Genuine Parts Company (NYSE:GPC) Q1 2023 Earnings Call Transcript

Is it fair to say that both Europe and Asia Pacific segment Auto margins were up year-on-year?Bert Nappier That’s fair to say.Greg Melich Got it. And then the — on the Industrial side, how sustainable is the expansion rate, but also just the level that you’ve gotten to in industrial? Is something changed there about the fundamental profitability of that side of the business?Bert Nappier Greg, this is Bert. I wouldn’t say there’s anything fundamental that’s changed other than just continued strong momentum and building on the actions in that business over the last couple of years. You build on industrial team that — and the Motion team that is executing at a very high level, their core business, a stellar integration of KDG and how we’ve achieved synergy, which was transformational in driving additional size and scale and creating opportunity.

That combination has allowed us to continue to improve margin in that business.As we shared at Investor Day, we’re looking at that business being at a 12% level. And so, we’re marching towards that as a target. And, obviously, this quarter gave you a glimpse of our progression in that regard. And I think we’re on the right track to hit that level of profitability as we shared at Investor Day based on what we see right now and what we see for the next several quarters.Paul Donahue Hey, Greg, this is Paul. I would just cap off both those comments. When you think about the two businesses, Auto and Industrial, and we’ve talked about this a good bit in the past. We talked about it during Investor Day.If you go back a few years, we laid out our multi-year diversification strategy.

And I would tell you, this is a classic quarter where that strategy is really paying dividends. And it’s — and hats off to our teams, our Industrial team, our international teams all really delivered in Q1. We could not be more proud of them.Greg Melich Very well. Congrats guys and good luck.Paul Donahue Thank you, Greg.Will Stengel Thanks, Greg.Bert Nappier Thanks, Greg.Operator Next question is from Seth Basham from Wedbush Securities. Please, go ahead.Seth Basham Thanks a lot and good morning. My first question is just on the weather effects going forward. Given the gyrations you saw through the winter, do you expect the weather to be a drag on sales through the balance of the year?Will Stengel Hey, Seth, it’s Will. Listen, I don’t — I’m not in the — I don’t think any of us are in the business of forecasting the weather as we move forward.

So, no, we haven’t modeled in any of our forward commentary or outlook impact from weather.Paul Donahue Seth, I’ve been at this a number of years. It was a crazy, crazy quarter. When I look back at our call in January, we were sitting here in Atlanta, and it was 80 degrees, yet many parts of the country were shut down with incredible snowfall.At this point in time, all we’re going to do is we’re going to focus on what we can control. And our businesses are all performing at a really high level. We expect that to continue regardless of what Mother Nature has in store for us in the balance of the year.Seth Basham Understood. And in terms of the 100 basis points drag from weather in the quarter, was it more pronounced on the DIY side than the do-it-for-me side?Will Stengel Yes, I don’t think we can make a distinction between DIY and DIFM from a weather perspective.

I mean, 80% of our business is do-it-for-me. So — but there’s no distinction between the two.Seth Basham Fair enough. Thank you.Paul Donahue Thanks, Seth.Will Stengel Thanks, Seth.Operator And our final question for today will come from Daniel Imbro from Stephens Inc. Please, go ahead.Daniel Imbro Yes. Hey, good morning, everybody. Thanks for taking our questions. I wanted to start as a follow-up on the industrial margin kind of outlook you guys provided. Bert talked about kind of 12% guidepost. If I look at 1Q, really strong expansion, but the growth was up double digits.Obviously, the guide is calling for growth to slow to get to that 5% midpoint for the year. It’s your expectation, just to make sure we understood that correctly, margins would still be up year-over-year for the coming quarters, just maybe up less than the first quarter, or how would you think about the pace of industrial expansion as that headline growth flows through the year?Bert Nappier Well, I don’t want to get into giving quarterly guidance on the Industrial segment, but I’ll just talk about the full year and tell you that when you think about the industrial business, we’ve got, as we — I think we’ve said repeatedly high single-digit topline growth model for the first half.

That moderates down to low single digits in the second half based on our expectation of economic conditions, which could obviously change. Even with all of that, even with a low single-digit outlook for the second half, we’re expecting the segment to improve its margin for the full year.Will it be at the same rate as Q1? No. We’re not modeling that, and you know that from our full year guidance. But in a lower growth moderated environment in the second half that business will still perform well on a margin basis, and we expect that margin to expand for the full year, which is why we’re looking at overall GPC margin expansion for the full year as well.Daniel Imbro Great. I appreciate that color. And then to follow-up on the automotive margin, not to beat a dead horse, but you mentioned the wage investment and kind of I think you mentioned it in the question, the cost of doing business has gone up.I guess, what inning are we in, in terms of those wage investments as and when do we begin to lap these and we could return to levering that wage line on a low to mid-single-digit type comp?

Just what’s that kind of outlook look like on those investments you’re planning on making in the business?Bert Nappier Well, look, I’ll just tell you that we spent the last 12 months or so moving down the P&L in terms of inflation impact, starting with the topline and cost of goods sold, I think all businesses, so I don’t want to put us in some unique camp.I think all businesses are starting to feel the impact of inflation in the heart of the P&L. And that’s now moving into freight lines, SG&A, personnel costs, and some of those things.To call the inning on that is really tough. My dad was a baseball coach, and I like to say that I’m baseball-ready, but the call to inning on that one is a little difficult. I just go back to the point that in this highly inflationary environment, there’s no question the floor has been raised on the cost of doing business.

It’s not just here in the US, it’s around the world.And the best indicator for that is what all companies are facing right now with inflation on wages. I don’t want to give you a precise estimate on a range of leverage. I think historically, the company has been talking about a 3% to 4%. If it’s been 3% to 4%, it’s probably floating closer to the higher end of that range.But the thing we’re focused on, and I think it underscores and emphasize the importance of doubling down on these investments and initiatives we’re making in productivity and efficiency, modernizing our operations, and the things you heard about at Investor Day will help us. And then we’re always going to be faithful to driving leverage and reducing costs where we can.And you saw a great example of that in the business this quarter with the leverage we gained in the Motion business and the International Automotive businesses.