Genuine Parts Company

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company first quarter 2021 earnings conference call. At this time, all participants are in 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. And also, today's call is being recorded. At this time, I would like to turn the conference over to Sid Jones, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning and thank you for joining us today for the Genuine Parts Company First Quarter 2021 Earnings Conference Call. With me today are Paul Donahue, our Chairman and Chief Executive Officer, Will Stangle, our President, and Carol Yancy, our Executive Vice President and Chief Financial Officer. 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. Please be advised this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results, as reported under generally accepted accounting principles. 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. Now, I'll turn it over to Paul for his remarks.

Thanks, Sid, and good morning. Welcome to our first quarter 2021 earnings conference call. We appreciate you joining us today and hope you're staying safe and well. We are pleased with the strong start to 2021 and ongoing recovery in our automotive and industrial businesses. The GPC team remained focused on solid execution and in delivering strong financial results through improving sales trends, increasing operational efficiencies, and enhancing customer value. Through the quarter, we operated thoughtfully, with the physical and mental well-being of our employees the top priority. as our 50,000-plus GPC teammates are the core of our success. Turning now to our first quarter financial results, total sales for the quarter were $4.5 billion, up 9% from last year, and significantly improved from the 1% sales decrease in the fourth quarter of 2020. Gross margins was also a positive, representing our 14th consecutive quarter of year-over-year gross margin expansion, and our teams in the field continue to do a great job of managing our expenses through ongoing cost actions and the carryover of expense reductions implemented last year. These results drove a 41% increase in operating profit and an 8.1% operating margin, which is up 180 basis points from the first quarter of last year. Our strong operating performance drove net income of $218 million and diluted earnings per share of $1.50, up 88%. We also continue to fortify our balance sheet, ensuring ample liquidity and solid cash flow. We are proud of our teams, and we are encouraged by our results, and we intend to build on this momentum throughout 2021. Turning now to our business segments, automotive represented 66% of total sales in the first quarter, and industrial was 34%. By region, 73% of revenues were attributable to North America, with 16% in Europe and 11% in Asia-Pac. Total sales for global automotive were $3 billion, a 14% increase from 2020, and much improved from a 1% increase in Q4 of 2020. Comp sales were up 8%, improved from a 2% decrease in the fourth quarter, and segment profit margin was up 250 basis points, driven by strong operating results in each of our automotive operations. Sales were driven by positive sales comps across all our operations, with 15% comps in Europe and Asia PAC, 7% comps in the U.S., and 3% comps in Canada. The ongoing global economic recovery, including financial stimulus in the U.S., improving inventory availability, favorable weather conditions, and our focus on key growth initiatives were all sales drivers in the quarter. We would add that while we continue to expect a reasonable level of inflation as we move through 2021, price inflation was not a factor in our first quarter sales. In Europe, sales were much improved from Q4 as our team capitalized on the strengthening sales environment, despite lockdown throughout the region. In addition, initiatives to grow key accounts, enhance inventory availability, and the ongoing launch of the NAPA brand continue to prove effective in driving profitable growth and market share gains. For the quarter, our teams in France and the UK outperformed in the region with strong double-digit sales comps. We would also call out a much improved performance by our team in the Benelux region. The strong sales recovery combined with excellent expense controls produced a 500 basis point improvement in operating margin, so a terrific start to the year for our European operations. In Asia-Pac, our automotive sales remained in line with the mid-teen growth we experienced through the second half of 2020. For the quarter, both retail and commercial sales held strong as the region operated through multiple lockdowns associated with the pandemic. Retail sales, which represent over 40% of our total sales volume through our Repco stores, continued to outperform, posting a 33% increase in March and plus 24% in the quarter. Our commercial sales continue to accelerate as well, posting double-digit sales growth in the quarter. We continue to benefit from the strength in online sales, which reached record highs at 3x pre-COVID levels. Finally, building on the NAPA brand name has been well received, and we remain focused on growing our NAPA presence in the region. Summing it up, this group continues to perform at a very high level on both the top and bottom lines, resulting in 150 basis point improvement in profit margin for the quarter. In North America, comp sales in the U.S. were up 7%, helping this business post a 180 basis point increase in profit margins. In Canada, we operated through a variety of regional lockdowns, which impacted our larger markets of Ontario and Quebec. Comp sales were up 3%, and operating margin was up 130 basis points. Sales in the U.S., which posted its strongest quarterly comps since the first quarter of 2015, were driven by solid growth in both the retail and commercial segments. This was our first quarter of positive commercial comps since pre-pandemic, and our team produced record sales volumes in the month of March. In addition, both ticket and traffic counts were positive on both our retail and commercial transactions, marking our first increase in traffic counts in several quarters. By region, the Atlantic, Midwest, and West groups posted the strongest growth, although we would also call out our Northeast group, which produced solid growth in the quarter. This