Joining us. It is my pleasure to introduce Genuine Parts Company. We have with us today, Will Stengel, Chairman and Chief Executive Officer, and Bert Nappier, Executive Vice President and Chief Financial Officer and Chief Operating Officer. Will and Bert, thank you so much for joining us today.
Thanks for having us.
Thanks for having us. No, it is great to be here.
I stumbled over the title because there has been some changes.
Yeah.
Sorry about that. Will, last week you issued a press release announcing the leadership teams for both the automotive and the industrials businesses. Congratulations.
Thank you.
Can you share a little color around the process for selecting the leadership teams, including the appointment of Court as CEO-elect GPC, and ultimately, how his operating background, board familiarity, and leadership approach fit with the go-forward strategy for automotive?
Yeah, happy to, and thanks for having us. This is obviously our first opportunity to talk about the announcement.
Looking forward to the discussion. We've been working on this for quite some time, as you would expect, and we're thrilled to be able to announce what we did last week. The way to think about it is we really were solving for two or three different thoughts. The first and foremost is making sure that we've got the right talent aligned with the right business strategy. It starts with the business strategy, making sure that we've got the skills and the capabilities of the leadership team aligned to go and execute against that. That was kind of pillar number one. Pillar number two is what I would call kind of continuity and familiarity, where we needed to, especially in this transaction, make sure that on the Motion side, we were ready to be the public company right out of the gates.
That was a pillar number two. 2B, I would say, is familiarity, which is how do we make sure that we maintain and sustain the business momentum that we have and the strategic work that we've done over the last two to five years on both sides of the business. I think if you look at the announcement, we've solved a lot of those objectives, starting obviously with Bert. Bert has been with the business for five years.
As I've said publicly and certainly internally, Bert plays a bigger role than just the financial officer of the company. Having him elevate and take on more responsibility on the automotive side fits all three of our criterion. Bert will do a great job taking on more and working with Court, who I'll talk about here in a second. On the industrial side, similarly, James Howe, a fantastic talent. He's been with Motion for over 30 years. He's had every single role in the business. Motion obviously has been an operating division of a public company, and so my public company background kind of partnered up with James and the team, I think, positions us to hit the ground running early on. Court will be a fantastic addition to the team, as you alluded to in your question.
He's got all of the things that we need in a leader of the automotive business. He actually has automotive experience. Similar to when I joined Genuine Parts Company, he's a distribution guy by trade. All of the value creation levers associated with anything distribution are relevant. Court's a high energy, high passion guy, great followership. He has been in the boardroom for the last couple of years, so in terms of understanding our strategy, he's very well up to speed. He knows the team. The leadership team respects him. I think he brings a lot of relevant expertise in terms of supply chain and tech and global business and global sourcing and e-commerce and everything in between. We're thrilled to have him. Both sides of the business are super energized. I would obviously admit that people were waiting for this announcement internally.
I think the clarity that we've provided everybody has created a lot of positive energy. We're looking forward to closing out the year and then getting started in 2027.
Great. So maybe just to drill down a little bit more on that detail. Will, you're going to become Chairman and CEO of Motion following the separation. What excites you most about Motion as a standalone company, and how does your prior experience at GPC and HD Supply and in distribution shape your priorities for the business?
Yeah, I would say on the last part of your question, the nice thing about the way in which we've set up these teams is the strategies have really been put in place well before this moment in time. Not only have they been put in place, but we've been working as a collective team on those strategies for multiples of years. So in terms of what it means and a big reveal in terms of change of strategy, I don't see that. As we think about kind of what I'm most excited about at Motion, I would say it's all about growth. Quite frankly, these comments could be for both sides of the business.
The special sauce of Motion is just the way in which it interacts with its customers. It's so embedded in the customer operation, and we've got so many great embedded relationships. At the same time, we have so much opportunity to grow that wallet share with existing customers. So we've got a lot of opportunities on organic growth that are exciting. We've got a lot of opportunities from a margin standpoint driven by pricing and sourcing. And we've got some really good opportunities to think about bolt-on M&A to add on top of our growth algorithm. So there's really a lot to like in the Motion business and certainly also on the automotive side.
