Genuine Parts Company

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company fourth quarter and full year 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I'd like to turn the conference over to Sid Jones, Senior Vice President, Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us today for the Genuine Parts Company fourth quarter and full year 2020 conference call. With me today are Paul Donahue, our Chairman and Chief Executive Officer, Carol Yancey, our Executive Vice President and Chief Financial Officer, and Will Stengel, our newly appointed President. As a reminder, today's conference call and webcast include a slide presentation that can be found on the Genuine Parts Company Investor Relations website. Before we begin this morning, please be advised that this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our reports as reported under a generally accepted accounting principle. A reconciliation of these measures is provided in the earnings press release issued this morning, which is also posted in the investor section of our website. 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. Finally, consistent with the prior two quarters, we've accounted for the business product segment, SP Richards, as discontinued operations for all periods presented. Now I'll turn the call over to Paul for his remarks.

Thank you, Sid, and good morning, everyone. Welcome to our fourth quarter and full year 2020 earnings conference call. We appreciate you joining us today and hope you are all staying safe and well. Our fourth quarter results reflect the benefit of our ongoing strategic actions, despite the continued challenges of COVID-19. The GPC team was agile in adapting to dynamic conditions and executed on our initiatives to deliver customer value, operational efficiencies, and strong financial results. We are grateful to our 50,000 associates for their unwavering commitment to excellence while responding to unprecedented business and economic conditions, which have continued for nearly 12 months. Our operational focus is on ensuring a safe work environment supporting our talented workforce, and further strengthening our strong culture. In January, we are pleased to promote Will Stangle, the President, and we now welcome Will to this quarterly call. As our Chief Transformation Officer since 2019, Will helped our business units work to achieve a variety of strategic initiatives and significant cost savings in 2020. Will's vast skill set and relevant experience in his previous career with HD Supply have added tremendous value to our management team. His exceptional talent, proven leadership, and experience make Will an excellent choice as our company's next president, and we look forward to his future contributions. You will hear from both Will and Carol later in the call, and then we'll take your questions. So now turning to our fourth quarter financial results. Total sales for the quarter were $4.3 billion, down 1% due in part to the continued challenges of COVID-19. While our automotive sales were strong in Asia-Pac, the pace of recovery slowed in Europe and North America relative to the previous quarter. Industrial sales grew progressively stronger during the final three months of 2020 and were much improved from the prior two quarters. We further improved gross margin, and in fact, the fourth quarter was our 13th consecutive quarter of gross margin expansion. In addition, we successfully took action to reduce costs, lowering our year-over-year operating expenses. For the quarter, we generated an additional $40 million in permanent cost savings and realized another $40 million in temporary savings related to our response to COVID-19. Our progress in these areas drove a 14% increase in total operating profit and an 8.8% operating margin. This 110 basis point improvement in operating margin from the fourth quarter of 2019 was supported by margin expansion in both the automotive and industrial segments. Our strong operating performance drove adjusted net income of $221 million and adjusted earnings per share of $1.52, up 20%. Due to ongoing working capital and debt financing initiatives, we also finished the quarter and year with a strong balance sheet, ample liquidity, and robust cash flow with $2 billion in cash from operations in 2020. Turning now to our business segment, automotive represented 66% of total sales in the fourth quarter, and industrial with 34%. By region, 73% of revenues were attributable to North America, with 16% in Europe and 11% in Asia-Pac. Total sales for the global automotive group were $2.8 billion, a 1% increase from 2019, with comp sales down 2%. Segment profit margin was up 130 basis points, driven by improvement in each of our automotive operations. Fourth quarter sales were led by strong growth in Asia Pac with continued retail and commercial sales momentum driving a second consecutive quarter of mid-team sales comps. The Asia Pac team performed well all year and deserves a special shout out on their exceptional results. So congratulations and a big thank you to Rob Cameron and the entire automotive team down under. In Europe and North America, the surge in COVID cases led to more restrictions on mobility and mild weather through most of the quarter pressured sales of seasonal items. A second lockdown in November significantly slowed sales activity across Europe, although sales gradually improved through December, driving flat comps for the quarter. We would add as well that despite the challenging conditions in Europe overall, Our UK operations continue to outperform with solid results for the quarter. Additionally, the positive impact of our cost savings initiatives more than offset the sales pressure, and the European team produced a 100 basis point operating margin improvement. This caps a strong recovery in Europe's operating performance over the second half of 2020. In North America, our U.S. automotive total sales and comp sales declined approximately 6%. Despite the sales decrease, the U.S. team generated a 200 basis point improvement in operating profit margin. In Canada, quarterly sales were down slightly, comp sales declined 2%, and operating margin improved by 40 basis points. Growth in sales for our retail customers continued to outperform expectations, while sales to the DIFM segment remained challenged. Through the quarter, DIY sales were strong, driven by COVID-related shifts in consumer behavior and stimulus payments, and stronger NAPA sales positioning, resulting from several key initiatives. These include our ongoing store refreshes, investment and retail specialists, the benefit of our NAPA rewards program with 12.5 million active members, targeted promotions, and enhanced merchandising initiatives. In addition, our growing omnichannel capabilities, including direct-to-customer shipping from select suppliers, enabled our team to double our online sales volume from pre-pandemic levels. DIFM sales were down from 