Q3 2021 Genuine Parts Co Earnings Call
Good day, ladies and gentlemen, welcome to the genuine parts company third quarter 2021 earnings conference call. Today's call is being recorded a question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
At this time I would like.
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 2021 earnings conference call with.
With me today are Paul Donahue, our chairman and Chief Executive Officer.
Single, 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.
All of 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.
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'll turn.
Turn it over to Paul for his remarks, Thank you Ted 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.
If the business climate and how we are managing through the recovery we can report the.
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 initiative.
<unk> and.
And cost control efforts, which have offset these increases.
And finally, our strategic efforts with our global supplier partners had prevented significant shortfalls in our overall inventory levels, allowing us to deliver quality customer service.
Taking a look at our third quarter financial.
Initiatives 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.
<unk> execution of our operational initiatives.
As a result segment profit increased 14% and our segment margin improved 30 basis points to nine 3%.
This represents our strongest margin in two decades and confirms our key initiatives are driving meaningful improvements.
Net income was $229 million or $1 59 per diluted share.
And adjusted net income was $270 million or $1 88 per share.
This is a 15% increase from 2020 and establishes a new record for Gpcs 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 of 2019.
Comp basis sales were up 5% from last year and up 7% on a two year stack with.
With our strongest year over year automotive comps coming from the U S business.
In addition from a cadence perspective.
Sales held up well through the quarter with the strongest average daily sales volume.
And each of our geographies coming in September.
The broad strength in our global automotive sales reflects a number of factors.
First we are proud of our team's efforts to shore up our supply chain.
The difficult backdrop of product delays and logistics challenges.
Supply chain disruptions have.
<unk> been more substantial for U S automotive than in our international or industrial operations and we continue to work closely with our global suppliers to manage through these issues and ensure we have the right inventory available for our customers.
We are confident in the effectiveness of our global sourcing team and.
And believe we are well positioned in the industry.
We also continue to benefit from our key growth initiatives and market tailwind.
Our growth initiatives, our emphasis on innovative sales programs and sales force effectiveness are positively impacting commercial sales.
As examples we've.
Really finalizing any exclusive partnership in the education space for technician recruitment with over 10000 active tech students in the process of earning their credentials.
We are also excited that Napa and AAA have executed an agreement for <unk> to be the exclusive auto parts supplier.
For the new AAA branded premium battery.
This battery will be available to all consumers with a focus on the over $62 million AAA card holders and 5400 approved auto repair centers.
We're also equipping our sales team with incremental resources.
We've reached our any NIM development, which have led to more productive customer facing calls.
In addition, our Omnichannel investments continue to drive strong <unk> and <unk> digital sales and.
And finally, the international rollout of the Napa brand is driving significant growth in both our European.
And Asia Pac operations.
So now turning to the market tailwind.
These macro drivers include the following.
The ongoing reopening of the economy, and improving miles driven which generate the need for more repairs and more maintenance.
Our robust used car market that is keeping more.
Because on the road longer.
An improving aftermarket fundamentals such as a growing and aging vehicle fleet, which will continue to benefit the industry over the long term.
Looking next at our automotive highlights by region total U S sales were up 9% comp.
Comp sales.
Car, 8% from last year and are up 5% on a two year stack.
In Canada total sales were up 1% with comp sales essentially flat both year over year and on a two year stack as lockdowns in major markets have slowed the recovery.
It's been encouraging to.
Creased restrictions reading of late.
Which should lead to stronger demand through the final three months of 2021.
Our U S sales were driven by strong demand for product categories, such as exhaust.
Control brakes tool than equipment, which all outperformed.
In addition, both retail and commercial ticket and traffic counts were positive for the third consecutive quarter.
By customer segment sales to both commercial and retail customers held strong.
<unk> sales outperforming DIY for the second straight quarter.
We do remain.
Main pleased however, with the continued strength of our DIY business.
And believe we can drive additional growth with ongoing initiatives such as <unk> digital investments.
