Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Third 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, October 22, 2024. I would now 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 third 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, October 22, 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 the call. With that, let me turn the call over to Will.

Thank you, Tim, and good morning, everyone. Welcome to our third quarter 2024 earnings call. As always, I'd like to start by thanking our global teammates for their hard work serving our customers. And I'd also like to acknowledge all those who were negatively impacted by the devastating hurricanes in the U.S. I'm proud of our teams as they rally together to take care of each other and our customers. Our culture shines through with our teammates going above and beyond to navigate the challenge. Taking care of our communities is a pillar of our mission at GPC and we'll continue to support impacted communities through our partners at the American Red Cross. Let me also welcome Jenn Hulett to GPC. Jenn joined GPC in August as our new Executive Vice President and Chief People Officer, responsible for advancing the company's global talent and culture initiatives. This is a critical area of focus as we continuously strive to be an employer of choice. We look forward to Jenn's many contributions. Before I get into the results for the quarter, I'd like to take a few moments to provide an update on the business and share my perspective after nearly six months in the role as CEO. GPC has a great legacy. NAPA will celebrate its 100th anniversary next year. Motion is a market-leading value-added industrial solutions business founded in 1946 and our international automotive businesses in Europe, Asia Pacific and Canada have similar long proud histories. Together, GPC is a differentiated business with compelling opportunities individually and collectively as one GPC team in each of the global markets we serve. As we leverage the size, scale and strength of our company in our fragmented industries, we're intensely focused on evolving the business and leaning into the initiatives around talent and…

Thanks, Will, and thanks to everyone for joining the call this morning. Our results for the quarter reflect the impact of several factors; weak market conditions, the cost impact of investments we are making in the business and disruptions from the CrowdStrike outage in July and two major hurricanes. The third quarter was challenging and in evaluating our financial results and to provide additional transparency, we reflected on three key themes, which I will address, along with an update on our cash flows and capital allocation. Those themes are, what drove our profitability down year-over-year, how did the quarter differ from our expectations and what is our outlook for the remainder of 2024. My comments this morning will focus primarily on adjusted results, which exclude the non-recurring costs related to our previously announced global restructuring program and costs related to the acquisition of MPEC and Walker. During the third quarter, we incurred a total of $45 million of pretax costs or $36 million after-tax related to the restructuring efforts and integration activities. Before I review our three key themes in detail, let me share some high level context for our results, starting with sales. Total sales were up 2.5% in the third quarter, which included a benefit from acquisitions of 320 basis points and the benefit of an additional selling day in the U.S. totaling 110 basis points. Sales in the third quarter were negatively impacted by disruptions from Hurricanes Helene and Beryl, as well as the CrowdStrike outage, totaling approximately 70 basis points. For the quarter, our gross margin was 36.8%, an increase of 60 basis points from last year. The improvement in our gross margin was driven by acquisitions, primarily at U.S. Automotive, which drove approximately 60 basis points of gross margin expansion. Turning to cost, our SG&A…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Kate McShane with Goldman Sachs. Your line is now open.

Hi, good morning. Thanks for taking our question. Thanks for all the detail on the call today. One area that we wanted to learn a little bit more was just the detail around the inventory increase you saw during the quarter. And if you could maybe drill down into some of the investments that you're making in freight?

Sure, Kate. Good morning. Look, on the inventory side, I think that goes back to really some of what Will touched on and positioning us in the marketplace on the NAPA side. We've made some great strides on getting inventory availability, where it needs to be. That's a year-over-year kind of effort. We started that this time last year, as you recall. And I think we've really made some nice moves to increase depth, increase SKU count and do the things that matter in the field. We know that inventory availability is the deciding factor in being successful, NAPA's great legacy, it's got a great brand, it's got a great footprint. And so when we put that inventory power behind it, I think it really positions us well in the marketplace. That's the biggest driver of the change there. We also have some acquired inventory from the acquisitions we've made. So that will show up in the balance sheet as well. In terms of investments at freight, some of those are a bit competitively sensitive. I would just leave it at the fact that we're really leaning into making sure that, we've got on the other side of the equation, that store excellence, making sure, we have the driver availability and consistency of experience that we want to make sure, we're meeting the needs of our customers.

