Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Second Quarter 2024 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, July 23rd, 2024. At this time, I would like to turn the conference over to Tim Walsh, Senior Director, Investor Relations. Please go ahead, sir.

Thank you and good morning, everyone. Welcome to Genuine Parts Company's second quarter 2024 earnings call. Joining us on the call today are Will Stengel, President and Chief Executive 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'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's views as of today, July 23rd, 2024. 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 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 companies 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 Will.

Thank you, Tim, and good morning, everyone. Welcome to our second quarter 2024 earnings conference call. Before we turn to the results of the quarter, I'd like to share a few thoughts as part of my transition into the CEO role over the last 45 days. First and foremost, it's an honor and a privilege to serve as only the sixth CEO in Genuine Parts Company’s nearly 100-year history. GPC has a special culture which was founded on taking care of our people and offering solutions to our customers efficiently and consistently. This has served our business incredibly well over the years and will remain a core element of our foundation. As part of the transition over the last several months, I've spent time engaging with our teammates, customers, and suppliers around the world. I'll share a few key messages that have come out of those discussions and that are areas of emphasis as we move forward. First, leverage our culture as an advantage. We have a unique and differentiated culture. Our global engagement data shows the vast majority of our employees are incredibly proud to work for GPC. That's a fact of which we are proud and is a testament to our strong, consistent leadership over the years. We must nurture our culture to extend our unique advantage, but we must also continuously evolve with our customers and our markets. Second, build high-performing teams. Our talent strategies have been intentional as we continuously work to be an employer of choice. We have a capable group of leaders around the world that have aligned values and a clear understanding of our shared vision. But we amplify our impact when we relentlessly build high-performing teams throughout the organization, who are energized to work together, solve problems, and deliver results. Third, capture…

Thank you, Will, and thanks to everyone for joining us today. Our second quarter results were below our expectations, as market conditions, including lagging industrial production and weaker demand in our US automotives and European businesses negatively impacted our performance. Despite the muted market backdrop, our teams continue to operate with discipline and are making progress on priority strategic investments necessary for the business. The softer market conditions combined with the impact of inflation and acquired businesses on SG&A resulted in flat adjusted earnings year-over-year. With that context, let me take a few moments to comment on more specific details of the quarter along with our updated view on our outlook for the year. My comments this morning will focus primarily on adjusted results, which exclude the non-recurring cost related to our previously announced global restructuring program and transaction costs related to the acquisition of MPEC. During the second quarter, we incurred a total of $62 million of costs on a pre-tax basis or $46 million after tax related to restructuring efforts and MPEC integration costs. As we look at the second quarter, total sales were up 0.8% versus the prior year, reflecting a 2.2% contribution from acquisitions, partially offset by a 0.9% decrease in comparable sales and a 0.5% unfavorable impact of foreign currency and other. During the quarter, the contribution from inflation was less than 1% in both our automotive and industrial segments, in line with our expectations. For the quarter, our gross margin expanded by 50 basis points from last year, driven in part by the ongoing execution of our strategic sourcing and pricing initiatives. Our investments in technology and category management capabilities are continuing to deliver positive results in our gross margin performance. In addition, the acquisitions we are making in our US automotive business contributed…

[Operator Instructions] Our first question comes from the line of Bret Jordan from Jefferies. Go ahead please.

Hey, good morning guys.

Good morning, Bret.

Will, your comment about independents expecting more normalized buying behavior in the balance of the year, could you give us, I guess, more color? I think they destocked late in ‘23 and then bought in pretty well in the beginning of ‘24. I guess, how do you see the cadence working out?

Yeah, look, we've seen continuous sequential improvement on that topic. As I mentioned in my prepared remarks, all the initiatives that we're working on here in US automotive are affecting both company-owned and independent-owned stores. And so when we think about inventory strategies, service excellence, those initiatives are all relevant for what we're doing with the independent owners. And we've seen nice sequential improvement through the year. We would expect that to continue through the balance of the year. The math of how that works, I won't get into the specifics, but the tone is good, the relationships are good, the partnership’s good. We had a bunch of independent owners into Atlanta just last week, and everyone's got their hand in the huddle and committed to continuing to grow the business and compete in the local markets.

