Morning, everyone. I'm Greg Melich. I cover the retail broadlines and hardlines here at Evercore ISI. It's a great pleasure of mine to have today kicking off the second day of our Annual Consumer Conference, Genuine Parts Company, with both Will Stengel, the President and CEO, and Bert Nappier, the EVP and CFO of the company. You know, guys, I would love to jump right into the key things. We've had a lot of some exciting updates on the leadership front, and congrats, Will, on recently being named CEO in addition to president. And, you know, Paul's been a great steward of the culture for a long time, but you got there, what, in 2019? So I'd love to hear from your words, you know, the imprint you're expecting to make on the business going forward.
Yeah, Greg, first and foremost, thanks for having us. It's a great conference, and thanks to your team for pulling it all together. It's flawless and very professional, as always. But thanks for having us. And thanks for the kind words. Obviously, a massive honor and great responsibility to be only the sixth CEO in Genuine Parts Company's history over the last 100 years, nearly 100 years. And so big honor, obviously. You know, as we think about our culture here at Genuine Parts Company, you know, it's largely rooted in that consistent leadership that we've had over the 100 years. As I said, only five CEOs prior to me. And I think that consistency of leadership, that continual emphasis on culture has served this business really, really well. You know, as we think about moving forward, you know, we can't be complacent with our culture. It's a dynamic world.
The pandemic has clearly challenged all companies to think about, nurture, and evolve culture. It's not a surprise that for our business, talent and culture is our first foundational pillar. As we've talked about with all of our stakeholders, we have five or six areas of focus, and it starts with talent and culture. I think while we're super proud of where we are today, roughly 80% of our global employees around the world, per our engagement data, says that they're proud to work for our company. That's an astounding statistic. While we're proud of that, we need to continually evolve and invest in our teams so that in the essence, we're building high-performing culture conditions where everyone can be successful and deliver winning performance. We'll stay in tune with what we need to do to continually invest and involve in talent and culture.
Well, look at that. I love how you went right to the core, which is that culture that ties it together. It is amazing to hear, you know, a 100-year-old company with just the six CEOs. So I guess looking ahead, if we look back four, five, six years from now, what do you think will be the hallmark of your tenure? And are there any focal points or things that, you know, or even subtle changes on strategic focus that we should keep an eye on?
Yeah, look, I'm in day eight of the role, so might reserve the right to declare a five or six year vision. But, you know, at the core, I think for any leader, what you're solving for is making the business both strategically, financially, culturally a better place than when you started. So that's kind of the high-level aspiration to do that. You know, I think as you think about the last couple of years, you know, I was a new talent coming into the organization. And so in a lot of ways, the body of work that Paul, Bert, and the entire global executive team have been executing over the last three to four years really has been a joint collaboration in terms of, you know, some of the thoughts that I brought to the table, Bert's brought to the table, et cetera.
If you look at those five foundational pillars for us: talent and culture, technology, supply chain, sales effectiveness, and then having an understanding and appreciation of how our markets and technologies are evolving from an innovation standpoint, you know, doubling down and investing and accelerating emphasis on those areas, I think is going to be super important. What that does for us is it extends and evolves our value proposition with our customer. Simply, you know, that's foundational work that I think is super important for us to do. It's a short, medium, and long-term effort. I think that's something that as we look back on the business five or six years from now, we want to make sure that we've made really good progress serving our customers better and investing in the business.
You know, I'd love to dig a little deeper there. And, you know, where do you see the biggest growth opportunities for Genuine Parts? Is it on an industry basis, geographic basis, business line basis? Where do you really want to lean in?
Yeah, it's a great question, Greg. You know, the good news for this company is we've got ample opportunities in front of us in both businesses. We've done a lot of work over the last three or four years to simplify the business so that we can reprioritize and emphasize areas of opportunity. And so if you just look at the dollar opportunity for, in terms of addressable market, obviously our North American industrial and automotive business presents the biggest dollar opportunity. And we've talked about with all of our stakeholders really driving and focusing on the basics to make sure that we do one or two really important things, which is taking care of the existing customers that we have today, driving customer loyalty, wallet share. That's very tactical, very exciting, very attractive financial expression body of work.
