Genuine Parts Company

Greetings. Welcome to Genuine Parts second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Sid Jones, Senior Vice President of Investor Relations. Thank you. You may begin.

Good morning and thank you for joining us today for the Genuine Parts Company second quarter 2020 conference call. With me today are Paul Donahue, our Chairman and Chief Executive Officer, and Carol Yancey, our Executive Vice President and Chief Financial Officer. Today's conference call and webcast are accompanied by a slide presentation that can be found on the Genuine Parts Company Investor Relations website. Before we begin this morning, please be advised that 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 issued this morning, which is also posted in the investors section of our website. Today's call may also involve forward-looking statements regarding the company and its businesses. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filing, including today's press release. The company assumes no obligation to update any forward-looking statements made during this call. Finally, please note that we've accounted for the business product segment, SP Richards, as discontinued operations for all periods presented. Now I'll turn the call over to Paul for his remarks.

Thank you, Sid, and good morning, everyone. We appreciate you joining us today for our second quarter 2020 earnings conference call. We hope you're staying safe and enjoying good health. So as we think about our quarterly performance and long-term focus, we want to highlight four key messages today. One, we are aggressively managing our company's operations through the challenges of COVID-19, by managing the short-term dynamics while staying focused on our long-term growth initiatives. This includes rigorous cost management as well as targeted investment to successfully position GPC in the recovery period and beyond. Two, we delivered strong quarterly results amid the challenging backdrop as we executed on our transformation strategy and omnichannel initiatives. Three, with the sale of our business product segment, In our streamlined portfolio, we are now well positioned to maximize the full potential of our automotive and industrial segments. And four, we continue to strengthen our financial position by reducing our debt and generating stronger free cash flow. We significantly enhanced our liquidity this quarter and remain in excellent position to deploy capital towards high ROIC initiatives. The COVID-19 pandemic continues to impact the world in significant ways, both in our personal lives and from a business and economic perspective. We remain focused on prioritizing the health and safety of our employees and their families, our customers, and our suppliers. We also want to extend another heartfelt thank you to the healthcare providers and first responders on the front lines of our fight against this outbreak for their commitment to the care and protection of our communities. We are proud of the tireless work by our associates across the global GPC family. As essential businesses, our operations have generally remained fully operational to fulfill critical customer needs, which required hard work under incredibly difficult circumstances. So a big thank you to our 50,000-plus team members for providing exceptional customer service to our partners around the globe. Working as a team, we have executed with agility through the pandemic, quickly and effectively adopting new safety protocols to ensure a safe work environment. And as mentioned last quarter, we have stepped up our communications with our global teams and our board to preempt and prepare for developments as much as possible. Overall, our intensified approach to managing our operations has enabled us to enhance our balance sheet flexibility achieve meaningful cost savings, and advance operational excellence. During the quarter, we also took steps to advance our ESG initiative and we plan to highlight these many enhancements in our annual sustainability report to be issued later this year. Environmental, social, and governance best practices are an important priority for GPC. Amid the ongoing effects of COVID-19, The S element of ESG has been paramount over the last several months, given the social unrest in our country and the world. At GPC, we have a longstanding corporate commitment to diversity and inclusion, and we pledge to be part of an enduring solution to ensure equality for all. In addition to our progress in these areas, we were pleased to announce the sale of our business products operations, SP Richards, on June 30th. The sale of SPR represents the culmination of a multi-year strategy to optimize our portfolio and simplify our company. Over the last three years, we have reshaped GPC with several divestitures, including AutoToto, EIS, and now SPR and its operations in North America. All in, these divested businesses represent approximately $3 billion in annual revenues which we have essentially exchanged for higher return investments in our automotive and industrial segments. From here, we move forward with plans to strengthen our focus on sustainable, value-enhancing growth and productivity initiatives associated with our faster-growing, higher margin core businesses. In addition, we will continue to opportunistically expand our global footprint. Our streamlined portfolio has many notable advantages, including scale and volume, the ability to leverage shared services and global branding, as well as synergies associated with common business processes, systems, suppliers, and talent. As a more simplified, service-oriented distribution company, we can better maximize the value of GPC and continue to deliver strong results and long-term value. Now, moving on to our financial performance and business update, we entered the second quarter operating in a sales environment pressured by government mandates to prevent the spread of COVID. Broad shelter-in-place restrictions and