Yeah, Bert, I have the same question for you. On the automotive side, you have this expanded role now, as Will mentioned. What are some of the key operational and financial priorities you're focused on to ensure just day one readiness and long-term value creation?
Well, thanks for having us again, and I'm just thrilled to have the support of Will, Court, the board, and my new role. Excited about our opportunities. Will said it best. We both have compelling businesses. And there's a tremendous amount of growth ahead for us. The automotive business starts with a great team, so continue to have the blessing of having Alain in his role with North America, Franck in Europe, Rob leading Asia-Pac, and strategies that we put in place almost a year ago. So in terms of being ready for day one, I think we're there. We have to execute and continue to carry out 2026, but turn into the separation with a lot of momentum, which is what we have. We're going to be focused on supply chain excellence and investment in supply chain, modernizing our supply chain in the U.S.
We've made these investments, as many of you know, internationally over the last couple of years with changes to DCs in Asia-Pac, changes to the DC network in Europe. We now get to harvest that benefit as we turn into 2027 and take all of that learning and apply it in the U.S. now with a team that's ready to deploy the CapEx. We have a great supply chain team here in the U.S. We've got two new DCs coming online this year, three more approved. You'll see us modernize our supply chain in the U.S. because it's important to have the right part at the right time, at the right place. Second part, I think of where we'll be focused is on sales excellence. We have to continue to be competitive in terms of having the right people in the field, the right share of wallet.
We have great opportunities with share of wallet inside the U.S. and internationally, and that also drills down into the opportunity set we have with independent owners. Continuing to drive that benefit we have with that really important part of our network in the U.S. and our operating model. We'll continue to lean in there on sales excellence. I think the third part of where we'll be focused is on just continuing to run great stores. We've done a good job in the last two years of improving the performance of company-owned stores in the U.S. You've seen us go from a -0.5% comp two years ago to mid-single digit comps as we've started this year.
That's just a culmination of all the work we've done in the U.S. NAPA business in terms of foundation, leadership, inventory availability, and now we actually have that ability to carry that back to the independent owner set and drive further sales excellence there. We're excited about our opportunities. I'm thrilled to be a part of this business going forward. It's going to be fantastic. We have two compelling businesses and great opportunities for everyone.
That's great. Just because as we're getting closer to the planned separation of the two businesses, we've passed some critical milestones with the standalone audits and the soon to be filed Form 10. Can you walk us through the remaining critical items between now and the separation date and what, if anything, could move the timing in either direction and what you're prioritizing over the balance of 2026?
Sure. We've had the benefit of this going, touch wood here, pretty smoothly all year long. It doesn't mean there won't be hiccups along the way. We've really divided it into three buckets of work, and you touched on a few of them there. The first and most important is the separation of the business itself.
Yep.
We've got a dedicated PMO team that's focused on the separation. That was important to make sure that the business as usual part, the day-to-day continues to execute. We deliver our numbers and do what we need to do on the day-to-day. That team is dedicated to looking at the contract separation, looking at system separation, and re-architecting process. That's going extremely well. The second body of work, you touched on it, Kate, with the standalone audit of Motion and the Form 10, all of that is in flight. It's on track. Our filings with the SEC are on track. We feel really good about where we stand on that front. Then finally, it's just the rest of the capital markets kind of activity.
The capital structure of the businesses, capital allocation, rolling into investor days, which are December 8th for automotive, December 9th for Motion here in New York, and that'll be the focus in the second half. I don't know that we have anything that I would call out at this point that would move us one way or the other from the first quarter. There's certain things that aren't in our control. Obviously, we have an SEC review process to go through, but as I said, we continue to feel really good about that. We feel good about the work that's being done. So say we're on track. We've had a lot of great announcements through the course of the year with standalone costs, dissynergies, all those things.
Now a leadership announcement, and so we continue to deliver on milestones, and I think that's just a reflection of the progress we're making and how confident we are in where we're headed.