Kate, I might just add, as we look at all the internal operating metrics that we use to run the business, in particular in NAPA, we continue to be very bullish about the progress that we've made. So whether it's service levels from deliveries to stores, from DCs, from stores to customers, those are at all-time highs and getting better every day. As Bert said, the inventory strategy was all about making sure that we had the right vendor alignment with the right availability in the local markets and those have seen material improvement year-over-year. Safety is better in our DCs, inventory breadth and depth, as Bert alluded to, has never been better. So we've added deeper and wider inventory while using our existing supply chain. Voluntary turnover is down 30% plus year-over-year. And importantly, we're seeing about 100 basis point improvement in our customer metrics in terms of their satisfaction. So as we're running the business and putting these investments in, we feel good about the returns that are associated with them.

Thanks, Kate.

Your next question comes from Scot Ciccarelli with Truist. Your line is now open.

Yes. So you did not call out U.S. auto as a primary source of profit disappointment in the quarter? Does that mean U.S. margins held up and the total margin decline was really due to the international business? Or does that mean you just had subdued expectations for U.S. auto? And then secondly, obviously, '24 is going to fall well below initial expectations. Without providing any specific guidance, can you give us a general feel for how you're thinking about '25, meaning the sequential trends continue to weaken, but your comparisons get easier, et cetera? Thank you.

Hey, Scot, it's Bert. Look, on the margin side for U.S. Automotive, we don't really get into the details by the individual regions. I will say that the pressure we felt at the consolidated level was consistent across all the markets. And so, we were disappointed in total with where we were. It came in underneath our expectations as we've outlined. But I wouldn't isolate the pressure in any one market regionally around the world versus the other. They're all feeling the same kind of pressure. Interest rate pressure in all of our markets on the automotive side, cost inflation are both present in all of those markets. And so, when we think about the factors that drove SG&A, that I outlined in my prepared comments, those would be true for each of the regions individually. In terms of how we're looking ahead, and as you said, we don't want to get too specific. But look, I mean, I think the bottom line on 2025, is that we're going to continue to watch all the same data that you all are. And at this point, as we exit the third quarter and start the fourth quarter and start to look into 2025, those conditions remain pretty stagnant quarter-over-quarter. And so, market conditions are going to be a big factor in how we look at things. The bottom line though, is we're very encouraged by the long-term fundamentals for both segments. And we're in great fixed industries. I think those are beneficial to us in the long-term. Our size and scale is a benefit there as well. We have leadership positions in fragmented markets around the globe, and we're bullish on the execution of our strategic initiatives as Will outlined. But the biggest wildcard moving ahead with that positive backdrop is the pace and timing of recovery of market conditions. And so we'll take the fourth quarter to see what we think the market will give us for next year, plus our own actions and the things that we think we're going to be able to do and we'll update that and share that with you in February.

Scott, I might just add in the same way that we've articulated the higher interest rates have had the intended effect muting and slowing down overall growth, we are encouraged, obviously by the start of an easing scenario around the world. The U.K. has reduced rates once in the last, call it, six months, U.S. once, Eurozone 3 times, Canada 3 times. So obviously, there'll be a lag benefit to that, but we would hope as we move forward, those types of policy decisions provide a tailwind as opposed to a headwind.

Great. Thanks, guys.

Yes. Thank you.

Your next question comes from Michael Lasser with UBS. Your line is now open.

Good morning. Thank you so much for taking my question. Your SG&A dollars were up about $166 million in the quarter versus the same year ago. Can you outline a bit more what drove that increase? And should we expect the pace of increase to continue for the next several quarters given the investments that you're making?

