Q3 2024 Genuine Parts Co Earnings Call
Speaker Change: Good day ladies and gentlemen. Welcome to the Genuine Parts Company 3rd Quarter 2024 earnings conference call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session.
Speaker Change: If at any time during this call you require immediate assistance, please press star zero for the operator. This call has been recorded on Tuesday, October 22nd, 2024. I would now like to turn the conference over to Tim Walsh, Senior Director, Investor Relations. Please go ahead, sir.
Tim Walsh: Thank you, and tomorrow everyone, welcome to Jenny and Parts Company's third quarter of 2024 earnings call. Joining us from the call today are Will Stengel, President and Chief Executive Officer, and birthday to your Executive Vice President and Chief Financial Officer.
Tim Walsh: In addition with this morning's press release, a supplemental fly presentation can be found on the investor's page, the genuine parts companies website.
Tim Walsh: Today's call is being webcast, and I replay will also be made available in the company's website after the call.
Tim Walsh: Following our prepared remarks, we call the open for questions. The response is to which we reflect manager and use as a today October 20, 2024.
Tim Walsh: If we're unable to get to your questions, please contact our Investor Relations Department.
Tim Walsh: Please be advised with this comment, including certain non-gap financial measures, which may be referred to during the day's discussion of our results as reported under generally expected accounting principles.
Tim Walsh: Reconciliation of these measures was provided in the earnings personally.
Tim Walsh: Today's call may also involve forward-looking statements regarding the company and its businesses as defined in the private security's litigation reform act in 1995.
Tim Walsh: The company's actual results could differ materialies from any forward looking statements. These are several important factors described in the company's latest FCC violence, including this morning's press release.
Tim Walsh: The company seems now obligation to update any forward-looking statements made during the call. Now, let me turn it over to Wilk.
Wilk: Thank you, Tim, and good morning everyone. Welcome to our third quarter, 2024 earnings call.
Wilk: As always, I'd like to start by thanking our global teammates for their hard work serving our customers. And I'd also like to acknowledge all those who were negatively impacted by the devastating hurricanes in the U.S.
Wilk: I'm proud of our teens as they rally together to take care of each other and our customers.
Wilk: Our culture shines through with our teammates going above and beyond to navigate the challenge.
Wilk: Taking care of our communities as a pillar of our mission at GPC, and we'll continue to support impacted communities through our partners at the American Red Cross.
Wilk: Let me also welcome Gen Q at the GPC. Gen joined GPC in August as our new executive vice president and chief people officer responsible for advancing the company's global talent and culture initiatives.
Wilk: This is a critical area focused as we continuously strive to be an employer of choice.
Wilk: We look forward to Jen's many contributions.
Speaker Change: Before I get into the results for the quarter, I'd like to take a few moments to provide an update on the business and share my perspective after nearly six months in the Royal CEO.
Speaker Change: GPC has a great legacy. Nappier will celebrate its 100th anniversary next year. Motion is a market-leading value added in industrial solutions business founded in 1946, and our international automotive businesses in Europe, Asia Pacific and Canada, have similar long proud histories.
Speaker Change: Together, GPC is a differentiated business with compelling opportunities individually and collectively as one GPC team in each of the global markets we serve.
Speaker Change: As we leverage the size, scale and strength of our company and our fragmented industries, we're intensely focused on evolving the business and leaning into the initiatives around talent and culture, technology, supply chain, and sales effectiveness that we shared it our last investor day.
Speaker Change: Transformation and investment across all industries is critical as customers needs and markets continue to evolve at increasing speeds.
Speaker Change: I'm confident that we're doing the right hard work for GPC's long-term benefit, as we look to not only extend our existing competitive advantages, but also create new ones.
Speaker Change: Most importantly, our legacy has created financial strength, both in terms of our cash flow and our balance sheet, to thoughtfully pursue these actions through business cycles.
Speaker Change: Our capital allocation discipline is elevated as we work to methodically balance foundational, growth and innovative investments across the most attractive and strategic GPC opportunities.
Speaker Change: In parallel, we're committed to growing our longstanding dividend.
Speaker Change: We acknowledge that these strategic investments come with near-term trade-offs, including higher costs that are amplified by sluggish market conditions and an underlying inflationary cost environment, in turn, pressuring results have seen in the third quarter.
Speaker Change: We're balancing the medium and long-term by offsetting current headwinds with a back-to-basic customer and operational excellence mindset, which is gaining traction as evidence by improved internal operating metrics.
Speaker Change: We're also managing core operating costs through global restructuring activities, which are active to deliver the intended impact.
Speaker Change: We continuously pursue initiatives to simplify the business and further enhance our productivity.
Speaker Change: As we close out 2024 and look ahead to 2025, I want to highlight select examples of actions that reinforce our enthusiasm for GPC's future.
Speaker Change: At Motion, we continue to extend our value proposition with our customers, with tools, technology and expertise to drive embedded solutions to create value and efficiency for our customers.
Speaker Change: Further, our investments in automation to address customer's productivity needs, and mobilizing our technical sales expertise to capitalize on reshoring and near-shoring activity present meaningful new opportunities for us.
Speaker Change: At our U.S. automotive business, we've invested in inventory to drive better availability by broadening our assortment while simultaneously improving operational productivity.
Speaker Change: These investments combined with actions to improve our delivery times from stores have strengthened our daily value proposition.
Speaker Change: The quality of the Nappier brand is differentiated, and our longstanding local relationships, geographic footprint, and expertise positioned us to continue to weed in the do it for me segment.
Speaker Change: The recently announced refinement to the U.S. automotive operating model will drive greater commercial opportunities and key markets across the U.S. Improving revenue growth and profitability over time.
Speaker Change: Underpinning these activities are critical investments in technology that include automation of DCs with next-generation robotics, enhancements to the customer digital experience, including better search and catalog capabilities, and modernization of our store systems.
Speaker Change: The investments will position us to deliver a better customer experience and capture growth moving forward.