Okay, great. And then on Europe, is there anything notable, I guess, regionally? I mean, France has had some political backdrop, I mean, you're talking about sort of softening in that market, but is there anything to attribute it to, sort of from a geographic standpoint, or is it just widespread?

It's more widespread than it was probably 90 to 100 days ago. Just to be clear, we're really pleased with the European performance. I mean the business continues to grow and grow profitably. The M&A pipeline is having its effect with very accretive acquisitions. In particular, our Spanish and Portuguese businesses after their acquisition last year continue to perform really well. They're a standout. NAPA brand is a differentiator as part of that to help us compete in the market. But we've seen some softness earlier in the year in the UK and France, I would say. It's moderated growth through the balance of the business, call it Germany, Benelux, et cetera. But the business is still performing in excess of market and we think we're winning share. So, tougher times, but proud of what the team's executing over there.

Great, thank you.

Thank you. Our next question comes from the line of Scot Ciccarelli from Truist. Go ahead please.

Good morning, guys.

Good morning, Scot.

Hi. You guys referenced a few times about your pricing issues is providing a boost to gross margins for your auto business. I'm assuming that is code for raising prices. So with that context, at what point do you start to run into competitive pricing issues, especially in an environment where the WDs become more price competitive and one of your public competitors is actively reducing prices?

Yeah, Scot, thanks for the question. I think our pricing strategies are more holistic than just raising prices. And so as we've talked about before, we talked about it through the prism of category management which is the intersection between not just pricing but also sourcing and in some -- at the SKU level, and some SKUs are going up and many others you're going down as well and the challenge that we put to the category managers across the business has net-net positioned us in a better margin profile as we move forward both on the sourcing and pricing side. So we're being very thoughtful about being competitive in the market on certain categories and we're balancing that with a lot of very scientific and thoughtful technology work that we've done around data analytics to make sure that we've got visibility down at the local field level to compete and win.

And, Scot, this is Bert. I’ll just amplify that a little bit with -- in the quarter the gross margin improvement was skewed to the majority side from acquisitions. So we're seeing a nice benefit from the new acquisitions in US automotive. And just to parse out how we think about this split between sourcing and pricing, where you would have seen a bigger benefit in 2023 from pricing, we're actually drawing most of our benefit this year on the back of the work that Will just described in category management and sourcing. So again, pricing is a complex topic. It's a lot of moving things up and down to be competitive. So I wouldn't just categorize it as we're moving prices up. It's a lot of moving pieces here, but we're also getting this nice benefit from acquisitions as well.

Okay, thanks. And then kind of related to that, when you guys go, you've been on a pretty active sequence, trying to acquire some of your independence. When you guys own a store rather than selling product to an independent or wholesale relationship, can you give us some generalized color just regarding the sales and gross -- the profit dollar contributions once you own that business?

Yes, so that's one of the benefits of this pivoting strategy. So we see the mix shifting to more company-owned, continue to lean in on the independent owner model as we have in the past. So we'll have this hybrid model going forward, but as we look at isolation of adding more company owned stores, the benefits come across a few prisms. First, commercially, we'll stop sharing the margin. So we see a difference there in terms of recapturing some of the margin that we were sharing previously and you're seeing some of that come through in what we've seen in the second quarter here. Secondarily, when you just start at the very top of the house and you think about the commercial transaction itself, we'll have more control over the transaction from the outset. So that means the price in the market will have the ability to adjust and flex the depth and breadth of inventory in the market to be competitive. Some of those things were tension points between the independent owner and us before. And then as you move through the rest of the P&L, we obviously get benefits from SG&A. We're able to simplify and streamline the back office. In many cases, the independent owner had their own back office, which we can leverage our own, we'll be able to capture some of the benefits from technology and continuing to drive technology into the stores and create some incremental leverage on some of the supply chain elements as well. Many of these independent owners had their own small stocking and many kind of offsite locations that we obviously wouldn't need. So as you move through the different elements of the P&L, I think we have a lot of goodness there. We bought a great business here in the second quarter with the MPEC business, and we're already seeing benefits of that coming through our P&L. So we're excited about this pivot. The team is doing an outstanding job in terms of integration and execution and bringing these folks on board.