These include new search features improving catalog functionality and enhanced payment options such as buy now and pay later.
While online <unk> sales continue to grow at a rapid pace up over 40% from the third quarter and up two <unk> from 2019.
The strength in commercial sales in the quarter was driven by several of the initiatives mentioned earlier as well as the ongoing economic recovery.
In the U S.
Sales to our major account partners were strongest with mid teen growth followed by sales to our Napa auto carrier customers, which were up low double digits.
We would add that our Napa auto care membership has surged with the reopening of markets.
And includes nearly 400.
Nash App upgrades, thus far in 2021.
So really terrific momentum for our Premier independent garage program.
Rounding out our commercial segments fleet and government and other wholesale customers also posted high single digit growth for the quarter.
So really strong results across.
Hundreds of our commercial accounts.
These are encouraging trends and as we look ahead, we remain confident in our growth strategy and our key priorities to deliver customer value and ultimately sell more parts for more cars.
Our AG.
Team in Europe continue to perform well.
It's all a total Q3 sales up 8%.
We were up a strong 23% on a two year stack.
Comp sales increased two 5% from last year and were up 14% on a two year stack.
While the U K and Benelux continue to stand out with really strong results.
We were pleased with the solid results in each of our seven European markets are reflection of stable market conditions and execution of our key sales initiatives.
These include the continued rollout of the Napa brand and ongoing emphasis on key account development, which are driving market share gains.
Now looking at our Asia Pac business total sales were up 2% from 2020 and up 18% on a two year stack.
Comp sales were up slightly from last year and up 15% on a two year stack.
With both commercial and retail sales up double digits driven by positive.
Growth with both the <unk> and Napa brand.
We are really pleased with these results given the severe lockdowns in the major markets of Sydney, Melbourne, and Auckland during much of the quarter.
We are energized to see the reopening of these markets is finally getting underway and.
And we expect a surge in demand in the coming.
Coming months.
So now let's discuss the global industrial segment.
Total sales for this segment were $1 6 billion, a strong 15% increase from last year and a 5% increase from 2019.
Comp sales were up 13% and up 4%.
<unk> on a two year stack.
Through the quarter average daily sales in July and August were in line with the second quarter.
While our strongest results were in the month of September.
This quarter's positive momentum in industrial exceeded our expectations, which is a reflection of the great work by our motion team.
And the strengthening of the industrial economy.
Both the PMI and industrial production were positive for the quarter and these indicators correlate closely to the overall healthy state of the industrial sales climate.
For the second consecutive quarter, we had positive sales growth across each of.
<unk> served.
The industry sectors that stood out with double digit growth include our largest customer segment equipment and machinery as well as iron and steel automotive aggregate and cement lumber and wood fabricated metals.
Equipment rental.
Our independent oil and gas.
In addition, our newly added fulfillment and logistics industry experienced tremendous growth.
So as you can see the current growth in our industrial business is quite broad across the markets we serve.
As we have conveyed in our prior calls and in our industrial.
Real deep dive event on September 15th our motion business as a market leader in the industrial distribution space in North America and Australasia.
The team's drive to be the preferred preferred industrial solutions provider in the industries we serve.
We partner with the best manufacturers.
<unk> industry to provide tier one brands our customers demand.
In addition, we are constantly broadening our product offering as well as our service capabilities to maximize our sales potential and drive market share gains in a very large and fragmented market.
With these fundamentals of our.
<unk> in mind, our focus on continued profitable growth in this segment remained grounded in five key initiatives.
Omnichannel buildout to accelerate e-commerce growth and drive sales with new customers as examples motion dot com and our inside sales center, which has grown.
<unk> 15 to now 35 reps in just six months.
To drive incremental sales from new motion customers.
The expansion of our industrial services and value add solutions in areas, such as equipment repair conveyance and automation.
Strategic M&A to generate.
Significant growth in new markets, and new products and services as an industry consolidator.
Enhanced strategy to create a dynamic dynamic pricing environment that provides us a competitive advantage in the marketplace.
