Genuine Parts Company

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company third quarter 2022 earnings conference call. Today's call will be recorded. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star then two. At this time, I would like to turn the conference over to Sid Jones, Senior Vice President, Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us today for the Genuine Parts Company Third Quarter 2022 Earnings Conference Call. With me today are Paul Donahue, our Chairman and Chief Executive Officer, Will Stengel, our president, and Bert Napier, executive vice president and chief financial officer. As a reminder, today's conference call and webcast include a slide presentation that can be found on the investor's page of the Genuine Parts Company website. Please be advised this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results as reported under generally accepted accounting principles. A reconciliation of these measures is provided in the earnings press release issued this morning, which is also posted on the investor page 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 this morning's press release. The company assumes no obligation to update any forward-looking statements made during the call. Now, I'll turn it over to Paul for his remarks.

Thank you, Sid, and good morning. Welcome to our third quarter 2022 earnings conference call. Before diving into the details of the quarter, we want to say that our hearts go out to our teammates, suppliers, customers, and all those affected by the devastating impact of Hurricane Ian in late September. GPC is committed to providing care and support through our GPC Relief Fund and our partners at the American Red Cross. So now turning to the quarter, we are pleased with the continued strength of our results for 2022, and we are proud of the great work by all of our 53,000 GPC teammates who are at the core of our success. Our team delivered record results with double-digit sales and earnings growth, driven by the execution of effective strategies and continued resilience of our automotive and industrial businesses. Let's review several of our Q3 highlights. Total sales of 5.7 billion, up 18%, and adjusted earnings per share of $2.23, up 19% from last year. Record quarterly sales for the automotive and industrial segments, And our sixth consecutive quarter of double-digit sales growth. Operating margin expansion in both segments and for GPC overall. Record quarterly earnings and our ninth consecutive quarter of double-digit earnings growth. The ongoing integration of KDG, which continues to create significant value. And finally, continued strong cash flow generation and the further strengthening of our balance sheet. Our teams are executing on key strategic initiatives to deliver market share gains and drive ongoing momentum in our top and bottom line results. We remain agile and navigating a dynamic operating environment created by inflation and economic conditions, the geopolitical landscape, and supply chain challenges. We continue to benefit from the competitive advantages of our size and scale, And we remain focused on advancing our technology to optimize inventory availability, enhance network productivity, and maximize the effectiveness of our pricing strategies. We are making significant progress in our operations through our efforts in all these areas, as evident in the expansion of operating margins again in the third quarter. Our automotive and industrial businesses continue to take advantage of several industry tailwinds. In automotive, the increase in year-to-date miles driven, an aging car park, limited new car inventory, and elevated used car prices are all supportive of healthy demand in the aftermarket. In industrial, the manufacturing economy remains expansionary, with PMI holding at greater than 50, while industrial production just at its ninth straight quarter of growth. up 2.9% year-over-year. Our teams continue to operate well in a challenging environment, and as we wind down the year, we remain focused on driving our strategic initiatives across all of our global operations. This past quarter, we spent considerable time in the field visiting stores and branches, meeting with many of our strategic suppliers and customers, And we came away encouraged by the general outlook for continued growth in the automotive aftermarket and industrial space. In addition, during the quarter, our global leadership team met to review our near-term initiatives and collaborate on our long-term strategic roadmap. Our teams are well aligned, and we are confident in our strategic plans to deliver long-term sales and earnings growth and margin expansion. Our strong cash flow generation and exceptional balance sheet position GPC with the financial strength and flexibility to pursue strategic growth opportunities via investments in both organic and acquisitive growth, while also returning capital to shareholders through the dividend and share repurchases. So before I pass the call over to Will, we'd like to highlight our 2022 sustainability report. which we published earlier this month. The new report advances GPC's long-term sustainability strategy and expands our reporting and disclosure to reflect the extent of our global operations. We do this through a focus on three key areas, including improving diversity, equity, and inclusion, reducing carbon emissions, and enhancing ESG governance. Two highlights from the report include the completion of our 2022 employee engagement survey, where we had significant participation across our global teams and received an 80% global engagement score. And secondly, the calculation and disclosure of our scope one and two carbon emissions and plans for greenhouse gas reduction programs across our global operations. We believe that our 2022 sustainability report illustrates GPC's strong ESG strategy and a way forward that underscores our commitment to keeping the world moving. We encourage you to visit the sustainability page on our website for more information on our progress in this important area. So again, we thank each of our GPC teammates for taking great care of our customers and delivering on another great quarter of record results. So now I'll turn the call over to Will.

