The paragraph is an introduction to Genuine Parts Company's Third Quarter 2024 Earnings Conference Call. The operator announces that the call, held on October 22, 2024, is in a listen-only mode, with a Q&A session to follow. Tim Walsh, Senior Director of Investor Relations, introduces the participants: Will Stengel, President and CEO, and Bert Nappier, EVP and CFO. The call includes a webcast and replay, accessible on the company’s website, and may discuss non-GAAP financial measures with reconciliations in the earnings release. Forward-looking statements might be included, with a disclaimer noting that actual results could differ due to factors in the company’s SEC filings.

In the third quarter 2024 earnings call, Will Stengel, the CEO of GPC, begins by expressing gratitude to the company's global team and acknowledging those affected by recent U.S. hurricanes. He highlights GPC's commitment to community support through partnerships like the American Red Cross. Stengel welcomes Jenn Hulett, the new Executive Vice President and Chief People Officer, emphasizing the focus on talent and culture. Reflecting on his tenure as CEO, he appreciates GPC's legacy, noting its branches like NAPA and Motion, and stressing GPC's strong position and opportunities in global markets. Stengel outlines the company's focus on evolving its business, enhancing talent, technology, supply chain, and sales strategies.

The paragraph emphasizes the importance of transformation and investment across industries due to evolving customer needs and market dynamics. GPC is committed to leveraging its financial strength to pursue strategic investments while balancing foundational, growth, and innovative opportunities. Although these investments come with higher costs amidst challenging market conditions, the company aims to offset short-term pressures by focusing on operational excellence and managing costs through global restructuring. GPC is also committed to maintaining its dividend and enhancing business productivity. Looking ahead to 2025, specific initiatives, particularly at Motion, are highlighted to reinforce the company's optimism for its future.

The paragraph discusses the company's strategic investments in automation, technology, and inventory to enhance operational productivity and customer experience in the U.S. automotive segment. They are focusing on improved delivery times, a strong NAPA brand, and leveraging local relationships to lead the do-it-for-me segment. Refinements to their operating model aim to boost revenue and profitability. Additionally, they are utilizing global tech resources in Poland for software innovation and employing a unified operating philosophy to integrate their automotive and industrial sectors, aiming for value creation through IT collaboration and operational harmonization.

The paragraph discusses the company's initiatives aimed at enhancing customer experience, achieving market-beating growth, reducing costs, and generating returns. Despite challenges from near-term market headwinds and underwhelming third-quarter financial results, the company remains optimistic about its long-term investments. The third quarter encountered disruptions from two major hurricanes, affecting sales, which totaled approximately $6 billion, up 2.5% year-over-year due to extra selling days and acquisitions in the U.S. automotive sector. However, global softness, especially in Europe and the industrial business, hindered sales growth, exacerbated by high interest rates, cost inflation, and geopolitical uncertainty, leading to tightened budgets and decreased spending by customers.

The company experienced a decline in adjusted earnings for the third quarter due to a weak sales environment and rising costs in wages, rent, depreciation, and interest expenses. Adjusted diluted earnings per share fell to $1.88 from $2.49 the previous year, missing expectations. Anticipated improvements in European market conditions and global industrial activity did not occur, leading to sales being over $140 million below expectations. As a result, the company adjusted its 2024 outlook, expecting weaker market conditions to persist. Total sales for the Global Industrial segment decreased by approximately 1% year-over-year, with comparable sales down 2%, despite having an additional selling day. Daily sales were down in July and September but flat in August. The company remains focused on managing controllable factors and anticipates eventual market tailwinds.

The industrial segment is facing headwinds due to the longest period of contraction in PMI in over 33 years, impacting production activity and sales. While certain end-markets like pulp and paper showed growth, others such as equipment and machinery lagged. The core MRO business remained stable, but customer spending on capital projects decreased as clients await clearer signals from interest rates and U.S. elections. Despite short-term challenges, Motion is well-positioned for future growth and has been recognized with Supplier of the Year awards. The industrial segment's third-quarter profit decreased by 8% due to sales deleverage, wage inflation, and higher depreciation expenses.

In the third quarter, the Global Automotive segment saw a modest 5% sales increase to $3.8 billion, partly due to an extra selling day in the U.S. Profitability, however, declined by 19% to $262 million, influenced by a subdued sales environment and cost pressures in Europe and the U.S. In Europe, sales growth was 6% in local currency, but market conditions remained weak, largely due to deferred maintenance linked to economic challenges such as real wage declines, unemployment, and higher interest rates in Germany, France, and the U.K. These factors are contributing to reduced consumer confidence and spending power across these regions.

