Q3 2022 Genuine Parts Co Earnings Call
Good day, ladies and gentlemen, welcome to the genuine parts company third quarter 2022 earnings conference call today's call will be.
<unk> recorded all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on a touchtone phone to withdraw your question. Please press star.
And then two at this time I would like to turn the conference over to Sid Jones Senior Vice President Investor Relations. Please go ahead Sir.
Good morning, and thank you for joining us today for the genuine parts company third quarter 2022 earnings Conference call with me today are Paul Donahue, Our chairman and Chief Executive Officer will Stengel, our president and Bert Napier Executive Vice President and Chief Financial Officer.
As a reminder, today's conference call and webcast includes a slide presentation that can be found on the investors page of the genuine parts company website.
Please be advised this call may include certain non-GAAP financial measures.
May be referred to during today's discussion of our results as reported under generally accepted accounting principles a.
Liaison of these measures is provided in the earnings press release issued this morning, which is also posted on the investor page of our website.
Today's call May also involve forward looking statements regarding the company and its businesses the company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest SEC filings, including this morning's press release the company assumes no obligation to update any forward looking.
Statements made during the call.
Now I'll turn it over to Paul for his remarks.
He said and good morning, welcome to our third quarter 2022 earnings Conference call.
Before diving into the details of the quarter, we wanted to say that our hearts go out to our teammates suppliers custom.
Customers in all of those affected by the devastating impact of hurricane in in late September .
P. P. C is committed to providing care and support through our TPC relief fund and our partners at the American Red Cross.
Okay.
Now turning to the quarter. We are pleased with the continued strength of our results for 2022.
And we are proud of the great work by all of our 53000 GPC teammates who are at the core of our success.
Our team delivered record results with double digit sales and earnings growth.
Driven by the execution of effective strategies and continued resilience of our automotive and industrial businesses.
Let's review several of our Q3 highlights.
Total sales of $5 7 billion up 18%.
And adjusted earnings per share of $2.23 up 19% from last year.
Record quarterly sales for the automotive and industrial segment, and our sixth consecutive quarter of double digit sales growth.
Operating margin expansion in both segments and for GPC overall.
Record quarterly earnings and our ninth consecutive quarter of double digit earnings growth.
The ongoing integration of K D G, which continues to create significant value.
And finally continued strong cash flow generation and the further strengthening of our balance sheet.
Our teams are executing on key strategic initiatives to deliver market share gains and drive ongoing momentum in our top and bottom line results.
We remain agile and navigating a dynamic operating environment created by inflation and economic conditions, the geopolitical landscape and supply chain challenges.
We continue to benefit from the competitive advantages of our size and scale.
And we remain focused on advancing our technology to optimize inventory availability and.
Enhanced network productivity.
And maximize the effectiveness of our pricing strategies.
We are making significant progress in our operations through our efforts in all these areas.
That is evident in the expansion of operating margins again in the third quarter.
Our automotive and industrial businesses continue to take advantage of several industry tailwind.
In automotive.
The increase in year to date miles driven.
Aging car Park.
Limited new car inventory.
And elevated used car prices are all supportive of healthy demand in the aftermarket.
And industrial the manufacturing economy remains expansionary with PMI holding a greater than 50.
While industrial production just at its ninth straight quarter of growth.
Two 9% year over year.
Our teams continue to operate well in a challenging environment and as we wind down the year, we remain focused on driving our strategic initiatives across all of our global operations.
This past quarter, we spend considerable time in the field visiting stores and branches means.
Meeting with many of our strategic suppliers and customers and.
And we came away encouraged by the general outlook for continued growth in the automotive aftermarket.
And industrial space.
In addition, during the quarter, our global leadership team met to review our near term initiatives.
And collaborate on our long term strategic roadmap.
Our teams are well aligned and we are confident in our strategic plans to deliver long term sales and earnings growth.
And margin expansion.
Our strong cash flow generation and exceptional balance sheet position G. P C.
The financial strength and flexibility to pursue strategic growth opportunities via investments in both organic and acquisitive growth.
While also returning capital to shareholders through the dividend and share repurchases.
So before I pass the call over to well, we'd like to highlight our 2022 sustainability report.
Which we published earlier this month.
The New report advances GP sees the long term sustainability strategy and expands our reporting and disclosure to reflect the extent of our global operations.
We do this through our focus on three key areas, including improving diversity equity and inclusion.
Reducing carbon emissions and enhancing ESG governance.
Two highlights from the report include the completion of our 2022 employee engagement survey, where we had significant participation across our global teams and received an 80% global engagement score.
And secondly, the calculation and disclosure of our scope, one and two carbon emissions and plans for greenhouse gas reduction programs across our global operations.
We believe that our 2022 sustainability report illustrates J P. C strong ESG strategy and a way forward that underscores our commitment to keeping the world moving.
We encourage you to visit the sustainability page on our website for more information on our progress in this important area.