Thank you, Paul. Good morning, everyone. I also would like to thank the global GPT teams as well as our supplier partners for their ongoing commitment to serving our customers. We appreciate the collective focus and hard work to deliver great results around the world. During the third quarter, we continued to deliver strong results across both our automotive and industrial businesses. Our results were driven by solid team execution and disciplined focus on strategic initiatives, which are aligned around our five foundational priorities, talent and culture, sales effectiveness, technology, supply chain, and emerging technology. Turning to the performance by segment, total sales for global automotive were 3.5 billion in the third quarter, an increase of approximately 285 million or 8.9% versus the same period last year. Our sales performance was relatively consistent in all three months of the quarter, and on a comparable basis, sales growth for the quarter increased 9.2%. Our global teams delivered mid-single-digit to mid-teens comp growth across each of our operations, and as Paul mentioned, the automotive segment continues to be driven by solid industry fundamentals and strong team execution. Global automotive segment profit was $309 million, and segment operating margin was 8.9%, an increase of 10 basis points versus the same period last year. This performance reflects strong sales growth and operating expense leverage. During the third quarter, our automotive business experienced high single-digit levels of inflation, relatively consistent with the levels we saw in the second quarter. The pricing environment remains rational, and we're pleased with the ongoing positive impact of our strategic category management initiatives. We expect sales inflation in the fourth quarter to be largely consistent with the third quarter. Now, let's turn to an overview of our automotive businesses by geography. In the U.S., automotive sales grew approximately 11% during the quarter, with comparable sales growth of approximately 8%. Sales were solid across each U.S. region and broadly across product categories, with brakes, filters, fluids, and batteries all posting double-digit increases in the quarter. We continue to be pleased with market share growth within the majority of our categories. Sales to both commercial and retail customers were positive, with low double-digit commercial growth outpacing retail, which had low to mid-single-digit growth. Our commercial business saw broad-based strength across all customer segments. Digital channels across all customers also performed well, with high single-digit sales growth during the third quarter, reflecting continued traction from investments in our omnichannel experience. U.S. automotive initiatives are advancing well, with continued progress in talent, technology investments, customer segmentation analytics, pricing capabilities, and emerging tech. During the quarter, the U.S. Automotive Team formally realigned team resources to establish a centralized project management office to coordinate and drive impact of its business initiative portfolio. As an example of emerging tech efforts, the U.S. Automotive Team hosted its first-ever EV Day in Atlanta, which included teammates and representatives from various strategic emerging tech partners. We used this opportunity to update internal teammates and collaborate with our electric vehicle and emerging technology suppliers. In addition, as another example of our emerging tech focus, Motion recently established a new electric vehicle battery customer segment based on increasing opportunities presented by the build out of new battery manufacturing facilities across North America. We continue to build momentum with our EV effort as we leverage our global footprint, business mix, and scale to extend our emerging tech leadership position. In Canada, sales grew approximately 15% in local currency during the third quarter, with comparable sales growth of 13%. The strong results in Canada are reflective of solid industry fundamentals, team execution, and market share gains. As examples of sales effectiveness and data and technology initiatives, Canada continues to improve the customer experience and simplify its business processes with advanced analytics and business intelligence tools. This micro market visibility has increased wallet share and identified growth opportunities as the team executes both organic and inorganic growth initiatives. In Europe, our automotive team delivered another strong quarter with total sales increasing approximately 20% in local currency and comparable sales up 7%. Growth in Europe is a result of the continued focus on its strategic initiatives, including growth with key customer accounts, the rollout of the NAPA brand across the region, and investments in our people, technology, and supply chain capabilities. In addition, our bolt-on acquisition efforts continue to create value and add to our local market coverage. Our recent acquisitions in Germany, Spain, and Portugal are tracking well with integration plans, and the performance and synergy capture has exceeded our internal expectations. Overall, we believe our European strategies have resulted in solid market share gains. In the Asia-Pac automotive business, sales in the third quarter increased approximately 16% in local currency from last year, with comparable sales growth of 14%. Both commercial and retail sales performed well with Repco, NAPA, and our motorcycle accessories division all delivering strong, profitable growth. Next month, our Australian and New Zealand team will celebrate Repco's 100-year anniversary, which is a testament to the power of the brand, differentiated customer value proposition, and Repco's position as the leading automotive aftermarket business in the market. Congratulations to our teammates down under on achieving this incredible milestone. Turning to the global industrial segment, during the third quarter, total sales at motion were 2.2 billion, an increase of approximately 570 million or 35.3%. The sales cadence was consistently strong throughout the quarter and comparable sales, which exclude the benefit of KDG, increased approximately 20% versus last year. This marks our sixth consecutive quarter of double-digit comparable sales growth. The growth was consistent across almost all product categories and major industries served, with particular strength coming from industries such as food, chemicals, aggregate and cement, mining, and oil and gas. Industrial segment profit was 243 million, or 11.1% of sales, representing an 80 basis point increase from the same period last year and a new record for the industrial segment. The improvement is a result of Motion's strong sales growth and disciplined operating performance, including the KDG synergy realization. For the third quarter, inflation in the industrial segment held in the low single digit range, consistent with the levels we've seen throughout the year. Key initiatives contributing to the strong performance in the industrial business include sales programs to capture organic profitable share of wallet with target accounts, data-driven strategic pricing and sourcing programs, technology investments to enhance the omni-channel experience, and continued ongoing inventory productivity and footprint optimization initiatives. As an example of footprint optimization efforts, MOTION successfully executed its initial fulfillment center and branch optimization initiative in Florida, which is designed to improve the customer experience by offering next day delivery for an order placed by 3 p.m. In addition to an improved customer experience, the strategy reduces duplicative inventory position, increases available product breadth, and increases the efficiency and reduces the cost of our last mile delivery logistics. In addition, Motion opened two new strategically located facilities to grow its value-added automation services with existing and new customers. We're pleased with the initiative results and Motion will continue to methodically roll out these strategies nationwide over time. In addition, the integration of KDG continues to exceed our expectations. The teams are executing well-defined plans with customers, suppliers, and teammates to deliver growth and create value as a combined organization. All major work streams are at or ahead of plan, including the co-location and merging of overlapping branches, and we're excited for the continued growth opportunities at motion. Lastly, during the quarter, we were pleased to formally open the GPC Global Technology Center based in Krakow, Poland. As part of our strategic investments in talent and technology, the center is designed to help accelerate our technology initiatives and capability building. The technology center will serve as an integrated extension of our existing global teams and will focus on areas such as digital, supply chain, data platforms, pricing, and cybersecurity as a few examples. With nearly 1 million people living in Krakow and approximately 200,000 students, Krakow is a global hub for next-generation tech talent. As we move forward, we'll consider technology roles in Krakow to leverage our scale, build capabilities, and deliver faster path to value for global technology initiatives. As we execute our organic growth initiatives, we continue to complement them with strategic bolt-on acquisitions to capture share in our fragmented markets and create value. During the third quarter, we completed several bolt-on acquisitions, primarily consisting of small automotive store groups that increase local market density in key geographies. The M&A pipeline continues to be active, and we will remain disciplined to pursue transactions that advance our strategy, deliver profitable growth, and create long-term value. In summary, our strong third quarter and year-to-date results are being driven by supportive industry fundamentals and our key strategic initiatives. While the macro environment remains dynamic, our teams will prioritize our customers as we analyze our market and performance indicators, remain agile, and strategically invest with discipline in initiatives that extend our global leadership positions. With that, I'll turn the call over to Bert.