Speaker Change: We're also leveraging 250 world-class engineers at our Global Tech Center in Crack Out Poland to build software for global initiatives including innovative products with emerging technology.
Speaker Change: And finally, by leaning into our one GPC operating philosophy, we're unlocking the synergies that exist between our automotive and industrial businesses globally.
Speaker Change: With meaningful value creation opportunities ahead, as we implement as an example, a re-energized approach to IT collaboration across the globe to simplify and harmonize our operations.
Speaker Change: In total, our initiatives are designed to create a better cut from our experience.
Speaker Change: and generate growth in excess of the market, reduce costs and deliver attractive returns.
Speaker Change: All our efforts are at different levels of maturity, but all have exciting runaway.
Speaker Change: Our operating cadence as a global leadership team is designed to challenge ourselves and each other each day to be faster, smarter and better.
Speaker Change: The decisions to pursue long-term investment are difficult in the face of near-term market headwinds. But we believe that these investments will increase the intrinsic value of GPC over time.
Speaker Change: Our financial results were obviously below our expectations in the third quarter, driven by various market factors that we expect to be temporary in nature. But we are confident that we're doing the right body of work to make the company better.
Speaker Change: Now, turning to the third quarter, noted our results include the impact of two major hurricanes, barrel and halene, and the start of the fourth quarter has been affected by Hurricane Milton.
Speaker Change: For the third quarter, total GPC sales were approximately 6 billion, an increase of 2.5% year-over-year due to the benefits of an extra selling day in the U.S. and acquisitions, particularly in U.S. automotive.
Speaker Change: However, continued softness in market conditions across our global geographies, negatively impacted our sales growth in the quarter relative to our expectations.
Speaker Change: with the most pronounced impacts in Europe and our global industrial business.
Speaker Change: The weeker demand environment continues to be impacted by interest rates, combined with persistent cost inflation and election and geopolitical uncertainty.
Speaker Change: These factors are impacting our customers, most notably with tightened budgets and reduced spending for capital projects in our industrial business and reduced spending in general maintenance and discretionary categories across our automotive segment.
Speaker Change: The weak sales environment, along with cost pressure and wages and rent expense, plus anticipated headwinds from depreciation and interest expense, resulted in adjusted earnings being down year over year.
Speaker Change: Adjusted the alluded earnings per share in the third quarter was $1.88 down from $2.49 last year.
Speaker Change: Our results for the third quarter missed our expectations.
Speaker Change: Our Outlooking July included anticipated improvements in market conditions in Europe and global industrial activity, neither of which materialized.
Speaker Change: Our original expectation for the third quarter included flat industrial sales growth. Actual reported results ended up down low single digits.
Speaker Change: In Europe, we expected low-single-digital organic growth, actual results ended up flat.
Speaker Change: The combination of these market headwinds contributed to over 140 million in lower sales in the quarter versus our expectations.
Speaker Change: Given our results today and our expectation that these weaker marching conditions will likely persist for the balance of the year, we've adjusted our 2024 outlook accordingly.
Speaker Change: While many of these factors are outside of our control, we remain focused on controlling what we can and we're confident in eventual market tailwinds.
Speaker Change: We'll provide a clear explanation of the impact of hurricanes, variation drivers versus prior year and our third quarter expectations, as well as our updated outlook in this prepared comment shortly.
Speaker Change: Looking at our results by business segment. During the third quarter total sales for global industrial work 2.2 billion, a decrease of approximately 1% versus the same period last year, and comparable sales were down 2%.
Speaker Change: During the quarter, we had one extra selling day compared to the third quarter of last year, which positively impacted total sales growth by approximately 140 basis points.
Speaker Change: Looking at the cadence for the quarter, average daily sales were down mid-single digits in July, relatively flat in August and down mid-single digits in September.
Speaker Change: Lagi Industrial Production Activity continues to be the main headwind for Industrial Business. As we're now in the longest period of contraction for PMI in over 33 years.
Speaker Change: While this period of contraction has lasted longer than many expected, history does show us that we typically see a long period of attractive growth once the index influx into expansion territory.
Speaker Change: During the third quarter, three of our 14 end markets we track showed positive average daily sales growth year over year.
Speaker Change: We saw relative strength coming from Paul Donahue paper and our distribution and logistics segment, which was offset by weakness in equipment and machinery, lumber and wood and iron and steel.
Speaker Change: Within Industrial Art Corps, MRO Business has remained relatively flat year-over-year, with continued strength across corporate accounts through the year.
Speaker Change: However, customer spending related to capital projects, which represents approximately 20% of sales, has been down mid-single-biggest versus prior year.
Speaker Change: We continue to hear from customers considering capital projects that they are pausing, not canceling these plans until they have better visibility into the interest rate environment and the outcome of the election in the U.S.
Speaker Change: As the market leader motion is well positioned to capitalize on the eventual improvement in the manufacturing economy, near and long-term, to expand our customer base and profitably grow share of wallet in this highly fragmented market.
Speaker Change: As a testament to Motion's value proposition and customer service, Motion has already received supplier of the year awards from six of its largest 25 customers in 2024, surpassing the total that received in the previous four years combined.
Speaker Change: Duffield segment prophet in the third quarter was 259 million.
Speaker Change: Down approximately 8% versus prior year and 11.9% of sales.
Speaker Change: Representing an approximate 100 basis point decrease from the same period last year, driven by sales to leverage, combined with wage inflation and higher depreciation expense.
Speaker Change: Turning to the global automotive segment, sales in the third quarter were 3.8 billion and increase of approximately 5% with comparable stores sales up slightly.
Speaker Change: During the quarter, we had one extra selling day in the US compared to prior year, which positively impacted global automotive sales growth by approximately 90 basis points.
Speaker Change: Similar to the first half of the year, the global automotive sales benefits from inflation remain less than 1% in third quarter.
Speaker Change: and Inspector Stengel in the fourth quarter.
Speaker Change: Global Automotive Segment Profit in the third quarter was 262 million, down approximately 19% versus prior year and 6.9% of sales, down from 8.9% of sales in the same period last year.
