True Transformation of Working Capital Management

Genuine Parts Company (GPC) is nearly a century old, but it certainly isn’t heavy. Founded in 1928, the company distributes automotive and industrial parts. For 85 years, GPC’s operations have focused on North America, but 2013 marked the start of a global expansion. After acquisitions in Australia and New Zealand, the company also began to establish itself in Europe.

“I have worked for Genuine Parts Company for almost 17 years,” said Matt Brigham, vice president and assistant treasurer. “The business has grown tremendously and I’ve seen a lot of changes over that time. It is very exciting to experience the transformation of our company.

When Covid-19 hit in 2020, liquidity in the automotive sector – which accounted for around 60% of GPC’s revenue at the time – was as tight as in much of the economy. “Like many businesses, we’ve seen a significant impact on sales,” says Brigham. “Mobility was limited and consumers weren’t driving, which seriously hurt our revenue. The duration of the period of disruption was uncertain and, at the same time, we wondered if we would continue to collect our receivables. We needed to demonstrate to the investment community and all of our stakeholders that GPC’s business was sustainable despite the widespread disruption. »

Claims ultimately didn’t suffer much, which Brigham attributes to Covid relief provided by governments around the world. Nevertheless, he adds, “the pandemic has made us realize some things that we hadn’t thought about before. One was that we were too dependent on certain partners. We have seen that our competitors use multiple sources of funding, including the public debt market. GPC had not issued bonds before; the management team decided it was time to do it.

“We went out with our management team and talked to Moody’s, S&P and Fitch,” says Brigham. “We got our credit ratings, which gave us access to a whole new financing market.”

At the same time, GPC needed to make improvements to its working capital management to tap into additional cash and give the company’s North American, European and Australasian divisions maximum financial flexibility. However, Brigham and his colleagues were clear from the start that rushing suppliers by extending payment terms was not the solution.

Many GPC vendors faced their own challenges. After all, the pause in consumer spending has affected companies across automotive supply chains. Some key suppliers lacked access to affordable capital even as cash flow suffered at the start of the pandemic. “We view every relationship with a supplier as a partnership; we want people to be proud to work with us,” says Brigham. “Some vendors offered extended terms to help our business, so we wanted to be able to offer them attractive financing with our banking partners in exchange.”

The Treasury launched a project team focused on liquidity and working capital issues. They evaluated different strategies to generate global liquidity while strengthening the financial positions of GPC and its suppliers. As they found solutions, they had to align a range of internal stakeholders, including executives, technical accounting, finance, business process improvement, accounts payable (A/P) , accounts receivable (A/R) and IT teams, as well as external auditors.

The group identified several key objectives. One was to proactively avoid any potential debt commitment issues that might arise as a result of the pandemic disruption. “No one knew how long Covid would last,” Brigham says. “We did not know if the covenants on our term debt would be triggered. We therefore modified our existing credit facilities and, shortly after entering the public debt market, we repaid our floating rate term loan.

GPC has also developed an A/R sales program. “It’s an idea we’ve had for many years,” Brigham says. “A/R is one of our main strengths. We kept dithering, but then Covid hit, and we decided the time was right to move forward with this initiative.

Now, GPC is selling accounts receivable from its automotive and industrial parts business to an unaffiliated bank. The program does not change anything for customers; they send their payments to the same safe and GPC manages the cash applications. But the client account is no longer on GPC’s balance sheet, meaning the company has access to a lot more cash. The value of receivables sold under the program has increased from US$500 million at the start of 2020 to US$1 billion in January this year.

On the accounts payable side, says Brigham, “Our banking partners’ supply chain finance programs have proven to be a great way to allow suppliers who give us extended payment terms to take advantage of our credit rating. We want the best possible terms, but we don’t want it to be a financial burden on the supplier.

Some of GPC’s banking partners have voluntary supply chain finance programs that allow suppliers to sell their corporate receivables to certain banks without recourse. The project team wanted to extend the benefits of these programs by increasing participation. “Many banks have also felt the impact during Covid,” says Brigham. “They were worried about being too exposed to single customer or supply chain finance programs. So, as we considered how to grow our program, it made sense to expand our relationships with our funding partners in North America, Europe, and the Australian and New Zealand market.

Bringing in financing partners in each geographic market would help ensure that GPC providers around the world can access the benefits of early payment. However, before making the case to lenders in the different regions, the project team often had to introduce them to the company. “To start, we had to give them a history of our company, educate them on our strategy, and get them comfortable with our industry and with GPC,” says Brigham.

In addition to expanding the geographic reach of available financing, “the diversification of our banking partner base opens up new opportunities for us,” Brigham points out. “Having multiple lenders stimulates competition. Our banking partners know that we have other banks that provide us with both market information and good ideas. When we want to do business in a new region, we have access to a network of banking partners that we can call upon.

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The project team also expanded vendor platform options, ending up with 28 banking partners participating in five different supply chain finance programs. Brigham explains, “The main reason we have multiple platforms is to give options to our vendors.”

The interest rates at which suppliers discount their receivables (the debts of GPC) vary slightly between the five platforms. “In most cases, the prices for supply chain finance programs are better than what the supplier could obtain in the capital markets, whether through its revolving credit facility, a private placement or public debt markets,” Brigham said. “Most importantly, when suppliers use the supply chain finance program to accelerate receivables, they are not using their own capital to give us extended terms. This leaves them with their credit facility available to run their business.

Overall, says Brigham, “our expanded supply chain finance program is truly a win-win. Genuine Parts Company has generated tremendous cash flow benefit for the business through extended payment terms, and our suppliers can use our strong balance sheet to fund their operations.

GPC’s customers represent a third winner in the working capital equation. Because GPC and its suppliers can continue to adequately fund their operations, “our customers can put our auto parts in their vehicles to get them running again. And on the industrial side, we help manufacturers big and small keep their factories running,” Brigham concludes. So, in the end, the project team achieved a win-win-win working capital.