And lastly network optimization and automation to further improve our operating.
Rone proficiency and productivity.
We are pleased with the progress from these initiatives, thus far and we're excited for the opportunities ahead.
Another third of third quarter highlight is the publication of our 2021 sustainability report update on.
Our initiatives and activities over the past.
<unk> appear have led to continued progress toward our goal of promoting diversity equity and inclusion.
We've also taken steps to reduce the environmental footprint of our operations.
By reducing energy emissions, while increasing recycling opportunities across the globe.
Two.
Pasty tested all of us an accentuated the importance of supporting our people and our communities.
We are really proud of our GPC teammates around the world for their resilience and contributions to furthering our sustainability goals.
We invite you to learn more about these initiatives and our full report, which you can find.
<unk> PC website.
So in summary, we made great progress in several important areas during the third quarter.
And we are very pleased with the strong results in our automotive and industrial businesses.
And the continued improvement in our sales and operations we.
We could not be more proud of the GPC team.
On the <unk> now I'll turn the call over to Wil will.
Thank you Paul good morning, everyone.
Let me reiterate Paul's comments and acknowledged the continued strong team performance this quarter.
Always a proud moment to have the opportunity to showcase our global team's hard work relentless customer service and.
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 team.
Teams are executing the initiatives well and consider strategic.
Initiatives, a central part of our operating cadence.
Teams have rigor around measurement and progress visibility.
We measure unique global initiatives and are ahead of our 2021 plans established at the beginning of the year.
As we execute our GPC strategic planning process for the upcoming year, we reflect.
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 activity and customer activities starting to be possible in most of our geographies.
We recently had the opportunity to meet in person with the.
A 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.
Round the country recently had the chance to meet in person for the first time since early 2020 to detailed business performance and review strategic initiative priority.
In Europe, our executive leadership team recently met together in person for the first time in nearly two years.
Our Atlanta based GPC and U.
U S. Napa field support team also posted an employee appreciation event for 400 teammates that included a well received visit from our celebrity Napa racing teammates, including Chase Elliot.
We're cautiously optimistic our teams in Australasia will soon be able to exit locked down in November and also.
To a more normal in person routine.
At each of these events, it's energizing to see the positive attitudes strong team alignment and visible excitement about our GPC momentum and vision.
It is also reassuring to see our differentiated GPC culture up close and intact.
<unk> also had the opportunity to spend time in person with customers and vendors this quarter. These.
These discussions are critically important as we share our growth vision listened to feedback and explore ways to deepen our strategic partnerships.
These conversations not only reinforced our GPC core strategic priorities talent.
Sales effectiveness digital and tech supply chain and emerging tech.
But also always affirmed the unique customer value propositions across our GPC businesses.
Growth technology solutions supply chain excellence product and technical expertise and longstanding local relationships.
Please key theme.
As an example, we recently visited with an industrial customer who is enjoying exponential growth.
Our motion team mates co locate associates at the customer facility to provide real time expertise on the plant floor to ensure the facility is operating to its potential.
Part.
Our discussions with this customer explored the use of embedded technology solutions that will make customer ordering for motion easier and faster.
We're building plans to triple the size of this customer relationship over the next few years.
In our customer discussions are recent common theme as the supply chain challenges that face all company.
We explain we believe our global scale in country resources data and analytics investments in our supply chain strategic inventory actions and proactive daily team approach position us to navigate the headwinds relative to others.
We're in constant discussion with.
S levels of our supplier partners, many of which for whom GPC represents a large and important global customer.
Over the past quarter, we've held numerous top to top meetings with our global executive leadership and vendor partners to review progress and jointly problem Saul.
It's a challenging.
With heightened but our global teams and partners.
Our proactively acting each day to navigate it.
Turning to our focus on talent. We recently completed an end to end strategic review of our global GPC employee value proposition and talent initiatives.
This disciplined work in.
Ensures we have the right capabilities aligned to our current and future business strategies.
