Q3 2023 Genuine Parts Co Earnings Call
Good day, ladies and gentlemen, welcome to the genuine parts company third quarter 2023 earnings conference call.
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At this time I would like to turn the conference over to Tim Walsh Senior Director of Investor Relations. Please go ahead Sir.
Thank you and good morning, everyone welcome to genuine parts company third quarter 2023 earnings call.
Joining us on the call today are Paul Donahue, Chairman and Chief Executive Officer.
Will stengel, President and Chief operating officer.
And Bert Nappier Executive Vice President and Chief Financial Officer.
In addition to this morning's press release.
Momentum slide presentation can be found on the investors page of the genuine parts company web site.
Following our prepared remarks, the call will be opened for questions.
We're unable to get to your questions. Please contact our Investor Relations Department.
Please be advised this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results as reported under generally accepted accounting principles.
A reconciliation of these measures is provided in the earnings press release.
Today's call May also involve forward looking statements regarding the company and its businesses as defined in the private Securities Litigation Reform Act of 1995.
The company's actual results could differ materially from any forward looking statements due to several important factors described in the Companys latest SEC filings, including this morning's press release.
The company assumes no obligation to update any forward looking statements made during this call.
With that let me turn the call over to Paul.
Thank you Tim and good morning, welcome to our third quarter 2023 earnings Conference call.
Like to start this morning with a few remarks on our overall performance before turning it over to will to cover the highlights of the automotive and industrial businesses and then Bert will get into the details of our financial performance before we open the call to your questions.
To recap the third quarter total GPC sales were $5 8 billion, an increase of two 6% compared to last year.
Total company segment margin was 10, 4% a.
Increase of 11, 7% from adjusted diluted earnings per share in the same quarter last year.
I wanted to take this opportunity to give a call out to our GPC teammates around the globe as we delivered our 13th consecutive quarter of double digit EPS growth.
Our third quarter results reflect our strong operating discipline and our ability to improve our operating margins and profits. Despite a more challenging top line environment.
Overall, we continue to benefit from solid industry fundamentals in both the automotive and industrial end markets, including rational pricing environments in both segments and.
In our global automotive business, the underlying fundamentals of the aftermarket remain favorable incur.
Increasing miles driven and a gene in complex vehicle fleet, and I vehicle prices and financing cost.
Within our global industrial business, we benefit from our highly diversified portfolio of customers and end markets with overall growth driven by manufacturing and opportunities with onshoring and reassuring trends.
Our automotive and industrial businesses are mostly break fix and then non discretionary in nature.
And as a result, we remain focused on offering solutions that support our customers to have the right part in the right place at the right time across both business segments.
Sales in our industrial business were up slightly in the third quarter and the team continues to deliver exceptional profit conversion as evidenced by 180 basis points of segment margin expansion.
During the quarter.
Man trends were positive, but continued to moderate relative to the first half as expected.
Overtime motion has transformed its business into an industrial solutions provider with a compelling value proposition.
In addition, with the acquisition of K D. G motion has added scale and enhanced its industry, leading offering of value added services, such as fluid power and automation conveyance and repair.
The motion team is focused on executing on our strategic initiatives to expand gross margin.
Remaining disciplined non cost driving further segment margin expansion.
Turning now to our global automotive business, we continue to see strong results across our international automotive businesses with the eighth consecutive quarter of double digit sales growth in Europe and record sales and profits in Australia and New Zealand.
Our teams continue to focus on our key organic initiatives. In addition to our bolt on acquisition strategy.
During the quarter, we announced the acquisition of Goudy, one of the largest independent players in Spain, Europe's fifth largest car park.
Building on our 2022 acquisition of Lepton Goudy, mainly operates in the Catalonia, and Madrid regions and <unk>.
<unk> further scale and a national platform across Siberia, with the addition of 22 stores to our market leading position.
We expect this acquisition to be accretive to our European business post synergies.
We welcome the <unk> team to GPC.
While we were pleased with the growth internationally. The U S. Automotive business performance was below our expectations with sales down one 1%.
Let me take a moment to share a few thoughts on the performance of U S auto.
There is no doubt we have seen some challenges in 2023.
From the record levels of inflation seen a year ago, which benefited the industry and abated throughout 2023 has anticipated.
Two challenges across our own execution.
Our year to date results demonstrated that we have not operated to our full potential in 2023.
As many of you know success in the automotive aftermarket is highly dependent on availability of inventory.
Particularly for the important D I F M customer, which represents approximately 80% of our automotive revenue.
Further the automotive aftermarket has demonstrated consistent performance throughout all economic cycles.
As we close out 2023, we are taking actions to better service our customers.
And ensure our commercial activities are where they need to be.
Under the leadership of Randy Breaux, we're confident the U S. Automotive team has taken the measures to improve execution whether customers.
We'll plan to discuss these actions in greater detail.
And before passing the call over to Wil wed like to highlight our 2023 sustainability report, which we published earlier this month.
At GTC, we embrace our responsibility to build a more sustainable and equitable future for our planet.
This year's report highlights the progress we've made as a company to measure and reduce our carbon footprint.
This year, we are proud to report that in 2022, we further improved our measurement of our carbon emissions and have reduced scope, one and scope two emissions by over 10%.
We encourage you to visit the sustainability page on our website for more information on our progress.