is notable as this region of the U.S. has been most affected by the COVID-19 lockdowns over the past 13 months. Likewise, we would add that product sales in categories such as batteries, tools and equipment, and brakes were strong this quarter. We are especially encouraged to see the rebound in our brakes business, which generally is a positive indicator for our commercial business. On the retail side, which continues to outperform with strong double-digit growth We continued to drive sales via investments in retail specialists and store refreshes, as well as targeted promotions. We would also call out our ongoing omnichannel investments and the increase in B2C online sales, which reached record levels in the quarter and were up 150% from the prior year. For commercial sales, our other wholesale category of independent garage customers, continued to generate strong growth. We have been encouraged by the number of new accounts we are serving. Clearly, our investments in increasing the number of professional salespeople on the street has been effective in attracting new customers to NAPA. We were also pleased to see improved sales with our NAPA Auto Care and major account customers, which posted positive sales growth for the first time in several quarters. Sales to the fleet and government group were down year over year, but sequentially improved from the fourth quarter, and we look for further improvement in sales to this segment. As we look ahead, we are excited for the growth opportunities we see for our global automotive segment. We expect further improvement in aftermarket fundamentals, such as increased miles driven, a growing vehicle fleet, and an increase in vehicles aged 6 to 12 years, all favorable for the industry. We can assure you we remain focused on our initiative to deliver customer value and ultimately sell more parts for more cars. These plans include further enhancing our inventory availability, strengthening our supply chain, and investing in our omnichannel capabilities. In addition, we expect to expand our global store footprint with additional bolt-on acquisitions, changeovers, and new greenfield stores to further enhance our competitive positioning. So now let's discuss the global industrial parts group. Total sales for this group were $1.5 billion, flat with last year. Comp sales were down 2%, improved from a 4% decrease in Q4, and reflecting the third consecutive quarter of improving sales trends. March was a breakout month with the North American Motion Team posting a 7% increase in average daily sales and achieving record sales volumes. This was a tremendous accomplishment and another turning point for GPC in our emergence from the pandemic. The ongoing recovery over the last nine months is in line with the continued improvement in the industrial economy, which you can see in several key indicators for our business. For perspective, PMI was 64.7 in March, an increase of 4.2 points from December 31st. In addition, industrial production increased by 2.5% in the first quarter, the third consecutive quarter of expansion following the significant downturn in the second quarter of 2020. Importantly, we can see these positive indicators translating to more activity with our customers. which are operating at higher run rates, as well as releasing capital project orders. The strengthening sales environment, along with our initiatives to drive growth and control cost, produced an 80 basis point margin improvement, with segment profit margin at 8.3% versus 7.5% last year. Diving deeper into our Q1 sales, we would start by saying that inflation remains a non-factor in our numbers thus far. That said, we are seeing more pricing activity and expect another year of 1% to 2% price inflation from our suppliers. For the quarter, we experienced improving sales trend among virtually all product categories and industries served. We were especially encouraged by the recovery in the equipment and machinery, aggregate and cement, and wood and lumber sectors, all key industry groups for us. In addition, we continue to benefit from the build-out of our omnichannel capabilities, with digital sales up 2x from the first quarter in 2020. A key driver of our digital growth relates to our inside sales center, which is generating incremental sales to new motion customers. While still a relatively small percentage of total sales, we are excited by the potential for future sales growth. We also remain focused on growing our services and solution businesses to expand our expertise and sales opportunities in areas such as equipment repair, conveyance, and automation. We have made several bolt-on acquisitions to build scale in these areas, and our services and solutions capabilities remain a key consideration in our overall M&A strategy for the industrial business. To further ensure profitable sales growth, We continue to enhance our pricing and category management strategies. In addition, we plan to continue to optimize our supply chain network and further improve our productivity while delivering exceptional customer service. Closing out our industrial comments, we remain bullish about our motion business, and we are excited to see this team moving back into a growth mode. So now I'll conclude my remarks by providing a brief update on our ESG initiatives. As outlined in our corporate sustainability report, GPC embraces our responsibility to innovate in ways that provide for our environment, our associates, and the communities in which we operate. In Q1, we expanded our training and development programs to ensure personal growth and enhance our comprehensive well-being program focused on the emotional, financial, and physical health of our GPC teammates. Additionally, we continue to make progress in the advancement of our corporate commitment to diversity and inclusion. We are actively recruiting talent that is representative of the communities we serve, training our teammates to mitigate unconscious bias and model inclusive behaviors, while strengthening partnerships that support our D&I initiatives. Finally, we remain focused on our mission to be good corporate citizens where we both work and live. Since 1928, we have been giving back to communities and causes that make a difference, and that legacy continues in 2021. So now I'll turn it over to Will for his remarks. Will?