The work also insurers, we're constantly striving to be an employer of choice in this dynamic and competitive talent environment.
Around the globe, we continue to take deliberate actions to lead recognized and ensure the well.
Environment teams.
For example, we recently streamlined recruiting processes to move faster to attract talent.
Introduced new wellness incentives improved holiday schedules enhanced vacation eligibility and flexibility invested in health care cost to reduce the burden on our associates.
Proved tuition.
Being a divestment program and relaxed dress code policies to name a few.
At talents are most important advantage, we'll always work to take care of and invest in our people.
We also continue to execute well against our broader digital and technology initiatives during.
During the quarter the teams have made exciting progress under leaders.
<unk> re a new chief information and digital officer being Krishna we're <unk>.
Focused on building high performing teams that engineered technology to solve customers' problems at scale.
In addition, we will optimize human and financial resources to focus on the most critical and impactful activities.
Our.
Chip with funding technology initiatives.
Including electric vehicles and related technologies also continued to advance the.
The global teams are partnering well to execute a disciplined and coordinated strategy.
We're pleased with the team momentum and will continue to dedicate resources to this exciting effort.
<unk> the teams are executing our M&A strategy with discipline.
For example, we added several store groups through our North American and European automotive networks to increase local market density.
And we announced the acquisition of <unk> automotive distributors, a leading automotive parts distributor in.
Glen.
This new geography represents the 15th country, and which GPC operator.
In addition, we were pleased to recently sign a definitive agreement to acquire auto accessories garage, a leading U S based digital platform specializing in automotive accessories.
This.
Iron logic digital acquisition adds new capabilities and accelerate the strategic product category for the U S automotive team.
The acquisition pipeline is active and we remain disciplined to prioritize transactions. We believe meet all of our GPC strategic and financial criteria.
We are thrilled.
Strategically our newest teammates to the global GPC family.
Overall, we are really pleased with the record setting team performance.
Despite uncontrollable headwinds the teams continue to rally together each day to service customers and deliver performance.
We look forward to working hard to close the year strong.
So well build on our solid momentum as we move forward into 2022.
With that I'll now turn the call over to Carol to review the financial details.
Thank you well and thank you 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.
Long 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, 8% 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.
<unk> and global sourcing strategies and price inflation proved neutral to gross margin.
On a total company basis, we estimate of 3% inflationary impact on Q3 sales.
Listing of three 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 $135 billion in the third quarter up 11% from 2020 and at 20.
Percent of sales.
The increase from last year is due to several factors, including the prior year benefit of approximately $60 million in 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.
<unk> as well as cost pressures in areas, such as wages and incentive compensation freight ran.
<unk> 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 the quarters ahead.
Our total segment profit in the third quarter was $447 million up 14%.
Our segment profit margin was nine 3% compared to nine 8% last year, a 30 basis point year over year improvement and up 130 basis points from 2019, So we're really.
Really pleased with the continued improvement and the excellent work by our team.
Looking ahead, we raise our margin expectations for the full year and we currently expect segment profit margin to improve 40 to 50 basis points from 2020 or 80 to 90 basis points from 2019.
This would be our strongest full year margin in more than 20 years.
Our tax rate for the third quarter was 24, 9% on an adjusted basis up from 23, 4% last year with the increase in rate primarily related to income mix shift to higher tax jurisdictions.
Our third quarter net income from continuing operations was $229 million with diluted earnings per share of $1 59.
Our adjusted net income was $270 million or $1 88 per diluted share, which compares to $237 million or $1 63 per adjusted diluted.
They're in the prior year, a 15% increase.
So turning to our third quarter results by segment. Our total automotive revenue was $3 2 billion up 8% from last year.
Our segment profit increased 6% to $281 million with profit margin is solid.
Eight 8%.
While down 20 basis points from 2020 due to the prior year benefit of temporary savings. This represents an 80 basis point margin improvement over 2019 and reflects the underlying progress in our operations.
For the nine months profit margin is eight points.