Thank you, Will. And thanks to everyone for joining us today. As Paul and Will have shared, we are very pleased with our third quarter results. As I review the key highlights for the third quarter, our comments this morning focused primarily on our adjusted quarterly results, which exclude the non-recurring costs related to the integration of KDG. Total GPC sales were $5.7 billion in the third quarter, up $856 million, or 17.8% from last year. Our increase in total sales reflects a 12.7% increase in comparable sales, including mid-single-digit levels of inflation and a 9.1% contribution from acquisitions. These items were partially offset by a 4% unfavorable impact of foreign currency, in line with our assumptions. Hurricane Ian did not have a material impact on our third quarter financial results. Our gross margin was 34.9%. a 60 basis point decrease compared to the third quarter last year. Gross margin was negatively impacted by three key factors. First, moderating supplier incentives, which pressured gross margin by approximately 80 basis points. Second, foreign currency, which impacted gross margin by approximately 30 basis points. And finally, a shift in the mix of our sales based on the strength of our industrial segment which impacted gross margin by approximately 35 basis points. These headwinds were partially offset by the positive impact of our data-driven pricing and sourcing programs, where our teams continue to leverage our growing global scale. These actions and our expertise drove an 85 basis point favorable impact to gross margin in the third quarter. We currently expect our full-year gross margin to be in line with our third quarter and nine-month rate. Our total operating and non-operating expenses, excluding non-recurring items, were approximately $1.6 billion, up 15% from 2021 and at 27.5% of sales compared to 28% of sales the prior year. We continue to drive leverage across our businesses, and our teams remain focused on effective cost control and executing our initiatives to produce operational efficiency. With our strong performance, segment profit was 552 million, up 24%, and our segment profit margin was 9.7%, a 40 basis point increase from last year, and up 170 basis points from 2019. We believe the multi-year improvement in our segment margin is the result of transformation to a stronger and more agile company. Our teams have taken actions to streamline our operations and optimize our portfolio of automotive and industrial segments. We have also enhanced our pricing and sourcing capabilities to ensure that we deliver profitable growth. In addition, we've generated significant cost savings over the last few years to lower our cost structure. Collectively, These actions, along with continued hard work by our teams, set the foundation for long-term strategic growth. Our third quarter adjusted net income, which excludes 4.9 million, or 3 cents per diluted share, in non-recurring KDG integration costs, was 317 million, or $2.23 per diluted share. This compares to adjusted net income of 270 million, or $1.88 per diluted share in the prior year, an increase of 19%. This exceptional performance is a result of the crisp execution of our initiatives, which are translating to GPC delivering accelerated growth and profitability. As we turn to the balance sheet, changes in the key elements of our working capital were generally in line with our sales growth. At September 30th, Our total accounts receivable were up 17%, with inventory up 15%. Likewise, accounts payable increased 15% from 2021, which also correlates to the increase in inventory. We continue to generate strong cash flow, with $454 million in cash from operations in the third quarter and $1.2 billion for the nine months, up 23% from last year. For the full year, We continue to expect cash from operations to be in the $1.5 billion to $1.7 billion range with free cash flow of $1.2 billion to $1.4 billion. We close the third quarter with $2.1 billion in available liquidity and our debt to adjusted EBITDA is 1.7 times. This compares to our targeted range of 2 to 2.5 times and highlights our financial strength and flexibility. The key priorities for capital allocation at GPC remain unchanged. As a reminder, these include reinvestment in our business through capital expenditures and M&A, and the return of capital to our shareholders through dividends and share repurchases. During 2022, we have invested $244 million in capital expenditures, including $91 million in the third quarter, primarily in technology and other projects to further automate and consolidate our distribution networks and drive productivity. We've also invested $1.6 billion for acquisitions and returned $542 million to shareholders in the form of dividends and share repurchases. This includes $369 million in cash dividends paid to our shareholders and $173 million in cash to repurchase 1.3 million shares. The continued strength of our cash flow provides us the ability to manage our capital allocation through all business cycles and has allowed GPC to increase our dividend for 66 consecutive years. Turning to our current outlook for 2022, we are updating our full year guidance and raising adjusted diluted earnings per share to a range of $8.05 to $8.15. which represents an increase of 16 to 18% from 2021 and up from our previous guidance of $7.80 to $7.95. We expect total sales growth for 2022 to be in the range of 15 to 16% and increased from 12 to 14%. By business segment, we're guiding to the following. Seven to 8% total sales growth for the automotive segment an update from 6% to 8%. This new outlook also reflects 7% to 8% comparable sales growth. For the industrial segment, we are updating our total sales growth outlook to 31% to 32%, an increase from our previous outlook of 26% to 28%. The new outlook includes a 15% to 16% comparable sales increase, which is up from 9% to 11%. We are pleased with the positive momentum in our business in the third quarter and through the nine months of 2022. Our outlook for the remainder of the year reflects the continued confidence in our execution, balanced against the backdrop of a dynamic and uncertain macro environment. Our continued strong cash flow generation provides us with full flexibility to support our growth plans through ongoing investments in the business and return of cash to our shareholders while remaining balanced and disciplined. We look forward to reporting on our fourth quarter and full year results on our next call in February. Thank you, and we will now turn it back over to the operator for your questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two.