So in closing our performance in the third quarter again demonstrates our unique and differentiated portfolio.
Well and I continue to visit with our global teams, including our recent trip to Europe and Australia.
The teams are investing in the right areas of the business to drive long term profitable growth.
And they couldnt be more energized.
We enjoyed the benefit of strong global brand and the GPC culture is alive and well across all our global operations.
Further we remain committed to the strategic investments and initiatives that we highlighted at our Investor day back in March.
We believe these investments are critical to our long term success.
And are contributing to our financial performance, both now and for years to come.
We want to thank each of our 58000 GPC teammates for their hard work and continued dedication to serving our customers around the world.
So with that I'll turn the call over to will.
Thank you Paul Good morning, everyone I want to start by also thanking the global GPC team for their ongoing commitment to serving our customers. We appreciate the hard work every day to deliver parts and solutions that help keep the world moving.
It's great to see the teams work together as one GPC team to deliver customer success.
We do this with coordinated focus on our foundational priorities, including talent and culture sales effectiveness technology supply chain and emerging technology complemented by a disciplined M&A strategy.
To that end I'd like to take a moment to specifically recognize the global teams for the progress on our numerous in flight initiatives around the world.
We're executing a broad set of initiatives across our global business, and making strong and steady progress.
The teams are simultaneously working to evolve the business for the better while delivering on our day to day service commitments to our customers.
As we detailed at our Investor Day, we believe we have compelling opportunities to invest back in the business and are excited about the progress and outlook.
As Paul mentioned, we have great examples of progress around the world specific examples range from state of the art distribution centers with automation and next generation technology.
Hance data visibility and analytics capabilities added talent and expertise modernized technology platforms to enhance growth and productivity and much much more.
We know the teams are working hard to execute the body of work. So thank you very much.
Now turning to the details of the business segment results before I get into the specifics I should mention that the third quarter had one less selling day in the U S when compared to the third quarter last year.
This impacted our total sales and comparable sales growth versus prior year for both our industrial and automotive segments.
During the quarter total sales for global industrial were $2 2 billion, an increase of 0.6%.
We estimate that the one less selling day negatively impacted global industrial sales growth by approximately 160 basis points.
Total sales for global automotive were three 6 billion, an increase of three 9% with a negative impact of global automotive of approximately 100 basis points due to the one less selling day.
Now turning to the global industrial segment.
Our quarterly results were essentially in line with our expectations and we remain ahead of our year to date plans.
Recall that our expectation was for industrial growth to be lower in the second half of the year compared to the first half.
Comparable sales growth increased 0.3% in the third quarter versus the same period last year.
The same period last year was our highest quarterly comp during the year and an approximately 20%.
The monthly average daily sales cadence through the quarter was relatively consistent with each month of the quarter up low single digits.
During the quarter motion saw a more mixed results across its various end markets with the strongest growth coming from industries, such as food products iron and steel and mining offset by relative softness in equipment and machinery.
As mentioned motion continues to make excellent progress with initiatives, including sales excellence pricing E Commerce technology and supply chain strategies that are helping to win profitable market share.
As one example, the inside sales team initially formed in 2020 now covers approximately 25% of active customer accounts.
The proactive sales calls are helping to drive profitable double digit growth across the selling channel with a lower cost to serve.
Our technology investments supporting revenue growth, we're also helping deliver a better customer experience with nearly 30% growth across E. Commerce channels year to date and E. Commerce now at over 30% of total sales up approximately six percentage points since 2021.
Motion second new fulfillment center in Fort Mill, South Carolina is another example of exciting progress.
This supply chain initiatives consolidates various older legacy facilities, while improving productivity efficiency speed and service to customers.
Our first fulfillment center in Lakeland, Florida opened at the end of 2021 and has delivered outsized sales growth at 10% reduction in operating expenses and corresponding profit margin expansion.
We will continue to roll out this strategy with additional fulfillment centers opening scheduled for 2024.
In Asia Pac our motion team delivered another strong performance in the third quarter with double digit sales and profit growth.
Our local teams are energized is reaffirmed by recent independent survey data showing high levels of team member engagement combined with market, leading customer satisfaction rates.
Motion is a trusted value added adviser to its customers and the team has detailed plans to win additional share in this fragmented market.
Industrial segment profit in the third quarter was approximately $283 million up a strong 16, 6%.
And at 12, 9% of sales, representing a 180 basis point increase from the same period last year.
The profit improvement in industrial was driven by another quarter of excellent operating discipline in both North America and Australasia.
The accelerated integration of the KCG acquisition has contributed to the strong performance and we will exceed our $50 million synergy estimate by the end of this year.
Turning to the global automotive segment similar to the first half of the year total automotive sales benefited from our global diversification with our international auto businesses outperforming with mid single digit to double digit sales growth in local currency.
Comparable sales for the global automotive segment increased 0.6% in the third quarter and by geography include low to mid single digit growth in each of our international businesses and comparable sales of negative two 9% in the U S.
The moderation in inflation continues to be a significant factor in our year over year performance.
As expected global automotive sales inflation moderated in the third quarter to low single digits from mid single digits in the second quarter.
By comparison in the third quarter of 2022 global automotive benefited from high single digit levels of sales inflation, which includes a benefit in the U S of approximately 10%.