Thank you, Paul. Good morning, everyone. First, I want to congratulate the global GPC team on the performance this quarter. I'd also like to thank our customers for their loyalty and our suppliers for their partnership. As Paul mentioned, our team delivered solid performance in the first quarter and have strong momentum. The environment is improved compared to 2020, but we remain cautious as global uncertainty continues to be a part of doing business each day. Areas of attention for us include COVID-19, inflation, global logistics, and product and labor availability. We also have more challenging year-over-year comparisons that will require sustained momentum during the second half of the year. Despite the uncertainty, the GPC team is energized and focused to deliver performance. I'll now share some additional perspective on our strategic initiatives in progress. The foundation of our priorities is based on the customer experience and understanding their needs and working to exceed their expectations. We are analyzing and listening to customer feedback and our corresponding strengths and opportunities. In the simplest terms, our customers need us to be easy to do business with, reliable, and helpful. This independent data reinforces our priorities and serves as a guiding principle in terms of required action and strategic investment. To deliver a best-in-class customer experience, we have opportunities to simplify and integrate our existing operations. The global teams are executing multi-year plans to realign teams, streamline processes, improve operational productivity, and reduce costs. These initiatives will not only create operating efficiency, but also enable faster team executions, deliver a better customer experience, and accelerate profitable growth. I'd like to highlight a few initiatives that illustrate our efforts to simplify and integrate. For example, we're working to optimize facilities footprint and coverage, simplify and integrate disparate legacy IT systems, streamline back office support functions, offshore non-customer facing functional activities, and centralized GPC indirect sourcing processes as a few examples. As we simplify and integrate, we're simultaneously investing in our core business and positioning for the future. Our strong cash flow, solid capital structure, and disciplined capital allocation provide the flexibility needed to continue to make these investments. Key pillars of our core investments include talent, Salesforce effectiveness, digital, supply chain, and emerging vehicle technologies. A few highlights of our progress across the key pillars during the quarter include, one, talent. We continue to take deliberate action across the globe to recognize high potential talent, infuse new capabilities into the organization, and recruit diverse talent that is representative of the communities we serve. Examples include category management, digital, emerging vehicle technology, and field leadership roles to name a few. Talent will always be a priority area of investment as we strive to be an employer of choice for teammates, that share our GPC values and want to play a leadership role in our exciting future. Two, Salesforce effectiveness. Data and analytics to understand our unique customer segments, the different needs of each segment, and associated strategies to serve the segment is a foundational element of Salesforce effectiveness. The sales efforts reflect our omni-channel initiatives and include an increasing mix of both traditional selling and digital strategies. As an example, the U.S. automotive team revamped its sales intensity with new reporting and tools to track customer visits, digital tools to communicate with field sales teammates, and enhanced virtual product and skills training. In addition, in 2021, the U.S. automotive team adjusted compensation programs to better align incentives with profitable growth. Three, digital. As I mentioned, digital is a foundational priority as we deliver a best-in-class customer experience and accelerate profitable growth. Our businesses delivered excellent performance via digital channels in the quarter. We continue to see strong increases versus prior year across our global digital channels. Digital still represents a relatively small portion of our total sales and we're excited about the compelling digital vision our teams are executing. Related, we continue to invest in foundational digital elements, including catalog, search, and other critical customer experience elements such as ease of ordering, pricing, and analytics. Four, supply chain. Our supply chain initiatives are focused to ensure we have the right product available in the right market at the right time. We're continuously executing inventory, facility, productivity, logistics, and technology strategies to achieve this goal. One solid example is the success the U.S. industrial team enjoyed with recent facility automation investments that delivered a 500% labor productivity improvement. Other select examples would be enhanced workforce management and delivery tracking tools in the U.S. automotive business. Lastly, emerging vehicle technologies. We aspire to lead as it relates to the opportunities that emerging vehicle technologies presents for our automotive industries. We believe we have a unique position to leverage, including our scaled global footprint, diverse portfolio, leading global brands, established customer-supplier relationships, and one GPC team approach. Through our planning process, we developed a multidimensional strategy to address electric vehicle trends. A few select highlights include the alignment of talent 100% dedicated to developing and executing EV strategies, product and category management strategies with existing and new SKUs, global supplier councils with existing strategic partners, advisory groups leveraging our 25,000 global repair center relationships, and partnerships with strategic EV market participants. While we acknowledge the focus on critical initiatives that deliver near and medium-term performance, we're taking action to build out and act on an exciting future vision. Lastly, strategic bolt-on acquisitions are a key part of our GPC growth strategy. We utilize acquisitions to acquire new customers, further penetrate existing priority markets, enter new geographies, acquire product and service capabilities, and acquire talent. We also believe our acquisition capabilities position as well as we selectively consider and test new business models. Our acquisition pipeline remains active and actionable given the fragmentation of our markets. We believe our scale, market-leading brands, global footprint, and unique culture position us to be an acquirer of choice. We will remain selective and disciplined as we execute this important part of our strategy. Similar to the approach utilized for our 2019 cost savings plan, the global teams developed tools in a monthly cadence to create visibility and status on initiatives. This approach not only helps drive performance, but also helps to share best practices around the globe as one GPC team. In summary, I hope today's remarks reinforce our sense of focus and global teamwork. We will remain agile as the global environment continues to evolve, and we will remain focused on what we can control as we execute through the balance of the year and beyond. Thank you, and I'll now turn it to Carol to review the financial performance details.