Speaker Change: A third quarter results for global automotive segment reflect ongoing pressures from the soft sales environment and cost pressures, particularly in Europe and the US.
Speaker Change: Now, let's turn to our automotive business performance by geography.
Speaker Change: Starting in Europe, our team delivered total sales growth of approximately 6% in low currency with comparable sales flat.
Speaker Change: During the third quarter, overall market growth remains muted, down low single digits, which was consistent with the second quarter.
Speaker Change: The weak economic backdrop in Europe is being driven by an elevated level of deferred maintenance, attributable to real-wage declines, unemployment, higher interest rates, and uncertain political and geoflitable situations.
Speaker Change: In addition, the benefits from same skew inflation was less than 1%. While the prior year benefit was mid-single digits.
Speaker Change: As we look at the economic backdrop in three key European markets, Germany, France and the UK, higher interest rates continue to negatively impact consumer purchasing power across these 3 geographies.
Speaker Change: Furthermore, higher unemployment rates and real-waged declines in France and Germany have contributed to softer spending at the consumer level.
Speaker Change: Collectively, these factors are driving weak consumer confidence across the three markets.
Speaker Change: Dispices Challenging Environment are team continues to outpace the market growth and winch air. Driven in part by our initiatives with key accounts and the rollout of the Nappier brand, which is a competitive differentiator.
Speaker Change: In the Asia Pack Automotive Business sales in the third quarter increased approximately 7% in local currency.
Speaker Change: with comparable sales growth to 4%.
Speaker Change: Sales for both commercial and retail increased in the third quarter, would continue to strengthen retail, particularly in Australia.
Speaker Change: The macro environment is also challenging in the region, with Australia experiencing the weakest economic growth in nearly three decades, and New Zealand currently is in a second recession in 18 months.
Speaker Change: However, our teams are executing well, extending our industry-leading position and taking market share.
Speaker Change: In Canada, sales increased 1% in local currency during the third quarter, with comparable sales decrease in 1%.
Speaker Change: Our Canadian team continues to perform despite ongoing pressure from a more cautious consumer and difficult macro environment.
Speaker Change: Sales in automotive and heavy vehicle performs similar in during the quarter with both having positive growth.
Speaker Change: Lastly, in the US, automotive sales increased 4% during the third quarter, with comparable sales essentially flat.
Speaker Change: The extra day versus the same quarter last year, positively impacted sales growth by approximately 160 basis points.
Speaker Change: Our growth was also driven by acquisitions, most notably the acquisition of MPEC that we completed in May.
Speaker Change: The sales results were broadly in line with our expectation, as we believe we're benefiting from the actions that we've detailed over the last few quarters to improve our execution and we're seeing a positive impact in the marketplace.
Speaker Change: Our average daily sales cadence through the quarter was positive in all three months with July being the softest month.
Speaker Change: Sales to our commercial customers increased low single digits in the quarter, while sales to do it yourself customers with down mid-single digits.
Speaker Change: Within commercial, fleet and government auto care and other wholesale were all positive while major accounts underperform the group but improved sequentially as we remain focused on profitable growth within the major account segment.
Speaker Change: On a comparable basis, sales from company on stores were slightly positive, while comparable sales into our independent stores were down slightly.
Speaker Change: More broadly for U.S. automotive to provide additional perspective on the cautious consumer.
Speaker Change: On a year-to-date basis are non-discretionary repair categories which accounts for approximately 50% of NASA's business where upload amid single digits are general maintenance categories which represents approximately 35% of our business, where flat year-over-year driven by continued cautious and consumer whose deferring certain service and maintenance-related purchases.
Speaker Change: Discussionary Categories, representing approximately 15% of the business, were down mid-Singled digits.
Speaker Change: We continue to invest in our U.S. automotive business for growth and build on significant improvements in service over the past year.
Speaker Change: During the quarter, we further invested in inventory, increasing the few coverage in our company owned stores by approximately 10% while driving further productivity in our DCs, which resulted in a more than 8% increase in our internal DC service metrics.
Speaker Change: We're encouraged with the continued progress and have seen a material improvement in our customer service and stored delivery metrics.
Speaker Change: We will obviously continue to stay focused on this important effort.
Speaker Change: Going forward, we see the commercial customer as the growth engine of our industry, and we benefit from the fact that 80% of Nappier's business serves this segment.
Speaker Change: Our continuous improvement on inventory availability, service, and product quality position as well to win in the markets that we serve.
Speaker Change: Following our successful acquisition of the impact business in the second quarter, we completed the acquisition of our next largest owner, Walker Automotive Supply in August. Further in our plan to own more of our stores in strategic priority markets.
Speaker Change: We added approximately 70-9th of stores across North Carolina.
Speaker Change: Here today, we've made strategic acquisitions of more than 450 Nappis stores from our independent owners, as well as competitive stores in key markets, including approximately 160 in the third quarter.
Speaker Change: Our store network in the U.S. is now comprised of over 6,000 stores, of which approximately 35% are company owned, up from approximately 25% at the end of 2022.
Speaker Change: Over time, we see a path to bring our network closer to a 50-50 mix, with our independent owners continuing to play a critical role in our network.
Speaker Change: While our quarterly financial results were below our expectations, we are confident that we are investing in the right areas to better position GPC and we're experiencing traction across numerous efforts.
Speaker Change: We believe the current market softness is temporary and will eventually serve as a tailwind.
Speaker Change: The long-term fundamentals of our industries are attractive, and our businesses are well-established with leadership positions.
Speaker Change: We're balancing near-term actions and medium and long-term investments.
Speaker Change: Disciplined and Consistent Investment in our Business, particularly during temporary periods of broad-weeker industry dynamics, we'll strengthen our leadership positions and earn profitable market share and create value.
Speaker Change: In closing, thank you again to our global teams for the leadership and hard work and with that, I'll turn the call over to Bert.