Despite a challenging macroeconomic environment, the company has seen market share gains and growth driven by initiatives with key accounts and the NAPA brand. In the Asia Pacific region, sales grew by 7% in local currency, with significant retail strength in Australia, despite economic challenges. Canadian sales rose by 1% despite a cautious consumer environment. In the U.S., automotive sales increased by 4%, aided by an acquisition and an extra day in the quarter. Overall, sales growth aligned with expectations, supported by strategic actions that improved performance.

In the recent quarter, sales to commercial customers at NAPA grew slightly, while sales to do-it-yourself customers declined. Within the commercial segment, fleet, government, auto care, and wholesale sales were positive, although major accounts underperformed but showed sequential improvement. Company-owned store sales were marginally positive, whereas independent store sales slightly declined. For U.S. Automotive, non-discretionary repair categories increased modestly, general maintenance was flat due to cautious consumer spending, and discretionary categories decreased mid-single-digits. NAPA continues to invest in growth and service improvements, increasing inventory and SKU coverage, which has enhanced customer service and delivery metrics. The company views commercial customers as the primary growth driver, with 80% of its business targeting this segment.

The paragraph highlights the company's strategic growth through acquisitions, including MPEC and Walker Automotive Supply, and adding approximately 70 NAPA stores in North Carolina. They have acquired over 450 NAPA stores year-to-date, increasing their company-owned stores to 35% of their U.S. network, aiming for a 50-50 mix with independent owners. Despite current market softness and quarterly financial results below expectations, the company remains confident in its investments and long-term industry fundamentals. They emphasize disciplined investment during downturns to strengthen leadership and gain market share, expressing gratitude to their teams and transitioning the call to Bert Nappier.

In the third quarter, the company's results were influenced by weak market conditions, investments, a CrowdStrike outage, and two hurricanes. Sales increased by 2.5%, aided by acquisitions and an extra selling day but were negatively impacted by the disruptions. Gross margin improved by 60 basis points due to acquisitions, although SG&A expenses rose by 220 basis points year-over-year. The company incurred substantial restructuring and integration costs and is focusing on three themes: factors driving decreased profitability, deviations from expectations, and the outlook for the rest of 2024. Adjusted results consider the exclusion of non-recurring costs.

The paragraph explains the impacts of business acquisitions, IT investments, and cost pressures on year-over-year financial performance. The MPEC and Walker acquisitions increased SG&A costs initially but are expected to stabilize as integration plans progress over 24 months. While these acquisitions have positively influenced EBITDA margins, inflation-driven expenses, including rent, salaries, and minimum wage hikes, have led to a 120 basis points increase in SG&A deleverage. Investments in technology modernization also contributed a 20 basis points increase. The company’s global restructuring initiative, aimed at counteracting market and cost inflation challenges, is on track, with $160 million spent year-to-date. The restructuring has yielded $16 million in benefits in the third quarter, with further projected benefits in 2024. The paragraph concludes with a transition to discuss third-quarter profitability.

In the third quarter, the company's adjusted earnings per share (EPS) decreased from $2.49 to $1.88, a decline of $0.61 compared to the previous year. This decline was largely attributed to increased expenses, including depreciation, interest, IT costs, and inflation-related impacts on salaries, wages, and rent. These expenses collectively reduced earnings by $0.25, while lower sales exacerbated the decline by an additional $0.38. However, global restructuring efforts provided a $0.08 offset. External disruptions, such as hurricanes and a CrowdStrike outage, further impacted revenues, resulting in a $0.06 reduction in earnings. Overall, the company fell short of its expected performance for the quarter.

In the third quarter, the company's earnings were below expectations with an adjusted EPS of $1.88, lower than the targeted range of $2.20 to $2.25. This shortfall was primarily due to weaker market conditions in Europe and the industrial sector, as well as impacts from CrowdStrike and hurricanes. Despite anticipating improvements in the second half of 2024, the European market remained negative, and industrial sales declined. This led to reduced sales and a projected $0.36 earnings shortfall overall. These outcomes prompted the company to revise its financial outlook for the remainder of 2024.

