GENUINE PARTS CO Q3 FY2024 earnings call

• Business Update: Acknowledged legacy of the company, welcomed new EVP of People, focused on talent, culture, technology, supply chain, and sales effectiveness. Addressed impact of hurricanes and support for communities.
• Segment Details: Industrial faced headwinds from lagging production activity, while automotive had sales growth but margin pressure. Progress in inventory availability, service levels, and customer satisfaction in automotive.
• Investments: Emphasized investments in technology, automation, DC modernization, and M&A activities in automotive. Restructuring efforts to manage costs and improve operational excellence.

Global Industrial

• Total sales were $2.2 billion, a decrease of approximately 1% versus the same period last year and comparable sales were down 2%. Segment profit in the third quarter was $259 million, down approximately 8% versus prior year and 11.9% of sales, driven by sales deleverage combined with wage inflation and higher depreciation expense.

Global Automotive

• Sales in the third quarter were $3.8 billion, an increase of approximately 5% with comparable store sales up slightly. Segment profit in the third quarter was $262 million, down approximately 19% versus prior year and 6.9% of sales. In Europe, sales grew ~6% in local currency but market was muted. Asia Pac sales increased ~7% in local currency. Canada sales increased 1% in local currency. U.S. sales increased 4% in the third quarter, driven by acquisitions.

• Revised 2024 adjusted EPS range: $8 to $8.20 (previously $9.30 to $9.50).
• Total sales growth range: 1% to 2%.
• Automotive segment sales growth 3% to 4%, Industrial segment sales down 1% to 2%.
• Gross margin expected to expand 40-60 basis points.

• Market conditions: Weak demand, interest rates, inflation, and geopolitical uncertainty impacting sales and margins.
• Disruptions: Hurricanes and CrowdStrike outage causing lost revenues and operational challenges.

Q: Hi, good morning. Thanks for taking our question. 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 making in freight?

A: Sure, Kate. Good morning. Look, on the inventory side, I think that goes back to really some of what Will touched on and positioning us in the marketplace on the NAPA side. We've made some great strides on getting inventory availability, where it needs to be. That's a year-over-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 SKU count and do the things that matter in the field. We know that inventory availability is the deciding factor in being successful, NAPA's 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. We also have some acquired inventory from the acquisitions we've made. So that will show up in the balance sheet as well. In terms of investments at freight, some of those are a bit competitively sensitive. I would just leave it at the fact that we're really leaning into making sure that, we've got on the other side of the equation, that store excellence, making sure, we have the driver availability and consistency of experience that we want to make sure, we're meeting the needs of our customers.

Q: Yes. So you did not call out U.S. auto as a primary source of profit disappointment in the quarter? Does that mean U.S. 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 U.S. 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 to weaken, but your comparisons get easier, et cetera? Thank you.

A: Hey, Scot, it's Bert. Look, on the margin side for U.S. Automotive, we don't really get into the details by the individual regions. I will say that the pressure we felt at 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. 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 in all of our markets on the automotive side, cost inflation 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 prepared comments, those would be true for each of the regions individually. In terms of how we're looking ahead, and as you said, we don't want to get too specific. 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, those conditions remain pretty stagnant quarter-over-quarter. And so, market conditions are going to be a big factor in how we look at things. The bottom line though, is we're very encouraged by the long-term fundamentals for both segments. And we're in great fixed industries. I think those are beneficial to us in the long-term. Our size and scale is a benefit there as well. We have leadership positions in fragmented markets around the globe, and we're bullish on the execution of our strategic initiatives as Will outlined. But the biggest wildcard 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, plus our 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.