Bert: Thanks Will, and thanks to everyone for joining the call this morning. Our results for the quarter reflect the impact of several factors, weak market conditions, the cost impact of investments we are making in the business, and disruptions from the crowd strike outage in July and two major hurricanes. Thank you very much.
Speaker Change: The third quarter was challenging, and it evaluating our financial results and to provide additional transparency, we've reflected on three key themes, which I will address, along with an update on our cash flows and capital allocation.
Speaker Change: Those themes are what drove our profitability down year over year.
Speaker Change: How did the quarter differ from our expectations and what does our outlook for the remainder of 2024?
Speaker Change: My comments this morning will focus primarily on adjusted results, which exclude the non-recurring costs related to our previously announced global restructuring program, and costs related to the acquisition of M. Tech and Walker.
Speaker Change: During the third quarter, we incurred a total of 45 million of pre-tax costs, or 36 million aftertax, related to the restructuring efforts and integration activities.
Speaker Change: Before I review our three key themes in detail, let me share some high-level context for our results starting with sales.
Speaker Change: Total sales were up to 0.5% in the third quarter, which included a benefit from acquisitions of 320 basis points, and the benefit of an additional selling day in the U.S., totaling 110 basis points.
Speaker Change: Sales in the third quarter were negatively impacted by disruptions from hurricanes, halene, and barrel, as well as the crowd strike outage, totalling approximately 70 basis points.
Speaker Change: For the quarter, our gross margin was 36.8%, an increase of 60 basis points from last year. The improvement in our gross margin was driven by acquisitions, primarily at US Automotive, which drove approximately 60 basis points of gross margin expansion.
Speaker Change: Turning to costs, our SGNA as a percentage of sales for the third quarter was 28.8% plus 220 basis points year over year. The impact of acquired businesses, investments in IT, and cost pressures contributed to the year over year delivery. However, it's not over yet.
Speaker Change: More specifically, our insect and water acquisitions negatively impacted SGNA by approximately 50 basis points.
Speaker Change: The incremental SGNA from acquired businesses will abate over time as we execute on our integration plans and capture synergies.
Speaker Change: We are now five months and two months post-closed of our impact and walker transactions respectively and expect each respective integration to take approximately 24 months from start to finish.
Speaker Change: Our integration efforts are on track with respect to timing and synergy capture. Both acquisitions contributed positively to our EBITDA margin in the third quarter.
Speaker Change: Inflation-driven increases in ren expense and salaries and wages, including increased minimum wages in certain international markets, along with service improvement investments and freight expense resulted in approximately 120 basis points of SG&AD leverage versus the prior year.
Speaker Change: In addition, our planned investments in technology to modernize our business resulted in a 20-based point headwind in SGNA in the third quarter.
Speaker Change: Our global restructuring initiative remains on track. Our restructuring efforts are a key element of our work to offset the headwinds of current market conditions and cost inflation across the business.
Speaker Change: Here today, we've incurred approximately 160 million of costs related to our restructuring efforts. In line with the top end of our range of 100 to 200 million of costs.
Speaker Change: During the third quarter, we realized approximately 16 million in benefits from our restructuring efforts and expected to deliver a benefit of between 30 to 40 million in 2024 and 45 to 90 million on an annualized basis in line with our expectations.
Speaker Change: With that context, let's turn to the first theme, our third quarter profitability. Our third quarter results were down year to year, from an adjusted EPS of $2.49 to an adjusted EPS of $1.88, a decline of $0.61.
Speaker Change: As we look at the details, I will describe the major drivers of our year-to-year decline in terms of impact to ETFs, and you can see these illustrated in our earnings presentation.
Speaker Change: First, as we expected, higher depreciation and interest expense combined with IT costs I referenced in my SGNA comments drove approximately 25 cents of the year-over-year decline in earnings. Our initiatives come with cost-set wins which we anticipated in plan 4 in 2024. These costs are in the form of higher depreciation expense as we depreciate new investments higher SGNA as our efforts to modernize IT show up in operating expense and higher interest expense from borrowing to fund investments, particularly in this higher interest rate environment.
Speaker Change: As I mentioned, core cost inflation is negatively impacting salaries and wages along with friend expense.
Speaker Change: and we are making investments to improve service that are contributing to higher freight expense.
Speaker Change: For the quarter, these higher costs, combined with the leverage on lower sales, reduced our year-over year earnings by an estimated 38 cents.
Speaker Change: These negative impacts are partially offset by benefits of our global restructuring actions totalling eight cents.
Speaker Change: Finally, the quarter was negatively impacted by lost revenues as a result of the impacts of disruptions from the hurricane and the crowd strike outage, which translated into an estimated 6% reduction in earnings for the quarter.
Speaker Change: With respect to Hurricane Haleen, we close September with approximately 200 locations across Nappa and Motion impacted by power outages and storm damage.
Speaker Change: Many of these locations have come back online, but we continue to operate with closed doors and disrupted customers.
Speaker Change: With respect to the second theme, related to our expectations, we underperform, but we expected to be in the third quarter.
Speaker Change: As we shared in our second quarter earnings call, we expected weekmarked conditions and headwinds from depreciation, IT investments and interest to result in lower third quarter earnings and we were targeting an adjusted EPS range of $2.25.
Speaker Change: Our objective results for the quarter with EPS of $1.88 came in below our expectations driven by two key factors.
Speaker Change: We could result in Europe and our industrial business and the impact of crowd strike and the hurricane.
Speaker Change: When we gave guidance in July, our outlook assumes sequential improvement in marked conditions in the second half of 2024 and tailwinds from easing comparisons.
Speaker Change: More specifically, our original expectations for the third quarter included industrial sales growth coming in flat and low single digit organic European growth.
Speaker Change: Underlying European market conditions did not reflect in the quarter and remain negative on a sequential basis from the second quarter.
Speaker Change: For Industrial, PMI closed June at 48.5, nearly flat to May, and then turned sharply negative into lie at 46.8, rebounding slightly to 47.2 in both August and September.
Speaker Change: Along with negative industrial production manufacturers' readings in September, this backdrop resulted in our sales for industrial in the third quarter being down.