Thank you, Will. We will begin with a review of our key financial information, and then we will provide an update on our full year outlook for 2021. Total GPC sales were 4.5 billion in the first quarter, up 9% from last year, and improved from the 0.7% decrease in the fourth quarter. Growth margin was 34.5%, a 60 basis point improvement compared to 33.9% in the first quarter last year. Our steady progress in improving growth margin continues to reflect the positive impact of a number of initiatives, including our pricing and global sourcing strategies, And we also benefited from a sales mix shift to higher gross margin operations. We would add that the level of supplier incentives in the quarter were in line with last year and neutral to gross margin. And as Paul mentioned earlier, there was minimal impact of price inflation in our first quarter sales, and this is true for gross margin as well. As we move through the year, we will continue to execute on our initiatives to drive additional gross margin gains via positive product mix shifts strategic pricing tools and analytics, global sourcing advantages, and also strategic category management initiatives. Our selling, administrative, and other expenses were $1.2 billion in the first quarter, up 4.6% from last year, or up 5.3% from last year's adjusted SG&A. This reflects an improvement to 26.8% of sales this year, which is down nearly 100 basis points from 27.7% last year. So tremendous progress and primarily due to the favorable impact of our cost savings generated in 2020, as well as ongoing cost control measures and also improved leverage on our stronger sales growth. Our progress in these areas was slightly offset by rising costs in freight expenses, which we're closely managing and planned increases in our technology spends, which supports our strategic initiatives as Will covered earlier. Our total operating and non-operating expenses were $1.3 billion in the first quarter, up 2.2% from last year, or up 2.1% compared to last year's adjusted expenses. First quarter expenses include the benefit of approximately $20 million related to gains on the sale of real estate and favorable retirement plan valuation adjustments that are recorded to the other non-operating income line. All in, our total expenses for the quarter improved to 28.1% of sales, down 190 basis points from 30.0% in 2020. Total segment profit in the first quarter was $361 million, up a strong 41% on the 9% sales increase, and our segment profit margin was 8.1% compared to 6.3% last year, a 180 basis point increase. In comparison to 2019, our segment profit margin is improved by 100 basis points. So solid improvement and our strongest first quarter profit margin since 2015, a reflection of the positive momentum we're building in our businesses. Our net interest expense of $18 million was down from $20 million in 2020 due to the decrease in total debt and more favorable interest rates relative to last year. The corporate expense line was $31 million in the quarter, down from $55 million in 2020, due primarily to the favorable real estate gains and retirement plan adjustment discussed earlier. Our tax rate for the first quarter was 23.8%, in line with the reported rate last year, and improved from the prior year adjusted rate of 26.5%. This improvement primarily relates to the favorable tax impact of stock options exercise, as well as the previously mentioned real estate gains and retirement plan adjustment. Our first quarter net income from continuing operations was 218 million, with diluted earnings per share of $1.50. This compares to 84 cents per diluted share in the prior year, or an adjusted diluted earnings per share of 80 cents for an 88% increase. So now let's turn to our first quarter results by segment. Our automotive revenue for the first quarter was $3 billion, up 14% from the prior year. Segment profit of $236 million was up a strong 65%, with profit margin at 8.0%, compared to 5.5% margin in the first quarter last year. The 250 basis point increase in margin was driven by the continued recovery in the automotive business and the execution of our growth and operating initiatives. We were pleased to have each of our automotive businesses expand their margins for the third consecutive quarter. In addition, we're encouraged that our first quarter margin also compares favorably to the first quarter of 2019, up 120 basis points. So a broad recovery across our operations, and we look for continued progress in the quarters ahead. Our industrial sales were $1.5 billion in the quarter, flat with last year, and improved sequentially for the third consecutive quarter, which is consistent with the strengthening industrial economy. Our segment profit of $125 million was up 10% from a year ago, and profit margin was up 80 basis points to 8.3% compared to 7.5% last year. The improved margin for industrial reflects the third consecutive