2019 as a slow recovery in miles driven, mild temperatures, and continued pressure in our large fleet and government customer segment weighed on sales demand. To address these declines and build positive momentum in 2021, our team has focused on several initiatives, including maximizing sales force effectiveness by repurposing our field resources and doubling the number of professional salespeople calling directly on our end customers, the professional repair garages. Continued enhancement of our industry-leading commercial programs and promotions for the professional customer, including NAPA AutoCare and AutoPro. Improving our inventory availability, utilizing enhanced analytics to ensure more parts for more cars across our store networks. Strengthening our supply chain, focusing on our global supplier relationships, as well as ensuring we have multiple suppliers by category. While we are seeing gradual improvement with supply chain service issues, there is more work yet to be done. And finally, further optimizing our network, including DC consolidations, increasing automation in our facilities, and additional daily shuttles. In 2021, we will also continue to execute on several global initiatives and invest in our omnichannel strategy, both B2B and B2C, to enhance and build new digital catalog and search capabilities, implement strategic pricing initiatives, focus on value-added services, and continue our rollout of the NAPA brand in Europe and Australasia. We also have plans to expand our global store footprint with additional bolt-on acquisitions, changeovers, and new greenfield stores to enhance our competitive positioning across our automotive operations. These initiatives are designed to deliver customer value, sell more parts, and capture market share. To that end, we are pleased to report a strong start in 2021. With January, average daily sales up low double digits in the U.S. and for our global automotive group. Backing out the positive impact of FX and acquisition revenues, comp sales were up high single digits in January. We would add that we continue to see little impact of price inflation in our sales, although we expect to see more supplier increases in the coming months and quarters, possibly in the 1% to 3% range for the full year. So in summary, we believe improving product availability, colder winter weather in North America and Europe, and the gradual reopening of the economy are current tailwinds for automotive business. In addition, favorable industry fundamentals, a growing total vehicle fleet, an increase in vehicles aged 6 to 12 years, and expectation for the gradual recovery in miles driven give us confidence in our growth expectations for 2021, despite the ongoing uncertainties due to COVID-19. So now let's discuss the global industrial parts group. Total sales for this group were $1.4 billion, down 3.3 percent from last year. Comp sales were down 4.4 percent, a significant improvement from the 9 percent decrease in Q3 and the 17 percent decrease we saw back in Q2. The steady recovery in sales over the last half of 2020 is consistent with the gradual improvement in the industrial economy which is evident in indicators such as the Purchasing Managers Index and industrial production. Strengthening conditions, combined with our ongoing initiatives to drive growth and lower cost, resulted in a 70 basis point improvement in segment profit margin and our strongest quarterly return on sales since the fourth quarter of 2007. Sales in North America and Australasia showed similar sales trends for the fourth quarter overall. although December was the strongest month in the quarter in North America. In addition, the most key product categories achieved positive sales growth in December with improved month-to-month sales trends among virtually all the industries we serve. We expect to build on these favorable trends in 2021. As we move forward into 2021, which is Motion's 75th year in business, The industrial team will continue to execute on strategic initiatives to drive profitable sales growth, improve operational productivity, and deliver customer value. These initiatives include building out our omni-channel capabilities to drive organic sales, optimize the value of the motion website, and accelerate e-commerce growth. Growing our services and solutions business to expand our expertise in areas such as repair, conveyance, and automation. Ongoing discipline M&A to further boost our products and service offerings while expanding our global footprint and market presence. Enhancing our global pricing and product category management strategies to ensure sales excellence, margin effectiveness, and a product offering that evolves the Motion brand globally, and optimizing our global distribution network via enhanced automation and facility rationalization to lower cost, improve productivity, and deliver excellent customer service. We are confident that our focus on these key initiatives will optimize our competitive positioning as the industrial markets recover to full capacity. We are encouraged to see releases of capital project orders that were on hold throughout most of 2020, which is a positive sign for our greater plant activity in the months and quarters ahead. In addition, we are pleased that our supplier service levels are strong, despite extended lead times on select items, and our inventories are in good position to meet expected growing demands. Finally, we currently expect another year of reasonable 1% to 2% price inflation from our suppliers, which compares to inflation of just under 1% in 2020. For additional perspective, we experienced positive sales momentum in January, with average daily sales up 2% for the month. This is better than the sales trends we reported in the third and fourth quarter of 2020, and is a testament to the great work done by the entire industrial team. So despite the ongoing challenges of COVID-19 and its uncertain impact on the global economy and our markets, we are confident in our plans for the industrial segment and look forward to a strong 2021. So let me conclude by providing an update on our ESG initiative. At GPC, we embrace our responsibility to innovate in ways that also benefit our environment, our associates, and the communities in which we operate. Our ESG practices, including human capital management and diversity and inclusion, are discussed in our 2020 Corporate Sustainability Report. In addition, our Board of Directors adopted a formal human rights policy which communicates the company's commitment to upholding human rights in every location in which we operate, as well as our expectation that our suppliers, partners, and affiliates also respect human rights. Our company-wide commitment to sustainability is integral to our corporate growth strategy. We invite you to visit our GPC website to view these documents and learn more about our ESG initiatives. So with that, I'll turn it over to Will for his remarks.