Genuine Parts Company Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Thanks and Introduction: Thanked over 63,000 global GPC teammates. Turned to third quarter results, noting total sales were $6.3 billion, up ~5% vs prior year, gross margin expanded 60 basis points, adjusted EBITDA up 10% year-over-year, and adjusted diluted earnings per share of $1.98, up 5% from prior year.
• Segment Details: Global Industrial had 5% sales growth, with comparable sales up 4% and 3% sales inflation. Global Automotive saw 5% sales growth, with comparable sales up 2%. Discussed performance by geography for Automotive, including U.S., Canada, Europe, and Asia Pacific. Addressed First Brands relationship, which represents ~3% of Global Automotive sales, with no negative impact to third quarter performance.
• Operational and Strategic Review: Made good progress on internal work related to Board evolution and strategic planning, with an update expected in 2026 at an Investor Day.

Segment Performance

• Global Industrial: Total sales for the third quarter were $2.3 billion, an increase of approximately 5% versus the same period in the prior year, with comparable sales up approximately 4%. Sales inflation during the third quarter was approximately 3%. Segment EBITDA was approximately $285 million and 12.6% of sales representing a 30 basis point increase from the same period last year.
• Global Automotive: Sales in the third quarter increased approximately 5% with comparable sales growth up approximately 2%. Global Automotive segment EBITDA in the third quarter was $335 million, which was 8.4% of sales, representing a 10 basis point increase from the same period last year.

Guidance

• 2025 Outlook: Updated full year adjusted diluted earnings per share range to $7.50 to $7.75. Revised revenue guidance to total GPC sales growth in the range of 3% to 4% for 2025. Guided Automotive segment sales growth to 4% to 5% and Industrial segment sales growth to 2% to 3% for 2025. Expect gross margin expansion to moderate in the fourth quarter as acquisitions' anniversary is passed. Anticipate SG&A leverage in the fourth quarter. Expect restructuring expenses in the range of $180 million to $210 million and a benefit of $110 million to $135 million in 2025.
• Fourth Quarter Expectations: Expect to continue expanding gross margin but at a moderated rate, anticipate SG&A leverage, and expect earnings growth in the fourth quarter.

Risks

• Market Conditions: End markets remain muted, notably in Europe. Customers globally are cautious and looking for the best value. Tariffs, trade uncertainties, elevated interest rates, a cautious consumer, and muted industrial spending are challenges.
• Inflationary Pressures: Proactively managing the business to offset an inflationary cost environment, with ongoing pressure from salaries, wages, and rent.

Question and Answer

Q: I wanted to start on the -- where you ended Bert, on the fundamentals in the business in the fourth quarter guide. Besides the cycling of the business acquisitions, what would -- is anything else accounting for gross margins being up less in the fourth quarter, timing on tariff pass-through, vendor rebates, anything along those lines?

A: Greg, I would say, no. There's no other uniqueness to the gross margin expansion in the fourth quarter and the guide. It's really about just the continued great work we're doing on sourcing and pricing. And as you mentioned, the lapping of the acquisition benefit as we've gotten past the anniversary of the big U.S. auto acquisitions last year.

Q: And then I guess more strategically on the review, given that this is the first time we've had a call since the Board evolution, well, I'd just like to -- as you're looking at it, what do you think are the real benefits of having the businesses together today? And if you think that would change? Is there any reason to have them together as you think about the longer-term future?

A: Yes, Greg, thanks for the question. We've enjoyed very meaningful benefits over the last 3 to 4 years associated with being together. As I've talked about before, as we studied all of the investments that we put into the business and the strategies around our initiatives, they are very, very consistent. And so as you think about the benefits of the work that's happened in the last 3 to 4 years, it's really been an acceleration in the sum of the pieces that is better than the individual pieces. So whether it's sales effectiveness, technology investment, supply chain, we've really benefited from working as one team. And as I said in my prepared remarks, we've had the opportunity, as we do every year as part of our strategic planning process, to evaluate all those initiatives, pressure test what's working, where we want to improve, what we want to do more of and how we think about the future? And so this is a very natural and -- process that we go through every year. And so we've done that with great rigor. I had my entire executive team plus another level out at an off-site later -- earlier this summer. And we've done really good work to ask tough questions, challenge each other, think about capital allocation. So it's a very healthy fulsome process. And again, as I said in my prepared remarks, we'll give everybody an update next year after we finish the work.

Q: When you think about the factoring programs and obviously, the First Brands' issue, have you seen any either increased risk spread pricing from the banks or any less willingness to participate on the payables model?

A: No. I'll say it no, and then I'll give you a little bit more color on it. Look, we see the First Brands' situation with respect to supply chain financing really isolated to First Brands. Those programs have been around for some time, and they've been through periods of disruption, broader disruption like COVID and have remained strong. So our current view is that the programs are continuing to function normally across all of our other supplier partners. Our program is designed well. Our size and scale makes us an attractive partner for our suppliers. And we've got a great group of banking partners that help us work with the suppliers, 5 big platforms. And our utilization, while down year-to-date, really on the back of lower inventory replenishment, we don't see anything unusual. First Brands has been suspended in our programs, which you would expect. I can't speak to the others more broadly, but that's true for us globally. But we feel good about the program overall and wouldn't call any question into the health of it more broadly for the automotive aftermarket in the industry.