I would just add, of course, the teammates around the world. We've asked a lot of everybody to go through this separation while running the business and delivering on our customer commitments, and I couldn't be more pleased with the work that we've done around the world while we're doing this work, but making sure that we're not losing focus on taking care of customers. It starts and ends with that, and so delivering on our commitments, both internally and externally the first half is something I'm proud that the team's been able to do for everybody.
Yeah, it's a great point that you've been through this major change while maintaining the great financial metrics of the business. Bert, I wondered if I could ask you just how you're thinking about the targeted leverage profile and credit rating for each company post the separation.
For both, I think we've been consistent in saying that we're targeting investment grade for both businesses. We believe we have a strong path to do that. Automotive business, it's important to be investment grade for the supply chain finance program, which many of you are familiar with. We've got all of that work underway right now. We'll be going to the rating agencies later this fall for that conversation and then continue to work on the structure side of it as well. With that investment grade rating, I think we'll still have the flexibility to follow capital allocations for both sides that follow the business strategy, and this will be the moment that we really, as we've been saying, there's no sacred cows.
We're going to make sure that we're setting up and taking the separation as the moment to ensure that that capital allocation strategy follows the business strategy. I think you'll see Motion lean on organic growth-
as a very strong, compelling part of their storyline. That's a space where there's plenty of M&A opportunity.
Right.
You'll see, I think, the industrial side of the business focus on M&A as a leading priority for capital allocation, followed by CapEx. It's a little less CapEx intensive than automotive. Then we'll be focused on shareholder returns as well. On the automotive side, I think you'll see us focus on CapEx as the leading kind of priority, particularly when you think about the point I was making a minute ago about modernizing our supply chain in the U.S. We have a great bolt-on M&A track record in Europe. You'll see us continue to lean in there and have opportunities in the U.S. as well. Then we'll have our opportunities for shareholder return for the U.S. business as well. So we're going to be true to GPC's roots.
We've always been very thoughtful and disciplined about capital allocation, and I think you'll see that as each business separates and shares its investment story, shares its strategic plans, and shares the capital structure and allocation at Investor Day in December.
Kate, I missed the chance to welcome Howard Yu, who will be the CFO at Motion. Just drafting off of the points that Bert made. We're thrilled to have Howard join the Motion team. Howard brings public company CFO experience and in fact, led a spin coming out of Danaher.
He brings a lot of very deep and relevant expertise around all things capital markets, spin-offs, and then capital allocation. We are thrilled to have him on the team. He started yesterday officially and is listening from Atlanta. Good to have you on the team, Howard.
Great. Thank you for that. One thing, just because you just mentioned it, Bert, and I might be putting the cart before the horse, but I just wanted to make sure I did not forget to ask it. Modernizing the supply chain in the U.S. for automotive is a priority for CapEx is what I heard. Do you have line of sight into what that means or what that looks like yet?
Yeah, we do actually, and I mentioned this earlier. Great supply chain at NAPA in the U.S. Over time, I think you are going to see us re-architect our network in a way that makes us more efficient and gets parts closer to the customer at the right time. It is a multi-echeloned approach. I think we will re-architect it in a way that allows us to be smarter about product returns. It will be smarter about import product, and then it will be smarter about how we deploy the product and the availability into the store network. You will see us kind of operate through those three different prisms. The two that come online this year, one is a returns-oriented DC that came online in August. Second facility comes online later in the fall that is more core DC-focused.
When we think about that, we are going to be leaning into probably over time, a net smaller network from where we are today, 60 DCs in North America will probably come down from that, but more efficient and a much deeper use of technology. There is no better time than right now to open a DC with all of the technology that we have available at our fingertips. We actually did what I think is a pretty clever investment just outside of Atlanta. We built a robotics lab where we are actually allowing vendors to test their technology in front of us and compete with each other so that we can take the best of breed technology, whether it is robotics or shelf movers, into a facility and have that be today's technology and have that ability to compete.
The good news is, I think that we're going to do all of this investment in the U.S. within the cost envelope of CapEx that we've been deploying today. It's just a reallocation for where we've been able to deploy that offshore. We get to deploy it now into the U.S. and have a team that's ready and willing to go execute.