quarter of margin expansion in both our North American and Australasian industrial businesses. And it's also up by 90 basis points from the first quarter of 2019. So another quarter of strong operating results for industrial, which we expect to continue with stronger sales growth projected through the remainder of the year. So now let's turn our comments to the balance sheet. We continue to operate with a strong balance sheet and ample liquidity and the financial strength to support our growth strategy. At March 31st, total accounts receivable is down 27% from last year, which is primarily a function of the $800 million in receivables sold in 2020. Our inventory was up 6% from the prior year, and accounts payable increased 14%. And our AP to inventory ratio improved to 124% from 116% in the last year. We are pleased with our progress in improving our overall working capital position, and we continue to believe we have opportunities for further improvement. Our total debt is $2.6 billion at March 31, down $1 billion, or 28%, from last March, and down $60 million from December 31, 2020. We significantly improved our debt position throughout the course of 2020 with the issuance of new public debt and a new revolving credit agreement that provide for expanded credit capacity and more favorable rates. With these positive changes to our debt structure, our total debt to adjusted EBITDA has improved to 1.8 times from 2.5 times last year. Additionally, we closed the first quarter with $2.6 billion in available liquidity, which is up from $1.1 billion at March 31st last year and in line with December 31st. We also continue to generate strong cash flow, generating $300 million in cash from operations in the first quarter, which is up from $28 million in the first quarter last year. With a strong start to the year, including the increase in net income and the improvement in working capital, we continue to expect cash from operations to be in the $1 billion to $1.2 billion range and free cash flow of $700 million to $900 million. Our key priorities for cash include the reinvestment in our businesses through capital expenditures, M&A, the dividend, and share repurchases. We invested 48 million in capital expenditures in the first quarter, an increase from 39 million in 2020. Looking forward, we have plans for additional investments in our businesses to drive growth and improve efficiencies and productivity. We continue to expect total capital expenditures of approximately 300 million for the year. As you heard from Will earlier, strategic acquisitions remain an important component of our long-term growth strategy. We continue to cultivate a strong pipeline of targeted names, and we expect to make additional strategic bolt-on acquisitions to complement both our global automotive and industrial segments in the months and quarters ahead. In the first quarter, we paid a cash dividend of $114 million to our shareholders. The company has paid a cash dividend to shareholders every year since going public in 1928, And our 2021 dividend of $3.26 per share represents our 65th consecutive annual increase in the dividend. We have actively participated in a share repurchase program since 1994. While there were no repurchases in the first quarter, the company is currently authorized to repurchase up to 14.5 million additional shares, and we will resume share repurchases in the months and quarters ahead. Turning to our outlook for 2021, we are updating our full year guidance previously provided in our earnings release on February 17th of 2021. In arriving at our updated guidance, we considered several factors, including our past performance, current growth plans and strategic initiatives, recent business trends, the potential for foreign currency fluctuations, inflation, and the global economic outlook. In addition, we consider the continued uncertainties due to market disruptions such as with COVID-19 and its potential impact on our results. With these factors in mind, we expect total sales for 2021 to be in the range of plus five to plus 7%, an increase from our previous guidance of plus four to plus 6%. As usual, these growth rates exclude the benefit of any unannounced future acquisitions. By business, we are guiding to plus 5 to plus 7% total sales growth for the automotive segment, an increase from plus 4 to plus 6%, and a total sales increase of plus 4 to plus 6% for the industrial segment, an increase from plus 3 to plus 5%. On the earnings side, we are raising our guidance for diluted earnings per share to a range of $5.85 to $6.05, which is up 11 to 15% from 2020. This represents an increase from our previous guidance of 555 to 575. We enter the second quarter focused on our initiatives to meet or exceed these targeted results, and we look forward to reporting on our financial performance as we go through the year. Thank you, and I'll now turn it back over to Paul.