So again, we thank each of our GPC teammates for taking great care of our customers and delivering on another great quarter of record results. So now I'll turn the call over to will.
Thank you Paul good morning, everyone.
I also would like to thank the global GPT teams as well as our supplier partners for their ongoing commitment to serving our customers.
We appreciate the collective focus and hard work to deliver great results around the world.
During the third quarter, we continued to deliver strong results across both our automotive and industrial businesses.
Our results were driven by solid team execution and disciplined focus on strategic initiatives, which are aligned around our five foundational priorities talent and culture sales effectiveness technology supply chain and emerging technology.
Turning to the performance by segment total sales for global automotive were $3 5 billion in the third quarter, an increase of approximately 285 million or eight 9% versus the same period last year.
Our sales performance was relatively consistent in all three months of the quarter and on a comparable basis sales growth for the quarter increased nine 2%.
Our global teams delivered mid single digit to mid teens comp growth across each of our operations and as Paul mentioned, the automotive segment continues to be driven by solid industry fundamentals and strong team execution.
Global automotive segment profit was $309 million and segment operating margin was eight 9% an increase of 10 basis points versus the same period last year.
This performance reflects strong sales growth and operating expense leverage.
During the third quarter, our automotive business experienced high single digit levels of inflation relatively consistent with the levels. We saw in the second quarter.
The pricing environment remains rational and we're pleased with the ongoing positive impact of our strategic category management initiatives.
We expect sales inflation in the fourth quarter to be largely consistent with the third quarter.
Now, let's turn to an overview of our automotive businesses by geography.
In the U S. Automotive sales grew approximately 11% during the quarter with comparable sales growth of approximately 8%.
Sales were solid across each U S region, and broadly across product categories with brakes filters fluids and batteries, all posting double digit increases in the quarter.
We continue to be pleased with market share growth within the majority of our categories.
Sales to both commercial and retail customers were positive with low double digit commercial growth outpacing retail, which had low to mid single digit growth.
Our commercial business saw broad based strength across all customer segments.
Digital channels across all customers also performed well with high single digit sales growth during the third quarter, reflecting continued traction from investments in our Omnichannel experience.
U S automotive initiatives are advancing well with continued progress in talent technology investments customer segmentation analytics pricing capabilities and emerging tech.
During the quarter the U S automotive team, formerly realigned team resources to establish a centralized project management office to coordinate and drive impact of its business initiative portfolio.
As an example of emerging tech efforts the U S. Automotive team hosted its first ever <unk> day in Atlanta, which included teammates and representatives from various strategic emerging Tech partners.
We use this opportunity to update internal teammates and collaborate with our electric vehicle and emerging technology suppliers.
In addition, as another example of our emerging Tech focus.
<unk> recently established a new electric vehicle battery customer segment base.
Just on increasing opportunities presented by the Buildout of new battery manufacturing facilities across North America.
We continue to build momentum with our <unk> efforts as we leveraged our global footprint business mix and scale to extend our emerging tech leadership position.
In Canada sales grew approximately 15% in local currency during the third quarter with comparable sales growth of 13%.
The strong results in Canada are reflective of solid industry fundamentals team execution and market share gains.
As examples of sales effectiveness in data and technology initiatives, Canada continues to improve the customer experience and simplify its business processes with advanced analytics and business intelligence tools.
This micro market visibility has increased wallet share and identified growth opportunities as the team executes both organic and inorganic growth initiatives.
In Europe , our automotive team delivered another strong quarter with total sales, increasing approximately 20% in local currency and comparable sales up 7%.
Growth in Europe as a result of the continued focus on our strategic initiatives, including growth with key customer accounts, the rollout of the Napa brand across the region and investments in our people technology and supply chain capabilities.
In addition, our bolt on acquisition efforts continue to create value and add to our local market coverage.
Our recent acquisitions in Germany, Spain, and Portugal are tracking well with the integration plans and the performance and synergy capture has exceeded our internal expectations.
Overall, we believe our European strategies have resulted in solid market share gains.
In the Asia Pac automotive business.
<unk> in the third quarter increased approximately 16% in local currency from last year.
With comparable sales growth of 14%.
Both commercial and retail sales performed well with Repko Napa and our motorcycle accessories division all delivering strong profitable growth.
Next month, our Australian and New Zealand team will celebrate Rep goes 100 year anniversary.
Which is a testament to the power of the brand differentiated customer value proposition and <unk> position as the leading automotive aftermarket business in the market.
Congratulations to our teammates down under on achieving this incredible milestone.
Turning to the global industrial segment during the third quarter total sales at motion were $2 2 billion, an increase of approximately $570 million or 35, 3%.
The sales cadence was consistently strong throughout the quarter and comparable sales, which exclude the benefit of atg increased approximately 20% versus last year.
This marks our sixth consecutive quarter of double digit comparable sales growth.
The growth was consistent across almost all product categories and major industry served with particular strength coming from industries, such as food chemicals aggregate and cement mining and oil and gas.