Speaker Change: As we'll share the underperformance of our European and industrial businesses, versus our expectations, translated into 140 million and reduced sales for an estimated 30 cents of earnings.
Speaker Change: We can bind with a 6-cent impact from CrowdStrike and the Hurricanes. This led to an approximate 36-cent earning shortfall versus our expectations.
Speaker Change: Our third quarter performance, which was largely driven by ongoing week market conditions, led us to the third theme, our outlook for the remainder of 2024.
Speaker Change: Based on the trends we are seeing in our business, including our lower than expected third quarter performance, we are adjusting our 2024 outlook.
Speaker Change: With no sequential improvement in market conditions in the third quarter, from the second quarter. Our revised outlook reflects our view that the demand environment for the balance of the year will remain consistent with the third quarter.
Speaker Change: We now suspect that deluded earnings per share, which includes the expenses related to our restructuring efforts, will be in the range of $6.60 to $6.80.
Speaker Change: Compared to our previous outlook of $8.55 to $8.75.
Speaker Change: We now expect adjusted deluded earnings per share to be in a range of $8 to $8.20. This compares to our previous Outlook of a range of $9.30 to $9.50.
Speaker Change: Our earnings presentation includes an illustration of the key business drivers impacting our revised outlook for 2024. Let me take a moment and walk you through the details of these components starting with sales.
Speaker Change: We now expect total sales growth in a range of 1% to 2% versus our previous outlook of 1% to 3%. Which includes the benefit of acquisitions we've made here today.
Speaker Change: By Business segment, we are now guiding to the following.
Speaker Change: Three to four percent total sales growth for the automotive segment, which includes the benefit of acquisitions made here today. We anticipate comparable sales growth to be approximately flat.
Speaker Change: And for the Industrial segment, we expect total sales growth to be down 1% to 2% With comparable sales growth also down 1% to 2%.
Speaker Change: Our reduced sales outlook for the years driven by updated expectations around market conditions.
Speaker Change: For the balance of 2024, we do not expect any improvement in market conditions across our geographies.
Speaker Change: Our expectations are informed by third party data, as well as the trends we experienced in the third quarter, which have persisted into the start of the fourth quarter.
Speaker Change: Further, the beginning of a quarter has been compounded by the impact of Hurricane Milton across Florida, as well as the continuing effects of Hurricane Halene.
Speaker Change: While we've made good progress on restoring our operations, uncertainty remains around our customers and their ability to resume operations, which makes the ultimate impact on our business difficult to predict. Our updated guidance includes our estimated impact of these storms on our results for the remainder of the year.
Speaker Change: Within Industrial, the Week Industrial Production Activity remains a headwind for the business.
Speaker Change: As we'll mentioned, we are now in the longest period of contraction for PMI in over 33 years.
Speaker Change: We now believe that improvement won't come in 2024, as we wait for PMI to inspect and to expansionary territory and for the benefit of initial interest rate cuts to have a positive impact on our customers.
Speaker Change: In our international and U.S. automotive businesses, market conditions continue to remain soft as consumers are impacted by wide range of factors, including inflation, interest rates, and geopolitical election uncertainty.
Speaker Change: In the U.S. while our independent owners continue to gain strength, high interest rates remain a headwind for these small and medium business owners.
Speaker Change: Gross Margin, we continue to expect 40-60 basis points of full year gross margin expansion, primarily driven by the acquisitions in U.S. automotive and our strategic sourcing and pricing initiatives.
Speaker Change: Our outlook assumes that SGNA will deleverage between 140 and 150 basis points, which includes SGNA deleverage on our reduced sales outlook, ongoing cost inflation, and the impact of incremental SGNA from acquisitions in the U.S. automotive business.
Speaker Change: Our views include the expected benefits from our global restructuring activities.
Speaker Change: For Global Automotive segment margin, we now expect to be down approximately 90 to 100 basis points versus last year given the softer organic failed growth and corresponding pressure on SGNA.
Speaker Change: For 2024, we expect the global industrial segment margin to be down approximately 40 to 50 basis points year over year.
Speaker Change: For the first nine months of 2024, we generated 1.1 billion in cash from operations and 700 million in free cash flow. We are competent in the strength of our cash flows in 2024 and continue to expect cash from operations to be in a range of 1.3 to 1.5 billion with free cash flow of 800 million to 1 billion. [inaudible]
Speaker Change: Delivering consistent cash flows and all business cycles, combined with our liquidity, a strong balance sheet and discipline capital allocation philosophy, positions us to grow the business long-term.
Speaker Change: In 2024, we have invested approximately $386 million back into the business and the form of capital expenditures, including 126 million in the third quarter.
Speaker Change: With respect to capital expenditures as we shared our investor day in 2023, our historical investment rate in our business covered at around 1% or less of revenue.
Speaker Change: Over the past two years, to drive the needed transformation of our business, this is moved to 2% of our revenue. And we continue to expect an investment rate of 2% of revenue, or approximately 500 million spending in 2024.
Speaker Change: The growth capital we are deploying, which represents approximately 55% of our total 20, 24 catbecks, will drive modernization of our supply chain, including new DCs and automation that went partnered with technology, enhances our customer experience and positions us for long-term growth.
Speaker Change: Further, discipline M&A has been a key element of our growth as we take advantage of value creation opportunities in our fragmented markets globally.
Speaker Change: In 2024, our M&A strategy has evolved with respect to our operating model at NAPA and our new approach to having a more balanced mix of company owned and independently owned stores will improve our revenue growth and profitability over the long term.
Speaker Change: We have invested $954 million globally here today in the form of strategic acquisitions, including the acquisition of our now largest independent owner, Walker Automotive Supply.
Speaker Change: As we acquire these businesses, we have a disciplined integration playbook, where we extract values through incremental sales opportunities, capture the full gross margin, and optimize the SGNA of the acquired business.
Speaker Change: During the third quarter, we further strengthen our balance sheet by initiating the transition of our U.S. pension plan to a third party insurance company, which we expect to complete in the fourth quarter of 2025.
