first went into Europe back in 2017, there was very little, if any, private brands have sold through the AAG network. So everything that we're moving through right now and the NAPA brand is all incremental. And as Carol said, we're targeting 10%. We think that's a good number, but we could certainly increase that in the years ahead as we expand into new product categories.

Great, thank you.

You're welcome.

Our next question is from Greg Melich of Evercore ISI. Please state your question.

Thanks. My first one was on inflation. The 3% that you saw in third quarter sales. What should that accelerate to or doesn't need to accelerate into the fourth quarter to keep it neutral on a margin standpoint?

Yes. We think that fourth quarter is probably in the 3 to 4% range. We would say that that would be 3 to 4% for our Global Automotive and 1 to 2% for industrial. It's slightly higher on the us automotive than it is on international automotive. Then Greg, having said that and again, I couldn't be more pleased with our teams. They are doing a tremendous job and we do not think despite having incremental inflation coming in Q4, we're confident in our ability to manage through that and be able to continue to deliver gross margin improvements.

And has there been any shift in mix or any demand destruction. This is accepted by the customer?

Well, Greg. I guess just generally what we would say when you look at our top-line results and you look at the strong demand, whether it's industrial or automotive. I mean, at this point, we haven't seen the push back, and part of it is the nature of our business that is non-discretionary. So we haven't seen necessarily the push back, pricing has stayed rational and inflations in all sectors, all industries. So really haven't seen that yet.

Got it. Make sense. And then the second was a little more strategic. Will, you talked about the M&A out there and some of the strategic things you've added. I know, historically, you guys have had a nice model paying 8 times EBITDA for things and getting some synergies and then rolling it in. What's the current environment now in terms of just finding the right opportunities and paying what you are used to paying for acquisitions?

Yeah. Greg. It's a good question. Thanks for it. It is certainly a dynamic M&A market. I think as we alluded to, we have a very disciplined approach to thinking about deals. Whether it's financially, operationally, strategically, etc. And for us, it's all about the value creation potential. And I think on our Industrial Conference, I made a comment talking about creating value so that the eight or nine times becomes something lower than that. And so that's how we think about [Indiscernible]. What does this business look like? And how much value can we create when we bring it into the GPC family. Greg, I would also add on to that one. When we look at our bolt-on acquisitions in the automotive space, whether it's in Europe or here across North America. Those continue to be very reasonable and rational, and are very close to our historic kind of valuations. But as Will said, we'll -- we will continue to be incredibly disciplined as we look at M&A here going forward.

That's a great summary. So thanks, congrats to you all and good luck.

Thanks.

Thank you Greg.

Thank you

Our next question is from Daniel Imbro of Stephens.

Thanks for taking my question. This is Andrew on for Daniel. So on the industrial side of the business, September PMI stepped up a bit. It's a nice surprise. How are you -- are you able to meet the demand in the market today? Have you had any issues with the risk?

Our industrial business has held up -- well, you see the numbers Andrew that our industrial numbers are as strong as they've ever been. We had a terrific -- the team had a terrific Q3. We're not seeing that type of supply chain disruptions on the industrial side as we're seeing across the automotive -- North America automotive sector. So they are in good shape, not to mention our industrial team going into 2021 did not trim back their inventories. They were in a good place, an inventory. And that is largely held up throughout the course of the year which has led to that great sales increase, they popped in Q3. So all is good on the industrial front.

Excellent. On the call through, you mentioned adding in some buy now pay later. Is that something you are just rolling out on the DIY side or do you see an opportunity to maybe roll that out to the DIFM channel to help out with affordability on repairs?

Yes, it's a great question. It's mostly on the DIY side and it's early days with the pilots that we're testing, but I'll tell you, is a good example of kind of understanding and listening to the customer, and then coming up with some solutions that meet these needs. So it's early days, but online retail is probably the place where that's most relevant.

Perfect. Thanks. That's all from me.

Thank you.

Our next question is from Seth Basham of Wedbush Securities. Please state your question.

Thanks a lot. And good morning. My question is on the U.S. Auto business and acceleration and growth that you saw in September, was that just a function of the comparison or is there something else that might have driven the acceleration in September and into October?

Well, I would tell you, Seth, that I think it's a combination of factors. I think our U.S. automotive team continues to get their legs under them. The year, continues to get better as we go. I mentioned October is looking strong. It's looking strong across all regions of the country. It's looking strong in both DIY and DIFM. And we don't -- we don't see it slowing. I would also comment that we had our best month, our best quarter with our big partners on the major accounts side, our AutoCare business continued strong and, Seth, our DIY business continues strong. So it's really across the board, it's held up well and we're seeing that trend continue on the month of October as well.

Got it. And just as a follow-up, when you think about new customer growth, have you seen an acceleration there or is it more about growing business with existing customers and the major accounts and NAPA AutoCare?