full lockdowns in markets such as France and New Zealand significantly slowed mobility and overall economic activity. As announced in our May 6 earnings call, April sales were down 30% in automotive, and 10% in industrial. And while the industrial segment remained pressured throughout the quarter and was down 12% in June, the automotive group had a strong recovery, down only 2% in June, led by returns to pre-COVID sales volumes in Europe and Australasia. Total sales for the second quarter were $3.8 billion, down 10.1%, excluding the impact of divestitures. with operating margin of 8.6%, up 40 basis points, and adjusted net income at $191 million, or $1.32 per share. We also delivered improvements in working capital and strong cash flows, which Carol will cover later. We are pleased to report a 40 basis point improvement in our segment operating profit. This was a significant accomplishment given challenging business conditions and a reflection of the strong leadership quick decision-making, and disciplined execution demonstrated throughout GPC. This approach resulted in continued gross margin expansion and significant actions to adjust our cost structure, and we are well ahead of our original cost savings target for 2020. As we move forward, we expect our teams to maintain this cost discipline and convert many of these temporary expense reductions to permanent and sustainable savings. But now turning to a review of our business segments. The Global Automotive Group had sales of $2.5 billion in the second quarter, down 10.1% from 2019, and representing 65% of total company revenues. As mentioned earlier, we experienced a sharp decline in sales in April, followed by a strong recovery in both May and June. In our North American operations, U.S. automotive sales were down 12%, with comp sales down 13.8%. Despite the challenging top line, we were pleased to deliver a 60 basis point improvement and net operating margin. In Canada, total sales were down approximately 13%, with comp sales down 15%, and net operating margin up an impressive 400 basis points. For perspective, both regions showed similar recovery trends throughout the quarter, with sales improving from 25% to 30% declines in April to mid-single-digit declines in June. For the quarter, sales to our retail customers continue to outperform through the pandemic, with positive sales growth in the U.S. and Canada. The strength in retail reflects the benefit of stimulus funds and other macro trends, as well as the positive impact of our omnichannel strategy to create an excellent in-store and online customer experience. As examples, we continue to refresh our NAPA stores, train our store associates, and build on our loyalty program while also enhancing our digital tools to grow our DIY business. Enhanced digital capabilities such as buy online, pick up in store, curbside pick up, ship to home, and deliver from store are driving increased traffic to our websites and record online sales in both the U.S. and Canada. We expect to benefit from this positive trend in the future through continued expansion of our digital offering. Commercial sales remained under pressure as lower demand from our professional shop customers led to declines in hard part categories such as brakes, chassis, ride control, and exhaust. In particular, sales to accounts such as municipalities, state governments, and fleets which commonly distinguish our customer base from the competition, were especially hard hit. Overall, we believe the slowdown in commercial sales reflects the decline in miles driven related to COVID-19. However, we are optimistic that miles driven and other growth drivers will improve as consumers get back on the road for both work and personal travel. Our North American automotive teams have also been busy executing on several transformative initiatives to streamline their organizations. These steps included changes in management structure, further DC rationalization, a sales reorganization, and a continued focus on new delivery strategies and digital tools. These actions have already generated incremental cost savings and operational productivity. as evidenced by our improved operating margin in both the U.S. and Canada. We expect these efforts to continue to add value today and over the long term. So as we mentioned in our last call, we have worked closely with our independently owned NAPA stores and auto care customers to help them benefit from the financial aid available to small businesses. The vast majority applied for and received PPP assistance. In light of this support, and current business trends, we remain confident in the lasting financial stability of these key partners. In Europe, our automotive sales were down approximately 3% in the second quarter, reflecting pressure from COVID-19 and lockdowns in France and parts of the UK. While our operations in Germany and the Benelux region held up fairly well through the peak of the pandemic, France and the UK drove an approximate 40% total sales decrease for this group in April. We had a sharp recovery from the lows of April with the reopening of France in May and the UK in June, which produced a surge in demand associated with deferred maintenance and repairs. As a result, total sales in Europe were positive in both months with high single-digit comp sales growth in June. The improving business conditions across our operations in Europe are promising. We look forward to building on the positive sales momentum and expanding our operating margin as we execute on initiatives to drive both top and bottom line in the periods ahead. We believe our current footprint in the large and fragmented European marketplace is an important competitive advantage for us. In addition, we see growth opportunities in Europe associated with the ongoing rollout of the powerful NAPA brand. This year, we have been expanding on the five product categories introduced in 2019 with the rollout of several new product categories, including