Speaker Change: This is a continuation of our pension derisking strategy that began in 2013 when the plan was frozen and does not impact the benefits of the plan participants.
Speaker Change: Our tension plan is well funded, and we took this step to reduce balance sheet and income statement volatility and protect us from future potential cash flow contributions.
Speaker Change: We anticipate a one-time non-cash charge in the fourth quarter of 2025 and do not expect any impact to our 2024 financial results.
Speaker Change: Further, we do not expect any cash payments associated with a transfer of the plan to the third party insurance company in 2025.
Speaker Change: In closing, we continue to operate in challenging market conditions and are taking actions, including advancing our global
Speaker Change: We believe the backdrop of lower growth is market-driven, not specific to our business, and we stand well-positioned for growth once the cycle turns more favorable.
Speaker Change: As we look ahead, we are encouraged by the recent reduction in interest rates in the U.S. and our optimistic that lower rates will create a more constructive market backdrop moving forward, although we recognize that this will take time to result in improved activity.
Speaker Change: We remain confident in the underlying fundamentals of our businesses and will continue to invest in the business with a long-term focus.
Speaker Change: Thank you, and we will now turn it back to the operator for your questions.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and after session. Should you have a question, please press star followed by the one on your touch tone phone. You will hear prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please set the hand set before pressing any keys. Please press star followed by the two.
Speaker Change: Please let me know your self-to-one question and one follow-up. One moment please for your first question.
Speaker Change: Your first question comes from Kate McShane with Goldman Sachs. Your line is now open.
Kate Mcshane: Hi, good morning. Thanks for taking our question.
Kate Mcshane: Thanks for all the detail on the call today. One area that we wanted to learn a little bit more was just the detail around the inventory increase you saw during the quarter and if you could maybe drill down into some of the investments that you're going to do.
Kate Mcshane: and making in freight.
Speaker Change: Sure, Kate. Good morning. Look on the inventory side. I think that goes back to really some of what will touched on in positioning us in the marketplace on the napissite. We've made some great strides on getting inventory availability where it needs to be. That's a year over a year kind of effort. We started that this time last year as you recall, and I think we've really made some nice moves to increase depth, increase skew count, and do the things that matter in the field. We are the deciding factor in being successful. Nappis got a great legacy. It's got a great brand. It's got a great footprint. And so when we put that inventory power behind it, I think it really positions us well in the marketplace. That's the biggest driver of the change there.
Speaker Change: We also have some acquired inventory from the acquisitions we've made, so that'll show up in the balance sheet as well. On terms of investments that create, some of those are competitively sensitive. I would just leave it as a fact that we're really leaning into making sure that we've got On the other side of the equation that store excellence, make sure we have the driver available to be a Consistency of the experience that we want to make sure we're meeting the needs of our customers.
Speaker Change: Kate, I might just add, you know, as we look at all the internal operating metrics that we use to run the business in particular in Napa, we continue to be very bullish about the progress that we've made so whether it's service levels from deliveries to stores. Thank you very much.
Speaker Change: from these these front stores to customers those are at all time highs and getting better every day.
Speaker Change: As Bert said, the inventory strategy was all about making sure that we had the right.
Speaker Change: Vendor alignment with the right availability in the local markets and those have seen material improvement year over year.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Your next question comes from Scott. Check a rally with truest. Your line is now open.
Scott: So you did not call out US Auto as a primary source of profit disappointment in the quarter. Does that mean US margins held up and the total margin decline was really due to the international business, or does that mean you just had subdued expectations for US Auto? And then secondly, obviously 24 is going to fall well below initial expectations without providing any specific guidance. Can you give us a general feel for how you're thinking about 25, meaning the sequential trends continue a weekend, but your comparisons get easier, et cetera. Thank you.
Speaker Change: Thanks guys, Mark. I look on the margins side for you. I thought I'm motives, and we don't really get into the detailed by the individual regions. I will say that the pressure we felt that the consolidated level was consistent across all the markets. And so we were disappointed in total with where we were. It came in underneath our expectations as we've outlined.
Speaker Change: But I wouldn't isolate the pressure in any one market regionally around the world versus the other. They're all feeling the same kind of pressure, interest rate pressure and all of our markets on the automotive side, false inflation.
Speaker Change: are both present in all of those markets and so when we think about the factors that drove SG&A that I outlined in my separate comments, those would be true for each of the regions individually.
Speaker Change: In terms of how we're looking ahead, and as you said, we don't want to get too specific.
Speaker Change: But look, I mean, I think the bottom line on 2025 is that we're going to continue to watch all the same data that you all are. And at this point, as we exit the third quarter and start the fourth quarter and start to look into 2025,
Speaker Change: and the conditions remain pretty stagnant in order to report. Mark and conditions are going to be a big factor.
Speaker Change: and how we look at things.
Speaker Change: The bottom line though is we're very encouraged by the long-term fundamentals for both segments.
Speaker Change: and we're in great fixed industries. I think those are beneficial to us in the long term.
Speaker Change: Our size and scale is a benefit there as well, we have leadership positions and fragmented markets around the globe. And we're bullish on the execution of our strategic initiatives as well outline. But the biggest wild card moving ahead with that positive backdrop is the pace and timing of recovery of market conditions. And so we'll take the fourth quarter to see what we think the market will give us for next year.
Speaker Change: Plus the own actions and the things that we think we're going to be able to do and we'll update that and share that with you in February.
Speaker Change: Scott, I might just add in the same way that we've articulated that higher interest rates have had the intended effect, muting and slowing down overall growth, we are encouraged, obviously by the start of an easing scenario around the world. The UK has reduced rates once in the last, call it six months, US once, Eurozone, three times, Canada three times, so obviously there will be a lag benefit to that, but we would hope as we move forward those types of policy decisions provide a tailwind as opposed to a headwind.
Speaker Change: Great, thanks for watching!
Speaker Change: Good. Thank you.