And so we have that opportunity around the world, but in particular here in North America. I think we've also talked actively about this idea of increasing our value-add services and our solutions mix. So in addition to just putting a widget in a box for our customers, it's bringing more value to that customer experience and making it easier for them to do business with their ultimate end customer and then also with us. The other thing I would just say is, you know, one of the things that you've seen, and it goes back to your previous question, we have been a bit more intentional and subtle changes around the emphasis on our industrial business. Today, that represents about 50% of the profits of Genuine Parts Company.
Our Kaman Distribution Group acquisition there, I think, is a great example where we're really excited about the fragmentation in the market, the megatrends in our industrial business. And so we're excited about areas of opportunity there. I think the other subtle change that we've also put forward to the market is a bit more clarity on in the U.S. how we're operating with our NAPA operating model and our independent owners and an evolution and philosophy tweak there. And so that's super exciting as well. And then lastly, Greg, sorry for the long-winded answer, but, you know, the NAPA brand in particular around the world has proven to be incredibly powerful. And so you see that in the performance in our European business where we've gone from zero to about $500 million in NAPA-branded product in Europe in a very short period of time.
We've got a great NAPA presence in our Asia-Pacific business. And so as we look out to the opportunities, it's to continue to propagate and expand on these strong brands that we have around the world.
Yeah, I want to get deeper into NAPA for sure, but I want to make sure we stay a little bit of a high level here. You talk about industrial becoming, you know, half the profit of the business. I guess what are the biggest risks that you see across the company from both industrial and auto? I mean, they are very different businesses. It would never make sense to separate the two so that they can grow faster. And I know we get a lot of questions from investors about right to repair, disposable cars, the EV impact. So I would love to hear in your words what you think the biggest risks are to both sides of the business.
Yeah, Greg, I think like every business, the reality is most of the risks to the company are uncontrollable. So whether it's the market dynamics, whether it's regulatory environment, I mean, all businesses fight through that. I would tell you, I think the pandemic experience and all the lessons that Genuine Parts Company learned coming through that crisis has served this business really, really well so that we're ready and agile and proven to execute in the face of uncontrollable market dynamics. So as I think about it, it's hard to call the biggest risks. Having said that, I think we've got a great playbook to address anything that we've got that faces us. The thing that I would tell you is on right to repair, the evolution of these industries, these are slow changes.
One of the things that the team has been very mindful of is making sure that we're doing work today, understanding the different scenarios of change in the business, and having a game plan to make sure that you're ready regardless of how these industries evolve. We feel really good about what we are working on. To your question about the two businesses, at the end of the day, Greg, these are distribution businesses. The five pillars of focus and investing in the business serve the entire company and the entire globe in the same way, in the sense that one playbook works no matter where we are. And so we're focused on making both businesses better as we move forward.
Got it. Well, look, I'd love to go deeper into that, the core business or the original business, I would say, NAPA in North America. Basically, there's a lot going on competitively. Advance has talked about a Worldpac and even Carquest Canada sale. You've had some of your own share pressures they have as well. So I'd love to hear what actions you're taking to stabilize share, you know, win back jobber business or get the jobbers to win more business. Just, you know, what are we doing there to fix it?
Yeah, thanks for the question. We've been very clear with everybody, you know, the tactical things that we're working on in our NAPA business. The overarching theme is kind of executing the basics really, really well. So we talk about local store service. We talk about inventory availability and breadth. And we talk about effective sales coverage and incentive alignment. Our owners play a very important role in our NAPA business, a long-standing history of success. And I think the question that we've been executing against is how do we partner together to effectively win in the local markets? And all of those activities that I just described line up with that objective. And so this is a self-help, you know, daily grind, execute well, category management, thinking about the very micro market pricing dynamics by category, by SKU, and just being relentless at daily execution.
The team's made really, really nice progress. We need to continue it month after month. We feel good about what we're working on there, Greg.
Maybe to go a little deeper on that, one of the ways that NAPA has grown over time and Genuine Parts has been M&A, both acquisitions and divestitures over the years. So remind us of your typical acquisition discipline as you're going through what things to buy and not over the next couple of years.