brakes, filtration, oil, and steering and suspension. We are also initiating the development of our omnichannel capabilities in Europe, which will extend the digital platforms already offered in our North American and Australasian operations. Turning to Australia and New Zealand, we are extremely proud of the exceptional performance from this team in the second quarter. Total sales were up 4.4%, driven by an approximate 2% core sales increase. With these sales and continued cost savings, this team produced a 300 basis point improvement in net profit margin. Our team achieved these results despite aggressive steps by the Australian and New Zealand governments to prevent the spread of COVID-19, which generally restricted mobility and related demand for auto parts. In fact, these operations have recovered to pre-COVID sales volumes, driven by strong double-digit retail sales growth and solid commercial sales growth in both May and June. In Australia and New Zealand, retail online sales continue to grow at greater than 300% from the pre-COVID levels And through our investment in SparesBox and other digital capabilities, we are prepared for additional online growth in the future. The execution of key initiatives, such as the rollout of the Napa brand across our trade offering, new Napa store openings in Australia and New Zealand, and optimized global sourcing have been important growth drivers for our commercial business. So as I said before, we are very pleased with our performance in Australasia. and expect to further build on this positive momentum. Turning now to our global industrial parts group, total sales were $1.3 billion, down 10.2%, excluding the EIS divestiture. Comp sales in North America were down 16.7%, offset by the addition of Enenco in Australasia, as well as other acquisitions, which contributed 7% to sales in the quarter. Despite the challenging industrial climate, this group produced a flat operating margin relative to 2019 and is up slightly for the first six months in 2020. Looking further at Motion Industries, the slowdown in sales beginning in mid-March continued throughout the quarter, with mid-teen declines in each month. While we operated in a difficult environment, We had anticipated a lagged recovery in industries such as equipment and machinery, iron and steel, pulp and paper, and automotive. That played out accordingly with declines in almost every product category and in every industry sector. Still, we saw positive trends in the second quarter. First, more of our customers are reopening their plants and returning to work, which we expect to improve demand for our core industrial categories. including power transmission, hydraulics, and conveyance, among others. Second, our customers are beginning to release CapEx orders that were on hold for the past several months. Third, leading industrial indicators, such as the Purchasing Manager's Index and industrial production, pointed to improved industrial activity in June, which we expect to benefit our business in the months ahead. Additionally, the Motion team has been executing on several strategic and transformative initiatives, including the restructuring of their sales organization to optimize their customer coverage and provide for effective remote selling. This team also enhanced their omni-channel capabilities in the quarter with the rollout of a new Motion Industries website, which is expected to drive incremental sales with both existing and new customers. And as in our other businesses, there has been significant focus on aligning motions cost structure to drive meaningful savings and more productive operations. In Australasia, our NENCO team is performing well with positive total sales growth in June driven by strong sales in the mining sector. In addition, this team continues to focus on ongoing initiatives to reduce their cost structure. Effective in August, an ENCO will further integrate with our North American operations and assume the name MI Asia PAC. The team will utilize Motion's branding and new website and proprietary technology platform to enhance their digital capabilities and drive incremental volume. Our industrial parts group sells to thousands of customers representing a diverse cross-section of industry sectors. We continue to expand our products and services in several key areas, including robotics and automation solutions, and have plans to bolster our offerings with small full-time acquisitions before the end of 2020. So we move forward confident about capitalizing on these additional growth opportunities for industrial operations in the quarters ahead. So that's our business update, and now we'd like to make a few comments on our strategic planning for the future. We are excited about the recent actions to reshape our portfolio and focus solely on our automotive and industrial business segments. Both of these businesses have market-leading positions and brands in large and fragmented end markets, strong long-term industry fundamentals, and steady 2% to 3% industry growth with consolidation opportunities. As we execute on our near-term initiatives, we have also accelerated our strategic planning process to build on our momentum, optimize our readiness for next year, and improve our post-COVID recovery rate. Our strategic growth framework is intended to build out our global branding strategy and further leverage the NAPA and MI brands, capture more wallet share with existing customers and acquire new customers, introduce new products and services, innovate and expand on our digital offerings, expand our global geographic footprint, acquire strategic businesses that complement our existing operations, and continuously enhance operational excellence and productivity. We expect to use this framework to focus our teams on driving profitable growth and delivering higher levels of free cash flow and ROIC over time. So with that, I'll hand it over to Carol to give you a deeper look at our financials for the quarter. Carol?