Hey, Michael, good morning. Look, a big part of the dollar increase in SG&A is going to come from acquired businesses. So I think that's an isolated activity, particularly here as you look in the second half of 2024 with the acquisition of our two largest independent owners on the NAPA side of the house. So I kind of outlined that and detailed that in my prepared remarks. On that particular point, we would expect that SG&A to abate over time as we continue to integrate those businesses and capture synergies. The great news is we're on track on that front. We're seeing our synergy capture come in consistent with our business case. And as I shared, both of those acquisitions contributed positively to our third quarter. As we look ahead on some of those other elements, I think we'll continue to see pressure here in the near-term on the cost side of things with inflationary impacts on wages and rent. I don't expect those to abate in the fourth quarter. And likewise, we're going to continue to invest in IT, that's an important part of our transformation going forward. And there's some positive things there. Unfortunately, as we modernize systems, many of those are cloud-based platforms that transition expense out of capital into operating expense, which is why we're highlighting that for you. But we're also making some great investments in the business, in particular with our Global Technology center in Poland. We benefit from exceptional talent, high productivity and these teams are doing amazing work on some of our initiatives around catalog and search, which is clearly making a difference with our customers. So when we think about investment, that's an example of a thing I think you'll continue to see. But at the same time, we're also trying to be very thoughtful about offsetting some of this with our global restructuring, which remains on track. We saw a benefit in the quarter as we've discussed, and we're continuing to control headcount. The restructuring is helping with that. Most of that has come from voluntary retirements in the U.S. But if we look at our global headcount, we're down somewhere between 3% and 5% in 2024, excluding acquisitions. And we're continuing to do hard work across the network with engineering standards and engineering productivity and RDCs that's reducing over time and allowing us to be more thoughtful about headcount there as well.

Okay. My follow-up question is, your decision to make incremental investments in the decision -- in the business was inevitably prompted by something. You outlined your view that U.S. Auto business was down. Your business was flattish. So what is motivating the decision to make these investments? And how do you expect the return on these investments to play out in the next few quarters in terms of market share? Thank you.

Yes. Look, Michael, I think it's super important for any business to be investing in itself. And so I think as the management team organized their strategic plan, in particular, dating back to our Investor Day in 2023, we had a lot of compelling opportunities to invest back in the business in a different way, which I think is a function of the market realities, the changing technology landscape, the competitive dynamic. And so all those things put together set the stage for putting capital to work around the world in an accelerated way.

And Michael, I'll just add that I believe, that if you looked prior to Investor Day in 2023, you would have seen the GPC business in totality spending about 1% of revenue in terms of investment in the business. And so that's across all of our business segments. And that quite frankly, I think is not the level of investment we needed to stay at pace and grow this business and keep it on its front foot going forward. We think the technology work that we're doing and leading with technology is going to be a differentiator. And we think investing in our supply chains, which will make a difference for our customers, and as we know, having that part and having it at the right place and the right time, both on the Automotive and the Industrial side is critical to being successful. And as we make these enhancements across DCs, which we've mentioned, we're doing that in the U.K. and France, here in the U.S., we have a new DC in Melbourne, we're doing this all over the world. And you combine that with the technology, I think that's going to position us for a much stronger growth, particularly as we come out of this weaker economic cycle.

Thank you very much.

Thanks, Michael.

Your next question comes from Chris Horvers with JPMorgan. Your line is now open.

Thanks. Good morning. So my first question is, I just want to be clear. So was there a decision to step up investments above the original plan for this year or is it really just the acquisitions? And as we think about moving forward, do the acquisitions that you made during this quarter -- during the third quarter take sort of the underlying dollar run-rate higher as we look at the fourth quarter, obviously, relative to revenues?