Thank you, Carol. Looking ahead, the GPC team is excited for the ongoing recovery in the global economy and the growth prospects we see for both auto and industrial. Our strong balance sheet provides us the financial flexibility to pursue strategic growth opportunities, and we remain focused on executing our plans to capture profitable growth, generate strong cash flow, and drive shareholder value. As a result, we are optimistic that we can deliver strong financial results in the quarters ahead. So in closing, we want to thank each of our GPC teammates for their continued support, dedication, and commitment to being the best. So thank you for your interest in Genuine Parts Company. And with that, we'll turn it back to the operator for your questions.

And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And our first question is from Christopher Horvitz with JP Morgan. Please proceed with your question.

Thanks. Good morning, everybody.

Good morning, Chris.

Can you talk about, well, I guess on a comp basis, I think you have one less day. So the reported comps, does that reflect, are you including that as a headwind and how would you size it up for each segment? And then just as a follow-up, you talked about record-selling performance in motion in March, you know, I think it was plus seven on a per day basis. Was there something unique about that performance, and what did that sort of March comp look like on a two-year basis?

Yeah, Chris, you're right. We did have one less day in the quarter, and we did not reflect that in our comp sales numbers that are provided. it would be about a point and a half for each of our segments equally. The good thing is the rest of the year, we really won't have that. We will close the full year with the one less day, but we have not shown that or adjusted for it, if you will, in any of our comp numbers.

And Chris, relative to your question regarding motion, and thanks for your question on motion, we always like to talk about our industrial business. They had a breakout. They had a breakout month in March. We've been waiting for it, honestly. If you look at all the indicators from PMI to industrial production, they've all been going up and to the right. So we knew it was just really a matter of time. Motion got sidelined a little bit in February with the storms, knocked out a lot of our business down in the south, but they came roaring back in March. And honestly, this trend, and we've seen it before with motion, when they get on a positive trend as they are now, our expectation, that's going to carry through the balance of the year.

Got it. And then, Carol, on the gross margin, you know, 34.5% in the first quarter and up on a two-year basis, you know, some of that is divestiture and so forth. But can you talk about the puts and takes going forward, you know, do you think gross margin could still see some modest expansion over time given the, you know, the initiatives that you laid out? Or does, you know, DIY versus commercial mix and inflation keep that more in check?

Yeah, Chris, I would tell you we fully anniversaried all the impact of divestitures and discontinued. So that is true core gross margin impact. And we are actually modeling and have been, given what we did at our February call, continued to model improvement in growth margin for the full year 2021. It is a function of our initiatives. I mean, you heard Will and myself talk about the number of initiatives. So we have had some great progress in strategic pricing tools and analytics, our category management, global sourcing. We've had some product mix shifts as well. Our industrial team has done a tremendous job of just quarter after quarter increases. Our global sourcing teams, global tenders are really working out well. And we had really kind of a neutral impact on rebates for the quarter. So our full year, we do believe that growth margin will continue to improve and we'll be up for the full year.

Okay. One last quick one, you know, looking at the balance sheet, I mean, that's, you haven't, I don't, I'd have to look back, but I don't know if you've ever had this much cash sitting on the balance sheet. So, you know, typically you target $50 to $100 million kind of bolt-ons. Are you thinking something bigger there, or how are you thinking about the potential to, you know, be more aggressive around share repurchase?

Yeah, Chris, great question, and I think you're spot on. None of us recall having that much cash on the balance sheet, but as was prudent in 2020, We did look at conserving our cash and sort of prudently got ourselves in a great position. We do expect to return to more normal capital allocation. It is a little bit of a timing thing right now. So you will see our M&A pipelines, as Will talked about. You will see the bolt-on type acquisitions that will come in. You're going to see our CapEx getting up to the $300 million. And share buyback, again, we were somewhat precluded from buying in our shares with some of our debt agreements and where we had found ourselves. We expect to be in there buying, honestly, right away. We will do our normal share repurchase, and if we have the opportunity to do more, we'll certainly do that. So more normal capital allocation, and you'll see us putting that cash to use as we move ahead.

Understood. Have a great spring.

Thank you, Fred.

Thank you.

And our next question is from Greg Mellage with Evercore ISI. Please proceed with your question.

Hi, thanks. I have two questions. I wanted to start with the cost reductions. I heard of a 500 basis point improvement in labor productivity and just wanted to sort of understand that and sort of what part could be sustainable if we think about what the sustainable operating margin of the business could be.

Yeah, it's a great question. Thanks for asking it. That was a great case study in using technology inside the four walls of a distribution center as we think about getting more productive with the number of people we have doing the work relative to technology. So think vertical lift modules, et cetera. And that's completely sustainable. That technology and that investment is in the building, and it will continue to improve as we move forward.

And Greg, I would just add a comment on the operating margin improvement. I mean, again, our operating margin outlook and long-term is sort of the 8.5% to 9% operating margin. We're implying about 30 basis point improvement this year in our 2021 results, and that is coming from a combination of gross margin and SG&A. And honestly, that's probably a 50 to 70 basis point improvement over 2019 as well.