<unk>, 6% up 80 basis points from 2020, and up 90 basis points from 2019, driven primarily by margin expansion in our U S and European operations.
Our industrial sales were $1 6 billion up 15% from 2020.
Segment profit of 100.
60 million was up a strong 32% from a year ago and profit margin improved to a 10, 3%.
This is the 140 basis points from 2020, and up 220 basis points from 2019, and the first double digit margin for industrial since the.
<unk> quarter of 2006.
Year to date profit margin for this segment is nine 4% up 120 basis points from 2020.
And up 150 basis points from 2019. So this group is executing very well and posting excellent operating results through the industrial.
<unk> recovery.
So now, let's turn our comments to the balance sheet.
At September 30th total accounts receivable is down three 5% primarily due to the timing of the $300 million in accounts receivable sold in October of 2020.
Inventory was up 10%.
<unk> in line with our sales increase and a reflection of our commitment to having the right parts in the right place at the right time.
Accounts payable increased 20% from last year due to the increase in inventory and favorable payment terms with certain suppliers.
Our AP to inventory ratio improved to 100.
29% from 118% last year.
Our total debt is $2 4 billion down $474 million or 16% from September of last year and down $245 million from December 31 of 2020.
We closed.
The third quarter with available liquidity of $2 4 billion and our total debt to adjusted EBITDA improved to one five times from two two times last year.
So our teams continue to do an outstanding job of optimizing our working capital and our capital structure.
We also continue.
Strong cash flow with another $300 million in cash from operations in the third quarter and $1 billion for the nine months for.
For the full year, we expect our earnings growth and working capital to drive $1 2 billion to $1 4 billion in cash from operations and free cash.
<unk> of $950 million to 115 billion.
Our key priorities for cash remain the reinvestment in our businesses through capital expenditures M&A share repurchases and the dividend.
For the nine months, we have invested $138 million in capital expenditures.
Flow and we have plans for additional investments to drive organic growth and improve efficiencies and productivity in our operations through the balance of the year.
In addition, we have used approximately $143 million in cash for strategic acquisitions to accelerate growth.
These investments include several.
Promoted store groups across our markets, including the entry into Ireland discussed earlier.
We continue to generate a robust pipeline of additional strategic and bolt on acquisitions in both automotive and industrial segment.
This would include auto accessories garage as mentioned before which we expect to close.
Close in the fourth quarter.
Consistent with our long standing dividend policy. We've also paid a total cash dividend of more than $349 million to our shareholders through the nine months.
The company has paid a dividend every year since going public at $19 48, and has increased the dividend for 65.
Five consecutive years.
And as part of our share repurchase program. We have also been active with share buybacks dating back to $19 94.
In the third quarter, we used $100 million to purchase 800000 shares and year to date, we have used $284 million to purchase $2 2 million.
Shares.
The company is currently authorized to repurchase up to $12 2 million additional shares and we expect to remain active in this program in the quarters ahead.
So turning to our current outlook for 2021, we are raising our full year guidance previously provided in our earnings release.
Police on July 20, <unk> of 2021.
We expect total sales for 2021 to be in the range of plus 12 to plus 13% an increase from our previous guidance of plus 10 to plus 12%.
As usual this excludes the benefit of any unannounced future.
By business, we are guiding to plus 14, two plus 15 total sales growth for the automotive segment and increase from plus 11 to plus 13%.
And a total sales increase of plus 10 to plus 11% for the industrial segment and increase from plus 6%.
Plus 8%.
On the earnings side, we are raising our guidance for adjusted diluted earnings per share to a range of $6 60 to $6 65.
Which is up 25% to 26% from 2020.
This represents an increase from our previous guidance of six.
<unk> and <unk> to $6 35.
So we're encouraged by the strength in our financial results for the third quarter and the nine months and we enter the fourth quarter focused on our initiatives to meet or exceed our outlook for the year. We look forward to reporting on our financial performance for the fourth quarter and full year in.
In February.
