Good day everyone, welcome to the Genuine Parts Company conference call to discuss Alliance Automotive Group. Today's conference is being recorded. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. To get into the queue, please press star one. For opening remarks, I will turn the call over to Sid Jones, Senior Vice President, Investor Relations. Sid, please go ahead.
Good morning, thank you for joining our conference call to discuss the Genuine Parts Company acquisition of Alliance Automotive Group announced earlier today. Before we begin this morning, please be advised that this call may involve forward-looking statements regarding the company and its businesses, as well as Alliance Automotive Group. The company's actual results, including plans for and the results from the acquisition of Alliance Automotive Group, could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. We will begin this morning with comments from our President and CEO, Paul Donahue. Paul?
Thank you, Sid, and good morning everyone, and thank you for joining us on the call today. We are pleased to host this call and discuss our announced plans to acquire Alliance Automotive Group. This is an important strategic acquisition for Genuine Parts Company, and we thought it would be helpful to share a few details on the value created with this investment, as well as AAG's business in the overall automotive aftermarket in Europe. Alliance Automotive Group was founded in 1989 and has grown into a leading European distributor of automotive parts, heavy-duty truck parts, tools, and workshop equipment in Europe. Its founders, Jean-Jacques Lafont and Alistair Brown, serve as chairman and CEO and vice CEO respectively, and have led the company's growth and success and will continue to operate the day-to-day business as we move forward together.
We are fortunate to have an experienced and talented team across the AAG organization, and we look forward to working with them to grow this business further. AAG goes to market with 1,800 company-owned and affiliated outlets across France, the U.K., and Germany, and annual billings are running at over $2 billion. AAG is the number 2 player in all of Europe and has either the number 1, 2, or 3 position in each of their respective markets. AAG achieved their market-leading position with a consistent track record of organic revenue and earnings growth, supported by strategic M&A investments to gain scale, efficiencies, and geographic coverage in the large and fragmented European markets. We are pleased to expand our footprint into the European marketplace with critical scale and a leading market position in the automotive aftermarket.
We are confident that AAG will deliver significant sales growth and earnings accretion to GPC. The automotive aftermarket in Europe is estimated at approximately EUR 68 billion, concentrated primarily on the do-it-for-me side of the business, and includes a car park of approximately 285 million vehicles that are 11 years old on average. France, the U.K., and Germany are the three largest European markets and represent nearly 50% of the total aftermarket volume. Additionally, the markets include only a few major independent players in any one region, and the industry is experiencing a trend of consolidation. For these reasons, we are excited for the future growth potential we see in the European aftermarket, both within AAG's existing markets and across Europe. That's a very brief update on the Alliance Automotive Group and the European market.
We couldn't be more excited by the opportunity we have today to build on our strong automotive platform, which started in the U.S. as NAPA back in 1928. Our 90-year history of growth in the automotive parts industry, which included expansion into Canada, Mexico, and most recently Australasia, has laid the foundation to further expand our presence in the global automotive aftermarket. We are very pleased to enter Europe with a proven partner and believe that a combination of steady organic growth and an ongoing acquisition strategy will lead to long-term sustainable growth for AAG and ultimately GPC. Thank you, and I'll now turn it over to Carol for a few financial details. Carol?
Thank you, Paul, and good morning, everyone. As Paul mentioned, we want to cover a few additional financial details and then we'll open it up to your questions. I would also add that as we mentioned in our press release, we have updated our website for an investor presentation that also covers some of these details. We would encourage you to visit genpt.com for that supplemental information. Today's announcement represents the culmination of many months of work with the AAG team, and we want to thank everyone for their commitment to this new partnership and a value-creating transaction. In the fourth quarter of 2017, we expect to pay approximately $2 billion for 100% of the stock of Alliance Automotive Group and also the repayment of their existing debt.
We expect to finance the acquisition with a combination of new term loan agreements, new senior notes, as well as the upsizing of our existing revolving credit agreement. We are currently negotiating these financing agreements and will share more details on these arrangements and our related interest costs as that information is finalized. We can tell you that we expect our capital structure to include approximately $3 billion in debt upon closing, which is an estimated 2x EBITDA or 50% of total debt to total capital. Given our strong balance sheet, we are well-positioned to utilize it for this business investment, and going forward, we will use our strong cash flows to pay down the incremental borrowing. We have no exact timetable on that plan, but we would expect to reduce our leverage ratios gradually as we move forward.