Thanks guys.

Thanks, Scot.

Thanks, Scot.

Thank you. Our next question comes from the line of Kate McShane from Goldman Sachs. Go ahead, please.

Hi, good morning. Thanks for taking our questions. We wondered just within DIFM if you're seeing any notable strengths or weaknesses by customer segment? And also within automotive, if you could talk to product categories that were the strongest, and if there was any meaningful change when the warmer weather came in in late June, early July?

Yeah, Kate, thanks for your question. On the customer segment side for commercial, we actually have seen relative strength, as we said in our prepared remarks, in the auto care fleet and other wholesale for us. Our headwind continues to be our major account business. And if you look at and decomp major account, there's different pieces inside of that book of business, ranging from regional accounts to the big national guys, OE dealerships, et cetera. And so there are some customer specific challenges in that book of business, but I'll tell you, there's just as many recent wins, certainly on the regional accounts that we were talking about the other day as a team that we're really excited about that should position as well as we come through the second half of this year and into next year. So we're being really thoughtful in that major account book of business to make sure that it's a win-win economic relationship for NAPA and the customer. And so we're going to be pretty disciplined as we think about that going forward. From a category standpoint, we have seen some positive trends based on recent weather in all the categories that you would expect. And as I said in my prepared remarks, the inventory progress that we've made through the first half of the year has been quite fruitful and so those targeted categories we've seen nice momentum as we go through. So the category managers are really doing a very nice job and our sales folks out in the field on the commercial side are also being very thoughtful as well. We're proud of the teams.

Thank you.

Thanks, Kate.

Thank you. We have our next question coming from the line of Chris Horvers from JPMorgan. Go ahead please.

Hi, good morning. It's Christian Carlino on for Chris. So the industrial guide assumes that comps or sales growth accelerates to low single-digits in the back half. And understanding you have the extra day phenomenon, just, can you speak to what else drives this acceleration? And is there any appetite to start up larger capital projects or is it at this point really just break fix until after the election?

Yeah, Christian, it's Bert. I'll take that one. And maybe as we think about guide, it's just important to refresh on how we thought about the year when the year started and then where things have moved. When we started the year, we expected a moderated first half, stronger second half and a lot of our second half view was based on better industrial production and that being stimulated by interest rates. That model wasn't overly precise, so we didn't have a specific rate cut time to industrial growth or timing of industrial growth, and I think it was more philosophical like many companies about easing interest rates would be supportive of industrial production. As Q2 developed, which included some softer market conditions across industrial, we really have updated our outlook on that side of the house based on that updated view. And we think that with some third-party data, the industrial production activity will continue to lag, it'll still be a headwind for the business as we move here into the third quarter and getting into the fourth quarter as well. We really expected at this point based on our original view to enter the second half of the year with some better kind of low single-digit mid-single-digit growth in Motion and in our industrial side of the house and that's obviously not happening. So we've pushed that out a bit. We -- operating this period of PMI that's been down for quite some time and so now as we look we think that comes much later in the year in terms of improvement. Again, a function of interest rate cuts and we all can take our own predictions on those. Q3, I think we would have parked in our old guidance at somewhere at mid-single-digit, exiting the year at high single-digit. I think we'll see the rest of this year play out in the low single-digit range at best, as we indicated at the top end of our sales guidance and look for improvement as we move through the back half of the year and into 2025.