Yeah, I'll give Will a break and I'll take that one. I think, look, for us, as we look ahead, the opportunity set for us is pretty robust. We've got two great segments here with automotive globally and industrial. But the great thing for us is we have an incredible balance sheet with a lot of firepower, and we have a tremendous amount of discipline in the business. And so we don't shop without a list. We think about three key kind of criteria: cultural fit, strategic fit, and financial fit. And cultural is really important. You heard Will open with comments around the culture of this company and how important it has been to our success. And so the first thing we look at is the cultural side of an acquisition. You get to understand the management team, how they run their business, what they're focused on.
When we think about that, we think about how they think about a customer, how do they think about their team members, how do they think about their stakeholders? Because any of one of those things out of balance for us could lead to something that won't work when we bring the two businesses together. The great example of that is KDG with the success we had there with the teams coming together and how they all believe in the same thing, customer-centric, taking care of team members, and then also making sure we generate a good return and good profits. When we think about strategic, we think about where do we really want to play? That's different by geography. It's also different by segment.
For the industrial business, we're really looking at adding vertical capability and filling in places where we may not have the right coverage from a geographic perspective in North America and to a certain extent in APAC as well. If we look at the automotive business, you know, it's a little different by geography as well. We have market leadership in Canada and Australia. And those businesses tend to look at things a little bit differently than the U.S. automotive business, where Will's just kind of talked through what we're doing there and the pivot to shifting the balance between independent owners and company-owned stores. And then in Europe, we think about geographic expansion and additional bolt-ons there as well. So we're very deliberate about how we think about where our strategic opportunities lie. And then obviously we move to the financial side of the house.
We want to make sure that we're creating value, making accretive acquisitions, and running through a process that generates good returns. We've seen that. We talked about our ROIC last year at Investor Day in the mid-30s, well above our cost of capital. So I think we're doing a good job, and we've demonstrated that we do a good job position discipline. There's no better example of that than KDG, which integrated a year earlier than we expected and was synergy as well in excess of what we expected.
Maybe to circle back on just discussing NAPA before and the importance of the independents, I think you have had a major acceleration there. I guess MPEC is over 100 stores. Is that the largest of your independents that you recently bought in?
Yeah, Greg, it is. And look, I'll give you a little bit more color there. We love the model in both respects. And I think this is more of a pivot and a mixture than it is moving away from one or the other. We've had company-owned stores for some time. We've had an independent model that has proven to be successful at NAPA for nearly 100 years. And what we have seen, though, in the last couple of years is that there are advantages for us to shift the mix in terms of company-owned, particularly in strategic markets. The independent owner model works in a lot of places. It's great. It's capital-like, particularly for a business that's relationship-oriented. You know, we come from a place of strength where the trend of growth is going with, you know, our business is 80% commercial.
We see the do-it-for-me space being a space of growth going forward. In these businesses, because inventory availability is so critical and relationship is so key to driving that sale, the independent owner model has been successful and will continue to be a part of our business. We are going to pivot in certain cases in strategic markets to having that company-owned model shift its mix and lift our percentage of total. We love that because we then own the full commercial transaction end-to-end. In those key markets, we think that's important for us. These acquisitions have been attractive. They're generally at book value. In rare cases, we might pay a small premium. That makes them immediately accretive because we have the ability to go in, take out some of the SG&A, and drop in our own back office capabilities. We have commercial opportunities.
While many of our independents buy 90% or more of their product from NAPA, there is a small portion that is outside the ability to take that up to 100%. And then obviously we get the margin that we were sharing back as well. So these deals look good. The acceleration here, I think, was an important one. This MPEC acquisition, well-run business. Joe did a great job running that company, and we've inherited a great set of stores. Well, that really gives us a key kind of beachhead to start this new pivot. And we like where we're headed in that regard.
Interesting. And so if we think ahead five, six years, it wouldn't feel crazy if you said, you know, you ended up owning half the stores and half for the independents. Does that feel like a reasonable mix?
Yeah, look, I mean, I don't know that we're ready to set the high-water mark on where the mix will go. We have, you know, it has to be a willing transaction. These are independent owners that have to be willing to sell. And it has to be the right opportunity for us as well. With more than 2,000 independent owners, there would be a lot of wood to chop to get to 50% in the next, you know, call it, use your time frame, five to six years. But we certainly would like to see the mix move higher. The MPEC acquisition moved us up from about 25%-30%. We can see that continue to progress pretty nicely here in the short term.