Speaker Change: Next question comes from Michael Latter with UBS. Your line is now open.
Michael Latter: Good morning. Thank you so much for taking my question. You're S.C.A. Dollars. We're up about 166 million in the quarter versus in the same year ago. Can you outline a bit more what drove that increase and should we expect the pace of increase to continue for the next several quarters given the weeks that you're making?
Speaker Change: Hey Michael, good morning. Look, a big part of the dollar increase in SGNA has been a come from acquired businesses. So I think that's an isolated activity particularly here as you look in the second half of 2024 with the acquisition of our two largest independent owners on the on the opposite of the house. [inaudible] I'm sorry, I'm sorry
Speaker Change: So I kind of outlined that in detail that in my prepared remarks.
Speaker Change: On that particular point we would expect that SGNA to abate over time as we continue to integrate those businesses and capture synergies. The great news is we're on track on that front. We're seeing our synergy capture come in consistent with our business case. And as I shared, both of those acquisitions contributed positively to our third quarter. [inaudible]
Speaker Change: As we look ahead on some of those other elements, I think we'll continue to see pressure here in the near term on the cost side of things with inflationary impacts on wages and rent.
Speaker Change: I don't expect those to debate in the fourth quarter.
Speaker Change: and likewise, we're going to continue to invest in IT. That's an important part of our transformation going forward.
Speaker Change: And there's some positive things there. Unfortunately, as we modernize systems, many of those are cloud-based platforms that transition expense out of capital into operating expense, which is why we're highlighting that for you.
Speaker Change: but we're also making some great investments in the business and particular with our global technology center in poland we benefit from exceptional talent high productivity and these teams are doing amazing work on some of our initiatives around catalogust s which is clearly making a difference with our customers so when we think about investment that's an example of the thing i think you'll continue to see but at the same time we're also trying to be very thoughtful about all setting some of this with our global restructuring which remains on track
Speaker Change: We saw a benefit in the corner as we've discussed and we're continuing to control head count. The restructuring is helping with that. Most of that is come from voluntary requirements in the US, but if we look at our global head count or down somewhere between 3 and 5% and 2024 excluding acquisitions, and we're continuing to do hard work across the network with engineering standards and engineering productivity and our DCs that's reducing over time and allowing us to be more thoughtful about head count there as well.
Speaker Change: Okay, my follow-up question is your decision to make incremental investments in the decision in the business was inevitably prompted by something. You outlined your view that the US auto business was was down, your business was was flatish. So what is motivating the decision to make these investments and how do you expect the current. On these investments to play out in the next few quarters in terms of market share. Thank you.
Speaker Change: Yeah, look Michael, I think it's super important for any business to be investing in itself and so I think it's um
Speaker Change: The Management Team organized their strategic plan in particular dating back to our investor day in 2023.
Speaker Change: We had a lot of compelling opportunities to invest back in the business in a different way which I think is a function of the market realities, the changing technology landscape.
Speaker Change: The competitive dynamic and so all those things put together.
Speaker Change: Set the stage for putting capital to work around the world in an accelerated way.
Speaker Change: I'm Michael Odysad that I believe that if you looked prior to Investor Day in 2023, you would have seen the GPC business and totality.
Speaker Change: Spending about 1% of revenue in terms of investment in the business and so that's across all of our business segments
Speaker Change: and that...
Speaker Change: Quite frankly, I think it's not the level of investment we needed to stay at pace and grow this business and keep it on its front foot going forward. We think the technology, work that we're doing and leading with technology is going to be a differentiator. And we think investing in our supply chains, which will make a difference for our customers. And as we know, having that part and having it at the right place and the right time, both on the automotive and the industrial side.
Speaker Change: is critical to being successful. And as we make these enhancements across DCs, which we've mentioned, we're doing that in the UK and France here in the US. We have a new DC in Melbourne. We're doing this all over the world. And you combine that with the technology. I think that's going to position us for much stronger growth, particularly as we come out of this weaker economic cycle. [inaudible]
Speaker Change: Thank you very much.
Speaker Change: Your next question comes from Chris Horvers with JP Morgan. Your line is now open.
Speaker Change: Thanks, good morning. So my first question I just want to be clear, so was there a decision to step up investments above the original plan for this year? Is it really just the acquisitions? And as we think about moving forward, do the acquisitions that you made during this quarter, during the third quarter, take sort of the underlying dollar run rate higher as we look at the fourth quarter, obviously relative to revenues?
Speaker Change: Yeah, Chris, we haven't changed our view on investment level on CAPEX for 2024. We're still going to come in right around that 2% level. And as I commented in my prepared remarks, that's going to be around 500 million of investment. So there's no step up on the CAPEX out of the house. We really think the 2% number is the right proxy. We did that last year. We'll do that again this year, and we'll be thoughtful about how we look ahead to 2025. We're going to do that next year.
Speaker Change: In terms of run rate on acquisition, I think I would tell you that we expect that to that was never going to be linear. I think it's the best way to say it when you think about the independent owner strategy. Thank you.
Speaker Change: As you've seen this year, we've acquired the two largest and from there, you know, acquiring the 180 plus stores in May as we've announced with Walker 75 stores.
Speaker Change: The next levels of independent owners drop pretty significantly in terms of historic count size. And so I think you'll see while we continue to march to maybe a more 50-50 target, the pace and timing of that will slow. So I think we get the first two big ones, which we're important to do in the queue first. And then we'll move at pace, but the pace will decelerate from what you've seen here over the last two quarters.
Speaker Change: Got it. And then as you think about just, you know, what are we expecting, what are like implied, same-sure sales and organic growth in Napa and motion. And as you look out, you know, and you think about the industrial side of the business, you know, it does the election sort of like, is that a clearing event or do we have to wait for, you know, these capital budgets to come through for your customers in 2025 such that this actually could prolong to perhaps the second quarter when that capital gets deployed.
Speaker Change: Chris, I would say the election is a clearing event with a lag. So by the time you turn the calendar year, the election flips, and there's at least a clarity on the margin relative to where we stand today, especially with the backdrop of lower rates, and I think that that helps.