At this time, we will pause momentarily to assemble our roster.

The first question comes from Greg Melch with Evercore ISI. Please go ahead with your question.

Thanks. Congrats, guys, on some good numbers. I guess my first question is on the gross margin performance. Could you give us a little more insight as to by segment in both the quarter, you know, given that you've got to increase some costs. You said it's passing through. Price remains rational, but it is starting to fall. So just if you could sort of walk us through each segment as to what's driving that.

Sure, Greg. It's Bert. Thanks for joining. Thanks for the question. I'll start just with the reiteration. We were down 60 basis points to 34.9 on a consolidated basis. The quarter benefited from an 85 basis point improvement in the underlying execution of our day-to-day strategic pricing and sourcing programs. That really reflects the outstanding execution from the team across the environment. I don't really want to break it down into each segment. I mean, we're all performing well on the underlying core of the business. We're pleased with the actions on both segments. And the teams are really doing an exceptional job, as you can imagine, in a very, very dynamic environment. That's hard to see, unfortunately, here in the quarter. As I mentioned in my prepared comments, we had three key factors. I'll reiterate those. Year-over-year moderation and supplier incentives, that's 80 bps. Currency, which you're aware at the end of the quarter there, we had a lot of movement in currency rates, 30 basis points. And then the industrial performance and the acquisition of KDG, 35 basis point drag there. That's a lower gross margin business relative to automotive. But at the same time, we trade that off for a higher margin business. And as you heard Will mention in his prepared remarks, an 11.1% margin for industrial for the quarter, which is a record. Just a little more color on the supplier rebates. Those moderated from a year ago when heightened supply chain challenges were constraining things, as we're all aware. The positive is that we now have more inventory. We have a more available base of inventory for our customers, which is a good thing. Another reminder, a year ago, that was a 116 basis point benefit to margin from that issue. So look, as I mentioned, for the full year, I think the gross margin rate for the full year will be in line with the third quarter. But despite all that, we see expansion of margin here in the fourth quarter, I'm sorry, here in the third quarter. by 40 basis points to a 9.7% margin. That's the third consecutive quarter of overall margin expansion, and we expect that for the fourth quarter as well. When you look at the fourth quarter looking ahead, I think as you look at that number and guiding to the Q3 levels, we really see the two variables there from where we prior, from our prior guidance being gross margin performance at motion continuing to outperform our earlier expectations in currency.