Right. That's the structural part, effectively, it sounds like. That's great. To pivot a bit on inflation, I think you mentioned it really wasn't material in the first quarter, but obviously there's a lot of rising input costs out there. So I'd just like to know what inflation are you seeing in the COGS or in your guidance are you assuming, and what would you expect that also, what inflation numbers in the top line?

Yeah, you're right. We had pretty modest inflation for Q1 and really no impact on our sales or growth margin. As we look ahead, we do think that's going to come and probably more second half weighted. We're looking at a 1% to 3% on the automotive side and a 1% to 2% on the industrial side. But quite honestly, with our initiatives, we believe we'll be able to continue to deliver on our improvement in growth margin and be able to pass that through. But we have not modeled that, if you will, into our guidance on sales. Quite honestly, if it hasn't hit us yet, we'll look forward to that being a tailwind as we move ahead.

Got it. So that's what you think, but it's not in the guidance that, you know, by the back half, it would be presumably at the upper end of those ranges you just gave.

That's correct. And you know, our back half, we have sort of more normalized growth in the back half. And it's also not modeled into the cost side as well. So we'll update you as we move ahead on what we're seeing on the quarterly inflation, but we do expect it's coming.

Hey, Greg, it's Will. I might just add on the cost side. I mean, I alluded to it in the prepared remarks, but like everybody else, we're watching and seeing SG&A inflation in different parts of the world and in different parts of the business, ranging from, you know, wage inflation in selective geographies. You got global logistics inflation. You got commodity inflation. So we're watching that and doing good work around being cost productive to offset some of that inflation. But that's definitely something that we're working on actively every day. That's great.

I'll let someone else have a chance. Good luck in the spring. Thanks, Greg.

Thanks, Greg.

Our next question is from Kate McShane with Goldman Sachs. Please proceed with your question.

Hi. Good morning. Thanks for taking my question. Good morning. I wonder if I could just ask about some of the contributors to comp. I know there was improvement in the fleet business. However, it was a drag if you were able to quantify that. And you didn't call out regional performance. in the southeast. And I just thought that would have been a place maybe where you would see more strength, given that it seems more open than the rest of the country at this point. So just wanted to get your comment on that.

Yeah, Kate, thanks for your question. In terms of the breakdown fleet, fleet did come back in Q1, which I think we referenced that in our last call. We did see an improvement. Our expectation is that fleet will turn positive in Q2 and remain positive through the balance of the year. As you break down the various segments, our retail business was off the charts strong. What we were really encouraged by is seeing our both major account and Napa Auto Care Center business turn positive, both close to mid single digit growth in those categories. Yeah, we really saw improvements across the board and are especially encouraged to see our heavy-duty fleet business, government, municipalities turning to a positive in Q2. And as far as regionality, Kate, I think I called out our northern regions. I would also call out, in that mix, it includes our Atlantic Division. Our Atlantic Division really led the way in in Q1 for us, and Atlantic comes down to the Carolinas, Virginia, so that is close to the south. Our southeast performed just fine, but just was not as strong as what we saw in our northern regions as well as our western region.

Okay, thank you. And I was wondering, for my just follow-up question, you had mentioned that you were successful at signing up more commercial accounts thanks to your new sales effort. Is there a way to quantify that or compare it to what you see in the last couple of quarters?

Well, if you look at our, what we term other wholesale, Kate, that's, you know, some describe it as the up and down the street, you know, smaller garages, one, two bays. That business was up 7% in the quarter. And again, We have not seen that kind of growth in some time. We know we made significant changes and enhancements to our Salesforce coming out of 2020. We literally have doubled the touch points and we're getting out and we're seeing those customers and it's reflected in our business. So we're bullish going forward and really pleased to see the DIFM category bounce back as we expected it would in 21. Thank you.

Thank you. And our next question is from Scott Cicerelli with RBC Capital Markets. Please proceed with your question.

Hey, guys. Scott Cicerelli. I guess a bit of a follow-up on Kate's question. You know, would you or maybe more importantly your customers attribute improved commercial business that you guys are seeing or saw in the quarter to, you know, better consumer mobility? Or given your regional commentary, did it seem like it was more affected by, you know, weather patterns and, you know, like the harsh winter, et cetera, that we had?