Industrial segment profit was $243 million or 11, 1% of sales representing an 80 basis point increase from the same period last year and a new record for the industrial segment.
The improvement is a result of motion strong sales growth and disciplined operating performance, including the KCG synergy realization.
For the third quarter inflation in the industrial segment held in the low single digit range consistent with the levels we've seen throughout the year.
Key initiatives contributing to the strong performance in the industrial business includes sales program to capture organic profitable share of wallet with target account.
Data driven strategic pricing and sourcing programs technology investments to enhance the omnichannel experience and continued ongoing inventory productivity and footprint optimization initiatives.
As an example of footprint optimization efforts motion successfully executed its initial fulfillment center and branch optimization initiative in Florida, which is designed to improve the customer experience by offering next day delivery for an order placed by three P. M.
In addition to an improved customer experience the strategy reduces duplicative inventory position increases available product breadth and increases the efficiency and reduces the cost of our last mile delivery logistics.
In addition motion opened two new strategically located facilities to grow its value added automation services with existing and new customers.
We're pleased with the initiative results in motion will continue to methodically roll out these strategies nationwide over time.
In addition, the integration of <unk> continues to exceed our expectations.
The teams are executing well defined plans with customers suppliers and teammates to deliver growth and create value as a combined organization.
All major work streams are at or ahead of plan, including the co location emerging of overlapping branches and.
And we're excited for the continued growth opportunities that motion.
Lastly, during the quarter, we were pleased to formally open the GPC Global Technology Center based in Krakow, Poland.
As part of our strategic investments in talent and technology. This center is designed to help accelerate our technology initiatives and capability building the.
The technology Center will serve as an integrated extension of our existing global teams and we will focus on areas such as digital supply chain data platforms pricing and cyber security as a few examples.
With nearly 1 million people living in Krakow, and approximately 200000 students Krakow was a global hub for next generation Tech talent.
As we move forward, we will consider technology roles in Krakow to leverage our scale build capabilities and deliver faster path to value for global technology initiatives.
As we execute our organic growth initiatives, we continue to complement them with strategic bolt on acquisitions.
<unk> share in our fragmented markets and create value.
During the third quarter, we completed several bolt on acquisitions, primarily consisting of small automotive store groups that increased local market density in key geographies.
The M&A pipeline continues to be active and we will remain disciplined to pursue transactions that advance our strategy to deliver profitable growth and create long term value.
In summary, our strong third quarter and year to date results are being driven by supportive industry fundamentals and our key strategic initiatives.
While the macro environment remains dynamic our teams will prioritize our customers as we analyze our market and performance indicators.
Remain agile and strategically invest with discipline and initiatives that extend our global leadership position.
With that I'll turn the call over to Bert.
Thank you will and thanks to everyone for joining us today.
As Paul will have shared we are very pleased with our third quarter results.
As I review the key highlights for the third quarter. Our comments. This morning focused primarily on our adjusted quarterly results, which exclude the nonrecurring costs related to the integration of Kt G.
Total GPC sales were $5 7 billion in the third quarter up $856 million or 17, 8% from last year.
Our increase in total sales reflects a 12, 7% increase in comparable sales, including mid single digit levels of inflation and a nine 1% contribution from acquisitions.
These items were partially offset by a 4% unfavorable impact of foreign currency in line with our assumptions.
Hurricane Ian did not have a material impact on our third quarter financial results.
Our gross margin was 34, 9%, a 60 basis point decrease compared to the third quarter last year.
Margin was negatively impacted by three key factors.
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Moderating supplier incentives, which pressured gross margin by approximately 80 basis points.
Second foreign currency, which impacted gross margin by approximately 30 basis points.
And finally, a shift in the mix of our sales based on the strength of our industrial segment, which impacted gross margin by approximately 35 basis points.
These headwinds were partially offset by the positive impact of our data driven pricing and sourcing programs, where our teams continue to leverage our growing global scale.
These actions and our expertise drove an 85 basis point favorable impact to gross margin in the third quarter.
We currently expect our full year gross margin to be in line with our third quarter and nine month rate.
Our total operating and non operating expenses, excluding nonrecurring items were approximately $1 6 billion up 50.
15% from 2021, and at 27, 5% of sales compared to 28% of sales the prior year.
We continue to drive leverage across our businesses and our teams remain focused on effective cost control and executing our initiatives to produce operational efficiency.
With our strong performance.
Net profit was $552 million up 24% and our segment profit margin was nine 7% a 40 basis point increase from last year and up 170 basis points from 2019.
We believed a multiyear improvement in our segment margin is the result of transformation to a stronger and more agile company.
Our teams have taken actions to streamline our operations and optimize our portfolio of automotive and industrial segments.
We've also enhanced our pricing and sourcing capabilities to ensure that we deliver profitable growth.
In addition, we've generated significant cost savings over the last few years to lower our cost structure.
<unk>. These actions along with continued hard work by our teams set the foundation for long term strategic growth.