I guess my follow-up would be on that fourth quarter. If I sort of back into it, it seems like there's a pretty meaningful deceleration in organic growth with the new guidance saying it's maybe 500 or 600 pips in auto and maybe double that in industrial. Is that actually happening in October, or is that just conservatism?

Let me take that kind of up one level and give you some color on guidance overall. First, I want to thank our teams. You know, we've had a great third quarter, first nine months. I think the business continues to be very balanced and resilient. But like everyone, forecasting in this environment has its challenges. We took a number of factors into account in our guidance raise. Firstly, our performance year to date and the industry fundamentals and momentum we see. But obviously, we have to balance that against the macro, including what's happening with inflation and pressuring costs. We can't ignore any of these tightening conditions, and undoubtedly those will impact businesses and consumers at some point. The macro data has been pretty choppy, as you're aware, but we're very comfortable and confident in our overall guide with the new guidance range at 805 to 815. That's going to have EPS up year over year 16% to 18% on the back of a really, really strong year a year ago. We're being prudent, I think. It's probably the right way to phrase it, eyes wide open on things to watch. We've got inflation, geopolitical tension, supply chain constraints, effects, fuel and energy prices all moving around on us. But at the same time, there's probably, you know, Greg, a little modesty here. We outperformed in the fourth quarter a year ago, and we've outperformed so far this year, and we're not necessarily a management team that would continue to count on the same level of outperformance. When I look at the fourth quarter, I'd kind of call your attention to a few things for the fourth quarter guide in the full year. We've got incremental foreign currency, as I mentioned, 3 cent headwind in the fourth quarter relative to when we gave you guidance before. The gross margin rate compression that we just discussed. And also we have one fewer working day in the fourth quarter. So that's something to be aware of. But look, you know, my dad used to say be baseball ready. And that means to be ready for whatever comes. I think we're doing that. We're going to look for additional growth opportunities and efficiency and discipline. And I'm going to let Will give you a little bit more color on the segment side on the sales.

Yeah, Greg, maybe just to answer your question. I mean, we're encouraged by the trends that we're seeing through October across the global business. So if that's any indicator, we're not seeing a slowdown. We're proud of the teams for continuing to build on that momentum into the fourth quarter. Just maybe some other thoughts as you think about kind of what's implied in the Q4. I just remind you, Q4 21 for auto had a big comp high teens so the guide for auto on a two years kind of close to that 20 percent um and uh you know that holds true for us auto and kind of each of the pieces of global automotive so um still really solid performance and as i said encouraged by what we're seeing through october that's helpful and good luck thank you greg

Our next question comes from Christopher Horvitz. Please go ahead with your question.

Thanks, and good afternoon. Maybe to follow up on that a little bit, one of your industrial distributor peers talked about some, I guess, softer tone in certain customer segments when they reported recently. As you were out in the field recently, are you sensing any of that caution, and do you think it's maybe just like, the tack that you're taking, like, you know, eventually something could happen and we're being cautious, or do you think there's something, some real change going on in some of your businesses on the industrial side?

Yeah, Chris, thanks. This is Paul. I would tell you, and we have spent a good bit of time in the field late. I traveled with the motion team, I don't know, a few weeks back, and we spent a good bit of time with that group this week. The overall sentiment from our motion team, Chris, remains really strong, optimistic. They're seeing increases across just about every customer segment and every product segment. So, you know, I'm aware of the other industrial group you mentioned that reported earlier this week. But I have to tell you, we're not seeing it on our side, Chris. And I would just remind you, we We're still seeing expansion in PMI, which we generally track pretty closely with, through the years anyway. And industrial production came out earlier this week. And industrial production, again, posted good results in September. So, I would tell you overall, our motion team continues to perform at an incredibly high level. As Will said, early numbers in October point to that continuing well into Q4.

Chris, maybe just some other perspective to add to Paul's comments. You know, sales cadence was consistent for the industrial team through the quarter, as Paul said. The vast majority, if not all, the product categories were growing north of 20-plus percent, which, you know, were high single digits, 2-plus, 20%. All of our end markets, we're seeing super strong growth. We track 15 different industries. All are performing very well. We called out a few in the script. Equipment, machinery, food products, iron, steel, automotive, mining, oil, and gas. And I tell you, geographically, we're seeing strength pretty broad-based, including Canada and Mexico, as well as our service business, Fluid Power Automation Conveyance. Are the customers, just like everybody, trying to predict what happens in 2023? You know, certainly those discussions happened when we were out in the field, but the backlogs are strong and the recent trends have been strong. So, we feel bullish about certainly closing the year and then coming into next year with some momentum. Thank you for that.