Hey, Christian, I might just add a couple other thoughts. Obviously, the year-over-year compares ease in the second half of this year. And so as we do the two-year stack and kind of year-over-year compares, that's something that we've spent a lot of time thinking about. The other thing I would tell you just commercially, we've had a lot of discussion with the Motion business and all the leaders about stepping up the sales intensity of the business And as I suggested in my prepared remarks, the discussions we're having with our customers are very positive in the sense that they understand our value proposition. They're great strategic partners. They want to do more business with us. And as a result, you're seeing a lot of renewals of corporate accounts as well as some sales initiatives that is incremental to existing business. So, again, we're working on the right stuff in the Motion business. It's a choppy market. But once we get that sales growth and the customers start spending, we're going to be in a great position.

And, Christian, just on the specific point about capital projects, I mean, the feedback from the customer is, look, there's a lot of uncertainty out there, high interest rates. Capital projects at this point are must-do activities. So we're really seeing some tempering there on that spend. And again, to Will's point, we're having great wins and renewals with customers. And as this interest rate environment, I think, eases, we'll start to see things move.

Got it. That's really helpful. And just a follow up on Kate's question, I guess what do you think drove the acceleration in US NAPA over the quarter? Was it weather that abated as you got into May? Or is it starting to lap some of the early signs of deferral you saw last year? And just any comments on what you're seeing in terms of maintenance deferrals. Is that getting worse?

Yeah. I mean, look, I think April, as we've talked about, was super tough. I don't think that was new news for anybody. And so it's all relative. We were kind of working off a low base, and we saw sequential improvement. The initiatives are making a difference. The MPEC acquisition helped build some momentum through the quarter, and the weather did help. So that all being said, it's hard to extrapolate the trend out of the second quarter. I think that's some of the challenge with how we're thinking about the guide. July was a little bit choppy based on what we articulated. So pleased with the sequential improvement through the second quarter, but trying to make sense of the world and the macro environment that we find ourselves as we come into the second half.

Got it. Thanks very much. Best of luck.

Thanks, Christian.

Thank you. Our next question comes from the line of Greg Melich from Evercore ISI. Go ahead please.

Thanks. I wanted to follow up on that last point, guys. The start in July is choppy. So it sounds like -- was July as bad as April? Or is it something between the exit rate of June and April?

Well, Greg, I reserve the right to vote on July since it's not over yet. But look, April was a tough month for sure. Will has already articulated that. And as I said in my prepared comments, I think July has started out with a lot of mixed views. So we've got some disruption from Hurricane Beryl that impacted both of our US businesses on the automotive and Motion side. We've had some additional industrial production shutdown around the 4th of July holiday. I think manufacturers are taking advantage of any slowdown in a holiday to cut a little bit of their own costs and pull back on some costs there. And then obviously, we had a CrowdStrike outage that began late last week, and that's impacted many, many businesses. We were down for a brief part of the day, and Naveen and the teams around the world did an outstanding job of bringing us back up very quickly. So while we've taken care of our own house, part of the impact of that will continue to be how our customers and down the chain feel that impact across their businesses. So, look, I wouldn't compare April and July just yet. As I said, July is not over, but April certainly was a tough month. And I think the thing that is a challenge for us is just all these different pieces of noise create some lack of clarity into the true trend. Back to Christian's question a minute ago, how do you parse some of this out? And I think these are the things that we're looking at, but I feel good about where we are and all the work we're doing.

Yeah, Greg, I would just come over the top on that and emphasize the point that we feel good about the work that we're doing. And the tone of our meetings is positive. Everyone appreciates that it's a tough market, but the specific initiatives at NAPA or Motion or any one of our businesses is the right body of work. And at some point, hopefully soon, as the market recovers, we'll have a couple of nice tailwinds behind us.

Great. And my follow-up is maybe digging a little deeper on the consumer environment and the end market. Have you seen any sort of trade down or deferral of projects? Are you seeing that where just consumers are like, I’m out of money, and I'm just going to wait on things? Can you see that in the data?