Q: So with the independents continuing to work down their inventory levels and just given what we know the typical dynamics of the industry are, do we think that the independents have been losing market share? And like is there a way to potentially quantify that?

A: Yes, Scot, I wouldn't say they're working down their inventories. I think they're -- they've been mindful like we all have about managing inventory balances. And so that doesn't necessarily mean they don't have enough to compete. And so no, I'm not prepared to say that the independent owners are losing share in the market. I think all of the initiatives that we've been doing across company-owned stores and independent-owned stores are having their intended effect. We've been very consistent about the body of work in that regard, whether it's assortment planning, making sure you got the inventory operational excellence. And so I would describe the partnership with the independent owners as good as it's been in some time. So we need to keep our head down and continue to support them in a choppy market, but I feel good about the work that we're doing with the owners and how they're competing in the market.

Q: You mentioned you expect the run rate for inflation to remain in this range of, call it, 2% to 3%. Others in the industry have suggested that inflationary impact could peak as soon as the first quarter of next year, and that could be within the mid- to high-single-digit impact range. So what is different about GPC that it's not experiencing as much inflation? And presumably, it's not because you are not passing along the price increases, so we shouldn't expect price gaps to widen or anything of that nature?

A: Yes. Look, Michael, I would just say that as we think about this tariff dynamic, the most important thing that we focus on is to work with our suppliers to make sure that we are minimizing any disruption to our customers. And that means a very tight balancing of cost increases and price increases, and we're doing that in a very thoughtful way and considering what we think the market can accept. I think the experience today -- to date would tell you that the market has accepted the price increases across the board. And I think our philosophy is no different than the rest of the players in the marketplace, whether you're talking about the Industrial side of our business or the Automotive side of our business. We're working to pass along what we can. We benefit from it being a break-fix model on both sides. And we think that what's happening is rational. So I think we're thinking about it through all of those dimensions. We're certainly seeing a benefit -- a net small benefit of the outcome of that in the quarter, and we'll see that again in the fourth quarter. And so I don't think there's anything that's fundamentally different as we approach it to anyone else. Are the numbers slightly different? Of course, I think everybody has different dynamics in terms of their exposure to China, their size and scale. I think smaller players probably are feeling more of a price increase because they don't have the size and scale that we do. And I think when we think about that, it gives us some degrees of flexibility to work really closely with our customers. So we've seen a low single-digit benefit on the top line through the third quarter, we expect that again in the fourth quarter. Low single-digit increase to cost of goods sold here in the third quarter, we expect that for the fourth quarter. And again, it's a dynamic area. So we'll continue to watch it closely. But I think we've got it balanced and dialed in, in the right way.

Q: This is Mark Jordan on for Kate McShane. You touched on it a little bit there, but maybe can you talk about what you're seeing for inflationary cost increases in terms of salaries, wages and rent? And what the magnitude of the pressure is there and maybe what the company is doing to try and offset those headwinds?

A: Yes. Look, I think the magnitude of the kind of increase in inflation lives in that 3-ish percent range in the aggregate. I would say the inflation in rent is probably a little higher right now than it is in wages. Wages probably lives into 3% to 5%. Rent probably lives a little higher than that just because most of the lease renewals we're feeling right now are being renewed for the first time outside of the COVID period in which, obviously, leasing rates and rent renewals were depressed. And so there's a bit higher pressure there. I think in terms of what we're doing, it's everything we've talked about, and you see that here in the third quarter. We've taken, as a leadership team, a tremendous amount of actions across the business in 2024 double down in 2025 because with the cost inflation and SG&A being persistent, that means we have to work smarter. And that means we have to invest in productivity and operational efficiencies to offset that headwind. And we've done that. You've seen that here in Q3 with a flat SG&A as a percentage of revenue year-over-year, which is a massive improvement from Q1 and Q2. And so we're proud of that work. It's largely offsetting that headwind, and you see that with an overall core SG&A growth of 2.7% against the top line of 5%, which I think is allowing us to get some leverage on EBITDA in the business. So we're going to continue the hard work. We've got to keep our head down. We've got to keep grinding. And I think that work that we've done is the reason why you're going to see a bit of SG&A leverage in the fourth quarter as we work to continue to offset some of these other headwinds in the business.

Q: I guess I wanted to talk about the supply chain investment in NAPA, specifically thinking about the Nashville DC investment there, more efficient picking and shipping. Anything you can share with us in terms of kind of quantifying the improved customer service levels or maybe the subsequent sales growth in the region following that investment?

A: Yes, Chris, happy to. I wouldn't isolate it just to a Nashville example. We've seen benefits from our supply chain investments when we make building improvements. And it's everything that you described. It's kind of the productivity of the building itself. It's the service level to the customer. As a result, it's a function and drives better growth in the local market. I can think of one building in Canada that we've made recent investments, and they've got double-digit growth in the market post investment. And so that's kind of the marker that we set. You want to see significantly better growth, better coverage, better inventory flows, better safety, better productivity. So Nashville is one of many examples where we've seen really nice success as a result of our investments in the supply chain.