We expect sales inflation and global automotive to be low single digits in the fourth quarter.
Global automotive segment profit in the third quarter was $322 million up approximately 4% versus the same period last year and segment operating margin was eight 9% flat with last year.
In the quarter each of our international geographies delivered margin expansion, while U S. Automotive segment margin was down due to expense deleverage related to planned investments and the impact of lower sales.
Now, let's turn to an overview of our automotive business performance by geography.
In the U S as Paul outlined automotive sales declined approximately 1% in the third quarter with comparable sales down two 9%, which includes the negative impact of one less selling day year over year as I had previously mentioned.
Further the third quarter of last year included the benefit of sales associated with our Napa Expo.
Sales event held approximately every five years, which negatively impacted our year over year comparisons by an estimated 170 basis points.
Collectively these two factors represent approximately 340 basis points of headwind in evaluating our year over year growth performance in the U S.
In the third quarter sales to both commercial and retail customers were down slightly with commercial and DIY essentially performing at similar levels.
Our commercial business was mixed in the quarter as fleet and government outperformed in major accounts remained pressure driven by the impact of tighter market conditions on the end consumer.
The average daily sales cadence by month was July slightly up August down low single digits, and we exited the quarter with September up low single digits.
It's fair to say that our performance in the U S. Automotive business was below our expectations and we believe the underperformance is a combination of execution and further tightening of market conditions.
On the execution side, we have not been crisp enough in the field with service to our customers.
In addition, while supply chains have improved significantly post pandemic.
We've experienced some lingering issues with inventory availability in a few product categories.
Finally, the impact of tightening market conditions, including higher interest rates and persistence levels or higher cost inflation has created a more cautious trading environment for our customers.
Despite the challenges we're taking action.
First in terms of service in the field, we've taken actions to intensify our operational rigor at stores and Dcs as well as further enhance our inventory strategies powered by investments we've made in data analytics tools.
Second we've experienced fill rates below our acceptable levels in a few product categories.
This fill rate performance has taken too long to remedy post pandemic and as a result, our merchandising teams partnered with alternative suppliers to address the issue to ensure our markets are properly stocked.
Finally.
While we can't control the overall market conditions, we are working closely with field sales to drive incremental growth opportunities and we continue to be disciplined on costs, including ongoing cost actions, which Bert will discuss further.
As mentioned, we've underperformed our expectations at U S automotive in 2023, but with new leadership and role for 100 days now the team has clarity of the priority opportunities has taken action and are quickly moving to get where we need to be.
With solid industry fundamentals and the team's competitive drive to win we're confident in our U S. Automotive team is positioned to overcome our recent challenges and execute on our long term strategy to profitably grow share.
Canada sales grew approximately 4% in local currency during the third quarter with comparable sales growth of approximately 3%.
During the quarter, our automotive and heavy duty businesses grew mid single digits and low single digits respectively.
And we are pleased with the Canadians team execution of their strategic initiatives, despite macroeconomic pressures in a cautious consumer.
In Europe , our automotive team delivered another strong quarter with total sales growth of approximately 11% in local currency and comparable sales growth of approximately 7%.
We continue to drive strong growth and market share gains across our European markets due to the ongoing execution of our initiatives and strategic value creating acquisitions.
During the third quarter, we delivered mid single digit to double digit growth across each of our geographies driven by continued wins with key accounts, winning higher share of wallet with existing accounts and expanding the Napa brand in the region.
In addition, the team is making excellent progress on our new National distribution Center in France that Paul Burton I had a chance to visit.
Scheduled to open in 2020 for this 500000 square foot facility helps evolve the network strategy and upgrades the level of technology and automation within our supply chain.
This effort complements a similar investment in the UK and the teams are working well to leverage best practices.
We expect these facilities to further drive productivity and efficiency as well as increased service level to our customers.
In the Asia Pac automotive business sales in the third quarter increased approximately 6% in local currency with comparable sales growth of approximately 5%.
Sales for both commercial and retail were solid in the third quarter with retail growth slightly above commercial.
Having recently visited with this world class team, it's impressive to see the team consistently executing at such a high level and delivering another quarter of record sales and profitability.
Our Asia Pac team is driving market share gains improving profitability, increasing its employee value proposition all while executing strategic initiatives to create long term value.
In closing the global GPC team delivered solid third quarter results driven by the benefit of our strategic business mix and global geographic diversification.
We remain committed to our plans for continued growth through the balance of the year, Despite a dynamic environment.
We're confident in our teams are focused on the right long term strategic initiatives that will deliver customer solutions and create value.
Again to the entire GPC team for your hard work your performance and your dedication to taking care of our customers with that I'll turn the call over to Bert.
Thank you will and thanks to everyone for joining us today.
Our performance in the third quarter reflects the operating discipline and our business alongside the focus by our teams to serve our customers, which is evident with our double digit earnings growth for the quarter.
Before I walk you through the key highlights of our third quarter performance I would like to note that we had no nonrecurring items in the third quarter and nine months of 2023.
Our comparisons to the prior year, however, excludes certain nonrecurring items in 2022, primarily related to the integration of <unk>.
Total GPC sales increased two 6% to $5 8 billion in the third quarter of 2023.
This reflects a 0.5% improvement in comparable sales, which includes low single digit levels of inflation.
A one 7% contribution from acquisitions, and a 0.5% favorable impact of foreign currency.