We don't see it empirically in the data, but qualitatively, we have seen that. The other challenge that we put to the merchant is making sure that the good, better, best assortment logic kind of plays in every market condition and for every customer. And so we've seen some shifting around good, better, best. That's probably the closest data that we can look at to see the psyche of the consumer. And then you also anecdotally, you do hear that the consumer is if they needed to, maybe they only do one kind of phenomenon, with most of our big kind of major accounts. Those discussions are pretty consistent across the landscape. So we're seeing it, but I think we're well positioned in the market environment with how we're positioning our brands.

Got it. And then, I guess, last on that, it sounds like do you think you gained share in the quarter, in both industrial and auto?

We feel good about what we're doing. Quarter-to-quarter, we're the first one out of the gate. Hard to kind of fixate on all things share. The feedback that we get qualitatively from the supplier community, honestly, as has never been better. And I think that's just a reflection of another data point to support that the work that we're doing is all the right stuff. We've just got to keep our head down and keep sequentially improving.

Great. Thanks and good luck, guys.

Thanks, Greg.

Thank you. We have our next question coming from the line of Michael Lasser from UBS Securities. Go ahead please.

Good morning. This is Henry Carr on for Michael Lasser. Thanks a lot for taking our questions this morning. I wanted to ask, so assuming third quarter demand looks similar to second quarter, are you anticipating those pressure callouts of 50 basis points from increased salaries and wages, [Technical Difficulty] Are these pretty much going to be pretty consistent in third quarter, would you say?

Hi, Henry, thanks for the question. I'll talk a little bit about how we see the rest of the year. We've talked about some things already with Greg's question around the start to July. So we do have some things that we're managing through here in the month. I won't give quarterly guidance, but as we frame the rest of the year, Will talked about easing top line comps. But when we look at the third quarter specifically, to your point, we will continue to see deleverage in the business for many of those factors and the combination of a lower sales outlook for the rest of the year. Given that, I would tell you that we expect Q3 earnings to be down year-over-year, mostly because we see a lot of this persisting, particularly coming out of the second quarter and particularly with the softness on the industrial side of the house. With that, we would see Q4 being a little stronger on a relative basis. But as you know, there's plenty of things to think about in the fourth quarter with holidays and the weather. So I would just say, look, we've got an elevated degree of uncertainty in how we're forecasting from earlier in the year, particularly on the trends in industrial. But we're giving you all the information we have right now, everything we think, including all the other variables that are out there, with interest rates and elections and all of that are reflected in our guide.

Great. Thank you. And for a follow-up, I just wanted to ask about with the increased M&A of company-owned stores, I think it's increased to roughly 30% of mix. Does -- when we think about M&A as a contribution to sales growth moving forward, is that 1% target given at the Investor Day in 2023 still a good kind of benchmark to gauge with?

I think so, Henry. I mean I think that's a fair proxy. I mean, obviously, it will flux in any given year, a little higher maybe in a year where we do something like KDG. But I think if you're using that for a modeling point, I think it's a fair enough proxy, particularly when you look back over the history of GPC over many years. So let's just leave it there and you guys keep using that number as a reasonable proxy.

Thank you so much.

Thank you. Our next question comes from the line of Seth Basham from Wedbush. Go ahead please.

Thanks a lot, and good morning. First, congrats on the appointment of CEO Will, and best wishes to Paul.

Thank you, Seth.

My first question is just a follow-up to the last one. In terms of your goal related to acquiring independents, 30% of the mix of stores now I don't know that you have a stated goal necessarily, but do you expect continued strong acquisitions for the next couple of years?