Will, I think at a recent conference you mentioned you know, the ability to take segment margins to the double-digit range. Can you talk a little bit more about that? Do you see that, is that more of a blended of NAPA and Motion? Or could you see that potential for the NAPA segment to also reach double-digit? And what do you think the big drivers are to get there?

Hey, Chris, it's Bert. I'll take that one. Look, you know, I think As a new CFO coming in and taking a look at this business, I'm sitting here looking around and we're asking ourselves questions about what's the full potential of the two businesses together. So I know you would appreciate that exercise as the new guy. We're not ready to give you a target on that. I want to do some homework here over the next several months as we sharpen our pencil around that, but we're doing that work. I think the historical perspective here has been This business can be a 7% and then an 8%, and then we're marching our way up the chain there. You've seen a margin at 9.7% this quarter consolidated, which is another improvement in the third consecutive quarter in a row of improvement there. As I look ahead with a fresh set of eyes coming in, I see a tremendous amount of opportunity for things that are within our own control, not necessarily reliant on Some of those are underway. Some of those would be sourcing and category management initiatives, which are in early innings, pricing initiatives, which are in early innings. The business demonstrated a great ability through the pandemic to transform, continue to be more efficient and lower cost structure. That's going to continue, and I think there's a tailwind there. We've got two really great businesses with great size and scale. And when you have that kind of power behind you, I think you do have an ability to continue to grow and improve margins. We will have some modernization of our supply chain and DCs that continue. We'll talk about that a little bit in his prepared remarks around the Florida facility for motion. So there are just a tremendous amount of opportunities. And we owe you to come back and give you some full longer term targets there. But hopefully that gives you a little perspective as a new CFO.

That's great. Thanks, Burke.

Our next question comes from Christopher Horvitz with J.P. Morgan. Please go ahead.

Chris, you coming back for another one? I think we just had Chris.

I can ask more questions. Our next question comes from... I got a lot more.

We'll talk to you later, Chris. We'll be there. Let's thread the well. Our next question comes from Kate McShane with Goldman Sachs.

Hi. Thanks for taking our question. You had mentioned, I think, in your automotive comments that you saw growth in all categories. And we just wanted to confirm that if it includes discretionary categories and what you're seeing relative to the more defensive categories. And then just with regards to transaction versus ticket, if you saw any meaningful change this quarter versus last quarter in automotive.

Thanks, Kate. Thanks for the question. Let me take a pass at that and Bert and Paul jump in. You know, maybe just starting at the top, for U.S. auto, consistent growth through the quarter. We recognized and celebrated a variety of different sales records through the quarter, so super proud of the teams for that. As we mentioned, both DIFM and Do It Yourself were strong and positive through the quarter, which is always good to see. If you look at the subsets of the business, the mid-single-digit performance from our major accounts and our auto care, we had low double-digit to low teen in our fleet and government business. And we had, as we said, mid-single-digit retail performance on tough comps. No change in trends from ticket and transactions. We talked about that, I think, last quarter, transactions down, ticket up. But that was as we expected. Our categories of strength, batteries, filters, brakes, commodities, and chemicals. And then we saw really broad-based strength across the geographies with particular outperformance in our mountain region, which is Texas through Montana and Alaska for our business. and then down the Eastern part of the United States, including the Northeast Atlantic region and Southeast. So we saw some strength in our accessories category, which is a retail category for us, a smaller piece of the business, but I think that's somewhat discretionary in nature and we saw a nice strength there. So really strong broad-based performance through the quarter around the business on the U.S. auto side.

And Kate, I would just add to Will's comments that You know, a driver of that business is certainly fuel prices. We are seeing fuel prices coming down a bit, which is always a good thing for our auto business. We certainly expect to see miles driven ticking back. People are taking to the roads. They're still a little bit reticent to get on mass transit and airplanes. So all those factors, I believe, will continue to bode well for our auto business going into next year.

Thank you. And if I could just ask one follow-up question, I think you mentioned you expect the same inflation, same skew inflation in Q4 as what you saw in Q3. And I know you're not talking about 2023 today, but Do you have any high-level views about when you could expect to see some moderating of the inflation and how that might impact traffic versus – or transaction versus ticket next year?

Hey, Kate. It's Bert. I'll take that one. Look, I mean, Will kind of pointed this out, and I'll reiterate it. Our expectation – let's talk about the fourth quarter because that's a bit of a setup for 2023 – Our expectation at this point for inflation for Q4 is that it stays consistent with the Q3 level. And I think in our view, that means it's stabilizing on some level to moderating. However, as many of you know, the inflow of moderating or stabilizing levels of inflation takes some time to flow through supply chains. I think that'll lag into 2023. Obviously, we have a tremendous amount of monetary policy action afoot. And that will take some time to have an effect into 2023, but we would anticipate that it would. As we turn the corner into the next year, I think we'll see continued pressure on labor costs and on product costs at this point. Again, I mean, we're looking several months ahead here, so that's a little bit of our initial view. When we think about it from our perspective, it's a tough and dynamic environment, and our teams are really focused on this, and it requires intense focus. Our strategy remains unchanged in that regard as we look ahead. We're going to continue to pass along inflation impacts to protect our gross margin rate. I think we've done a nice job of managing that in a very dynamic environment. And we're going to continue to focus on those category management and pricing actions. So hopefully that gives you a little color. We are talking about something, you know, several months away, but that's our initial view on that front.