The company has revised its financial outlook due to unchanged market conditions from the second to the third quarter. They now expect diluted earnings per share, including restructuring costs, to range from $6.60 to $6.80, down from a previous forecast of $8.55 to $8.75. Adjusted diluted earnings per share are projected to be between $8 and $8.20, compared to an earlier estimate of $9.30 to $9.50. Sales growth is now projected at 1% to 2%, slightly lower than previously anticipated. The automotive segment is expected to grow by 3% to 4%, while the industrial segment may see a decline of 1% to 2%. These adjustments reflect ongoing market challenges, informed by third-party data and recent trends, as well as the impact of hurricanes Milton and Helene. No market improvements are expected for the remainder of 2024.

The paragraph outlines the company's challenges and financial outlook amid ongoing market uncertainties. While progress has been made in restoring operations, customer uncertainty and weak industrial production pose difficulties in predicting the business impact. The PMI contraction and economic factors such as inflation and high interest rates are affecting both their international and U.S. automotive businesses. Despite these challenges, there is an expectation of some gross margin expansion driven by strategic initiatives and acquisitions, although SG&A costs are expected to increase partly due to reduced sales outlook and acquisitions. Global Automotive segment margin is projected to decline due to softer sales growth, while Global Industrial segment margin is also expected to decrease slightly in 2024.

In the first nine months of 2024, the company generated $1.1 billion in cash from operations and $700 million in free cash flow, and projects annual figures of $1.3-$1.5 billion and $800 million-$1 billion, respectively. They've invested $386 million in capital expenditures, with 55% allocated to modernizing their supply chain through new distribution centers and automation. The company's capital investment rate has increased to 2% of revenue to support transformation efforts. Their M&A strategy, including $954 million spent on strategic acquisitions like Walker Automotive Supply, aims to improve revenue growth and profitability by balancing company-owned and independently owned stores.

The paragraph outlines a company's strategic actions to enhance value from acquired businesses, including optimizing sales opportunities and SG&A expenses. They are transitioning their U.S. pension plan to a third-party insurance company by the fourth quarter of 2025 as part of a long-term de-risking strategy started in 2013, with no impact expected on 2024 financial results. The pension plan transfer aims to reduce volatility and potential cash flow issues. Additionally, despite challenging market conditions, the company is implementing global restructuring activities for long-term profitability, and is optimistic about future growth opportunities, attributing recent lower market growth to broader economic factors. They are also encouraged by recent interest rate reductions in the U.S. and will continue to invest in their business with a long-term focus. The paragraph ends by opening the floor for questions.

In the paragraph, Kate McShane from Goldman Sachs inquires about the inventory increase during the quarter and investments in freight. Bert Nappier explains that the increase is due to NAPA's efforts to improve inventory availability, which started a year ago, to strengthen their market position. This includes increasing SKU count and depth, capitalizing on NAPA's brand and footprint, and incorporating inventory from recent acquisitions. He mentions that specific freight investments are sensitive but highlights the focus on store excellence, driver availability, and customer service. Will Stengel adds that they remain optimistic about NAPA's operational progress.

The paragraph discusses improvements in key business metrics, such as service levels, inventory strategy, and safety in distribution centers, with notable enhancements year-over-year. Voluntary employee turnover has decreased by over 30%, and customer satisfaction metrics have improved by about 100 basis points. Bert Nappier responds to Scot Ciccarelli's question about U.S. auto margins, indicating that pressure on margins was consistent across all markets and overall results were below expectations. While discussing the outlook for 2024 and 2025, no specific guidance is provided, but it's noted that comparisons may get easier as trends weaken.

The paragraph discusses the consistent pressures faced across global markets, specifically mentioning interest rate and cost inflation challenges in the automotive sector. Despite these challenges, there is optimism for long-term fundamentals in key segments due to their size, scale, and leadership positions in fragmented markets. The company remains cautious about market conditions and plans to assess these in the fourth quarter, with updates expected in February. Additionally, there's a note about the potential easing of interest rates, referencing a recent rate reduction in the U.K., which provides some encouragement for future growth.

In the paragraph, Michael Lasser from UBS asks about the $166 million increase in SG&A expenses compared to the previous year. Bert Nappier explains that this increase is primarily due to the acquisition of businesses, particularly the two largest independent owners in the NAPA network. He expects these SG&A costs to decrease over time as synergies are captured from the integrations. Although the acquisitions have positively contributed to the financials, near-term cost pressures from wages, rent, and continued investments in IT are expected to persist due to inflationary impacts. Overall, while addressing these costs, the company is focused on its IT transformation for future growth.