Thank you and I'll now turn it back over to Paul. 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 value.
We attribute the positive momentum in our business to our global teamwork and disciplined.
<unk> focus across all of our operations.
Our team is confident 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 positioned GPC with the financial strength and flexibility to pursue strategic.
<unk> growth opportunities via investments in 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.
Remain rock solid.
Our GPC teams around the world are stepping up under challenging circumstances, and taking great care of our customers.
So 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.
<unk>, 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.
I would like to ask a question. Please press star one on your telephone keypad.
Formation tone will indicate your line is in the question queue.
So with that you May press star two if he is vice chairman of your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
To allow for all questions in the designated time, we ask that everyone limit themselves to one question and one follow up per person.
One moment, please while we poll for questions.
Our first question is from Chris <unk> of JP Morgan.
Please state your question.
Thanks, Good morning, everybody.
Good morning.
Mike My first question is.
You talked about September being the best average daily volume in the in the automotive business.
And obviously motion had a very strong two year acceleration so can.
Can you talk about sort of the potential outcomes in the fourth quarter on the comps in both businesses.
Given that commentary would you expect that the two year trend could accelerate in the fourth quarter.
Well, Chris first of all thanks for your thanks for your question.
You 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 in what we can tell you is that the trends that we saw in.
Number 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.
The projections that we put out there for Q4, so right now everything is looking pretty solid.
Excellent and then Carol.
Can you diagnose maybe the 50 basis points of gross margin expansion.
It was vendor allowance some of those vendor allowance or was that pricing.
How much of that is perhaps not sustainable on the on the vendor allowance side and then how does that sort of parlay into your views about.
Oceans operating margin over time.
<unk>.
Yes, no. It's look we couldnt 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 in all of our teams because there has been a ton of efforts related to gross margin.
When.
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 of 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.
Again, taking into account everything in inflation quite honestly was neutral to our rate. So as we look ahead, we're not concerned.
When we think 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 two year stack basis.
And then on the motion.
<unk> operating margin.
Yes, the motion operating margin I think where you see them through the nine 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.
<unk> 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.
Okay.
Our next question is from Bret Jordan of Jefferies.
Please state your question.
Hey, good morning, guys. Good morning Brook.
You commented about share gains in automotive and I guess as it relates to the U S are you seeing the share shifts sort of smaller wd's, giving up share or are there real shifts amongst.
The larger players in the space.
I'll take a shot at that Brett. Thanks for your question, it's look it's hard to.
It's hard to say, where we're gaining the share I can tell you with some of the product categories that we look at and the growth that we're seeing in Q.
Three and on top of a really solid Q2.
We have to be outpacing the general market.
But we're also the first one out.
So we'll see what the numbers look like here going forward bottom line is as we all know the automotive aftermarket is.
Fragmented.
We like where we're at we like the performance by our Napa team and they had a terrific quarter and actually add terrific back to back quarters in and as I mentioned in the initial question.
Out of the gates.
In great shape in the month of October So we expect.
<unk> got to continue.
And I would also comment Brad that we.
We feel the same way about our international automotive businesses in R. R.
Sure.
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.
But I guess what are you seeing as you've rolled out the Napa private label program in Europe.
Is that gaining traction and maybe if you could give us a feeling for how the margin benefit of private label looks over there yes.
Yeah, I'll touch on I will touch on the acceptance apart maybe Carol you weigh in on the margins.
Okay.
The acceptance.
Brett I'll have to tell you is beyond our expectation so much so that we are accelerating our the number of product lines.
And.
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.
In the U K and in our UK business continues to outperform.
And now we've rolled that out into the other markets.
And I have to tell you it's.
Really surpassed our.
Expectations, so really.
<unk> and <unk>.
And I would also say, we're rolling it out in Australia, and New Zealand as well with similar similar results.
Yes, so on the margin standpoint that private label, specifically for Europe is neutral to the gross margin rate, having said that it is favorable.