Thank you.

Thanks, Kate. Thanks, Kate. Our next question comes from Brett Jordan with Jefferies. Please go ahead with your question.

Hey, good morning, guys.

Morning.

On the European automotive, could you talk a bit more about the private label strategy there? You know, what you're seeing as far as consumer acceptance of the Napa brand and maybe, you know, what percentage is in the mix now and how the margin delta sets up versus the legacy product that you were selling?

So, Brett, I'll take a stab at this one, let the other guys jump in. I was with our European team all last week over in Spain, and pleased to report that the Napa brand rollout continues to expand across Europe, not only in the new markets. We'll be launching in Spain and Portugal later this year, early next year. but also expanding the number of product categories that we're currently positioning under the NAPA brand. The acceptance, I have to tell you, Brett, has been beyond expectation. All that said, it's still about 10%, give or take, of our total business. So it's meaningful, but look, we're still We still have a long way to go before Napa becomes a real dominant piece of our overall business over there. So, very pleased with where we find ourselves. And look, you know, there's a lot of discussion around Europe, a lot of concern around Europe. But I can tell you, Brad, you saw the numbers, you heard Will talk about the numbers in Q3, another really, really strong quarter, up 20-plus percent local currency. And pleased to tell you that despite all the noise through the first couple of weeks of October, business in fourth quarter looks good as well. So we continue to be very bullish about our European business.

You just answered my second question, but just – To go back to the first half of the first question, on the October trend in Europe. But how does the margin shake up in Europe on the private label mix? You know, obviously a different supply chain.

Yeah, Brett, it's neutral. Generally speaking, on average, it's neutral. So either a good guy or a bad guy. And I just add to Paul's comments. I figured you'd have to follow up. But as he said, you know, we're continuing to see really good strength broadly in each one of our countries. Germany, mid-teens growth. Benelux low double digits, mid single digit growth in the UK and the French market. So as Paul said, Napa is a big part of each one of those countries' strategies and initiatives, and they've got nice traction delivering super nice results. So good to see.

If it's margin neutral, is the long-term goal to get a better cost of goods there to get margin out of it? I mean, what's the point of the initiative if it's not more profitable?

That's the strategy over time. Obviously, getting the brand into the market, putting it into the line logic, and penetrating the market is kind of step one. And then over time, as it develops the following, you know, we'll revisit that. Great. Thank you.

Thank you, Brett. Our next question comes from Elizabeth Suzeki with Bank of America. Please go ahead.

Great, thank you. Just a question on the automotive side. And Paul, you had mentioned that new vehicle supply and elevated used car prices have been tailwinds, but you started to see used car pricing rolling over and new vehicle supply could begin to improve. So, I mean, how much of a headwind do you think that could be as you plan your business for the next few years?

Yeah, you know, I appreciate you pointing that out, Liz. We are seeing used car prices coming down a bit. I honestly don't see that being a huge impact on our business overall. You know, we look at, look, the key drivers for our business have always been and will continue to be, I believe, the average age of the vehicle on the road, which is at a new record again this year over 12 years. Miles driven is always going to be a key element for us. We're seeing an uptick in miles driven as fuel prices moderate just a bit. And I think you're going to see that as folks do begin to return to the workplace and are, again, a bit hesitant to get on mass transit. I think we'll continue to see that drive forward. So look, in terms of new car sales, Liz, You know, it's a little bit of a double-edged sword. We need those new car sales because five years from now, those are going to be our customers as they come to the aftermarket. So if new car sales tick up a bit, that's not going to have a big impact on our business in the short term. In the long term, it's a good thing for us. And, you know, if we go back to the 17 million vehicle, new car vehicles produced each year, sold each year, that's not a bad thing for us at all because that's our future customer. So I think any way you slice it, our business, our U.S. automotive business and our global automotive business is in a good place and the fundamentals are very sound.

Great. Yep, that makes sense. And just a quick follow-up on the auto side. Will had mentioned you're pleased with the market share growth in the majority of categories. What are the categories where you aren't pleased with your market share, and what do you view as the biggest opportunities?

Look, I'm looking down our list, but I'm not sure I can call out one where we're not pleased. I mean, we're seeing really broad-based strength across all the product categories. You know, so I can't call out one where we're disappointed. Obviously, if there's some inventory opportunities, that would be the commentary where, you know, we would want to do better, but I'm not sure that's a function of the demand drivers or kind of our strategy. So sorry for not being more helpful, but I think that's the honest truth.