Yes. Chris, we haven't changed our view on investment level on CapEx for 2024. We're still going to come in right around that 2% level. And as I commented in my prepared remarks, that's going to be around $500 million of investment. So there's no step up on the CapEx side of the house. We really think the 2% number is the right proxy. We did that last year. We'll do that again this year and we'll be thoughtful about how we look ahead to 2025. In terms of run rate on acquisition, I think, I would tell you that we expect that to -- that was never going to be linear. I think it's the best way to say it when you think about the independent owner strategy. As you've seen this year, we've acquired the two largest. And from there, acquiring 180 plus stores in May, as we've announced with Walker 75 stores, the next levels of independent owners drop pretty significantly in terms of store count size. And so I think you'll see, while we continue to march to maybe a more 50-50 target, the pace and timing of that will slow. So I think we get the first two big ones, which were important to do in the Q first and then we'll move at pace, but the pace will decelerate from what you've seen here over the last two quarters.

Got it. And then as you think about just, what are we expecting, what are like implied same-store sales and organic growth in NAPA and Motion? And as you look out and you think about the industrial side of the business, does the election sort of like -- is that a clearing event or do we have to wait for these capital budgets to come through for your customers in 2025, such that this actually could prolong to perhaps the second quarter when that capital gets deployed?

Chris, I would say the election is a clearing event with a lag. So by the time you turn the calendar year, the election flips and there's at least kind of clarity on the margin relative to where we stand today, especially with the backdrop of lower rates. And I think that helps.

In the implied comps for the fourth quarter.

Not for the fourth quarter. I would say, the lag is coming into 2025. I don't think the election clarity in November, creates a business impact immediately in November and December.

And look, Chris, we don't give quarterly guidance. So the quarter comps we haven't provided. But I would just say, I'd go back to my thoughts in the prepared remarks, we really don't expect the fourth quarter thematically to look much different than the third quarter in terms of the underlying performance of the business given the market conditions.

Got it. And I just want to ask one clarification question. So I think you talked about a $0.30 EPS headwind on $140 million shortfall in sales, is that right? Because that's like a 40% operating margin, I guess, ask the other way. If you expected sales up 2.5% next year, you would expect that -- next year, you expect 40% flow through on that.

No, I wouldn't take it that way, Chris. I mean, I think we're trying to give you a reasonable proxy of what we felt like the sales loss was. I mean, given the gross margin rate impact of that and the lost sales in the quarter. So I wouldn't overread into that in terms of operating margin.

Got it. Thank you.

Your next question comes from Greg Melich with Evercore. Your line is now open.

Hi, thanks. I have a couple of questions. I wanted to start maybe, at a high level, given that I think Bert, you described the investments ramping up to 2% now versus 1%. When we think about the growth algo that you outlined at the Analyst Day in '23, should we be thinking about this year as a new base to build that off of or should we still go back to where we were a couple of years ago and have the growth off of that base.

I think this year is a tough year to use as a proxy, Greg, is my kind of initial response to that. We've had a lot of moving pieces. Market conditions have moved backwards. I think as you look historically, we've said that the growth algorithm is in that 3% to 4% top line range in the long, long term for the business in terms of top line and that we can lever off of that. This year with market conditions, particularly on the industrial side moving negative, it's not a year I would use as a proxy. So I don't think we're ready to move off of what we think are long-term algorithms, but obviously, we reserve the right to kind of update you as we get into 2025 and the 2025 guidance, particularly as we see with what the fourth quarter presents and how we think the beginning of 2025 will start. So let's not deviate from how we think about the health of this business on a long-term basis, as Will has said, I think we're very bullish on what the long-term can be and the investments we're making in the business. Those have stepped up from a 1% historical rate, but that 2% is the same level of investment we shared with you at Investor Day. So we think that does set a little bit of a new proxy there. But again, we'll come back to you with some more thoughtful outlook when we get to February.

Got it. And then my follow-up was you mentioned how dis-inflation has brought inflation down in both industrial and auto to sub 1%. Can you remind us of how that cycles, if you think about the comparisons from a year ago. And should that -- should we expect that to normalize back at maybe the long-term 2% to 3%? Or do you think we're sort of stuck at this flattish position?