The paragraph discusses the company's strategic decisions regarding investments and cost management. It mentions a shift from capital expenses to operating expenses due to modernizing systems with cloud-based platforms. The company is investing in its Global Technology center in Poland, benefiting from high talent and productivity, particularly in catalog and search initiatives. To manage costs, the company is engaging in global restructuring primarily through voluntary retirements, leading to a reduction in global headcount by 3% to 5% for 2024. The focus is also on improving engineering standards and productivity. When questioned about these investments, Will Stengel emphasizes the importance of businesses investing in themselves, despite a flat performance in the U.S. Auto sector.

The paragraph discusses the strategic planning and increased investments of a management team, particularly following their Investor Day in 2023. Bert Nappier emphasizes that prior to this, the GPC business invested only about 1% of revenue back into the business, which was considered insufficient for growth. The company aims to lead with technology and enhance supply chains to differentiate themselves and better serve customers. They are investing globally, including in the U.K., France, the U.S., and Melbourne, to position for stronger growth, especially in a weaker economic cycle. Chris Horvers from JPMorgan asks if the increased investments are due to a new decision or just from acquisitions.

In the paragraph, Bert Nappier discusses the company's investment strategy, stating that their CapEx will remain around 2% of revenue, equating to about $500 million, for 2024, with similar levels expected as they plan for 2025. He explains that the acquisition strategy won't be linear, noting that major acquisitions, such as the two largest and 180-plus stores with Walker, have been completed. However, future acquisitions will be smaller and slower in pace as they aim for a balanced acquisition strategy. Chris Horvers inquires about anticipated same-store sales and organic growth for NAPA and Motion, and questions whether the upcoming election will affect capital deployment in the industrial sector, potentially prolonging it until the second quarter of 2025.

The paragraph is a dialogue involving several speakers discussing the impact of an election on business performance and expectations for sales and operating margins. Will Stengel suggests that the election provides some clarity over time, but Bert Nappier argues that this clarity will not immediately affect business in November and December. Chris Horvers questions about a $0.30 EPS headwind related to a $140 million sales shortfall and speculates on operating margins. Nappier advises not to overinterpret this as a direct indication of operating margin. Greg Melich, from Evercore, then begins to ask a broader question related to investments increasing from 1% to 2%.

In this discussion, Bert Nappier and Greg Melich address the growth algorithm outlined during Analyst Day in 2023. Nappier suggests that the current year, marked by challenging market conditions, should not be used as a base for future growth projections. Historically, a 3% to 4% growth rate has been anticipated for the business's top line. However, with industrial market conditions being negative this year, this may not be a suitable proxy. The company remains optimistic about long-term growth and investments, which have increased from 1% to 2%, aligning with Investor Day projections. They plan to provide a more detailed outlook in February 2025. Additionally, Melich inquires about disinflation's impact, noting inflation rates in industrial and auto sectors have dropped below 1%, and questions if this trend will return to the long-term 2% to 3% range or remain flat.

The paragraph features a discussion led by Bert Nappier and Greg Melich regarding economic conditions and market performance. Nappier says they plan to update and share their 2025 models in February, noting that the inflation benefits from previous years are cooling off as expected. He anticipates a return to normalized conditions, assuming no major changes. Greg Melich inquires about their market share in the U.S. auto and industrial sectors amid macroeconomic challenges. Will Stengel responds positively, mentioning strong data from third-party sources and progress across several categories, indicating that their market performance is at or better than average. The conversation then transitions to a question from Seth Basham from Wedbush Securities.

In the paragraph, Will Stengel and Bert Nappier discuss market conditions and competitive environment changes. Stengel mentions market deterioration and hurricane impacts affecting data, resulting in a flattish market. Nappier notes the competitive landscape remains stable with rational pricing. They express confidence in NAPA's market position due to its strong presence and quality. Seth Basham inquires about improvements in the major account segment, to which Stengel attributes the progress to specific initiatives in different business areas, which are gaining traction. The conversation concludes with a brief interaction with Bret Jordan from Jefferies.

In the discussion, Bret Jordan inquires about regional performance disparities in U.S. NAPA, excluding hurricanes. Bert Nappier responds that, apart from the hurricanes and M&A benefits, performance levels were consistent. Bret also asks about nearshoring or reshoring of the supply chain. Will Stengel explains that they have many promising projects, specifically over 150 in the U.S. with a $2.5 billion MRO spending projection by 2030, and see new sales verticals and opportunities in Canada and Mexico as well. The call concludes with the operator thanking participants.

This summary was generated with AI and may contain some inaccuracies.