Paul mentioned that AAG is currently generating annual gross billings of more than $2 billion. To be clear, some of this volume relates to supplier direct billings, which are not included in sales on a US GAAP basis. AAG's current billings would translate to approximately $1.7 billion in annual sales. Supplier direct billings are much like our vendor direct billings in the U.S., but the customer agreements in Europe work differently. This volume is excluded from sales as it's reported in the U.S. We're very excited to partner with such a fine organization and to expand our automotive operations in Europe. Its long-term value to the company and to our shareholders is significant, and we also expect this acquisition to be immediately accretive to our diluted and adjusted earnings per share in the first year after the closing.
The impact of this acquisition in the fourth quarter will depend on the timing of the close, and combined with one-time transaction expenses that we expect to incur, it's premature to talk about any contribution from AAG for this year. Looking to 2018, we do expect AAG to contribute incremental diluted earnings per share of $0.45 to $0.50 and adjusted earnings per share of $0.65 to $0.70, which excludes the amortization of acquisition-related intangibles. Once again, we're excited about the growth opportunities we see for AAG, and you can count on us to emphasize strong asset management, working capital efficiency, and ongoing improvement in our cash flows, just as we do across all of our existing business segments. With that in mind, we also want to take this time to reinforce that our ongoing priorities for cash have not changed.
As mentioned earlier, we continue to forecast strong cash flows, and we remain committed to the dividend, which we have increased for 61 consecutive years. We will continue to target the return of 50%-55% of our prior year earnings in the form of dividends to our shareholders each year. Our other priorities for cash include the continued reinvestment in each of our businesses through capital expenditures, strategic bolt-on acquisitions, and our ongoing share repurchase program. We believe that our strong cash flows and our healthy balance sheet effectively support these key priorities and ultimately serve to maximize shareholder value. Appreciate your time today, and at this point, I'll turn it back over to Paul.
Thank you, Carol. This acquisition is an excellent strategic fit for both companies, and we're very excited to work together with the AAG team to create significant value for our shareholders. In closing, we want to reiterate the compelling benefits of this important investment. We strengthen our position as a leading global automotive aftermarket distributor with a network of over 9,100 stores and 130 distribution centers across North America, Europe, and Australasia. We enter a new and large market with a deep and talented management team, critical scale, and a leading market position. We are positioned for future growth both organically and via acquisition. Importantly, AAG provides Genuine Parts Company the opportunity for significant sales growth in both immediate and long-term earnings accretion.
That sums up our comments, and we're happy to take any questions that any of you may have, and we'll turn the call back over to the operator.
Thank you. Ladies and gentlemen, to ask a question, please press *1 on your touchtone phone. If you're using a speakerphone, please disengage your mute function so your signal will reach our equipment. Again, *1, we'll go first today to Bret Jordan with Jefferies.
Hey, good morning, guys.
Good morning, Bret.
A question on, I guess first, the $25 million of synergies over 3 years. How much of that is the supply chain? Is this going to be improving cost of goods with better scale? I guess a follow-up to that supply chain, if you could talk about the accounts payable to inventory ratio at AAG and what cash you might be able to take out if you could extend their payables.
Hey, Bret. I'll tackle the synergies, I'll turn the second part of your question over to Carol. Certainly, a good bit of that synergy we do believe will come from procurement, it's going to be procurement both on a direct basis and an indirect basis. We see opportunities with global sourcing. As you know, we have a sizable presence in Asia today, both in Shenzhen and Shanghai with our global sourcing offices. We see private label opportunities with AAG as well. Certainly, we'll attack it from a number of different angles. Carol, why don't you take the second part?
Yes, Bret, just to comment on the AP to inventory. What I would say, as we have seen with other acquisitions, including our Australia, New Zealand acquisition, Asia Pac, there are certainly working capital opportunities that we see. Again, some of that comes from the global aspect of our business. As we work with many common vendors, as Paul mentioned, from procurement synergies, we'll certainly be mindful and definitely see opportunity for improvement in their AP to inventory. Again, this is going to be done across all of our global suppliers, we definitely see also improvements that could come in the area of inventory as well.