Yeah. Look, Seth, I would tell you that we don't have a stated goal at this point. We're just in the early innings of this pivot. We've made some nice progress here in the second quarter. That move up to 30% came on the back of the acquisition of our largest independent owner. And we're going to continue to be opportunistic as we look at these. We obviously are trying to focus on target markets. I would tell you those lean a little bit more towards urban areas. The independent owner will continue to be an important part of our ecosystem. We have tremendously strong independent owners. They provide us strength in key markets, particularly in rural markets. They have deep relationships. We have great scale and good capabilities with all of them. And so we'll continue to have that hybrid. As we think about the March forward, I think we'll be more acquisitive as we move through the course of this year. But that will be based on the timing of these individual discussions. It's a willing buyer and a willing seller. And we've had some good luck here, bought a great business with MPEC, but it's not a one-size-fits-all, and we'll continue to let that go and come to us as it does.

Hey, Seth, maybe just a couple of other points. I mean I think we said in the script, it's not linear. So we started with the largest independent owner and transacted there. But obviously, we have a lot of smaller owners and so building nice momentum, but it's not linear. Just to make a finer point, we're 70-30-ish today. Three years ago, that was more like 20-80. So to help calibrate the last two to three years, we've made really nice progress. We continue to do that. That being said, the independent owner will always have a role in the NAPA operating model, and we value those relationships and look forward to working with those as we continue to align to win in the local markets.

Got it. And can you quantify the benefit to gross margin in the quarter from the independents acquisition? And [Technical Difficulty].

Yeah. We said that number was right around 30 basis points. So of the 50 basis points improvement in gross margin, all acquisitions contributed about 30 basis points.

And similar impact for the full year expected?

I didn't parse out the improvement for the rest of the year. We lifted the guidance for gross margin, primarily on the back of some of that goodness. So I'll let you guys kind of parse that out, how you want, but we're not being quite that specific in terms of how we thought about it. We know there'll be more benefit coming out of gross margin because of acquisitions, but also because of the great work we're doing across the business.

Got it. And my follow-up question is on the major [Technical Difficulty] segment in the US. You talked about discipline there, Will. Are you giving up business there where you don't see it economical? Or is the pressure there more related to elevated levels of deferred maintenance?

I wouldn't say we're giving up business, I would say we're having active discussions with customers to make sure that we've got a path to have it be a win-win. And as we think about incremental new business, we're bringing another level of perspective to that and defining what's helpful to the business. All of that obviously there's trade-offs to all things kind of pursuing new sales. And so each customer is a specific discussion and its own situation. We're just, I think, focusing a little bit more intently on making sure that we're doing right by the business and our customers.

Got it. Thank you very much.

Thanks, Seth.

Thank you. We have time for one more question. And our last question will be from Carolina Jolly from Gabelli. Go ahead please.

Hi, thank you for answering my questions. Will, congratulations, and that was a really, really great tribute to Paul. So thanks for that as well.

Thanks, Carolina.

First question is just around the modernization of supply chain you mentioning. Does that also require or imply more inventory?

No, Carolina, I think as we modernize DCs, it's actually probably one in which we optimize inventory, not have to stock and add more. I'll just give you an example of some of the big projects where when we look at an Australian DC consolidation of other satellite facilities around it into one, same thing happening with two different projects in Europe. And so actually, what we're seeing is it gives us a chance to be a little bit smarter and probably not have to be quite as broad in different locations and concentrated into one and maybe even get a little bit deeper in terms of what we're doing. They obviously have been designed and put in locations where they shorten stem times and lead times to get to the distribution network on the ground. That's helpful as well. So I don't think modernization of supply chain is a net negative for the inventory side of the balance sheet. I think it's actually a long-term net positive particularly when you combine it with some of the other things we're doing with service. And then if you look at the Motion side of the house, what they're doing with the fulfillment centers we've talked about in the past as well.

And then just a quick question. Do you date on the regional disparity [Technical Difficulty]?

Yeah, we had relative strength, call it, in the middle part of the country. For the quarter, the West Coast, East Coast was a little bit challenged relative to the balance of the country, but nothing material that I would suggest is a trend or a commercial challenge.

Thank you.

Thanks, Carolina.

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.