Our third quarter, adjusted net income, which excludes $4 9 million or <unk> <unk> per diluted share and nonrecurring <unk> integration costs was $317 million or $2 23 per diluted share.
This compares to adjusted net income of $270 million or $1 88 per diluted share in the prior year, an increase of 19%.
This exceptional performance as a result of the crisp execution of our initiatives, which are translating to GPC delivering accelerated growth and profitability.
As we turn to the balance sheet changes and the key elements of our working capital were generally in line with our sales growth.
At September 30th our total accounts receivable were up 17% with inventory up 15%.
Likewise accounts payable increased 15% from 2021, which also correlates to the increase in inventory.
We continue to generate strong cash flow with $454 million in cash from operations in the third quarter and $1 2 billion for the nine months up 23% from last year for.
For the full year, we continue to expect cash from operations to be in the $1 5 billion to $1 $7 billion range with free cash flow of $1 2 billion to $1 4 billion.
We closed the third quarter with $2 1 billion in available liquidity and our debt to adjusted EBITDA is one seven times.
This compares to our targeted range of two to two five time and highlights our financial strength and flexibility.
The key priorities for capital allocation at GPC remain unchanged.
As a reminder, these include reinvestment in our business through capital expenditures and M&A and the return of capital to our shareholders through dividends and share repurchases.
During 2022, we have invested $244 million in capital expenditures, including $91 million in the third quarter, primarily in technology and other projects to further automate and consolidate our distribution networks and drive productivity.
We have also invested $1 6 billion for acquisitions and returned $542 million to shareholders in the form of dividends and share repurchases.
This includes $369 million in cash dividends paid to our shareholders and $173 million in cash to repurchase one 3 million shares that.
The continued strength of our cash flow provides us the ability to manage our capital allocation through all business cycles and has allowed GPC to increase our dividend for 66 consecutive years.
Turning to our current outlook for 2022, we are updating our full year guidance and raising adjusted diluted earnings per share to a range of $8 five.
To $8 15.
Which represents an increase of 16% to 18% from 2021.
And up from our previous guidance of $7 82.
To $7 95.
We expect total sales growth for 2022 to be in the range of 15% to 16% an increase from 12% to 14%.
By business segment, we are guiding to the following <unk>.
7% to 8% total sales growth for the automotive segment, an update from 6% to 8%.
This new outlook also reflects 7% to 8% comparable sales growth.
For the industrial segment.
We are updating our total sales growth outlook to 31% to 32% an increase from our previous outlook of 26% to 28%.
The new outlook includes a 15% to 16% comparable sales increase which is up from 9% to 11%.
We are pleased with the positive momentum in our business in the third quarter and through the nine months of 2022.
Our outlook for the remainder of the year reflects the continued confidence in our execution balanced against the backdrop of a dynamic and uncertain macro environment.
Our continued strong cash flow generation provides us with full flexibility to support our growth plans through ongoing investments in the business and return of cash to our shareholders.
While remaining balanced and disciplined way.
We look forward to reporting on our fourth quarter and full year results on our next call in February .
Thank you and we will now turn it back over to the operator for your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question.
Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Greg.
Milk with Evercore ISI.
I would say ahead with your question.
Thanks, Congrats guys.
Good numbers.
I guess my first question is on the gross margin performance because if you can give us a little more insight as to by segment.
In the in both the quarter given.
Given that you've got increased cost you said, it's passing through pricing remains rational but it is starting to fall. So just if you could sort of walk us through each segment as to what's driving that.
Sure Greg it's Bert Thanks for joining thanks for the question I'll start.
Just with the reiteration, we were down 60 basis points to $34 nine on a consolidated basis.
The quarter benefited from an 85 basis point improvement in the underlying execution of our day to day strategic pricing and sourcing programs.
It really reflects the outstanding execution from the team across the environment I don't really want to break it down into each segment. I mean, we are all performing well on the underlying core of the business. We're pleased with the actions on both segments and the teams are really doing an exceptional job as you can imagine in a very very dynamic environment.
That's hard to see unfortunately here in the quarter as I mentioned in my prepared comments.
Three key factors I'll reiterate those year over year moderation in supplier incentives at the 80 bps.
Currency, which you are aware at the end of the quarter. There we had a lot of movement in currency rates 30 basis points and.
And then the industrial performance and the acquisition of KDD J D. G 35 basis point drag there that has a lower gross margin business relative to automotive, but at the same time, we trade that off for a higher margin business and as you heard will mentioned in his prepared remarks, an 11, 1% margin for industrial for the <unk>.
<unk>, which is a record.
Just a little more color on the supplier rebates those moderated from a year ago when heightened supply chain challenges, we're constraining things as we're all aware.
The positive is that we now have more inventory and we have a more available base of inventory for our customers, which is a good thing.
Another reminder, a year ago that was a 116 basis point benefit to margin from that issue. So look as I mentioned for the full year. We think the gross margin rate for the full year will be in line with the third quarter, but.