Our sales performance reflects ongoing strength in international auto continued but moderating growth in industrial offset by a decline in sales at U S automotive.
Further one less selling day in our U S businesses negatively impacted sales growth by an estimated 120 basis points.
Our ongoing execution of our strategic pricing and sourcing initiatives were the primary driver of our strong gross margin expansion.
Gross margin was 36, 2% in the third quarter, a 130 basis point improvement from the same period last year.
Given our performance year to date, we now expect our gross margin rate for the full year to improve 50 to 60 basis points from 2022.
An increase from our prior estimate of 30 to 50 basis points of improvement.
Our total operating and non operating expenses in the third quarter were $1 6 billion or 28, 2% of sales.
This compares to total adjusted expenses of 27, 5% of sales in the third quarter last year or an increase of approximately 70 basis points.
The SG&A deleverage in the third quarter is primarily attributable to a few key factors planned investments in wages and benefits for our teams and increased spending in technology to support our strategic initiatives.
These investments in wages and benefits for our team members impacted SG&A by approximately 35 basis points, while investments in it and digital impacted SG&A by approximately 25 basis points in the third quarter.
As you heard earlier from Wil within SG&A. The U S. Automotive team has been working hard to execute on cost improvement actions.
The team has been successful in reducing head count and implementing a hiring freeze and driving disciplined around travel and other discretionary costs.
These actions are on track and equate to approximately 15 to 20 basis points of benefit which is embedded in our annual guidance and year to date results for.
For the full year, we continue to expect SG&A deleverage of 30 to 40 basis points based on our investments in our team members in it.
Our third quarter revenue growth and gross margin expansion drove total segment profit of $605 million up nine 6% segue.
Segment profit margin was 10, 4%, a 70 basis point increase from last year, and our seventh consecutive quarter of margin expansion.
This quarter segment margin expansion is a clear reflection of the value of our portfolio diversification highlighted by industrial which now represents nearly 50% of GPC segment profit.
While we delivered strong overall margin expansion driven by industrial our global automotive segment margin was flat due to U S automotive.
We've demonstrated consistent improvement throughout 2023 as global auto segment margins improved again sequentially.
Further we have identified opportunities to improve execution at our U S automotive business and positioned the business to take share.
With a combination of operating discipline and ongoing investments in strategic initiatives to drive further operational efficiencies and productivity for the year. We now expect GPC segment margin expansion of 40 to 50 basis points, an increase of our previous outlook of 20 to 40 basis points of improvement.
Our third quarter net income was $351 million or $2 49 per diluted share.
This compares to adjusted net income of 317 billion or $2 23 per diluted share in 2022, an increase of 11, 7%.
Turning to our cash flows for the first nine months of 2023, we generated $1 1 billion in cash from operations and $733 million in free cash flow.
We closed the third quarter with $2 2 billion in available liquidity and our debt to adjusted EBITDA is one six times, which compares to our targeted range of two to two five times, highlighting our flexibility and the strength of our balance sheet.
We remain committed to our four key priorities of capital allocation, which include the investment in our business through capital expenditures and M&A and the return of capital to our shareholders through dividends and share repurchases.
During 2023, we've invested $350 million in capital expenditures, including $145 million in the third quarter.
We remain disciplined investing and initiatives, we believe will drive modernization and long term growth for our business as.
Acquisitions remain a key element of our growth strategy, we invested $211 million year to date for acquisitions, including the investment in goudy to expand our market leading position in Iberia.
We continue to generate a robust pipeline of bolt on acquisition targets for our business.
Thus far in 2023, we have also returned approximately $565 million to our shareholders in the form of dividends and share repurchases.
This includes $393 million in cash dividends paid to our shareholders and $172 million in cash used to repurchase one 1 million shares.
We remain well positioned with solid cash flows and a strong balance sheet to effectively deploy our capital through any economic environment.
Turning to our guidance.
We continue to navigate a balanced mix of headwinds and tailwind as we move into the fourth quarter with that backdrop, we are reiterating our full year sales guidance and updating our diluted earnings per share guidance previously provided in our Q2 earnings release.
We now expect diluted earnings per share to be in the range of $9 20 to $9 30.
An increase of approximately 10, 3% to 11, 5% from 2022.
This compares to our previous outlook of $9 15.
To $9 30.
Our sales guidance is unchanged and we continue to expect total sales growth for 2023 to be in the range of 4% to 6%.
By business segment, we are guiding to the following.
4% to 6% total sales growth for the automotive segment with comparable sales growth in the 2% to 4% range.
Within this outlook, we expect international automotive to be at the high end or above this range with U S automotive below.
We also expect global automotive segment margin to be flat to slightly down for the year.
For the industrial segment, we expect total sales growth of 4% to 6% with comparable sales growth also in the 4% to 6% range as.
As expected the sales growth within this segment has moderated along with the industrial economy and our outlook includes low single digit growth in the fourth quarter.
For the year, we now expect global industrial segment margin to expand by at least 150 basis points year over year.
We are reaffirming our outlook for cash from operations and free cash flow.
We expect cash from operations to be in a range of $1 3 billion to $1 4 billion and free cash flow to be in the range of $900 million to $1 billion.
We continue to plan for capital expenditures of 375 to 400 million for the full year, which includes incremental investments in technology and supply chain among others.