But I'm going to reserve the right to kind of call the high-water mark until we get a little bit more intel and we see how this goes. We certainly picked up the pace, and I think we'll continue to do so in the short term.
Fair enough. One of the questions we're asking everybody at the conference this week is, give us an update on the current consumer trends. We heard yesterday from our consumer panel that, you know, consumers are cautious, not necessarily trading down, but holding on as long as they can before making need-based purchases. I guess have you been seeing the same thing in the auto aftermarket of just a, you know, how's spring playing out and into summer?
Yeah, Greg, I would characterize it very similarly. You know, the consumers are cautious. They have been cautious for some time. I think as the shock of higher rates kind of got digested, people are kind of working through that event. And now as rates have stayed higher probably for longer than people thought, you know, people are working through that. And I think that all translates into just a general cautiousness. The beauty about our business is, as you know, it's a break-fix business, both on the industrial, Motion. And so if you have a problem in your car or a problem in your factory and it's mission-critical, you're going to get it fixed. But we have seen some cautiousness in the conversations that we're having with our customers, especially in the backdrop of kind of the uncertainty of the election in the fall here in the U.S.
And so I think it's a mixed and cautious consumer backdrop for both of our businesses and around the world for that matter.
Interesting. So you would say that trend in the U.S., it's not just because there was a warm winter again. It's also showing up in Europe and Asia-Pacific?
Yeah, look, I mean, there's so many factors you can point to, right, Greg? I mean, obviously the weather, as we all know, in the automotive aftermarket is a key variable. I don't know that it's necessarily been the best thing for most of us in the first quarter. Probably would have liked to have seen a little colder winter, particularly with our Canadian business, as we talked about on our earnings call. But then, as Will said, you've got all these other factors: interest rates, inflation. You have an election here in the U.S. Now you've got two elections going on in Europe, one in France and one in the U.K. And so I think when you look at all that taken together, I would say the consumer climate in Europe is similar in terms of cautiousness.
I would say that's also true in our Australia and New Zealand businesses. I think that the winds are blowing in a similar direction around the globe with an overall tone of caution. It's certainly pretty choppy out there. It's not getting any easier. I wouldn't say it's getting any tougher, but it's certainly not getting any easier in the near term.
Got it. You know, one thing I did want to look back on is we had a lot of disinflation in the auto parts industry. I think just most recently, several of your competitors have talked about it getting to near zero or just slightly positive. Do you think that disinflation is over? Is the industry still rational from a pricing environment? I mean, could we actually go negative here?
Greg, I'll take the rationality point. The market is still rational. There's no fundamental shift in pricing strategies or pricing rationality in our markets. So I should just say that we haven't, despite what competitors are talking about, as you know, over the last couple of years, everybody has had some version of kind of pricing disclosure and stuff that they're doing. And we've seen a very rational out there. You know, for us, what we do each and every day across all of our businesses is what we call category management. And that's the daily SKU by SKU, category by category analysis around, you know, ups and downs in strategic pricing so that we can serve the market and our customers as best we can.
That's something that we do all the time and will continue to do as we move forward, regardless of what's happening around us. We think that that's been a pretty effective strategy as you look at some of our gross margin performance across the business. Bert, I don't know if you want to talk about the broader inflation impact.
Yeah, on the inflation side, you know, I think where we sit is we see that somewhere between 0%-1% for the year. I mean, we've said less than 1% for the year in terms of our guide. That's obviously cooled down considerably over the last two years where you had 2022 with it rising into the end of the fourth quarter and probably hitting its peak as we moved into the first quarter of 2023. And then cooling all the way back down as we exited 2023 and leave this in a place where we expected to be slightly positive for the balance of the year in both of our segments. But it's certainly moving in different directions when you think about, like, Europe, for example. Europe was still at mid-single digits as we exited the 2023 timeframe and entered the year. So it's still slightly positive.
But when we take all that together for our business, I think that's why we're comfortable in our guide that it's going to be something slightly less than 1% for the year, still slightly positive. But I wouldn't see it, as building off of Will's point about rationality in the pricing environment, I wouldn't see it moving negative.