Back to the separation. Again, I'm jumping around a little bit, but you mentioned M&A might be a little bit more prevalent on the Motion side. But are we talking maybe larger transformative acquisitions or more bolt-on acquisitions?
I think we'll have a primary focus on doing bolt-on M&A certainly as we get out of the gates. If you actually look at the fragmentation in the market, it would lean towards bolt-on types of deals, just by definition of the landscape of the market. So that will be the primary focus, especially as we come out early days. I think we've demonstrated our ability to do bigger deals with the KDG acquisition.
We've got a playbook that flexes based on the opportunity that we see. We're going to be very disciplined allocators of M&A capital. I think Howard brings that expertise based on his background as well. And we've got some good institutional capabilities around doing smart M&A. We see a really exciting opportunity in M&A, but we also see an equally exciting opportunity in just taking really, really good care of our existing customers, selling more to them, acquiring new customers, investing in our sales folks, being really thoughtful about our multi-channel selling approach, because that's a really profitable way to grow. So we'll do both, and be very thoughtful.
A question we still get a lot is just how we should think about the dividend policy of each.
I think that goes back to my capital allocation point from a moment ago. No sacred cows. As we look at capital allocation, we are going to be thoughtful about the competitive base and what competitors do on shareholder returns as we think about each business. We are going to be thoughtful about what is needed to invest in the business, whether it is CapEx at U.S. NAPA or it is an M&A opportunity at Motion. More to come on the specific policy as we get to Investor Day. Again, we are being really, really thoughtful about taking this moment to be sure that we have set the companies up on an individual basis for success and allow them to pursue all the growth opportunities that they have ahead.
Great. Maybe if we can drill now into the individual businesses, starting with Industrial or Motion. What growth opportunities are you focused on capturing regarding data center infrastructure, and how material is it today?
Yeah, it's not a huge part of our business today. If you actually kind of decompose what goes into a data center, it's not your core traditional Motion product set. We obviously have opportunities in things like hose fittings, some of the kind of specialty solutions offerings that we offer up. That being said, I think it's a big opportunity for us as we evolve. We have all the right relationships, whether it's with hyperscalers on the customer side, whether it's with the vendor base to make sure that we've got the relevant product offering to take care of our existing customers or new customers. Then importantly, we're kind of getting granular to think about what that means for investing back in our selling resources to go and attack the market opportunities, not just by product category, but also by geography. So, it's a big opportunity.
You can get consultants to tell you and kind of try and frame it up. But, the long story short is it's exciting for us as we move through probably the medium term. It's not material today, but it should be an exciting one for us as we move forward.
Great. Then if we can move to the automotive business. Last quarter, you talked about a softer June, followed by a rebound to low single-digit growth in July. Since then, we've heard from a larger competitor who talked about softer demand, particularly from DIY customers. NAPA is more commercial than DIY. But can you talk about a little bit with regards to the recent demand trends and if you're experiencing any kind of similar headwinds and if you're seeing any signs of deferral or trade-down, just given this K-shape economy we keep hearing about and the health of the lower-income consumer?
Yeah, I think you made an important point, which is 80% of our business is B2B, so our retail business is not as pronounced as it is for some of our competitors. I would tell you that we've been really pleased with the sequential improvement through the first half.
On our earnings call, we did talk about what we saw in July and why that was encouraging. We actually haven't seen a material change from what we previously disclosed. What the other competitors are seeing in their business on the retail side, maybe it's business specific, I don't know. I don't run the business. I think we're cautiously optimistic that we've continued to sequentially improve and the environment is difficult, but it's been difficult for some time. I don't think we see a material change in kind of the health of the underlying market from my perspective.
Okay. The comp impact from lapping last year's tariff-related price increases, I think is very well known for the second half of this year. We are seeing some commodity driving pricing increases in specific categories like motor oil, other lubricants. Could that support higher than expected same SKU inflation into the second half of the year?