Is there a feeling for what their AP to inventory might be now and the total inventory balance?
We're not ready to give that out right now, we'll have more information on that later.
Okay, great. Thank you, guys.
Yeah, thank you, Bret.
We'll go next to Seth Basham with Wedbush Securities.
Well, thanks a lot, and good morning.
Morning, Seth.
My first question, Paul, is just thinking about this a little bit more strategically. If I'm not mistaken, Europe's always been on your radar screen as a potential area for expansion, but it's been towards the bottom of the list for years. Why now did you decide to go to Europe?
Yeah, great question, Seth, and I would just clarify one point. I'm not sure it was at the bottom of our list. We look at acquisitions in all four of our main businesses, and we look at acquisitions across all of our geographies as well. Europe has always been intriguing to us, and it has been of interest to us. We began discussions with AAG quite some time ago and discovered the really similarities in our cultures and our values, believe them to be a great partner. It is a huge market, as you I'm sure are aware, Seth, with over 285 million vehicles. We see consolidations happening across Europe, and we just felt this was, number one, a great partner to enter the market with a great leadership team, and a great opportunity in that market.
I would just also make one additional comment, Seth, that this doesn't preclude us from looking at other markets to continue to expand as well, whether that be the U.S., Mexico, Canada, or Australasia.
That's fair enough. As we think about the acquisition strategy going forward, should we consider Europe to be a bigger focus for acquisitions in automotive, and would you consider acquisitions in other business lines in Europe?
We invest where our businesses are growing, Seth, and where we see the best opportunity. If that's continued consolidation and acquisitions in Europe, absolutely, we will take advantage of those opportunities. I would also tell you that, again, just to kind of repeat myself, we will remain active in all the markets that we continue to do business in. As far as expanding into some of the-- I think your question, Seth, was would we consider going beyond automotive and look at other segments of the GPC family? There is nothing active right now in Europe as it relates to our other three businesses. Again, if the right opportunity and the right partner were to present itself, we would certainly have a look at it.
Understood. Thank you.
You're welcome. Thank you.
We'll go next to Christopher Horvers with JP Morgan.
Thanks. Good morning.
Good morning, Chris.
Can you talk about how fragmented those key markets are, France, U.K., and Germany? How much market share do the top three players hold in? Is it like the U.S. where it's mom-and-pop businesses that make up the rest of the market in addition to dealerships? Just trying to get a sense of how much consolidation opportunity lies ahead here.
We believe there are significant consolidation opportunities, Chris. It's not too dissimilar to the U.S. When you look at the top, oh gosh, eight or nine players across Europe, they have less than 20% or about 20% of the total market share. It varies by country, so our main competitors in the U.K. are not necessarily our main competitors in France or Germany. It varies by country. Overall, we do believe that there are additional opportunities to continue to consolidate the market.
It looks like they have a pretty nice profitability rate relative to yours. Is the difference basically relative to the core NAPA business? Is the difference basically that they don't have independence, and is the overall market more of a profitable market in Europe versus the U.S.?
No, you're right. They do have a really impressive margin structure. Look, some of it is they do have affiliates or independent owner. They do have a very similar model to us in the U.K. and in France. In Germany, I believe they own all their stores. There is some differences in the number and the % of independently owned and company-owned, which would be different. One of the things to point out, depending how you're doing it, if you're using their gross revenue, the gross billing versus the net US GAAP revenue, you're going to have a margin difference there. That's one thing I would point out that's different.
Lastly, look, they've done a terrific job in integrating the acquisitions they've made, and they have really driven some synergies in the procurement area by, over the years, rolling up these acquisitions and putting in a centralized procurement strategy and driving the savings. Again, it's a combination of several of those things.
Just last question, a little off to the side question versus today's call. As you think about, you've made some pretty big acquisitions that probably build over time on the industrial side outside of the U.S. Now you have this acquisition. Does it make you reevaluate your priorities, especially as it relates to the S.P. Richards business?
I guess what we would say, and again, Paul mentioned this earlier, as we think about acquisitions, we're going to invest where the growth is and where we see the right partner and the best fit for us, and ultimately the best way to create shareholder value. Specifically as it relates to Office Products, I would mention, you're going to see us investing in it as we have, it would be in the FPS area. The facility and break room area, which again, is a large market, mid-single digit growth, a lot of fragmentation, a lot of opportunities there. I don't think it changes what we've been doing for a number of years. We're going to continue to invest kind of in those strategic bolt-on acquisitions that have the best growth opportunities.