But despite all that we see expansion of margin here in the fourth quarter or I'm, sorry here in the third quarter by 40 basis points to nine 7% margin. That's the third consecutive quarter of overall margin expansion and we expect that for the fourth quarter as well when you look at the fourth quarter looking ahead I think.
Look at that number and guiding to the Q3 levels, we really see the two variables there from where we prior.
From our prior guidance being gross margin performance at motion continuing to outperform our earlier expectations and currency.
Got it I guess my follow up would be on that fourth quarter, if I sort of back into it it seems like there's a pretty meaningful deceleration in organic growth.
With the new guidance, saying, it's maybe five or 600 bps in auto and maybe double that in industrial is there is that actually happening in October or is that just conservatism.
Let me take that kind of up one level and give you some color on guidance overall first I want to thank our teams had a great third quarter first nine months I think the business continues to be very balanced and resilient, but like everyone forecasting in this environment has its challenges and we took a number of factors into account in our guidance.
Ray's.
Firstly, our performance year to date and the industry fundamentals the momentum we see but obviously, we have to balance that against the macro including what's happening with inflation and pressuring costs.
Can't ignore any of these tightening conditions and undoubtedly those will impact businesses and consumers at some point the macro data has been pretty choppy as youre aware, but we're very comfortable and confident in our overall guide.
With the new guidance range of 805 to $8 15, that's going to have EPS up year over year, 16% to 18% on the back of a really really strong year a year ago, we're being prudent I think it's.
Probably the right way to phrase it eyes wide open on things to watch.
Inflation geopolitical tension supply chain constraints, FX fuel and energy prices all moving around on us.
But at the same time, there is probably you know Greg a little modest to here and we outperformed in the fourth quarter, a year ago, and we've outperformed so far this year and we're not necessarily a management team that will continue to.
On the same level of outperformance when I look at the fourth quarter I'd kind of call your attention to a few things for the fourth quarter guide and the full year, we've got incremental foreign currency as I mentioned <unk> <unk> headwind in the fourth quarter relative to when we gave you guidance before.
The gross margin rate compression that we just discussed.
Also we have one fewer working day in the fourth quarter. So that's something to be aware of but look.
Yeah, My dad used to say be baseball ready and that means to be ready for whatever comes I think we're doing that we're going to look for additional growth opportunities.
And efficiency and discipline.
And I'm going to let will give you a little bit more color on the on the segment side on the sale, yes, Greg maybe just to answer your question I mean, we're encouraged by the trends that we're seeing through October across the global business.
So if that's any indicator, we're not seeing a slowdown.
Out of the teams for continuing to build on that momentum into the fourth quarter just maybe.
Some other thoughts as you think about kind of what's implied in the Q4 I'd just remind you Q4 'twenty one for auto had a big comp high teens. So the guide for auto on a two years kind of close to that 20%.
And.
That holds true for U S auto and kind of each of the pieces of global automotive so.
Feel really solid performance and as I said encouraged by what we're seeing through October .
Okay. That's helpful and good luck.
Thank you Greg.
Our next question comes from Christopher <unk>. Please go ahead with your question.
Yes.
Thanks, and good afternoon, maybe a follow up on that a little bit one of your industrial.
Distributor peers talked about some I guess softer tone in certain customer segments. When they reported recently as you were out in the field recently is or is are you sensing in any of that caution and do you think it's maybe just like the tack that youre attacking like.
Well eventually something could happen and we're being cautious or do you think theres some things some real change going on in some of your businesses on the industrial side, Yes, Chris. Thanks.
This is Paul I would tell you and we have spent a good bit of time in the field.
Laid out traveling with the motion team.
I don't know a few weeks back.
We spent a good bit of time with that group this week.
Overall sentiment from our motion team.
Chris remains really strong optimistic.
They're seeing increases across just about every customer segment and every product segment. So.
I'm aware of.
The other industrial group you mentioned that reported earlier this week, but but I have to tell you we're not seeing it on our side, Chris and I would just remind you of we were still seeing expansion in PMI, which we generally.
Track pretty closely with through the years anyway.
And industrial production came out earlier this week and industrial production again.
Postings posted good results in September so I would tell you overall, our motion team continues to perform at an incredibly high level and.
As will said early numbers in October point to that continuing and well into Q4, Chris.
Chris maybe just some some other perspective to add to Paul's comments sales cadence was consistent for the industrial team through the quarter as Paul said.
The vast majority if not all the product categories, we're growing north of 20%, which.
We were high single digits to plus 20%.
All of our end markets, we're seeing Super strong growth. We tracked 15 different industries, all are performing very well, we called out a few.
In the script equipment machinery food product iron steel automotive.
Mining oil and gas and I would tell you geographically, we're seeing strength pretty broad based including Canada, and Mexico as well as our service business fluid power automation conveyance. So are the customers just like everybody trying to predict what happens in 2023 certainly.
Those discussions happened when we were out in the field, but the backlogs are strong and the recent trends have been strong so.