I think it's possible. I don't think I would deviate from where we've kind of said inflation will be on the top line for the full year despite all the moving pieces. For us, we've approached the last 12 to 15 months with both tariffs and the conflict in Iran with a very customer-centric focus, that you've seen us kind of pass on low single digit price increases, steady as she goes kind of mentality. We think that methodical and intentional kind of level of price increase is good for our customers, particularly in a challenging environment for them. That's going to be our mentality for the rest of the year. We have commented that we think it's a low single digit benefit to the full year, probably with a little less benefit in the second half.
Could this potentially give us a little bit more lift as we look to the full year? Potentially.
I think we'll take the third quarter data here and when we report in October, we'll make sure that we incorporate that and give everybody a good view on what we think the fourth quarter brings. Obviously, there's a lot of moving pieces, but that's true for everyone, right? The conflict, how long it lasts and some of those things and specific pressures on commodities. I think when we think about the commodity space, it's also been well handled on our side. We've got a great merchandising team. We've got good supply and we've got really managed cost increases. And I think that goes back to our size and scale and our ability to work with our partner suppliers and then be really thoughtful about how we put that into the market.
Super proud of what's happening with the teams and how they're handling all these one in 100 things, whether it's the trade war from a year ago or Iran now, and being able to work with the suppliers and use our relationships, but also make that an effective outcome for our customers as well.
We wanted to make sure we asked about the independents, which still account for about 60% of your North American automotive footprint and is a very important part of your go-to-market strategy. You've talked the last several quarters about solutions you have designed to help the independents enhance their operations. We talked a little bit about the supply chain, but can you talk about what other support you're providing, what inning we're in terms of the rollout or adoption and what you think some of the early successes have been from the support?
I think we're in inning one.
Not in inning one with independent owners. Independent owners have been a part of our business for 100 years and
a really important part of our business and great partners for us and a great part of the NAPA brand and story. But in terms of what we can do to make each other better, I think we're in inning one, and I credit Alain Masse for this. He's come in, he's brought that experience from Canada, and he's energized the team to think about this in a different way. And it's a significant opportunity for us as we look ahead. Independent owners have great size and scale. They're great competitors. They're hungry. And I think for the first time, we've really applied the science that we've used on the company-owned stores and taken the positive trend that we've seen there and gone to the independent owner with a lot of credibility. Back to my point earlier, two years ago, we were negative comping in company-owned stores.
Now we're at mid-single digits. It's telling you that all of the investment, all of the tools and technology that we're using are benefiting the company-owned storyline and the performance there. And now we can take that with a ton of credibility to the independent owners and say, "Look, here's what we can bring to you." It starts with putting in quartiles.
As I mentioned on the Q2 call, our top quartile independent owners did a 5% growth rate in the quarter. That's as good as anyone.
It shows how competitive they are. With the rest of the set of independent owners, we're taking them inventory playbooks. This is what you can do in your store. We know that this is the right thing to do because we can look at the inventory of competitors around you. This is where you need to be. You need to be more focused. We can give them sales excellence tools. We can give them pricing technology. We can help them think about how to operate a great store inside the four walls of their own store. What's happening with overtime? What's happening with turnover? I think it's taking that rich playbook and deploying it from the company-owned store side to the independent owner side. The great news is we have a willing partner.
We have a group of owners that really want to win in the marketplace. Alain has got an independent owner council, where we're talking directly with the independent owner base and getting their feedback on how some of these things are happening and where else we can be helpful. Then obviously, we're all leaning into technology, and I think that's another place where we can help the independent owner. What are the tools and technologies do we bring to the table that we already deploy that they can leverage in the store.
Just to wrap up before we go into our four kind of rapid-fire questions, I wanted to be sure I asked about European automotive. The backdrop, I think, is fairly tough in Europe right now, but it was great to see a return to positive comps last quarter for you guys with the European automotive business. Can you talk a little bit about the outlook for that business and maybe where and why you're seeing signs of strength right now?
Yeah. We're really proud of the European team. It is a tough backdrop. They've had a tough backdrop for a couple of years and done a really, really nice job executing, making some hard decisions while investing in the business. We opened a couple of big Distribution Centers. That body of work alone is not easy, even in a good market. There's a lot of really nice execution happening in Europe. I think our results would suggest that we're taking some share. That business has a really bright future. It's got a really nice M&A engine. It's in the right markets in Europe. They're big. They're fragmented. We've invested a lot of capital into that platform in geographies where we really want to win, and we will win.