Our evolved 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 are taking their working capital improvements and reinvesting in additional product offerings and additional M&A, such as Jay and asset pollen well talked about earlier.
Okay, where do you see it 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 really 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%.
<unk> or something like that and incremental improvement year on year out I think you can expect that Brian.
Brian.
If you go back in time, Brad when we first.
Went into Europe back in 2017, there was very little if any private brands sold through the <unk> network. So everything.
Thing that we're moving through right now in the Napa brand, it's all incremental.
As Carol said, where we're.
We're targeting 10%, we think thats a good number but we could certainly.
Increase that in the years ahead, as we expand into new product categories.
Okay, great. Thank you.
Our next question is from Greg Malik of Evercore ISI.
State your question.
My first one was on <unk>.
Inflation.
The 3% that you saw in third quarter sales, what should that accelerate to or it doesn't need to accelerate into the fourth quarter.
To keep it neutral on a on a margin standpoint, yes.
So we think the fourth quarter is probably in the 3% to 4% range.
I would say that that would be 3% to 4% for our global automotive and 1% to 2% for industrial it's slightly higher on.
Best automotive than it is on international automotive, but Greg, having said that and again I couldnt 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.
The margin improvement and has there been any shift in mix or any sort of demand destruction. This is this was accepted by the customer.
Well, Greg I guess, just generally what we would say when you look at our topline results and you look at the strong demand, whether it's industrial or automotive.
Gross margin is.
And 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 pushback pricing has stayed rational and inflation then all sectors all industries. So.
Really haven't seen that yet.
Automotive got it makes sense and then the second was a little more strategic.
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 kind of pain eight times EBITDA for things and getting some synergies and then rolling it in.
Whats the current environment now in terms.
Just finding the right opportunities.
Pain, what youre used to paying for acquisitions.
Yes, 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.
Terms of thinking about deals, whether it's financially operationally and strategically et cetera.
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.
Two eight or nine times becomes something lower than that.
And so that's how we think about deals is what does this business look like and how much value can we create when we bring it into the GPC family.
Yes.
Greg I would also add on to that when we look at our bolt on acquisitions in the.
<unk> face.
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 evaluations.
But as will said, we will we will.
Automotive I need to be incredibly disciplined as we look at M&A here going forward.
Well, that's a great summary, so thanks, congrats to you all and good luck. Thanks.
Thank you Greg.
Our next question is from Daniel Enbrel of Steven.
Okay. Thank you.
With your question. Thanks for taking my question. This is Andrew on for Daniel.
So on the industrial side of the business in your September PMI stepped up a bit surprised.
How are you are you able to meet the demand in the market today, if you had any issues with.
Okay Alright.
While our domain our industrial.
Real business has held up Youll see those numbers, Andrew our industrial numbers.
Sure.
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 is we're seeing across the automotive North American automotive sector.
Sector.
Jose.
They are in good shape not to mentioned.
Our industrial team going into 2021 did.
Did not trimmed back their inventories they were in a good place and inventory and that is largely held up throughout the course of the year, which has led to that.
That great sales increase a pumped in Q3 so.
All is all is good on the industrial front.
Excellent.
On the call today, you mentioned.
And again some buy now pay later or is that something you're just rolling out on the DIY side or do you see an opportunity to maybe roll that out.
Channel.
With affordability on repairs.
Yes, it's a great question, it's mostly on the DIY side and it's early days with the pilot that we're testing, but I'll tell you. It's a good example of that.
Understanding and listening to the customer and then coming up with some solution.
Meet these.
Need so it's early days, but the online retail is probably the place where the most relevant.
Perfect. Thanks, that's all for 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 the acceleration in 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.
Okay.
Well I would tell you.
SaaS.
I think it's a combination of factors I think are our U S. Automotive team continues to get their legs under them.
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.
Why.
<unk> and <unk>.
<unk>.
We don't we don't see it slowing I would also comment that we had our best month, our best months, our best quarter with our.
Big partners on the major accounts side, our auto care business continue.
Strong.