Chris, I would just add to that the diversification strategy that we embarked on a couple of years back with both S.P., and for that matter, our electrical business, we'll continue to drive that forward. As Carol mentioned, our facility and break room initiative and driving safety supplies and janitorial sanitation type products through our office business. Also in our electrical business, driving the fast-growing wire and cable business. We're going to continue down that path. I would just, as we say, Chris, anytime we're asked, if we ever get to a point that we don't believe that we can continue to drive the type of metrics that we look for inside a Genuine Parts Company, we would not shy away from divesting a particular business. At this point in time, we have no plans to.
Thanks very much.
Yeah, thank you.
We'll go next to Matt Fassler with Goldman Sachs.
Thanks a lot, and good morning to you.
Good morning, Matt.
I've got a couple questions on the product or merchandise front and a quick one on the numbers. First of all, can you talk about the commonality of your vendor base? I think Carol touched on it briefly. Also whether these are vendors that have an infrastructure for selling on a global basis to a single customer.
Yeah. Great question, Matt. If there was something that attracted us, an additional element that attracted us to AAG and the European market is that if you go down their key supplier list, many of these suppliers are our key suppliers, our global suppliers, not only on the automotive side, but on the industrial side as well. Great companies like Bosch, like Schaeffler, like Gates, TRW, Axalta, are all great partners of AAG. They're great partners of NAPA, and many of them are great partners of Motion Industries as well.
Can you also talk about the role that private label plays in Europe relative to what it plays in the U.S. and where AAG is on that spectrum?
It's quite different. As you know, in the NAPA world here, in the U.S., Matt, 90% of what we sell is under the NAPA brand. If we turn to our Australian business, our private label business is more in the range of 50-plus %. As we look at the European market, specifically as we look at AAG, private branding is less than 10% of their overall business. We think there may be an opportunity down the road, but that's all yet to be determined.
Great. My final question. You gave us some accretion estimates. Carol, can you give us a rough sense of the blended cost of capital, which I realize is going to be sourced from several different options, the blended cost of capital that you used to get to that accretion expectation?
We are modeling. Right now, our blended debt rate is about 2.5%. We are modeling to be around 3% when we take it up to the $3 billion, we're still in the process of negotiating all that right now.
Is most of that going to be fixed versus floating, or is it too soon to tell how you're going to structure it?
We're going to do a combination of both. It'll probably be similar to what we have today. Maybe about 50/50. Again, we're still early in the process of all that.
Thank you so much, guys. Appreciate it.
Thanks, Matt.
Thank you, Matt.
We'll go next to Brian Sponheimer with Gabelli & Company.
Hi. Good afternoon, everyone. Good morning.
Good morning.
Good morning.
Morning, Brian. Just one question, most of them have been answered, on how the deal came to your office, whether it was being shopped or whether. Just start there.
Yeah. Brian, look, as I think was mentioned earlier, we've been very interested in the European market for some time. I had a chance to meet with the principal well over a year ago and built a relationship, which then developed really over the course of the last year. As we came together, and the more we came together, the more we visited their operations in the U.K. and France and Germany, honestly, the more interested that we became in the business. Certainly when we met the full management team and saw the depth of talent that they have as an organization, really kind of put us over the top.
As I said, the fundamentals of the market, the global suppliers that we share in common, the growth opportunities that we see in Europe all provided just really compelling reasons for us to make the move that we did.
Well, that's terrific. Congratulations. Looks like a great deal.
Thank you, Brian.
Thanks, Brian.
We'll go next to Chris Bottiglieri with Wolfe Research.
Hi, thanks for taking the question.
Hi, Chris.
Hi. Just helping to contextualize the growth here. On one hand, looks like the big three markets are about half the car park of the U.S. I know Europe tends to be more like a branch network than a store network. Maybe just help us contextualize these 1,800 outlets. Can you give us a sense, were they on a rollout? How many stores, branches, do you have in each of the U.K., Germany, and France? How many do you plan to get to? Maybe just start with that.