In closing our third quarter double digit earnings growth demonstrates our ability to improve earnings and expand margins in low growth environments backed by a strong balance sheet and returns to our shareholders through our dividend. Our teams are delivering on what we said we would do for 2023, including our expectations for mid single.
<unk> sales growth.
Most margin expansion segment margin expansion and double digit earnings growth for the full year.
We look forward to closing the year strong and reporting on our fourth quarter and full year results on our call in February .
Thank you and we will now turn it back to the operator for your questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble the roster.
Yeah.
Okay.
And our first question will come from Scot Ciccarelli of Truest. Please go ahead.
Good morning, guys, Scot Ciccarelli I know.
At your Investor day wasn't all that long ago, but you guys had outlined some margin targets for each of your divisions and while we've seen great progress on the industrial side. How are you guys thinking about your automotive margin targets given the performance from the last few quarters.
Yes, Scott Thanks for the question.
I don't think we've changed how we're thinking long term, we've got two years left on that cycle and again as we close out this year as I mentioned in my prepared remarks, we're looking for global automotive segment to be.
Flat to slightly down.
With two years left it's not unusual to get to a three year plan a little differently maybe than you started in March and when we announced all of that but we're still still feel confident that the levers are there as we look at the long term margin expansion, particularly for auto we got pricing and category management benefits and when we talk about pricing and sourcing benefits in gross margin.
<unk> will continue to see those levers.
And we've got further long term investments and that's really how we're thinking about this we've got some short term challenges, but a long term investment around things like supply chain investments in it.
<unk> remain in early innings, and so we're really still bullish on the long term. Despite some of this near term choppiness.
Okay. That's helpful and then given some of the near term Choppiness and you guys are obviously implant implementing various improvement processes to improve the U S auto business, but the way. This business. Typically works is once you lose market share its kind of hard to get back. So how are you guys thinking about.
You actually are you guys thinking that you can call that market share back or are there changes you're implementing really just kind of patching holes in the ship and stopping incremental share losses.
Yeah, Scott, It's we'll let me let me add a few thoughts and I'll start by just saying the U S. Automotive team just to be very clear is working incredibly hard every day to take care of their customers and be easy to deal with and as you know better than anyone what that means for customers as we can.
Got to be in a position to offer them the right quality part in the right place at the right time and have that transaction will be seamless once that product available in the market, we needed to efficiently and quickly.
Be efficient and quick to search for the par and then pull the party gets to the customer and so when you think about what we're working on every day, we have opportunities probably to be better in each part of that and there's no single point of failure that has recently developed I think and this is just a call to action for the team.
We need to be better across the board. The good news is as you started with your question on our initiatives that we detailed at Investor day are all focused around these customer needs and we're making good progress.
While we might have been disappointed with recent performance.
And.
Might indicate that would give them back a little bit of share we still feel good about we're working on we just need to do that body of work with more urgency at a faster pace.
Scott I would I would just.
Add on to that look we we've been in this business along long time, there is nothing structural.
Structural that has shifted or changed and in our business who are in our.
And our structure.
We know the leverage to Paul well hit on them and Trust me there is.
A very dense say up and down.
Up and down the organization to get it done and I have no doubt we will get it done.
Okay. Thank you very much.
Thanks Scott.
The next question comes from Michael Lasser of UBS. Please go ahead.
Good morning. Thank you so much for taking my question on the U S auto business.
Green.
<unk> market share.
We have lost in the most recent quarter and how does that compare.
Perfect.
Thank you.
Or is it getting worse.
Hey, Michael can you repeat the last part of that question Youre kind of fading in and out.
Sorry, Paul sorry.
Are you sure yes, sure Lawson is getting better or are they getting worse.
Yeah, Michael I don't think it's getting worse listen I think we're clearly disappointed with our recent performance and as I've said.
That plus some of the performance of our incredible competitors would indicate we have given back some share over the last couple of quarters.
But maybe a few thoughts to elaborate on the whole share thought which is we've always had strong competition in this profit pool, both large and small.
And as I said with Sky takes consistent execution everyday to serve those customers and we just havent performed to our expectations in 'twenty three I would tell you we have seen with the supply chain challenges moderating over the last 12 months some of our smaller competitors have gotten more healthy.
As it relates to inventory.
And so we're seeing them.
<unk> from a different place of strength than they were maybe 12 or 24 months ago.
But we're not we're not feeling like it's getting worse, we've got a good line of sight of what we're working on and taken action as we talked about on the call.
And Michael Michael I would just add to that debt.
You really have to break down and it's a very broad question. When you start thinking about and talking about market share, it's a very fragmented industry.
Yes, you have the big four but then you've got.
Independent W D scattered throughout the country.
Along with with others. So you really got to look category by category and what I'm pleased.
To see and I'm encouraged to see is that when I look at specific product categories product categories that move that needle.
For our business, we have made changes and we have improved our availability and we'd been proved our supply chain and.
I would tell you if we're at fault for anything it took us too long to make those changes I think will will touched on that so.
Yes, no doubt better days are ahead and the team under Randy Randy is later ship are all over it.
Mr. Pablo. Thank you then my follow up question.
Paul <unk>.
Okay.
Okay.
<unk>.
Okay.
Gary.
Hey, Michael its Barb you are still cutting out pretty pretty bad we can't hear you very well could be.
Albert.
Yes.
So hopefully that's better yes.
Much better.
Alright.
My follow up question.
Some of the share dynamic influence general general parts.
Genuine parts.
Ability or willingness to do acquisitions in the U S auto business.
Hey, Michael it's Bert and first and foremost welcome to the Universal coverage for GPC. Thank you for joining joining us we appreciate that.
I would say no I mean look we look at what we're what's happening here and as well and Paul have give me some color on.
Really just something that we're managing through here in the near term.
The great thing about GPC is that we performed pretty well through all cycles.
We've had $1 $1 billion of cash generated here year to date $733 million of free cash flow, we have a tremendously strong balance sheet and we're improving our margins and growing earnings double digits. Despite some softer top line and so I <unk>.
The great thing is the performance of the business Holistically allows us to continue to take advantage of the market, including the M&A market and investments in capital expenditures that are great for the business long term and so while we may have a little choppiness short term.
It doesn't impact our ability to move as we need to move whether it's in U S automotive on M&A or the whole portfolio.
Alright background.
Thanks, Michael Thanks, Mike.
The next question comes from Greg Melick of Evercore ISI. Please go ahead.
Hi, Thanks, I'd love to go a little deeper in the trend through the quarter and the exit rate and particularly how inflation may have.
Have impacted that.
Hey, Greg Hubert I'll talk about inflation first and then we'll come back to kind of our views on guidance and outlook.
I think we've talked about this a little bit along the way throughout the course of the year inflation is really developed almost exactly as we expected with with where we thought we would to begin the year.
That's a little bit of a surprise and that we could be kind of that consistently planning and thinking out of the way we're thinking about the trends of inflation, we thought they'd moderate through the course of the year and they have so we started the year.
With the mid single digits moving to low single digits in Q2, all up low single digits here again in the third quarter, and we expect to finish out the year and low single digits. So.
It really has followed how monetary policy has been implemented around the world and ticked down as we expected.
One thing to call out on inflation I think it is important to keep in focus and will mentioned it in his prepared remarks inflation or said differently price was a significant tailwind in 2022 for the automotive aftermarket and Thats dissipated in 2023 as I just kind of outline.
In particular in the third quarter, a year ago, we were looking at inflation and sales at the high single digit level for the global automotive segment with the U S at nearly 10%.
And Thats, a pretty tough comp when you think about low single digits.
Sure.
For this particular period.
Coming up against.
I think right now moving as we expected we will close out the year low single digits across the board and.
In terms of the outlook and how we're thinking about the rest of the year.
Bringing that up just a level I'll start at the highest level and then may be worked down through.
Getting to the U S automotive.
We think we've had a great quarter in terms of earnings growth double digit earnings here in Q3 that gave us some confidence to narrow our range and lift the bottom up with the new guidance range of $9 20 to 930.
As I said in my prepared remarks, we really have a mix of tailwind and headwind tailwind.
Tailwind solid industry fundamentals for both segments, we've improved our gross margin outlook industrial margin for the full year.
Better than we thought.
There are some positive trends in industrial production data I'm, not ready to call a new trend, but at least it leaning positive of late.
<unk>.
And we're going to have continued ongoing discipline in cost and thats going to lead to our expectations for segment margin expansion.
For GPC in terms of headwinds just note most of these we got a choppy environment out there we've got inflation geopolitical considerations on new thing here in October with student loan repayments, starting back that's probably somewhere near $10 billion a month, so obviously something that will impact the consumer.
Just rate environment up sharply over the last month and so taken together, we see an increasingly cautious consumer we're also going to be prudent about the time that it's going to take to.
Effectuate some of the operational changes and rigor that will mentioned so.
So that taken together I think is how we're thinking about.
The rest of the year, but again, we expect.
Long year, when it's all said and done we are going to close out the year based on our guidance with mid single digit revenue growth gross margin expansion segment margin expansion and we expect to have double digit earnings growth.
<unk> environment for the full year.
And maybe you will if you want to comment a little bit on the cadence of the quarter.
Yes, Greg for U S auto cadence of the quarter. It was mix through the quarter July was slightly up as I think we said in our prepared remarks August was down low single digits and we exited the quarter with September up low single digits, we did call out the.
<unk> Expo.
Over year compare that event was in July of last year by the time all the sales of processed it's probably it's not scientific probably impacting August . So as you think about that adjustment its probably mid quarter mid to end of the quarter.
And Greg I'll come back and give a.
A little bit more color you kind of talked about how things are looking as we start and maybe pull that up as I think about this year on youth automotive you know the full year.
We started out Q1 with a little softer.
Weather impact there and as we said in Q2, we really knew that our U S automotive business had more potential than we showed.
And it's a feeling we continue to echo Q2 made some new moves with new president cost actions to further drive some of the improvement to offset the weakness on the topline and the Q2 results were really a catalyst for the executive team to walk away and look at the things that were impacting our performance.
We'll share those perspectives, but as we look at the fourth quarter with respect to USA G. R to the U S automotive business.
We know that we've got a tough comp coming up yet again, so fourth quarter for U S. Automotive was a $9 six reported comp sales growth was six three so we have another tough quarter ahead and.
All things considered we expect the fourth quarter for them to be in line with the third quarter.
Got it and when did inflation peak last year and maybe you gave me brought it out some more like average unit.
Our price so if you think about mix.
Our third quarter would have been the highest inflation comp for the year for that business and will mentioned that we've got another tough comp on inflation in the fourth quarter, that's going to be around 8% for the U S automotive business.
The peak would have been Q3, but we still have a tough Q4 comp.
That's great. Thanks, and good luck guys.
I appreciate it.
The next question comes from Christopher <unk> of Jpmorgan. Please go ahead.
Hi, Good morning, it's Christian probably I'll answer Chris.
So motion organic trends had been outperforming the ISI and industrial production.
As the industrial economy had slowed so as you digest the outsized share gains following the ADT.
The ADT acquisition and those indicators become more relevant again and as you look ahead are there any end markets, where there is reasons to believe it should inflect positively or negatively.
Yes Christian thanks for the question.
Look those are two important data points, we monitor and track them closely.
And we've publicly said it seems whether it was <unk> or post pandemic.
The correlation was less clear, having said that we still look at those indicators.
And we've been encouraged obviously by the recent trends in particular in industrial production.
So there is certainly part of what we look at as we inform our views of the outlook for the business and.
Based on those recent inflections, we're cautiously optimistic.
There is no specific tied with those metrics to a specific part of our business I think it is a good representation of the diversity of our business and.
And so it's something that we look at in conjunction with customer vendor feedback.
Different other pieces of internal external data.
We're cautiously optimistic based on what we're seeing both in the business and from a third party data perspective.
Hey, Chris Yeah, I would just tag on to what will said we are encouraged.
One will mentioned in the industrial production numbers, which we saw a nice lift in September .
But we track 14 different indicators that our motion business.
Christian we we.
We saw five of those indicators improve in September .
So categories like.
I mean automotive has continued to be positive food products DSC logistics equipment leasing all are trending up including mining so yeah to Will's point.
Have has has the industrial downturn has had reached a trough I think if it hasn't we're darn close and what we generally find is as we see the.
Major indices like industrial production begin to bounce back we generally follow that somewhere 60 to 90 days later, we'll see our business began to ship so again.
Great team at motion, they've had a phenomenal year and and we're looking forward to better days here in 2024 on the top line for that group.
Got it that's very helpful.
As you think about gross margin are there any one time or unsustainable items and three Q Thanksgiving and as you look ahead.
Vendor allowances, historically, driven a fair amount.
Volatility in <unk> gross margins. So is there anything to call out there.
Kristen it's barb.
Nothing to call out we had a really clean quarter on gross margin.
Nothing related to some of the noise you just mentioned there.
Super proud of the teams they've executed at a very high level. So our expansion of gross margin here in the third quarter of 130 basis points continues to come on the back of the investments, we're making excuse me.
Sourcing and pricing.
Okay.
Got it got it. Thank you very much thank you.
Great.
Okay.
The next question comes from Seth Basham of Wedbush Securities. Please go ahead.
Thanks, a lot and good morning. My question is regarding the pricing strategy in the U S. Automotive business, obviously, you've done a great job improving our gross margins there, but what gives you the confidence that you are.
Lots of aggressive pricing is not leading to some market share losses.
Hey.
Yeah as Bert look it's a good question a thoughtful question and we don't believe that our work around gross margin has come at the expense of share gains.
I'll know that price is not generally the leading factor in driving sales in the aftermarket it's more about availability and quality of pollen and Willa mentioned. This morning, that's a really strategic question comes down to pricing strategies at the category and SKU level and the longstanding balance of that against unit growth. We believe the investments we're making in date.
Analytics and pricing tools many of those we showcase that investor day have really given us an ability to be even more strategic and flex our strategy up and down by both category and geography that allows us to remain competitive respond to the environment as it moves and stay in line with the market dynamics. So I think the short answer is no. We don't believe that our work.
There is impacting share gains or losses.
And we continue to stay focused on.
Driving our gross margin performance, we lifted our expectations for the year now looking at 50 to 60 basis.
<unk> of improvement for the full year.
I am pleased with that result.
That's helpful color and you mentioned refine the market dynamics, we'll talk about some of your smaller competitors being better in stock last quarter, you talked about weighing the cost and benefits of the major account segment can you give us an update on that latter point, how you're thinking about major accounts at this point has been more price competitive there.
Walked away from any business.
Yes.
I wouldn't say there is a material change in the major <unk>.
<unk> part of the business it continues to be pressured.
We have been.
More disciplined as you alluded to in the way that we're thinking about the business or that piece of the business, it's about 15% to 20% of our commercial business. So it's not a large outsized portion of the total commercial business.
And as I think we've said before.
Inside of our major account business, there is four or five different even sub verticals and there's different nuances associated with each one of those verticals. So.
We have seen some consolidation in some of the <unk>.
National players in particular.
Some of our existing customers that have come to consolidate that's impacted some of the year over year trends just as they work through some of their acquisition activity, but generally speaking the business continues to kind of.
Be at the same level than it was last quarter to slightly down just a little additional color on that.
As we break break apart that major account business, which.
Will alluded to.
Where we see challenges in some of the big National tire chains.
But on the flip side, we're seeing.
Good growth in our fleet and our government, we're seeing recent growth in the OE dealer segment, which we expect to.
Continue as some of those challenges for that segment continues so there's puts and takes.
But.
Again, our team is addressing those issues and I think we will see improvement here going forward.
Thank you very much.
The next question comes from Daniel <unk> of Stephens. Please go ahead.
Yeah, Hey, good morning, everybody. Thank you taking my questions.
Hi, Daniel I want to start on the automotive margin Oh, maybe a follow up to Scott's question earlier, I think you mentioned pricing and category management as levers to still pull in the coming years I'm. Just curious as you think about some of the fixes in the auto business as you expand the new suppliers does that limit the got it.
Management benefit or the Napa private label offering and then pricing is good to hear I guess, you kind of answered it in the past question, but can you just talk about the pricing backdrop and the ability to use that they'll ever to grow margins again.
Sure look I don't think we think anything differently about the longer term to follow up on that earlier point as I said, maybe we will get there a little bit differently than we expected when we when we announced everything in March. This year has played out slightly differently, but we.
We are two years ago, and gross margin opportunities arent going to be impacted by changes in suppliers actually they are opportunities more than anything as we look at continuing to be competitive going to market with our size and scale looking at some of these opportunities.
More globally and through a one GPC prism, so I don't see those as limitations at all they actually tend to be more of an opportunity for us.
Pricing environment remains rational and we still think there's opportunity there as I mentioned a few minutes ago. We've got great work in data analytics, there that allows us to be flexible and nimble.
And we haven't really seen a change.
And the way the competition is behaving in that space.
Would change our view on the longer term or the short term for that matter.
Yes, Daniel I would just add your question around the Napa brand and category management.
That's all upside and just as a reminder, I think as we talked at Investor day, when we when we look at category manage event now.
Essentially by product category, we look at our global volume So that Napa brand has got strong presence now across Europe Asia Pac and of course North America. So.
To me that's upside for for our North American business.
As we get.
To a better position from a supply and inventory standpoint.
Two two really.
Accelerate our growth at a couple of key product categories.
Great. That's helpful. And then just to clarify Bert I guess, you said, we had one fewer selling day in the quarter I guess, how did that happen, where the timing of our holiday and what month did that fall in as we think about the cadence you laid out and then are there any makeup if they're one more selling day in any quarter coming up we should be aware of as a model.
So Danielle missed the very beginning of your question can you give that back to me.
You said, one fewer selling day was it a holiday timing or kind of what drove that and then what month did it fall into as we think about the cadence you gave us a month to month comps.
I'd, rather not get into get into parsing out the quarter by month.
The quarter year over year in the U S for both motion and for U S. Automotive was impacted by one day, we will do.
Leave it there and then in the fourth quarter, we're going to be flat on operating days.
Okay.
Got it thanks, so much.
Our last question comes from Kate Mcshane of Goldman Sachs. Please go ahead.
Hi, Thanks for taking our question.
We had we had two quick ones first is there a way.
Between the pockets of where inventories maybe a little light versus from the execution issues that you highlighted in automotive and is there a timeline of when inventory availability improves.
Yes.
There is we have great information.
Where we've got our opportunities as we've talked about the last 12 to 24 months investing in analytics.
And in particular around inventory analytics has been an area of focus so.
I think thats made us better to know precisely where we have.
Opportunities and the opportunities are.
Not just availability, but it's movement and again Theres nothing there is not a new thought here. It's just better execution, that's taking the inventory that we have in getting into the right spot at the right time, and making sure that you've got enough of the stuff. That's moving fast. So we've got a lot of visibility into that.
And it's an ongoing effort I mean, we've been working on this topic.
Probably forever and we're just stepping up our urgency so will.
The teams are urgent and they're focused on it and we're going to make progress each and every day.
And Kate I would just tag on to what will said.
The specific categories that or.
Problematic for us during the pandemic and even post pandemic.
Those new programs are rolling out as we speak so.
We would expect to see improvement in those product categories.
Here going forward.
Okay. Thank you and then our last question is just around the 340 basis point headwind in the quarter.
Was that anticipated when you were originally guiding 46% same store sales in automotive and if so what is <unk> got a retail comp guide of $46 four more what's been anticipated in Q4.
Yes, Kate it's part.
Of course, we knew the Expo headwind in the selling day was there so that wasn't a surprise to us at all remember we don't guide to quarters. So we werent thinking about through that throughout Q3 lens, we were thinking about our guidance through the full year.
And we as.
As we guided thought we would sell through that and again, we've reaffirmed our topline guide for the year. This morning, we did lowered the comp guide for automotive I think thats, just being smart about having to factor factor in.
The slower and softer performance for U S automotive year to date, and what it's going to mean for the full year, but at the end of the day.
As we thought about expectations of sales recovery didn't progress quite as quickly as we thought in Q3 will be giving you a lot of detail around the execution things, we're working on and again, we've reaffirmed our full year top line. This morning.
Thank you.
Thanks Kate.
This concludes our question and answer session I would like to turn the conference back over to Paul Donahue for any closing remarks, yes, thanks, Andrea and just to reiterate we want to thank all of our teammates around the globe for their efforts in the quarter and year to date.
And just just to let them know how much. We appreciate all they do for the company and for our customers I would also like to thank all of you for joining us today and.
And thanks for your ear combined and your continued interest in genuine parts company have a great day.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Yeah.
Okay.
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