Maybe go a little deeper on industrial. I mean, it is half the profits now. And but we've seen some of the macro data there has also looked choppy, particularly industrial production. Just, you know, is Motion still able to outgrow industrial production the way it has the last couple of years? Or is that sort of normalizing to industry growth yet?
Yeah, Greg, I think we love how our Motion business is positioned. You know, part of the industrial logic of the KDG acquisition was really to extend that leadership position that Motion has in its profit pool. You know, all the strategies that they're executing are the right ones. You know, as you noted, that's delivered performance, you know, in excess of market through the cycle here. I will tell you, we were obviously disappointed to see the PMI prints in the last couple of months. On our earnings call, we were cautiously excited about the March PMI print. So, you know, those mixed data points, you know, we're digesting as well, like everybody else. You know, as I said, with the consumer, the market is choppy out there. The customer at Motion is, you know, waiting to see how the year plays out.
They remember, they think about capital projects as well as their break-fix business. Some of the more capital project-oriented discussions with customers are cautious. But ultimately, those projects have to go at some point. And if you actually look at the data as it relates to PMI in particular and the cycles over time, you know, once it inflects into an expansion period, that's a very good moment in time, not moment in time, multiple years of really attractive growth. And the Motion team is a great operating team, great strategies in place. And so they're at or better than market now. And then as the market comes, it's going to be a very compelling situation for our Motion business.
How much of Motion's business now is, you know, break-fix versus more CapEx?
The vast majority is break-fix, Greg. But as you can imagine, when you're talking with a customer, it's a two-dimensional discussion. It's, how are you thinking about the future of new plants? How are you thinking about major overhaul of line number one in the plant? And, oh, by the way, you know, the ordinary course, break-fix, let us take care of your shop and keep you up and running. That's the vast, vast majority of the business.
Got it. And when people are making those plans, do the elections have anything to do with it? Like, does that historically create a bit of a pause or even acceleration sometimes?
I think it's more a pause, Greg, honestly. I think it's a general statement, but it's certainly relevant when you talk to some of these Motion customers. They just uncertainty around kind of subsidy if you're talking semiconductor industries and new plants for EV and not sure what the economics will be of that and how the world's going to play out later this year. I think it's on the margin. It's cautiousness as opposed to acceleration.
Yeah, Greg, I would add to that. I just think when you think about an election and the one we're facing here in the U.S., you have probably two big issues for business that have vastly different outcomes than taxes and tariffs. You know, depending on who you're following and who your favorite is, taxes can go one way or the other. Tariffs can go one way or the other. Uncertainty is the enemy of business. So when you're trying to make decisions about big capital projects or big investments, and you know those are two variables, and you're in the industrial business and manufacturing, those can be quite significant. I think we're feeling a little bit of that. I would agree with Will that it's a pause. Let's see how that's going to play out.
And then you tell me the cards I've been dealt, and then I can work around that. We're seeing a little bit of that. And I also think that, you know, this PMI data and its choppiness has not been anyone's friend either. You know, one of the longest cycles of PMI downturns since the 2008, 2009 period. And borderline on getting to as long as that one was. And that would be, in our opinion, based on, you know, kind of the last 25 years of history, it would be nearing the final innings, we would think, of breaking out of that cycle and hopefully turning positive in the later part of 2024 and as we move into 2025. But I think that election piece too has something to color it as we look ahead.
Given we've got just a few minutes left, I will resist the temptation to dig into tariffs because I want to get to the bigger question, I think, which is just margins overall. You did have an analyst day last year. You outlined a new double-digit operating margin objective. Is that going to come more from gross margins or SG&A and sort of update us on, you know, the key initiatives to get there?
Yeah, look, I mean, I think in the near term, we're going to see more gross margin help than we are SG&A help. And we've called for SG&A deleveraged to a small degree in 2024. We've got some important investments we're making in IT. Those are providing benefits to the business. And they'll prove to be long-term benefits, particularly for SG&A, but in the near term, a little bit of a headwind. Gross margin has performed really well. And we see a lot of runway there. We've had a lot of pricing. I think we're going to see a little bit more success coming from sourcing and category management as we move forward. And so we feel good about where we're headed in terms of the expansion of margin in the business and across the business in both segments. I think industrial has more room to run.
I think certainly global automotive has room to run, particularly when we see a NAPA business improving sequentially. With the size of the U.S. business and the totality of global automotive, you know, we can't improve margin there unless you see the NAPA business recovering. We think it will. We think in terms of margin and profitability, it's a key focus for us. We improve segment profit in Q1. I think that'll be true for the full year as well. We're feeling good about where we're headed for our 2025 targets.
You already answered my next question on that. So it sounds like industrial margins, there's no cap, even though they've already gotten to record levels, right?
Yeah, they're at record levels. But I would just tell you some of the pace of acceleration in the margin expansion at Motion over the last couple of years has been a combination of factors. One, a great business that's very disciplined and is pulling levers around SG&A and gross margin. But also, you cannot discount the impact of the KDG acquisition, getting that faster than we expected and being more than what we expected. So I have a two-fer benefit there in terms of what we thought. That's contributed very nicely to Motion's profit expansion. And I would say that it's been at an exceptional level. And you can't sustain exceptional forever. But I think the solid good growth of Motion will continue. We're not ready to call a new high watermark there either yet, but certainly going to continue to build.
And we've called for 10-20 basis points of improvement off of the record of last year for this year, right in line with our long-term growth expectations. And if we can do better than that, we obviously will. We'll keep you updated.
Maybe on the auto side, you know, where do you, you know, they've had a tough 2023 in the U.S. at least. Walk us through where the upside is in auto, either U.S. or Europe or Asia.
Yeah, look, I think the combination of the three is what's great about our business. We have this great geographic diversity. They grow at different paces, maybe. The European business continues to perform very well. It's growing at a nice pace. It can continue to contribute. They've got a lot of great initiatives there. They're going to drive efficiency and productivity. But they've also got their own improvement work going on as well. In Asia, also the same. We've got a lot of investment that's going to drive productivity and efficiency in the business. Some of our transformational projects around DC expansion and transformation optimization of the network will drive efficiency there. And looking at the U.S., it's going to be a couple of levers. We're going to continue to focus on gross margin expansion in the U.S. We're going through restructuring that's largely U.S. focused.
That's going to take some costs out of the business. That restructuring program we announced in the first quarter is largely centered around what we're doing in the U.S., particularly on the NAPA side. We've got some international benefits too. It's a global project. We see a nice lift coming on the backside of that, particularly in the NAPA business in the U.S.
Got it. Well, then in the last couple of minutes, I'd love to go to balance sheet and capital allocation and cash flow because strong free cash flow has sort of been a hallmark of the company for decades. Could you just discuss the uses of it? You know, how many more years of consecutive dividend increases, et cetera? I'd love to hear in your own words.
Well, look, you know, I've had an enjoyable first two years as CFO of GPC. And I think touching the dividend increase might make me the shortest-serving CFO in GPC history. So, look, we're going to continue to stay focused on that dividend. It's an important part of our investor profile and thesis. We've had 68 consecutive years of increase. And we're going to continue to grow the dividend as our earnings grow. And so that'll be always an important part of our capital allocation. But we have many, many other great investment opportunities, particularly around CapEx. And we see a lot of great projects in the business. We've increased our CapEx forecast over the last two years. We've been running historically around 1% of revenue. We've moved it to 2%. That's around $500 million of capital this coming year.
The investment there is really important around supply chain modernization and leveraging technology. What Naveen is doing in transforming this business through an IT prism in terms of modernizing our platforms and all of our systems is going to be important to our growth profile. But when we think about capital, obviously, we think about the dividend. We think about CapEx. We think about M&A, which will be another important lever. That one we talked about earlier. We can be very opportunistic there and follow our discipline. It gives us a great ability to grow. We'll stay focused on share repurchase. I would probably park that as the fourth priority when we have such great attractive opportunities in M&A and CapEx. We love our balance sheet. We love the firepower that we have.
We're currently at about 1.8x levered, stated range of 2x-2.5x. So we still have a little bit of room to work.
That's fantastic. Well, I think we used up all of our time. I could keep going for another half hour, but I know we need to get everybody on their way. So, Will and Bert, want to thank you both. We got through a lot. And look forward to catching up later in the day.
Thanks, Greg. Appreciate it. Thanks for having us.
Thank you.