We feel bullish about certainly closing the year and then coming into next year with some momentum.
Thank you for that well.
I think at a recent conference you mentioned.
The ability to take segment margins to the double digit range.
Can you talk a little bit more about that do you see that.
Is that more of a blended of of Napa and motion or could you see that potential for.
The <unk> segment to also reach double digit and what do you think the big drivers are to get there.
Hey, Chris This is Bert I'll take that one look I think.
As the new CFO coming in and taking a look at this business I'm sitting here looking around and we're asking ourselves questions about what's the full potential of the two businesses together. So I know you would appreciate that exercise as the new Guy.
We're not ready to give you a target on that I want to do some homework here over the next several months as we sharpen our pencil around that but we're doing that work.
I think the historical perspective here has been this business can be a 7% and then an 8% and then we're marching our way up the chain there you've seen our margin at nine 7% this quarter consolidated which is another improvement in the third consecutive one this quarter.
Third consecutive quarter in a row of improvement there as I look ahead with a fresh set of eyes coming in I see tremendous amount of opportunity.
For things that are within our own control not necessarily reliant on external some of those are underway some of those would be sourcing.
Category management initiatives, which are in early innings pricing initiatives, which are in early innings.
The business demonstrated a great ability through the pandemic to transform.
<unk> continued to be more efficient and lower cost structure that is going to continue and I think there's a tailwind there.
Got two really great businesses with great size and scale and when you have that kind of power behind you. I think you do have an ability to continue to grow and improve margins.
We will have some modernization of our supply chain and Dcs that continue we'll talk about that a little bit in his prepared remarks around the Florida facility for motion. So there are just a tremendous amount of opportunities and we owe you to come back and give you some longer term targets there, but hopefully that gives you a little perspective as the new CFO .
That's great. Thanks, Brett.
Our next question comes from Christopher <unk>.
Whoever's with J P. Morgan. Please go ahead.
Chris you're coming back for another I think we'd just add Chris.
Sorry I.
Sorry, I'm going to ask more questions.
I think it comes from I got a lot more [laughter] talk to you later, Chris will be fair, let's rather well.
Our next question comes from Kate Mcshane with Goldman Sachs.
Hi, Thanks for taking our question.
You had mentioned I think in your automotive comments you saw growth in all categories and we just wanted to confirm that.
Discretionary categories.
What youre seeing relative to the more defensible categories.
Just with regards to transaction versus ticket. If you saw any meaningful change this quarter versus last quarter and automotive.
Thanks, Kate Thanks for the question, let me take a pass at that and Burton Paul jump in.
Maybe just starting at the top.
For U S auto consistent growth through the quarter, we recognized and celebrated a variety of different sales records through the quarter. So super proud of the team for that as we mentioned both.
<unk> do it yourself.
Strong and positive through the quarter, which is always good to see if you look at.
Subsets of the business.
The mid single digit performance from our major accounts and our auto care, we had low double digit to low teen in our fleet and government business and we've had as we've said mid single digit retail performance on tough comps.
No change in trends from ticket and transactions.
We've talked about that I think last quarter transactions down ticket up.
But that was as we expected our categories of strength batteries filters break commodities and chemicals and then we saw really broad based strength across the geographies with particular outperformance in our mountain region, which is Texas through Montana, and Alaska for our business.
And then down the eastern part of the United States, including the northeast Atlantic region Southeast So.
We saw some strength in our accessories category, which is a retail category for us.
Smaller piece of the business, but I.
I think thats somewhat discretionary in nature, and we saw nice strength, there so really strong broad based performance through the quarter around the business on the U S auto side.
And Kate I would just add.
Add to Will's comments that.
The Ah.
The driver of that business is certainly fueled prices, we are seeing fuel prices coming down a bit which is always a good.
Good thing for our auto business, we certainly expect to see miles driven ticking.
Kicking back people are taking to the roads. They are a little still a little bit reticent to.
Get on mass transit and airplanes, so all of those factors.
Believe we will continue to bode well for our auto business going into next year.
Thank you and if I could just ask one follow up question I think you mentioned.
The same inflation same SKU inflation in Q4 as what you saw in Q3, and I know youre not talking about 2023 today, but do you have any high level views about when you could expect to see some moderating of the inflation and how that might impact <unk>.
First is our transaction versus ticket next year.
Hey, Jade, it's Barry I'll take that one look I mean, I will kind of pointed this out and I'll reiterate it our expectation, let's talk about the fourth quarter, because that's a bit of a setup for 2023.
Our expectation at this point for inflation for Q4 is that it stays consistent with the Q3 level and I think in our view that means it's stabilizing on some level.
To moderating however, as many of you know the inflow of moderate moderating or stabilizing levels of inflation take some time to flow through supply chain I think that a lag into 2023, obviously, we have a tremendous amount of monetary policy action a foot and that will take some time.
To have an effect into 2023, but we would anticipate that it would as we turned the corner into the next year I think we'll see continued pressure.