It's got a fantastic team, led by Franck Baduel, who's been with the business for many years, has kind of come through ups and downs, and knows what it takes to execute in tough cycles. I think we're differentiated in the market with our NAPA brand.
Honestly. In tough times, that's really reset the assortment logic and the assortment strategy in the market where we can offer a better product at a more competitive price and have that be a win-win for the customer and for NAPA. I think there's a lot to like, and I would argue that in tough markets, that creates opportunities for them. We think that will carry on for the rest of the year as well. That was reflected in our updated guide. Maybe a little pressure on the automotive side.
That we thought about. Maybe a kind of continued strong performance out of Motion for the rest of the year. We'll just see once the year closes out and we turn into separate businesses, what we think about 2027. Obviously, investor days are an important moment for us to continue to comment on that. That's the balance of how we thought about it.
I would just observe that, this company and these industries have been choppy and challenged for the recent past.
That's the stuff that we can't control. I've never felt better about the controllable body of work that's happened at the company over the last two or three years. It's all going to culminate in this fantastic opportunity to really let these two businesses shine in their full glory as we turn the calendar year. I'm going to be biased positive, just because I see all the amazing work that's happening at the company. If you continue to control what you can control and do good work, especially in these industries where scale matters and you're competing with folks that aren't fortunate enough to have the resources that you have and the talent that you have, I'm going to lean positive as we look forward to 2027.
Thank you for that. Our second question is around pricing. Do you expect prices to be higher, lower, or the same in the second half of this year versus what you saw in the first half?
I think it kind of sticks with my comment earlier, steady as she goes. We think it's a low single-digit benefit for both businesses for the rest of the year. I don't think we're going to see a material spike upwards, nor do I see it moving downward rapidly. So we love that position of being able to be really smart and methodical about it and try to balance the pressure we feel from maybe cost increases being passed to us with being thoughtful about our customers and trying to help them through what is probably a tougher time too.
Okay. And our third question is on margins. Do you expect to see more margin headwinds or tailwinds in 2027 versus 2026?
Kate, you always like to ask me about next year.
I know.
Rapid fire questions.
This is prescribed, though. I have to ask.
2027. Let's not give 2027 guidance. But let's think about the totality of the momentum in the business. Obviously, the war is a headwind right now. We've reflected that in our commentary so far this year. What happens in 2027 with the war will be a question mark. We'll think about that as we go through the balance of the fall. I'm excited about both businesses. I think both businesses have very compelling stories in terms of expansion of operating profit and margin. Will talked about gross margin opportunities at Motion. I think they're there. They will continue to be there. Those are true on the automotive side of the business as well. We're all being extremely thoughtful about cost. We do have cost inflation that we all deal with, but we're also taking great actions to offset that.
When you put that together, and we continue to build great capabilities on the top line, whether it's sales excellence or even deeper inventory availability, it's the recipe for both businesses to have nice margin expansion going into 2027, absent some other market event that we're unaware of at this point.
Mm-hmm. Our fourth question is on AI. Do you expect a significant increase in efficiency as a result of AI in 2027 versus 2026, and in what areas?
Yeah, I think we are really excited about the opportunities there. I would say our philosophy at the company globally has been to be really measured and thoughtful around the foundation that we are setting up
to utilize AI. Think data governance, think about who is paying for the cost and where does the cost show up. We put a lot of really thoughtful building blocks in place. Our guiding principle is it is supposed to make our customers' lives easier, and it is supposed to make the lives of our teammates easier, and I think there is just endless opportunities to prioritize around that. Things like inventory management, the efficiency of our operations, the productivity of our salespeople. There are just so many wonderful ways in which we can get better for our teammates and our customers. We will obviously, as we go through Investor Day, make sure that we are articulate about what that means for our financials.
Looking forward to that. Thank you so much for joining us today.
Thanks for having us, Kate.
Thanks, Kate.
Good to see you.
Thank you.