Well, as I think was mentioned earlier, Chris, so you're right. We now have a significant presence in the three main markets. France will be our largest share of our business. U.K. will be number two. We'll be number one in France. We'll be number two in the U.K., with about 13% market share. We'll be number three in Germany. We believe we have good opportunities, actually, very good opportunities to continue to grow in all three, and certainly in the Germany area as well. I'm sorry, Chris. Well, actually, you asked about the 1,800 and how that breaks out. It's about 1,500 that are affiliates, 300 plus that are company-owned operations.
Got you. Yeah, maybe I probably over-complicated that. I guess what I'm trying to arrive at is maybe just give us a sense of how this company's been growing. What are the same store sale metrics been like? How much has been square footage been contributing? Kind of how do you think of that in the future?
Great question, Chris. If we look at same store sales or organic sales, not too dissimilar to the U.S., actually a little bit better, low single-digit for the most part. The growth story for AAG has really been a combination of three key pillars. It's been certainly organic growth, but it's been a lot on the backs of bolt-on acquisitions. They and us really view that as just a continuation of the organic growth strategy. The third pillar would be where we see strategic opportunities, whether that be in body parts, remanufactured parts, turbochargers. We're one of the key players in the U.K. market in the distribution of turbochargers. Really, it'd be a combination of those three key pillars.
Chris, I think if you look at our deck on page 10, there's a terrific chart of how they've grown from just under EUR 100 million to EUR 2 billion. When you look at 90 acquisitions in the last 15 or so years, you can kind of see how that's come to be. Again, similar growth to the industry growth there, with a low single-digit growth.
Got you. Okay. Sorry, just one unrelated clerical question. I'll try to back into the operating margins, that $45 million in amortization. Is that just the incremental amortization you're going to book to close the deal, or does that also include the amortization that the company had previously as a roll-up?
That is our incremental amortization related to this deal.
Got you. Any sense of how much amortization you're going to have in that EBITDA numbers, like before this deal?
No. When we give further guidance on 2018, we'll give you our full amortization numbers at that point. Look, until we close and do our finalization of purchase accounting and all that, we're just using that $45 million estimate right now for incremental.
Okay. That's fair. All right. Thank you for taking my questions. Appreciate it.
Thank you.
Thanks, Chris.
We'll go next to Elizabeth Suzuki with Bank of America Merrill Lynch.
Hey, good morning, guys.
Good morning.
Thanks for hosting the call. Can you give the DIY versus DIFM split for AAG? I don't know if I heard you mention that.
It's different, certainly different than it is here in the U.S., Elizabeth. The DIFM market in Europe is the dominant, much more dominant than even here in the U.S. If you recall our DIFM and DIY here in the U.S. we're about 75% DIFM to 25% DIY. Over in Europe, certainly as the case with AAG, they're closer, between 85%-90% DIFM and really a very small percentage of their business, 10%-13% is DIY.
Great. The average age of the car park, in France, the U.K., and Germany is a little lower than in the U.S., is it a somewhat different sweet spot for AAG in those markets, or is there a difference in how European warranties are structured versus U.S. warranties, so that maybe vehicles enter your addressable market at a somewhat younger age than in the U.S.?
No, it's very similar, Elizabeth. If you look at overall in Europe, I think the U.S. now we're at 11.5 or maybe 11.7 years average age of the vehicle. In Europe, the average age of the vehicle in Europe, again, one of the things that also attracted us, very similar fundamentals. Average age is about 11 years old in Europe as well. In terms of warranties and entering the marketplace, the aftermarket, it's very, very similar to the U.S.
Okay. Yeah, I just mentioned it because on slide seven you had the car park for France, U.K., and Germany, and it's like nine years, 7.6-
Yeah
9.3. It looks like it's a little bit younger, but you think that the sweet spot for you guys and your business is pretty similar?
Yeah, very much so. You're right, the numbers are a little bit less than, in France, Germany. When you roll up all of Europe and really that's where we see our real opportunity to continue to grow.
Yep. Gotcha. Okay. Thank you.
Okay. All right. Thank you.
Thank you.
Ladies and gentlemen, that will conclude our question and answer session. I'll turn it back to management for closing remarks.
Well, we want to thank you this morning for your participation in our call and your confidence and support in the company. We look forward to reporting out to you with our third quarter results in October. Thank you.
Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect.