Genuine Parts Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 20, 2023

There are 12 speakers on the call.

Operator

Day, ladies and gentlemen. Welcome to the genuine parts company 1st Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded.

Operator

At this time, I would like to turn the conference over to Sid Jones, Senior Vice President, Investor Relations. Please go ahead.

Speaker 1

Good morning and thank you for joining us today for the Genuine Parts Company Q1 2023 earnings conference call. With me today are Paul Donahue, our Chairman and Chief Executive Officer Will Stangel, our President and Chief Operating Officer Bert Napier, Executive Vice President and Chief Financial Officer. In addition to this morning's press release, A supplemental slide presentation can be found on the Investors page of the Genuine Parts Company website. Note, we will not be playing these slides through the webcast. Please be advised, this call may include certain non GAAP A reconciliation of these measures is provided in the earnings press release.

Speaker 1

Today's call may also involve forward looking statements regarding the company and its businesses. The company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest SEC filings, including this morning's press release. The company assumes no obligation to update any forward looking statements made during this call. Now, I'll turn the call over to Paul for his remarks.

Speaker 2

Thank you, Sid, and good morning. Welcome to our Q1 2023 earnings conference call. We were pleased with the continued strength and momentum in our businesses and to report results that exceeded our expectations for the quarter. Before I share my comments on the Q1, I want to share a few thoughts from our 2023 Investor Day, which we hosted just this past month. We use this event to convey our confidence in the bright future of Genuine Parts Company and update everyone on our strategy and the many opportunities we see for long term profitable growth.

Speaker 2

During the course of the day, we highlighted our rich history, ongoing transformation and strategic priorities, which we showcased through several key initiatives in an interactive expo. Our panel discussion with our global business unit leaders Allowed us to share specific business and market opportunities and provide insights to the collaboration among our leaders and synergies across the businesses. Finally, we provided 3 year financial targets, including a compelling outlook for double digit EPS CAGR and a double digit EBITDA and segment profit margin by 2025. It was a great day for the GPC leadership And hopefully an informative and productive day for all of our attendees and everyone in the financial community more broadly. If you missed it, we invite you to view the full presentation on our Investor Relations website.

Speaker 2

So now let's turn to the Q1. We are proud of the outstanding work by our global GPC teammates. With sales and earnings coming in ahead of our expectations, Our Q1 performance was a clear example of how our strategic transformation to a global automotive and industrial company It's a competitive advantage that distinguishes GPC in the marketplace. We benefited from our business mix And the geographic diversity of our operations with continued strong performances in our international automotive businesses and in the industrial segment. A few highlights in the quarter include record quarterly sales of $5,800,000,000 up 9% from the prior year Segment margin of 9.1 percent, up 50 basis points from 2022 Earnings per share of $2.14 up 15% from adjusted EPS last year And our 11th consecutive quarter of double digit adjusted earnings growth.

Speaker 2

And finally, we strengthened our balance sheet while generating solid cash flow to support our growth initiatives and capital allocation. The Global GPC team is focused on driving accelerated sales and earnings growth, continued margin expansion And strong cash flow through dynamic economic conditions. Across our businesses, our teammates are aligned and executing on our In industrial, demand trends held strong throughout the Q1 with new and existing customer activity and reassuring trends each presenting growth opportunities. We believe our continued momentum in Industrial is due to the diversity of our product and service offerings And end markets, which all performed well again this quarter. Our acquisition of KdG And enhanced capabilities in industrial solutions including automation, fluid power and conveyance Are proving to be competitive differentiators and we remain bullish on this business in the near term.

Speaker 2

Our global automotive business continues to benefit from the geographic diversity of our markets, which helped offset the headwinds of a warmer winter And volatile weather conditions in our U. S. Automotive business in Q1. In addition, the automotive aftermarket is And rising interest rates and continued high prices for new and used vehicles. These are all key drivers to ongoing growth in demand, Especially for the DIFM segment, which represents 8% of our global automotive sales.

Speaker 2

So after delivering back to back record years, we are pleased with the solid start to 2023 and we We continue to expect another strong year of profitable growth. Looking ahead, we are confident that GPC is well positioned with the right strategic plans, Strong fundamentals and rock solid balance sheet to pursue accretive organic and acquisitive investment opportunities, We're also returning capital to shareholders through dividend and share repurchases. So again, We thank each of our TPC teammates for taking great care of our customers around the world. So now I'll turn the call over to Will.

Speaker 3

Thank you, Paul. Good morning, everyone. I'd also like to thank the global GPC team for the strong start to the year. We appreciate all your hard work to take care of our customers every day. As Paul referenced earlier, the pride in our business was on display at our Investor Day last month.

Speaker 3

We were excited to share our vision, unique advantages, market opportunities and how we're winning as we execute strategic initiatives. Our initiatives are focused on talent and culture, sales effectiveness, technology, supply chain and emerging technology, all complemented by disciplined M and A strategy. As we shared during the sessions, our team is well positioned with leadership positions in attractive fragmented markets With established customer relationships, global supplier partnerships, technical expertise and a scaled global infrastructure. We work together with shared values as one GPC team to create customer success and shareholder value. Turning our attention to the Q1 performance in our two business segments.

Speaker 3

Total sales for Global Industrial segment were $2,300,000,000 An increase of approximately $240,000,000 or 11.9 percent. Comparable sales growth increased approximately 12.1 in the Q1 versus last year. This marks Motion's 8th consecutive quarter of double digit comparable sales growth. From a cadence perspective through the quarter, January February were the strongest 2 months on a 1 year basis, But on a 2 year basis, sales were relatively consistent throughout the quarter. In March 2023, Motion eclipsed a previous Monthly sales and profit record set in March of 2022.

Speaker 3

The sales growth at Motion continues to be broad based With double digit growth across most product categories and major industries served. During the quarter, we saw strength from industries such as food products, Chemicals, Mining and Oil and Gas. In addition, Motion continues to see solid performance with its corporate account initiatives As sales with these customers grew approximately 20% in the Q1. The corporate account strength is driven from not only new customers, But also strategic renewals of existing relationships. In Asia Pac, our Motion business continues to build on its momentum, Posting sales and profit growth well over 20% for the quarter.

Speaker 3

We realigned the leadership of the industrial business in Asia Pac By organizing under 1 automotive and industrial leadership team in the fall of 2022. The team has made impressive progress to identify Take action and deliver performance. Industrial segment profit in the Q1 was approximately $262,000,000 11.6 percent of sales, representing the 230 basis point increase from the same period last year. The continued profit improvement for this segment reflects excellent operating discipline on strong sales growth both in North America and Asia Pac. In addition, the team in North America continues to build on the synergies from the KTG acquisition last year.

Speaker 3

As we reported at our Investor Day, Thanks to the incredible teamwork from many, Motion realized over $30,000,000 in synergies in the 1st year and we expect to achieve our target of over For the quarter, Global Industrial represented 50% of total GPC segment profit. Turning to the Global Automotive segment. Total sales were $3,500,000,000 an increase of approximately $230,000,000 Or 7% versus the same period in 2022. Total automotive sales benefited from our global diversification As our businesses outside the U. S.

Speaker 3

Posted high single digit to double digit growth in local currency during the Q1. From a cadence perspective through the quarter, global automotive sales were strongest in February March. On a comparable basis, Global Automotive sales increased approximately 7% with comps ranging from low single digits in the United States To low double digit growth in Europe and Asia Pac. As Paul mentioned, we remain encouraged by the solid industry fundamentals and team execution, which we believe will continue to drive profitable growth. Global Automotive segment profit in the Q1 was 264,000,000 Essentially flat with last year and segment operating margin was 7.5% compared to 8.1% In 2022, the strong performance of our European, Canadian and Asia Pac businesses helps To partially offset lower margins in our U.

Speaker 3

S. Automotive business. Profit in the U. S. Automotive business was impacted by Sluggish start to the year on sales combined with planned investments in wages and elevated freight out expense.

Speaker 3

Now let's turn to an overview of our automotive business performance by geography. In the U. S, automotive sales grew approximately 4% The quarter with comparable sales growth of approximately 3%. The Q1 represents the toughest year over year comparison of 2023 With an approximate 12% comp growth in the Q1 of 2022. Looking at our average daily sales, growth was Relatively consistent throughout the quarter.

Speaker 3

However, milder winter temperatures combined with extreme weather events impacted automotive demand In certain product categories and periodically disrupted operations. As examples, sales of batteries were positive, But below internal plans during the quarter, particularly in the Northeast. More broadly, we offset sluggish categories in heating and cooling And undercar with strength in various core categories such as filters, brakes and fluids, all of which had growth above the U. S. Average.

Speaker 3

Growth was consistent across our regions except for our West region, which experienced a more pronounced negative impact from weather, which temporarily disrupted many of our operations. Overall, we estimate that weather negatively impacted U. S. Automotive sales by approximately 1% in the quarter. Sales to both commercial and retail customers were positive With mid single digit commercial growth outpacing retail, our commercial business saw sales increase across all customer segments, including continued strength with our fleet and government channel and mid single digit growth in our NAPA Auto Care network.

Speaker 3

The sales performance at U. S. Automotive started the year slow relative to our expectations. As a result, the team acted during March to address cost while balancing its longer term investment priorities. The benefits of the actions will be weighted towards the second half of the year.

Speaker 3

Sales have improved during the first half of April when compared to March and the team remains focused on delivering in 2023 despite the soft start to the year. In Canada, sales grew approximately 9% in local currency during the Q1, with comparable sales growth of approximately 9%. Our Canadian performance reflects strong growth in several categories like brakes, chassis and filtration, all of which were up double digits in the Q1. In addition, we saw strong performance in our heavy duty business, which outperformed The total Canadian growth rate. These categories helped offset headwinds in certain weather related categories like batteries, which were pressured by a milder winter season.

Speaker 3

We're pleased with the strong quarter in Canada and we continue to see compelling opportunities for long term growth due to our leading market position, solid industry fundamentals, share gain initiatives and strong team execution. In Europe, our automotive team delivered another exceptional quarter with total sales growth of approximately 22% in local currency And comparable sales growth of approximately 13%. The strong growth in market share gains across Europe continue to be driven by solid execution of Key initiatives. During the Q1, we saw high single digit to double digit growth across each of our geographies As our teams continue to win new business with key accounts, drive higher share of wallet with existing accounts and expand the Napa brand in the region. We're on track to grow our naphtha branded sales from €300,000,000 in 2022 to approximately €400,000,000 in 2023.

Speaker 3

Our entry into Spain and Portugal in 2022 has exceeded our expectations and value creation plans As it benefits from the NAPA brand and European scale advantage. In addition, our team is expanding our next drive EV service to approximately 400 locations, up from 150 shops in 2022. We believe our next drive offering will position the European team to lead our industry in the growing EV aftermarket. In the Asia Pac Automotive business, sales in the first quarter increased Approximately 14% in local currency from the same period in the prior year with comparable sales growth of approximately 11%. Both commercial and retail sales continued to perform well with both growing at a double digit rate in the Q1.

Speaker 3

In addition, March saw record sales and profits results across several go to market channels, including REPCO, NAPA and our motorcycle accessories. Asia Pac continues to make impressive progress on its talent and culture and customer centric growth initiatives. We continue to complement organic growth with strategic acquisitions to capture share in our fragmented markets and create shareholder value. During the Q1, we completed several bolt on acquisitions, primarily consisting of small automotive store groups that increased local market density in existing geographies. Our acquisition pipeline remains active And we'll remain disciplined to pursue transactions that extend our leadership positions and create long term value.

Speaker 3

In summary, the global GPC team delivered strong Q1 results and we remain confident in the outlook for the balance of the year Despite a dynamic environment, we will execute our near and long term initiatives and focus on what we can control. Our investments in our people, customer solutions, technology, supply chain and emerging tech will continue to enhance our capabilities and leadership positions. Thank you again to the entire GPC team for the hard work and performance. With that, I'll turn the call over to Bert.

Speaker 4

Thank you, Will, and thanks to everyone for joining us today. We are very proud of our teams as they continue to navigate a dynamic environment, And I'm pleased to walk you through the key highlights of our Q1 performance. Before I get started on the details of our results, I would like to note that we had no non recurring items in the Q1 of 2023. However, comparisons to the prior year do exclude certain non recurring items in 2022, primarily related to the integration of KTG. Total GPC sales increased 8.9 percent or $470,000,000 to 5,800,000,000 In the Q1 of 2023, this reflects an 8.7% improvement in comparable sales, including mid single digit levels of inflation and a 2.4% contribution from acquisitions.

Speaker 4

These items were partially offset by 2.2% unfavorable impact of foreign currency. Overall, our balanced portfolio and global diversification drove record total sales and strong earnings to start the year. Our gross margin was 34.9% in the Q1, improving 30 basis points from our adjusted gross margin last year, primarily driven by ongoing investments in our pricing and sourcing initiatives. The favorable impact of these And other initiatives contributed approximately 60 basis points of core gross margin improvement. These gains were partially offset by 2 key headwinds.

Speaker 4

1st, a shift in sales mix Related to the strength of our Industrial business, which impacted gross margin by approximately 15 basis points and second, foreign currency, which also impacted gross margin by approximately 15 basis points. As we highlighted at Investor Day, Our ongoing execution of key strategic initiatives around gross margin continue to drive strong results. Our total operating and non operating expenses in the Q1 were approximately $1,600,000,000 Up 9% from adjusted expenses in 2022 and in line with the prior year at 27.9% of sales. The increase in expenses in Q1 reflects the combination of solid discipline in managing core costs, offset by planned investments in our teams Due to inflationary wage conditions and increased spending in technology to support our ongoing strategic initiatives. As Will noted, with elevated operating costs pressuring margins in the Q1 in our U.

Speaker 4

S. Automotive business, We have taken actions in March to address these headwinds, which we anticipate to persist into Q2. We expect these cost actions combined with our ongoing discipline on cost across the remainder of the business And the execution of our broad base of strategic initiatives to drive further improvement in operational efficiencies and productivity for GPC. Our performance in the Q1 generated total segment profit of $526,000,000 improvement from last year and our 5th consecutive quarter of segment margin expansion. Our first quarter net income was $304,000,000 or $2.14 per diluted share.

Speaker 4

This compares to adjusted net income of $266,000,000 or $1.86 per diluted share in 2022, an increase of 15%. Our ability to deliver our 11th consecutive quarter of double digit adjusted earnings growth is indicative of the hard work And crisp execution by our teams to implement our strategic initiatives across our global operations. Turning to our cash flows. We generated $198,000,000 in cash from operations in the Q1. This compares to $399,000,000 in cash from operations last year, which included the sale of $200,000,000 in receivables Under our AR sales agreement, free cash flow was $109,000,000 and we closed the Q1 with $2,100,000,000 in available liquidity.

Speaker 4

Our debt to adjusted EBITDA is 1.7 times, which compares to our targeted range of 2 to 2.5 times. We are well positioned with financial strength and flexibility to take advantage of growth opportunities that may become available across the business. We remain committed to our long history of disciplined capital allocation. Our 4 key priorities for capital allocation are unchanged And include investment in our business through capital expenditures and M and A and the return of capital to our shareholders through dividends and share repurchases. In the Q1, we invested $88,000,000 in capital expenditures, primarily around supply chain and technology.

Speaker 4

These investments support many of the initiatives we shared at Investor Day That we believe will drive the modernization of our business moving forward. We also invested $40,000,000 for acquisitions, which remains a key element of our growth strategy. As Will mentioned earlier, we continue to generate a robust pipeline of acquisition targets for our businesses. For the quarter, we returned $194,000,000 to shareholders in the form of dividends and share repurchases. This includes $126,000,000 in cash dividends paid to our shareholders and $68,000,000 in cash used to repurchase 411,000 shares.

Speaker 4

We are well positioned with the cash flow to effectively deploy our capital through all business cycles. Turning to our outlook for 2023. We are updating our full year guidance previously provided In our earnings release on February 23 and reaffirmed on March 23 at our Investor Day, We are raising our guidance for diluted earnings per share to a range of $8.95 to $9.10 An increase of approximately 7% to 9% from 2022. This represents a $0.15 increase From our previous guidance of $8.80 to $8.95 Our sales guidance is unchanged And we continue to expect total sales growth for 2023 to be in the range of 4% to 6%. By business segment, we are guiding to the following: 4% to 6% total sales growth for the automotive segment With comparable sales growth also in the 4% to 6% range.

Speaker 4

For the Industrial segment, we are expecting total sales growth of 4% to 6%, also with a 4% to 6% comparable sales increase and with the ongoing assumption A stronger first half year over year sales growth relative to the second half of twenty twenty three, although our view on Q2 And Q3 has improved modestly. Turning to a few other items of interest. We are raising our outlook for cash from operations to a range of $1,300,000,000 to $1,400,000,000 an increase from $1,200,000,000 to $1,400,000,000 previously. We are raising our outlook for free cash flow to a range of $900,000,000 to $1,000,000,000 an increase from our previous guidance of 800,000,000,000 to $1,000,000,000 We continue to plan for CapEx of $375,000,000 to $400,000,000 for the full year, which includes incremental investments in technology and supply chain among others. In closing, We are very pleased with the strong start to the year and positive momentum in our business.

Speaker 4

While our U. S. Automotive business had a slow start to the year, We've started Q2 with good sales momentum and expect our team to execute, build traction through the 2nd quarter And have a solid second half of twenty twenty three. Our outlook for the full year reflects the ongoing confidence in our strategic plans And our ability to execute through the dynamic economic environment. CPC is truly differentiated With our business mix, global footprint, our size and scale, the execution of initiatives and our talent, We have a unique value proposition.

Speaker 4

As we shared at Investor Day, our team is well positioned to execute our plans to deliver our targets For a double digit EPS CAGR over the next 3 years and double digit margins by 2025. Thank you. And we will now turn it back to the operator for your questions.

Operator

Thank you. We will now begin our question and answer session. And the first question will be from Kate McShane from Goldman Sachs. Please go ahead.

Speaker 5

Hi, good morning. Thanks for taking our question. Just one housekeeping question. Just it sounds like Weather was a little noisy during the quarter, but the fundamentals are still intact. Can you remind us what exposure you have to California or to the West?

Speaker 3

Yes. Kate, it's a good question. I would say we don't have an outsized Exposure to any one region, the breakdown of the U. S. Automotive revenue Probably directionally correct, equally split across the regions.

Speaker 5

Okay. Thank you. And then, I think you mentioned in the prepared comments that because of the sluggish start in January, your team pivoted to some new strategies that will impact the Can you talk a little bit more about what that is and what impact do you think it will have in the second half?

Speaker 4

Yes, Kate, this is Bert. I'll talk a little bit about maybe I'll start with the outlook as a starting point just to give you some context for the full year. I'll talk a little bit about Q2 and then I'll flip it to Will and Will will give you a little bit more color on the cost actions in U. S. Auto specifically.

Speaker 4

When we think about the full year, we did raise the outlook $0.15 that's a 1.5% increase on the top end of our range. Really on the back of a better than expected Q1 and our expectations as we've commented for U. S. Auto to recover against some of these Q1 headwinds And a stronger view on Motion performance over the coming two quarters. When we think about that, do want to remind everyone that we do expect Growth moderate in 2023.

Speaker 4

We had exceptional growth in 2021 2022, but we're still looking at very solid earnings growth at 7 percent to 9% year over year with the new range. The business continues to perform well. We're going to continue to capitalize on size and scale And bullish against our execution of our own strategic initiatives and I think we're off to a great start as we march towards our 2025 targets that we shared on Investor Day. Obviously being very balanced and being prudent against the external factors that are out there, inflation levels, Foreign currency and the geopolitical landscape just to name a few. When I think about Q2 just to give you some color there about how we're thinking about the upcoming quarter, We started off in a good place.

Speaker 4

Global automotive is in line with April, 7% on the top line. And within that, as Will stated in his prepared remarks, U. S. Auto has started off with good momentum in the month of April, accelerating from March. We could see continued strength in international auto and the global industrial business momentum is carried into Q2.

Speaker 4

But again, we do expect that to normalize against the Q1 rate. Those cost pressures in U. S. Auto I think will persist into the early part of Q2 for the balance of the quarter probably. And Will will talk about those just in a moment on what we're doing to get us back to the expected level of performance that we're looking for in the second half.

Speaker 4

One thing I'd remind you too on Q2 is just as you think about your models, recall that Q2 of 2022 Represented our strongest earnings growth last year. And as a result, when we think about our guidance for the full year, the Q2 of 2023 will be our Our expectation will be that it will be our lowest earnings growth rate for this year. So Will, maybe you want to just take that from there and fill in a little bit more specific on the cost actions at U. S. Auto?

Speaker 3

Yes, happy to Bert. Kate, I would say, obviously, the teams around the world have been incredibly focused on cost. So I wouldn't say there's any necessarily new actions or levers being pulled. I think we're just stepping up The urgency and the focus at U. S.

Speaker 3

Automotive, they're predominantly around, as you would suspect, all things people, in particular around More rigor on overtime in stores and DCs, just being super thoughtful to make sure that we're balancing costs with Taking care of our customers, T and E expense. We've also pulled together some accelerated plans around merchandising and freight cost Strategies, which will take a little bit of time to materialize here through the second half of the year. But We're going to balance near term cost actions with as we talked about long term investments and make sure that we're doing the right thing for the business the medium and long term.

Speaker 5

Thank you.

Operator

And the next question will be from Bret Jordan from Jefferies. Please go ahead.

Speaker 6

Hey, good morning guys.

Speaker 4

Good morning, Bret.

Speaker 7

On the U. S. Auto, I think you said the comp was +3. Could you break out price versus units in that number?

Speaker 3

Yes. Brett, so total GPC price mid single digits, global automotive slightly Higher than that, I would put U. S. Automotive in that category, industrial slightly under the mid single digit, low single digit. So probably mid single digit plus is probably a good estimate for U.

Speaker 3

S. Auto.

Speaker 7

Okay. And then you talked about Margin benefits from pricing initiatives and could you talk about what you're seeing out there and I guess auto and And industrial as well. As sort of market share dynamics and how the competitive pricing environment looks This year, obviously, you guys were investing in price a year or so ago, but Auto Plus has gone Chapter 11, so maybe there's some sort of change in dynamics out there as far as the

Speaker 3

Yes, it's a good question, Brett. I would say generally speaking in U. S. Automotive, we haven't seen any material change in the Pricing dynamics as we've talked about many quarters before, it is a dynamic environment. That's why we're so focused on our strategic pricing Initiatives and all the investments we're making there.

Speaker 3

Like every industry, people are picking and choosing and Executing strategies in the market just like we are, but it is a kind of a rational but dynamic market. So We're really not seeing anything materially different than what we've seen in the last few quarters. We're going to focus on what we think is right from a strategic pricing perspective. As you heard at Investor Day, we've put a lot of investment into tools and talent and new rigor around collecting intelligence to make sure that we're In the right place for our customers. You also heard a lot about the Napa brand and the role that that plays in particular in Europe in our assortment And all the great work that our merchants and sourcing teams are doing around the world.

Speaker 3

So we're being very thoughtful in this pricing environment, but I wouldn't say there's material Change, despite some of the developments that you noted in your question. And

Speaker 4

Brett, this is Bert. I'll just add a little bit to that. And you see that Effectiveness with our gross margin expansion here in Q1 up 30 basis points. And within that as I've Mentioned in my prepared remarks, 60 basis points of improvement from these activities that Will just outlined. So the core is really performing well.

Speaker 4

We had some headwinds from Mix and FX, but we're really pleased with how all of that work is flowing through and delivering in terms of gross margin improvement.

Speaker 7

And just sort of follow-up on that point. Now that you've got Asia Pac sort of industrial and auto under one team, the potential to leverage the sourcing, Buying products from the same suppliers for both segments, is that something that you're seeing better traction in down there versus the broader portfolio?

Speaker 3

I wouldn't isolate it to down in Asia Pac. In fact, we just had our global sourcing teammates here in Atlanta from all around the world To build on this exciting momentum where all geographies on both sides of the business will be better aligned and More press on where we have our opportunities. So I wouldn't say that Asia Pac is benefiting now more on sourcing. Having said that, They are benefiting from being together as a team and that's a big part of how they're thinking about their business as they move forward. And so whether you're talking about The organization design, back office cost, etcetera.

Speaker 3

I think there's a lot of opportunities for them to continue to work better as one organization.

Speaker 7

Would you do broader integration globally?

Speaker 4

If it works at Asia Pac, would you

Speaker 7

just think about merging more of the overhead on both sides of the businesses?

Speaker 3

I think we have an opportunity to work together to leverage our scale. The definition of what you mean by merge Business units probably not, but working together as a team, you heard at Investor Day the importance of 1 GPC, That's the perfect philosophy around how do we work together to make sure that we're capturing all the opportunities as a global organization.

Speaker 7

Great. Thank you.

Speaker 6

Thanks.

Operator

And the next question will be from Scot Ciccarelli from Truist Securities. Please go ahead.

Speaker 6

Hey, good morning. This is Josh Young on for Scott. So on the segment margins, automotive down 60 basis points in the quarter, industrial up over 200. You just unpack a little more what the drivers were there for each segment?

Speaker 4

Hey, Josh, it's Bert. I'll take that one and I'll start kind of at the GPC level. When we think about we had margin expansion for gross margin really where we're focused on some of that drag is in SG and A. SG and A was up 10 basis points year over year. That's really a mix of 3 factors inflation, planned investments in the business and then offset by Really strong leverage across the business outside of U.

Speaker 4

S. Auto. For the quarter when we think about how to really think about the elements, I would say we had SG and A pressure about 50 basis points from those planned investments that we shared at the beginning of the year and again at Investor Day In IT and talent. Now some of the talent cost is certainly going to be inflation driven, but we're making very thoughtful investments in talent and IT, Which we see is critical for the future. When you look at U.

Speaker 4

S. Auto, the quarter was impacted by higher personnel costs there and freight delivery costs. So that's the outbound freight from a DC to a store. The wage side was really again the impact A planned investments we made to ensure we're staying competitive. I think everybody is facing that across all businesses and talent is a key part of our long term success.

Speaker 4

On the freight side, we're seeing the impact of higher rates from our carriers as they're looking to do the same thing. We're looking to cover Higher wages due to driver shortages. So those two things on the automotive side were part of the equation. The other thing I would just say is I'd turn back to this weather consideration. We really didn't anticipate that as you would expect none of us are forecasters here in terms of weather, But we didn't anticipate some of those weather impacts particularly coming off the very strong December we had in U.

Speaker 4

S. Auto. So our staffing models were set to align to a sales run rate where we exited 2022 and that was probably a little bit higher than we needed to support Q1 softer sales levels. So all of that together compressed margin in U. S.

Speaker 4

Auto and was a bit of a headwind for us. As we look ahead, the cost of business is doing a little is Of doing business is a little higher and inflationary conditions are certainly contributing to that. We're reducing where we can and again investments we're making in the business that we shared in Investor Day are a big part of driving efficiency. So what I'll do is kind of take that back to the top level again and we talk about these wage investments in IT and why we think they're so important to us. On the IT side, we're making investments to Our capabilities and modernize our platforms and Naveen shared that extensively last month.

Speaker 4

We think those are the right things to do, but in certain cases the pivot in that Space is the cloud based technology and as many of you know that changes the dynamic from a capital cost to an operating cost And as I shared earlier this year, that's about a 30 basis point drag for us for the year. On the talent side, it's a very competitive market out there for talent and we're making smart With our people with a mid single digit wage increase, I think that's in line with most businesses. It's slightly higher for us than 2022. And we also made the decision to take some of the healthcare costs we were seeing and absorb them here at the corporate level rather than what we might normally do And pass those on to our employees through higher contributions from them. And that's the right thing for our team right now.

Speaker 4

So I take that altogether. We got a little bit of deleverage for the year 30 basis points to 40 basis points. Those two things are 60 basis points. So you can see We're really leveraging outside of that U. S.

Speaker 4

Auto business right now. And with that, we expect the segment margin for the full year to be Up 20 basis points to 40 basis points. And as you saw in Q1, we were up 50 basis points.

Speaker 6

Got it. Okay. That's helpful. And then could you just walk us through what you saw in terms of inflation during the quarter and what your expectations are for the balance of the year here?

Speaker 4

Sure. Yes, I'll take that one as well. As we look at Q1, inflation moderated slightly during the quarter that was in line with our expectation. Again, we think monetary policies Here in the U. S.

Speaker 4

And around the world are having the desired effect, but that does take a little time to flow through. Q1 inflation and sales, All GPC total was mid single digit, auto was high single digit and again industrial which has been very consistent low single digits. Our expectation for inflation for the rest of the year is for it to continue to moderate. That's pretty consistent with the view I just shared at Investor Day. Obviously the actual impact is yet to be seen, but our assumption is that the automotive business will tick down from high single digits So low single digits to close out the year.

Speaker 4

Industrial stay in that low single digit range and that for GPC that translates in us going from mid single

Operator

And the next question will come from Christopher Horvers from JPMorgan. Please go ahead. Christopher, your line is open. Perhaps your line is muted on your end.

Speaker 8

Thanks. Good morning, everybody. So a couple of follow-up questions. First, is it fair to say that you were expecting U. S.

Speaker 8

Naphtha to be more like 4% comp for the Q1 considering you pointed out a point of headwind on the weather side. And is that a fair interpretation And of where the business is running in April?

Speaker 3

The first part of your question is Fair. And the second part of your question is fair.

Speaker 8

Okay. And so dovetailing back to the U. S. The NAPA division, you talked about 20 to 40 basis points of segment margin Fanchion, so was it the original is the original plan that you would deleverage the NAPA Operating margin due to the investments?

Speaker 4

Chris, this is Bert. So when I talked about 20 to 40 basis point the segment margin improvement, I'm talking about GPC consolidated. I don't really want to get Into parsing the onion too finally between the elements of that, but we were not expecting margin declines in either segment for the year. Math would be difficult to achieve 20 to 40 basis points being up consolidated for either of the two segments to be down year over year. Look we had a softer start to the year in U.

Speaker 4

S. Auto. We've got a great plan here in place with some cost actions we're taking that will take a Time to build traction in auger end through the quarter. We're looking for a really solid second half there and building that momentum across and we feel good about them.

Speaker 8

Got it. And then just on the freight front, understanding that there's some wage cost being pass through and driver shortages, But fuel prices surged in March of last year and All your freight out, I'm assuming is a periodic expense. So should the freight start to be a tailwind here in the second quarter? And How long before maybe some of the capitalized freight costs turn to a tailwind later in the year? Thank you.

Speaker 4

Yes. Thanks, Chris. It's Bert again. Look on the cost of ocean freight, those that are included in our inbound and cost of goods sold. My gross margin projection for the year and our guidance assumes we get a bit of a tailwind of that in the second half.

Speaker 4

That's clearly our expectation. I think that's in line with the market. On the outbound freight, diesel fuel is still up year over year just slightly in the quarter. It started out January, I think in the north of 20% moderated a bit in February into the teens and then turned positive in March. The net sum of that was about a 3.5% increase for the quarter in fuel cost.

Speaker 4

And so we had a bit of a headwind there on Top of the rates we're getting from the carriers in terms of fuel as it relates to diesel and that's the primary component of that delivery Cost as we think about fuel when it goes from the DC to the store. We would expect that if March is an indicator that that will start to tick down a bit and be a benefit to us. Will mentioned that we've got some actions related to that. On the labor side, I think it's pretty sticky though when we think about these carriers and we're all facing Higher wages, year over year the cost of doing business is undeniably higher because of wage rates and I don't think those will abate, but we might get a little bit of a tailwind here on Fuel aspect and see how that maps itself out over the next couple of quarters. Sorry for the long run.

Speaker 8

Got it. Thanks very much. No, thank you so much.

Speaker 2

Thanks, Brett.

Operator

And the next question is from Ms. Suzuki from Bank of America. Please go ahead.

Speaker 9

Great. Thank you. Just I guess this is more of a theoretical question about acquisition opportunities. I mean historically you've acquired businesses that are performing well, but To bring GPC's distribution capabilities to that business, would that ever be considered as an acquisition target?

Speaker 3

Yes, Liz, it's a great question and the answer is yes. We're going to do deals that create value that align with our strategy Regardless of how they're performing. And I would say our capabilities in this part of the business positions us pretty well as the environment gets Tougher. We're going to be really disciplined on whether they're a good business or a challenged business. But if we can create value and it makes sense our strategy, I think the power of our balance sheet and our liquidity position, is that's exactly the type of environment that we want to operate in so we can Leverage our scale.

Speaker 9

Got you. And then just on the guidance for the year, the interest expense came down just a little bit. So it sounds There are no near term plans to take on additional leverage, but just wanted to get your thoughts about that and on your current debt level And any near term plans for cash outside of the opportunities that you laid out already in the slides?

Speaker 4

Hey, Liz, it's Bert. Look, there's nothing in the near term that has really changed or really for the balance of the year in terms of how we're thinking. Interest expense come down a bit. We've had a little less need to borrow against our revolver intra month, which has been a bit of a benefit to us and intentional. And then when we think about the uses of cash and our capital allocation for the year, it's still pretty balanced.

Speaker 4

We don't have anything Than what we shared at Investor Day and no different plans. The only thing that's on the horizon is we've got a debt maturity at the end of the year And obviously, we'll want to be thinking about the environment that the capital market brings to us as we get closer to that on how we think about Refinancing or paying back or some of the various options we might have. So again, just being really disciplined as we always are, being faithful to our four Priorities on capital allocation and no surprises for you guys.

Speaker 9

Perfect. Thank you.

Speaker 3

Yes. Thanks, Liz.

Operator

And the next question is from Greg Melich from Evercore ISI. Please go ahead.

Speaker 10

I had a follow-up on auto and then Turning to Industrial. I just want to make sure on the auto margin, it looks like the decline was pretty much all in the U. S. Business. Is it fair to say that both Europe and Asia Pacific segment auto margins were up year on year?

Speaker 3

That's fair to say.

Speaker 10

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?

Speaker 4

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 KTG 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.

Speaker 4

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 then what we see for the next several quarters.

Speaker 2

Hey, Greg, this is Paul. I would just cap off both those comments. When you think about the 2 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 multiyear diversification strategy.

Speaker 2

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.

Speaker 10

Great. Well, congrats guys and good luck.

Speaker 6

Thank you, Greg. Thanks, Greg.

Operator

The next question is from Seth Sebastian from Wedbush Securities. Please go ahead.

Speaker 11

Thanks a lot and good morning. My first question is just on the weather effects going forward. And during the gyrations you saw through the winter, do you expect the weather to be a drag on sales through the balance of the year?

Speaker 3

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 impacts from

Speaker 2

weather. Seth, I've been at this a number of years. It was a crazy quarter. When I look back at our call in January, We are sitting here in Atlanta and it was 80 degrees. Yet many parts of the country were shut down with incredible Snowfall.

Speaker 2

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 balance of the year.

Speaker 11

Understood. And in terms of the 100 basis points drag from weather in the quarter, was it more pronounced in the DIY side than the do it for me side?

Speaker 3

Seth, I don't think we can make a distinction between DIY and DIFM from a weather perspective. I mean 80% of our businesses do it for me. So But there's no distinction between the 2.

Speaker 11

Fair enough. Thank you.

Speaker 2

Thanks, Seth. Thanks, Seth.

Operator

And our final question for today will come from Daniel Imbro from Stephens Inc. Please go ahead.

Speaker 6

Yes. Hey, good morning, everybody. Thanks for taking our questions. I wanted to start as a follow-up on the industrial margin of outlook you guys provided, Bert talked about 12% guidepost. If I look at 1Q, really strong expansion, but growth was up Double digit.

Speaker 6

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 Q1? Or how would you think about the pace of industrial expansion As that headline growth flows through the year?

Speaker 2

Well, I don't want to

Speaker 4

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 top line growth modeled 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.

Speaker 6

Great. I appreciate that color. And then to follow-up on the Automotive margins, not to beat a dead horse, but you mentioned the wage investments and kind of I think you mentioned 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 in when do we begin to lap fees and we could return to levering That wage line on a lowtomidsingledigit type comp is what's that kind of outlook look like on those investments you're planning on making in the business?

Speaker 4

Well, look, I'll just tell you that we've spent the last 12 months or so moving down the P and L in terms of Inflation impact starting with the top line 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 and L And that's now moving into freight lines, SG and 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 to call the inning on that one is a little difficult.

Speaker 4

I just go back to the point that in this highly inflationary environment, no question the floor has been raised on the cost of doing business. It's not just here in the U. S, 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.

Speaker 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 emphasized the importance 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. So I think that's a great data point on how we're Thinking about modeling this going forward and obviously my guidance contemplates that as do our 2025 targets.

Speaker 6

Yes, makes a lot of sense. Thanks so much for all the color this morning.

Speaker 2

Thanks, Daniel. Yes.

Operator

And ladies and gentlemen, this concludes our question I would like to turn the conference back over to management for any closing remarks.

Speaker 2

Yes. Thanks, Chad. We appreciate it. And listen, we appreciate All the questions and all of you joining us this morning. As I hope you've heard, we're incredibly pleased with the strong start to the year, And we could not be more proud of the great work being done on by all of our GPC teammates around the world.

Speaker 2

We continue to be excited with the momentum this business is generating. So I hope you feel that and heard that today in our comments. So Listen, all of you have a great day wherever you are and thanks for your interest in GPC.

Operator

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now

Remove Ads
Powered by Quartr
Earnings Conference Call
Genuine Parts Q1 2023
00:00 / 00:00
Remove Ads