It's really both Seth and I. And again, I would give our team high marks on the strategy they put together going into 2021, which was all around sales team effectiveness and putting more sales reps out on the street and getting them focused on the end-user customer. And even when you look at our So kind of what we deem as our all other wholesale business, which is a significant chunk of business that was up high single-digits, year-over-year. So I think a combination of growing business with existing customers, but also kind of restructuring our approach to the customers with our sales team and really driving a lot of new business as well. So very pleased with the NAPA team and where we find ourselves.

Great to hear. Thank you.

Thanks, Seth.

Our next question is from Liz Suzuki of Bank of America, please state your question.

Great. Thanks for fitting in my question. So Will had mentioned a number of enhancements to employee benefits with a focus on being a global employer of choice. Can you quantify the cost of these initiatives? Or if you can't, explicitly break out how much you think SG&A would be impacted, do you think it's fair to say that growth in wages and benefits is likely to be elevated compared to historical growth rates for the foreseeable future?

I guess I would comment and again, these are just great things they're really important to our teammates and they are important for the work force. And yet having said that, they don't come with significant costs. I mean, what we would point to that is just more relevant on the SG&A is just the true labor and wage inflation that we're seeing. Part of it is making sure that you have competitive benefit programs and things like that, we've talked about healthcare and some of those things, paid time off vacation. But I think more important and more significant is just the true wage inflation that we're seeing. Having said that though, we couldn't be more pleased with the team's hard work in really permanently reducing our cost structure and being able to offset a lot of that inflationary impact with some of our initiatives. So I would not say that you need a model anything in there for the incremental benefit of those types of programs. And all that is contemplated in our full-year operating margin improvement that we've kind of models. So we feel good about it going forward.

Got it. Then on a follow-up to that, just given the increase in the guidance for the year, I'd imagine that the quarter came in ahead of your expectations and that there are some encouraging leading indicators that make you feel increasingly optimistic about the fourth quarter. So I'm curious where the results have most surprised to the upside versus your prior estimates.

Yeah. I think look there weren't any major surprises. Our results were really due to the stronger sales and continued recovery in automotive and industrial. The 16th consecutive quarter of gross margin gains with a highly inflationary environment, but having cost controls to really drive improved margins was important. We had terrific cash flow in the quarter, and again, with all the supply chain disruptions. So having that higher volume and really the industrial recovery has been coming quicker each quarter. So that went into our thinking as we look at the rest of the year, but we feel really good about Q4. But again, it's been a great team effort. And I think as we've seen each quarter, recoveries and the reopening of economies and the fundamentals have gotten better each quarter.

Great, thanks very much.

Our last question comes from David Bellinger of Wolfe Research. Please state your question.

Hi, everyone. Thanks for taking the question. And very nice results today. To on -- the 350 basis points of inflationary benefits within Automotive, you're expecting a similar rate in Q4. Are there any -- are the majority of those price increases fully rolled out at this point, or is there still some room to go into next year? Are you taking any pricing actions that are different from your competitors at this point?

Yeah, look, I mean it's a very fluid environment with these price increases. I mean, as they're presented to us and again, the global sourcing and supply chain and procurement teams work very closely with the vendors and they look at timing and we look at areas that we can have time to work into those price increases. We look at accelerating purchases. I mean, there's a lot of work that's being done and the timing of when they go to market is a factor in that as well. There will be some that carries over. Brenda next year, certainly, but it's a day-to-day, week-to-week negotiation right now. It is more normal inflation and industrial, so keep that in mind, the 1 to 2% is just more normal inflation for them. It's really the us automotive that's got the heightened inflation. Again international automotive a little more normal. We will have some that goes into next year. But again, teams are doing great job to work through that and have improvement.

Got it. And then I also want to ask buy now pay later feature. Is there any way you could frame the potential size of that opportunity? Is it really aimed at widening the NAPA customer base in some way? And just given that initiative and the acquisition you announced today, are you expecting that elevated online percentage of the business remains peaking in the coming years?

I'll take a shot at the first part of that. David, the Buy Now, Pay Later pilot, we're in about 250 NAPA stores. And look, I give our team credit for jumping on the opportunity. It's so early yet. It's -- I would misspeak if I tried to put a number to it. It's something new. We'd never done it before. We're not doing it anywhere else in the world at this point. I would just tell you kind of stay tuned and certainly more to come on that initiative. And then I'm sorry, the second part of your question online. Certainly, the acquisition that was announced, Automotive Accessories Garage, we're excited about that acquisition and it really goes hand-in-hand, David, with recent strategies where we acquired wind parts in Europe, we acquired spares parts in Australia, a few years back. And it's really just broadening our knowledge base and expertise into all things online. I would certainly expect that this initiative here in the U.S. will follow in a same track that we've done in the international markets. And I'm very pleased to tell you that, they have exceeded our expectations. It's still early at wind parts in Europe, but I would tell you that, early results are very, very, very favorable. And we expect to see the same as we really just expand our knowledge base in selling products online.

Great. Thank you very much.

Thank you.

We have reached the end of the question and answer session. I will now turn the call back over to management for closing remarks.

We'd like to thank you for your participation in today's earnings call. We look forward to updating you on our year-end and fourth quarter results in February, and thank you for your support.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.