And Seth our DIY business continues strong so it is really across the board it's held up well.
And we're seeing that trend continue in the month of October as well.
Got it and just as a follow up when you think about new customer growth.
<unk> is an acceleration there or is it more about growing.
Business with existing customers and the major accounts and Napa auto care.
It's really both SaaS and again I would give our team high marks on.
On.
The strategy they put together going into.
2000.
<unk> seen one which was all around sales team effectiveness and putting more sales reps out on the street and.
And getting them focused on the end user customer and even when you look at our COO.
What we deem as our all other wholesale business, which is a.
20 <unk>.
<unk> a 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 restructured our approach to the two.
To the customers with our sales.
Signet 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 Andrew <unk> of Bank of America.
Team. Please state your question.
Great. Thanks for fitting in my question, So well 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.
I think growth in wages and benefits is likely to be elevated compared to historical growth rates for the foreseeable future.
Yes, I guess I would comment and again. These are just great things that are really important to our teammates and they are important for the workforce and yet having said that they don't.
Come with significant costs.
While 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 talked about health care and some of those things paid time off vacation.
But I think more important and more significant as just the true wage inflation that we're seeing having said that though again, we couldnt be more pleased with the team's hard work and 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 to model anything in there for the incremental benefit of those type of programs and all of that is contemplated in our full year operating margin improvement.
We've kind of modeled so we feel good about it going forward.
Got it and then on follow up to that just given.
The increase in the guidance for the year I would 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.
Yes, I think look there were any major surprises or.
Our results were really due to the stronger sales and continued recovery in automotive and industrial.
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.
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 that went into our thinking as we look at the rest of the year, but we feel really good about Q4, but again.
And a great team effort.
And I think as we've seen each quarter recoveries and the reopening of economies and the fundamentals have just gotten better each quarter.
Great. Thanks very much.
Our last question comes from.
It's David Bellinger of Wolfe Research. Please state your question.
Hi, everyone. Thanks for taking my question and nice results again.
350 basis points above inflationary benefits again, automotive youre expecting a similar rate in Q4.
The majority of those.
The decrease was fully rolled out at this point or location.
We want 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 is a very fluid environment with these price increases I mean is as they're presented to us and again the global sourcing.
Price supply chain and procurement teams.
Worked very closely with our vendors and they look at.
Timing, we look at.
Areas that we can.
Have time to work into those price increases we look at accelerating purchases I mean, theres a lot of work that's being done and the timing of when they go.
Thing and socket is a factor in that as well. So there will be some that carries over into next year, certainly, but it's a it's a day to day week to week negotiation right now it is more normal inflation in industrial so keep that in mind, the 1% to 2% is just more normal inflation for them.
Go to market is really the U S automotive that Scott the heightened inflation again international automotive a little more normal. So we will have some that goes into next year, but again. The teams are doing great job to work through that and have improvement.
Got it and then.
I also want to ask in a buying.
People eater with future 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 any acquisition you announced today do you expecting this elevated online percentage of the business to remain sticky in the coming years.
Yes, I'll take a shot.
The first part of that.
David.
The buy now pay later.
The pilot we're in about 250 Napa stores.
And look I give our team credit.
For jumping on the opportunity.
So early yet.
Now.
I would I would miss speak if I tried to put a number to it.
Something new we've never done it before we're not doing it anywhere else in the world at this point.
So I would just tell you kind of stay tuned and.
Certainly more to more to come on.
<unk> initiative.
And then.
I'm sorry, the second part of your question Oh 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.
<unk> strategies, where we acquired wind parts in Europe, we acquired spares box 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.
Kind of on the same track that we've done in the international markets and I am very pleased to tell you that they have exceeded our expectations its still earlier when parts.
In Europe, but I would tell you that early results are very very.
With favorable and we expect to see the same as we really just expand our knowledge base.
Selling products online.
Great. Thank you very much thank.
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 on 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.
Yes.
This concludes.
<unk> Conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Okay.
[music].