On labor costs and on product cost at this point again I mean, we're looking several months ahead here so.
That's a little bit of our initial view when we think about it from our perspective, it's a tough and dynamic environment and our teams are really focused on this and it requires intense focus.
Our strategy remains unchanged in that regard as we look ahead, we're going to continue to pass along inflation impacts to protect our gross margin rate I think we've done a nice job of managing that in a very dynamic environment.
And we're going to continue to focus on those category management and pricing actions. So hopefully that gives you a little color. We are talking about something several months away, but that's our initial view on that front.
Thank you.
Thanks, Ken Thanks, Kate.
Our next question comes from Bret Jordan with Jefferies. Please go ahead with your question.
Hey, good morning, guys good morning.
On the European automotive could you talk a bit more about the private label strategy, there what youre seeing as far as consumer acceptance of the Napa brand and maybe what percentage is in the mix now and how the margin Delta sets up versus the legacy product that you are selling.
So Brett.
I'll take a stab at this one and let the other guys jump and I was with our European team last week over.
In Spain and <unk>.
Pleased to report that the Napa brand rollout continues to expand across Europe , not only in the new markets, we'll be launching in Spain and Portugal.
Later.
Later this year early next year, but also expand expanding the number of product categories.
That we're currently positioning under the Napa brand they accept.
The acceptance I have to tell you Bret has been beyond.
Our expectation.
All that said it still is.
About 10% give or take of our total business. So.
It's meaningful.
But but look we're still.
We still have a long way to go in before Napa becomes a dominant piece of our overall business over there.
So very pleased with with where we find ourselves.
And look there is a lot of discussion around Europe , a lot of concern around Europe .
But I can tell you Bret you saw the numbers you heard will talk about the numbers in Q3, another really really strong.
<unk> up 20 plus percent local currency.
And pleased to tell you that despite all the noise.
Through the first couple of weeks of October .
Business in fourth quarter looks looks good as well. So we continue to be very bullish about our European business. You just answered my second question, but just to go back to the first half of the first quarter on the October trend in Europe , but.
How does the margin shakeup in Europe on the private label mix.
Obviously, a different supply chain, yes, Brett it's.
It's neutral generally speaking an average it's neutral so neither good guy or a bad Guy and I would just add to Paul's comments I figured you asked the follow up but as he said, we're continuing to see really good strength broadly in each one of our countries, Germany mid teens growth Benelux low double digits.
Mid single digit growth in the UK and the French market. So as Paul said Napa is a big part of each one of those countries strategies and initiatives.
And they've got nice traction delivering super nice results. So.
Good to see if it's margin neutral as the long term goal to get a better cost of goods there to get margin out of it I mean, what's the point of the initiative if its not more profitable.
That's the strategy over time, obviously getting the brand into the market putting into the line logic.
And penetrating the market is kind of step one and then over time is it.
<unk> develops the following.
We will revisit that great. Thank you.
Thank you Brett.
Our next question comes from Elizabeth Suzuki with Bank of America. Please go ahead.
Great. Thank you just a question on the automotive side and Paul you had mentioned that new vehicle supply and elevated used car prices have been tailwind, but you started to see used car pricing rolling over in new vehicle supply could begin to improve so I mean, how much of a headwind do you think that could be as you plan your business for the next few years.
Yes.
No.
I appreciate you pointing that out lives, we are seeing used car prices.
Coming down a bit.
I honestly don't see that being a huge impact on our.
On our business overall, we look at what the key drivers for our business.
Have always been and will continue to be I believe the average age of the vehicle on the road, which is.
At a new record again this year over 12 years of miles driven is always going to be a key key element for us.
We're seeing an uptick in miles driven as fuel prices.
Moderate just a bit.
And I think I think youre going to see that as folks do begin to return to the workplace and are again a bit hesitant to get on mass transit I think we will continue to see that.
Drive drive forward so.
Look in terms of new car sales Liz.
It's a little bit of a double double edge sword, we need those new car sales because five years from now those are going to be our customers.
As they come to the aftermarket so.
If new car sales tick up a bit.
Not going to have a big impact on our business in the short term and the long term, it's a good thing for us and.
If we go back to the 17 million vehicle.
New car vehicles produced each year sold each year.
That's not a bad thing for us at all because that's our that's our future customers. So.
Any way you slice it.
Our business, our U S automotive business and our global automotive business is in a good place and the fundamentals are very sound.
Great Yeah that makes sense.
Just a quick follow up on on the auto side, you had mentioned that you're pleased with the market share growth in the majority of categories and what are the categories, where you arent pleased with your market share and what do you view as the biggest opportunities.
Look I'm looking down our list, but I'm not sure I can call out one where we're not pleased I mean, we're seeing really broad based strength across.
All the product categories.
So I can't call out one where we're disappointed obviously there is some.
Inventory opportunities those would be that would be the commentary, where we would want to do better but I'm not sure that's a function of.