Speaker Change: in the implied comms for the fourth quarter.
Speaker Change: Not for the fourth quarter. I would say the lag is coming into 2025. I don't think the election clarity in November creates a business impact immediately in November and December . And look, Chris, we don't give quarterly guidance. So the quarter comps we haven't provided, but I would just say I'd go back to my thoughts in the prepared remarks. We really don't expect the fourth quarter semantically to look much different than the third quarter. In terms of the underlying performance of the business.
Speaker Change: Given the market condition.
Speaker Change: Scott, and I just want to ask one clarification question. So I think you talked about a 30 cent EPS headwind on a $140 million shortfall in sales. Is that right? Because that's like a 40% operating margin. I guess ask the other way if, you know, if you expected sales up to 1.5% fixed year, you would expect the next year you expect 40% flow through on that.
Speaker Change: Now I wouldn't take it that way, Chris. I mean, I think we're trying to give you a reasonable proxy, but we felt like the sales loss was, I mean, given the gross margin rate impact of that and the loss sales in the quarter. So I wouldn't overread into that in terms of operating margins.
Speaker Change: Got it, thank you.
Speaker Change: Your next question comes from Greg Malik with Evercore, your line is now open.
Speaker Change: I think I have a couple of questions. I wanted to start maybe at a high level given that I think for you to describe the investments you're ramping up to 2% now versus one. When we think about the growth algo that you outlined at the analyst day in 23, should we be thinking about this year as a new base to build that off of or should we still go back to where we were a couple of years ago and have the growth off of that base? I don't know. I don't know. I don't know.
Speaker Change: I think this year the tough year to use as a proxy grey is my kind of initial response to that. We've had a lot of moving pieces, market conditions have moved backwards. I think as you look historically we've said that the growth algorithm is in that three to four top line range. [inaudible]
Speaker Change: in a long, long term for the business in terms of top line and that we can leverage off of that.
Speaker Change: This year with Marky Condition, particularly on the industrial side, moving negative.
Speaker Change: It's not a year I would use as a proxy, so I don't think we're ready to move off of what we think are long-term algorithms but obviously we reserve the right to kind of update you as we get into 2025 and the 2025 guidance, particularly as we see with what the fourth quarter presents and how we think the beginning of 2025 will start. So,
Speaker Change: Let's not deviate from how we think about the health of this business on a long-term basis, as Will has said, I think we're very bullish on what a long-term can be in the investments we're making in the business. Those have stepped out from a 1% historical rate, but that 2% is the same level of investment we share with you in a best or day. So we think that does set a little bit of a new proxy there, but again we'll come back to you with some more thoughtful outlook when we get to February.
Speaker Change: Got it, and then my follow-up was, you mentioned how disinflation is brought in place and down in both industrial and auto to sub 1%. If you're my as of how that cycles, if you think about the comparisons from a year ago, and should we expect that to normalize back, it may be the long term 2-3, or do you think we're sort of stuck at this flat-ish position?
Speaker Change: Look, again, I'll always reserve my rights updates, you whom we built our models for 2025, and share those in February , but I think we're coming out of the period that we all expected. We saw this start last year in 2023 in the US, and we're seeing it now in Europe .
Speaker Change: We expect those high benefits of inflation in the top line to cool off and they have.
Speaker Change: We're going through what I think is the unwinding of all that now.
Speaker Change: Again, if I go back to the first question about the long term, if you think the long term is a three to four, embedded in that long term is a half to one percent range of price benefit and we would expect in the long term absent.
Speaker Change: Something else coming to light that changes our view on the health of the markets fundamentally that that would be the case. And we would hurt to something more normalized as we move ahead.
Speaker Change: I would just say, how would you describe your market share position right now?
Speaker Change: in the U.S. Auto in Industrial. I mean, there's a lot of macro headwinds.
Speaker Change: Do you think you're gaining share, holding share, still slipping a little bit?
Speaker Change: No, we feel really good about it. And we use on the Nappicide third party independent data that's got everybody's information in it. And it's never been stronger. Always opportunities. There's 120 categories that you have to look at to study, you know, skew level share. And we've made incredible progress there. So and then on the industrial side, we're right there are better than the market. There's some data points out there. There are from peers and obviously the PMI. So down a little bit in this market is at or better than market performance.
Speaker Change: That's great, thanks and good luck guys
Speaker Change: Your next question comes from South Basham with Weddblisch Security. Your line is now open.
Speaker Change: Thanks for watching, good morning, just following up on Greg's last question and thinking about the U.S. Market, your coms were a fly-edge X-X today, eventually, and slowly, and slowly onto your stack basis. Do you think that Market conditions got worse, or do you think that the competitor environment got more difficult this quarter-rel to the last?
Speaker Change: I think the market's got worse and the hurricane impact put noise into the data. So a flat-ish market feels about right to us, a plus or minus a point.
Speaker Change: And on the second part of that set, when the competitive set, I mean, I wouldn't say that the competitive sets changed much, they have great competitors, we compete day-to-day with competitive landscape that thankfully remains very rational on pricing and so we're encouraged by Nappier's position in the market, as I said earlier with its great footprint, legacy, availability and quality.
Speaker Change: and specific to the major account segment that you talked about getting a little bit better this quarter. What's driving that? Do you think it's the end markets? Do you think it's some of your initiatives? Any color there would be appreciated? No. No. No. No.
Speaker Change: Yeah, so we were really pleased with the sequential improvement in major accounts, as I think we've talked about publicly before. Inside our major accounts, we have four or five different books of business. [inaudible]
Speaker Change: and each have their own specific initiatives and those initiatives are gaining traction specifically around.
Speaker Change: Some of our priorities in our regional quote-unquote major accounts.
Speaker Change: and our independent affiliates. So we're focused intentionally there to make sure that we're doing business that makes sense for our customers and for us, and we'll continue to be very thoughtful there.
Speaker Change: Great, thank you so much.