Okay. All right. Thanks very much.

Okay.

Thanks. Thanks, Liz. Our next question comes from Scott Ciccarelli with Truist Securities. Please go ahead.

Good morning, guys.

Good morning, Scott.

How are you doing? So the industrial business is obviously very strong, and we know that historically it's followed some of the broader macro factors and index changes, typically with about a six- to nine-month lag or so. And, Paul, I think you already pointed out how PMI is still positive, but obviously it's moderated quite a bit. So I guess the question is, you know, how should we kind of net out today's strong growth versus at least what appears to be a pretty significant moderation in that broader macro trend?

So, Scott, thanks for the question. And, you know, you're right to point out that the moderation in PMI is But, again, anything over 50, we're growing, and we continue to grow. That said, the motion footprint, Scott, is different today than we were historically. So we've expanded our footprint into segments like conveyance, conveyors, and all things around that product category, which, as we've seen, the distribution center model expand across the U.S. We've seen great expansion in that product category. Automation and robotics is a growing double-digit, strong double-digit category for us, and we believe we have huge upside in that area. So if you look at the motion of today, Scott, it's different than it was three to five years ago when we were primarily a power transmission and industrial supplies type business. And that has been intentional from our team. And I think will shelter us going forward and will give us a leg up as we go forward if we do see continued softening. Because, you know, Scott, you're not alone. We continue to have people and analysts and investors question the industrial business and do we believe that, you know, we'll continue to see the great growth that we've seen out of that business the last couple years. And certainly while, you know, we've shown 20% comp growth in Q3, we're not going to stay at 20%. We're realistic enough to know that. But we also do believe that that's a business that we can continue to grow 68% year after year after year, regardless of what PMI and industrial production numbers might call out.

Interesting. Okay. Thanks a lot, guys. Thank you.

Our next question comes from Carolina Jolly with Gabelli. Please go ahead.

Hi, everyone. Thanks for taking my question.

No problem. Good morning.

Good morning. So just a quick question around cash flow, working capital. Your AP to inventory ratio is probably around 130% now. That's definitely higher versus 2019. So has that been a structural shift since you extended terms in Europe, or do you think we'll see that kind of revert to your historic?

No, you know, I don't think it has anything necessarily to do with Europe. When you look at the landscape at this part, by the way, I don't think it has anything to do with the European landscape. Look, the business has changed fundamentally over the last year. We have a large acquisition of KDG in the motion business. But when we look at our working capital metrics, we're very pleased with where we are. We've had a six-day reduction in our cash conversion cycle during the course of the year. So we're pleased with that. Managing payables well. DSO is down. Managing inventory very well. as well, and so I don't think there's anything that I would call out as a structural shift. It's something that we stay very focused on on a day-to-day basis, given the unlock of cash, as we're smarter about how we do that. Look, as we look ahead, I mean, nobody's perfect. We do have opportunities to optimize on the inventory side, and we'll continue to do that. And we've got great teams here that are focused on that as well, so I wouldn't place any over-reliance or over-indexing on any one factor. Bottom line is we've had very strong cash flows through the course of the year. We'll have a great result for the rest of the year in terms of free cash flow and for the full year. And that takes us back to our longstanding ability to continue to be very disciplined and thoughtful on capital allocation and reinvest in the business, which we will continue to do because we see great opportunities there and at the same time return capital back to shareholders which, as you all know, we have a longstanding history of doing so.

Thanks. So it doesn't sound like this is a temporary benefit you're seeing right now, but that it's corporate initiatives that have been working.

No, I wouldn't point to a temporary benefit. I think we are very consistently, I know some of this predates me, but consistently showing improvement across cash conversion and our working capital elements.

Great, thanks. And then just a quick second one. your DIY business seems to have been doing very well outperformers potentially just would have been said and in the second all could talk about why you think that is is it the digital factor that you talked about in the beginning of the caller just any

Yeah, Carolina, it's Will. I think you nailed it. We're super proud. We've made a lot of progress on all things technology and digital for our retail business all around the globe, but in particular U.S. Automotive and in Canada. And investments in the catalog, investments in search, investments in kind of product data quality have been making a real difference. So more work to do, but proud of the progress the teams are making.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Yeah, thanks, Dave. Just to all of our folks out there today, we appreciate your questions and everyone joining the call. Look, we're very pleased with another record quarter at Genuine Parts Company. We could not be more proud of the great work done by all of our GPC teammates around the world. We continue to be excited with the momentum that our business is generating, and I would just conclude by saying the future continues to be very, very bright for genuine parts companies. So you all have a great day, and we look forward to chatting again in February. Thank you.

The call has now concluded. Thank you for attending today's presentation. You may now disconnect.