The demand drivers or kind of our strategy so sorry.
Sorry for not being more helpful. But I think that's the honest truth, Okay, alright, thanks very much okay. Thanks, Thanks Liz.
Our next question comes from Scot Ciccarelli with <unk> Securities. Please go ahead.
Good morning, guys.
Alright, Scott was about how.
How are we doing so the industrial business is obviously very strong and we.
We know that historically, it's solid some of the broader macro factors and index changes typically with about six to nine month lag yourself and Paul I think you already pointed out how PMI still positive, but obviously, it's moderated quite a bit. So I guess the question is how should we kind of net out today's strong growth where it's at.
At least what appears to be a pretty significant moderation in that.
Broader macro trend.
So Scott Thanks for the question.
You are right to point out.
The moderation in PMI.
But again anything over 50, if we're growing and we continue to grow that said the motion footprint.
Scott is different today than than we were historically so we.
We've expanded our footprint into.
Segments, like conveyance, conveyors, and all things around that product category, which as we've seen the disc.
Distribution center model expand across the across the U S. We've seen great expansion in that product category automation and robotics.
Is a growing double digit strong double digit category for us and we we believe we have huge upside in that area.
So if you look at the motion of today, Scott it's different than it was three to five years ago.
When we were primarily a power transmission and industrial supplies type.
Business.
And that has been intentional.
From our team and I think we will shelter us.
Going forward and will give us a leg up as we go forward. If we do see continued softening because yes.
Scott Youre not alone we continue to have people.
And analysts and investors question.
The industrial business and do we believe that we will continue to see the great growth that we've seen out of that business in the last couple of years.
And certainly while.
We've shown 20% comp growth in.
In Q3.
We're not going to stay at 20%, we're realistic enough to know that but we also do believe that that's a business that we can continue to grow 6% to 8% year after year after year, regardless of what PMI and industrial production numbers might call out.
Interesting okay. Thanks, a lot guys. Thank.
Thank you thanks Scott.
Our next question comes from Carolina Jolly with Gabelli. Please go ahead.
Hi, everyone. Thanks for taking my question.
No problem good morning morning.
So just a quick question around cash flow working capital.
AP to inventory ratio was probably around 130% now.
That's definitely higher versus 2019, so has that been a structural shift since you extended terms in Europe or do you think we'll see that kind of offer.
<unk> historically.
No I don't think it has anything necessarily to do with Europe . When you look at the landscape of the sparked by the way.
I don't think it has anything to do with the European landscape look the business has changed fundamentally over the last year, we have a large acquisition of.
<unk> in the motion business, but when we look at our working capital metrics. We're very pleased with where we are we've had a six day reduction in our cash conversion cycle. During the course of the year. So we're pleased with that managing payables, well DSO was down managing inventory very well as well and so I don't think there is.
Anything that I would call out as a structural shift.
Something that we stay very focused on on a day to day basis.
Given the unlock of cash as we are smarter about how we do that look.
Look as we look ahead, I mean nobody's perfect, we do have opportunities.
Optimize on the inventory side, and we'll continue to do that and we've got great teams here that are focused on that as well. So I wouldn't play place any overreliance are over indexing on any one factor bottom line is we've had very strong cash flows through the course of the year. We'll have a great result for the rest of the year in terms of free cash flow and for the full year.
<unk> and that takes us back to our longstanding ability to continue to be very disciplined and thoughtful on capital allocation and reinvest in the business, which we will continue to do because we see great opportunities there and at the same time.
<unk> capital back to shareholders, which as you all know we have a longstanding history of doing so.
Great. Thanks.
It doesn't sound like this is a temporary benefit you're seeing right now.
Okay.
Corporate initiatives.
And.
And we're not I wouldn't I wouldn't point to a temporary benefit I think we're very consistently I know some of this predates me, but consistently showing improvement across cash conversion and our working capital elements great. Thanks, and then just a quick second one.
Our DIY business seems to have.
They're doing very well performing peers potentially just given what have been fed and the SEC.
Quarter calls.
Can you talk about.
Why you think that is it digital.
Factors that you.
We talked about at the beginning of the call or just any.
Inventory there Caroling, it's will I think you nailed it we're super proud we've made a lot of progress on all things technology and digital for our retail business.
All around the globe and in particular U S automotive and in Canada.
Investments in the catalog investments in search investments in kind of product data quality.
We have been making a real difference so more work to do but proud of the progress that teams are making.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Yes, Thanks, Dave just to all of our.
Folks out there today, we appreciate your questions and everyone joining the call.
Look we're very pleased with another record quarter at genuine parts company, we could not be more proud of the great work done by all of our GPC teammates around the world.
We continue to be excited with the momentum that our business.
Is generating and and I would just conclude by saying in the future.
<unk> to be very very bright for genuine parts company. So you'll have a great day and we look forward to chatting again in February thank you.
The call has now concluded. Thank you for attending today's presentation you may now disconnect.
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