Look, again, I'll always reserve my right to update you when we build our models for 2025 and share those in February. But I think we're coming out of the period that we all expected. We saw this start last year in 2023 in the U.S., and we're seeing it now in Europe. We expected those high benefits of inflation in the top line to cool off, and they have. We're going through what I think is the unwinding of all that now. And again, if I go back to the first question about the long-term, if you think the long-term is a 3% to 4%, embedded in that long-term is a 0.5% to 1% range of price benefit. And we would expect in the long-term, absent something else coming to light that changes our view on the health of the markets fundamentally, that would be the case and we would vert to something more normalized as we move ahead.

Got it. And then last, I would just say how would you look -- how would you describe your market share positioning right now in U.S. auto and Industrial. I mean, I know there's a lot of macro headwinds. Do you think you're gaining share, holding share still slipping a little bit?

No, we feel really good about it. And we use on the NAPA side a third-party independent data that's got everybody's information in it and it's never been stronger, always opportunities. There's 120 categories that you have to look at to study SKU level share and we've made incredible progress there. So -- and then on the industrial side, we're right there or better than the market. There's some data points out there from peers and obviously, the PMI. So down a little bit in this market is at or better than market performance.

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

Thanks, Melich.

Your next question comes from Seth Basham with Wedbush Securities. Your line is now open.

Thanks a lot and good morning. Just following up on Greg's last question, thinking about the U.S. market, your comps were flattish ex the extra day sequentially, and slowed materially onto your stack basis. Do you think that market conditions got worse or do you think that the competitive environment got more difficult this quarter relative to last?

I think the markets got worse and the hurricane impacts put noise into the data. So a flattish market feels about right to us, a plus or minus a point.

And on the second part of that Seth, on the competitive set, I mean, I wouldn't say that the competitive sets changed much. We have great competitors. We compete day-to-day with a competitive landscape that, thankfully remains very rational on pricing. And so we're encouraged by NAPA's position in the market as I said earlier, with its great footprint, legacy availability and quality.

And specific to the major account segment that you talked about getting a little bit better this quarter, what's driving that. Do you think it's the end markets. Do you think it's some of your initiatives? Any color there would be appreciated.

Yes. So we were really pleased with the sequential improvement in major accounts. As I think, we've talked about publicly before, inside our major accounts, we have four or five different books of business and each have their own specific initiatives. And those initiatives are gaining traction, specifically around some of our priorities in our regional quote, unquote major accounts and our independent affiliates. So we're focused intentionally there to make sure that, we're doing business that makes sense for our customers and for us, and we'll continue to be very thoughtful there.

Great. Thank you so much.

Your next question comes from Bret Jordan with Jefferies. Your line is now open.

Hey, good morning, guys.

Hey, Bret.

Hey, Bret.

A lot of it's been covered, but I guess ex the hurricanes, do you see any meaningful regional dispersion in U.S. NAPA?

We have -- we haven't seen any dispersion ex the hurricanes and then ex the M&A benefit, everybody was around the same level of performance, no material difference.

Okay. And then I think in the prepared remarks, you talked about either nearshoring or reshoring some of your supply chain. Could you give us a little more color on that? And is there a margin impact one way or the other?

Yes. Look, I think we had a great update with the Motion team a few weeks ago. We detailed this deeply and we've got a lot of great sales leads and traction for that matter around specific projects. I think on one of the calls, somebody asked us what that opportunity set is. And if you just look at the U.S. business by itself for Motion, we're tracking somewhere over 150 different projects between now and 2030, that represent about $2.5 billion of MRO spend for us. So, some small portion of that is a pretty attractive incremental headwind or a tailwind for us and we put some resources to it and seen some nice traction by vertical. That's what we refer to as our new sales verticals. So definitely, in focus. We see it in Canada, and we've got the same chart in Mexico, all with exciting opportunities.

Okay. Thank you.

Thanks, Bret.

Thanks, Bret.

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