Yeah, I think it's all of the above, Scott. You know, as you know in these calls, we – tend to talk a good bit about weather, and we did see a more normalized winter this year. Certainly, that has an impact on our business. The bounce back in miles driven, while still not anywhere near the levels it was two years ago, it is coming back from where we were last year. And then I think the efforts that our NAPA team is making that will touched on with the many changes we made in our sales force and how we're going to market. So I really think it's a combination of our sales strategy, our inventory availability at the street level is improved. So it's really, it's not one thing that I would point to. It's really a combination of really positive factors hitting at once. And You know, what I think I'm most encouraged by, Scott, is we had this kind of quarter despite, you know, still being in COVID-related lockdowns in many parts of the world. You know, Canada right now, Scott, is, as you would know, is in full lockdown. And yet our business still trended positive in the quarter. Our service... levels and our supply from our suppliers is not where it would traditionally be. So look, we're quite proud of the quarter we had, but I would tell you, I think there's even upside when a few of these more headwinds we put behind us.

Yeah, that's super helpful. And then I know we kind of dug into gross margin SG&A. I guess my question is maybe a little bit more broad here. You guys have had a combination of both permanent and temporary cost reductions. Are there still cost reductions that kind of need to be layered back in? Like you cut back for a period of time. Now that the business is recovering, we've got to layer some certain expenses back into the P&L.

Yeah, we had, and it's a great question. As volume comes back, I mean, there is a level of variable expenses that do come back in, but We did permanently lower our cost structure with the 2019 plan that we put in place. And those permanent cost savings, again, we capitalized on those and converted some of the temporary to permanent. So we had about a $20 million benefit in the quarter that was a carryover from those savings. Teams done a tremendous job on payroll, but again, contemplated in our outlook And I think when we came out in February, we had sort of flattish SG&A, and now with the improvement we've seen in Q1, we've contemplated in our operating margin that SG&A does remain and is improved as we go throughout the year.

Hey, Scott, it's Will. I might just add another kind of philosophical point, which is, you know, as we do productivity, SG&A productivity work, I mean, our intent is to reinvest some portion of that into growth initiatives and talent as an example. So we're not solely focused on driving productivity without reinvesting in the business philosophically.

Understood.

Very helpful, guys. Appreciate it. Thank you. And our next question is from Brett Jordan with Jefferies. Please proceed with your question.

Hey, good morning, guys. Good morning.

Good morning.

You talked about the strength in digital. Are you seeing a change in consumer behavior where they're buying online and waiting for shipment, or is this buying digitally and still expecting either a delivery or a pickup in store?

I think it's both. I think coming out of COVID, I would say there has been a dramatic change in the use of digital in every dimension, meaning frequency, the way in which you use it, and that whole concept of being easy to do business with. And that means different things to different customers, but the foundation of it is having the digital skills to meet those needs as they differ across the customer segment. So I would say it's a mix of everything, and we've done really good work around setting up the foundation of meeting those different needs, and we're going to continue to invest in it.

Could you maybe talk about what percentage of digital is actually still going out the door versus in a box being shipped? I'm not sure I have that number in front of me. Let me circle back with you. Okay, and then a question on supply issues, and with both motion and auto, I think there have been some, whether it's batteries or filters in the first quarter. Are you seeing any stock availability issues impacting, or is that pretty much behind us?

No, I wish it were behind us, Brett. I know you and I talked last quarter, and we specifically called out batteries. While that's gotten better, and we had a great quarter in our battery business, there's still some pockets where we're struggling. Filters, you mentioned, could be a whole lot better in terms of our in-stock levels, but we're seeing it in other product categories as well. So that's what I mentioned earlier, you know, I know the challenges some of our suppliers are up against with raw materials, with the global supply chain, labor issues. When that comes back up to more normal levels, that's just going to be increased upside for our business.

Okay, great. And then one just housekeeping issue, I guess you talked about off the charts retail. What was the percentage of retail versus commercial, I guess, in U.S. NAPA this quarter?

In terms of, well, in terms of our percentage increase, Brad, our retail business was greater than 20%.

Just as a percentage of the sales, sort of how the pie gets carved up.

Percent of total, it's still 20-plus percent. Look, we're still going to live and die on the DIFM side. Brett, but it is great to see that retail DIY business continuing to accelerate. And, you know, look, as you know, we put a hell of a lot of effort into improving our stores, improving our layouts in our stores, our store hours, our folks in the stores. So we put a lot of effort behind it, and we've talked a lot about it on these calls through the years. So it's It's really great to see that segment continuing to perform really well.

Okay, great. Thank you. All right, thank you. And our next question is from Seth Basham with Wedbush. Please proceed with your question.

Hello, Seth, is your line muted?

Yeah, maybe we can come back to Seth at the end here. We can keep moving. Can you hear me? Oh, we got you now.

Give me one second here.

Hello, Seth. You can go ahead and speak now. Oh, sorry about that. Paul, my question is around market share. I don't know if you can quantify – how you think that your core Napa business X fleet is doing in the U S this quarter relative to recent quarters.

Well, I, I look, it remains to be seen, right? Seth, we're the first one out this quarter. We're pleased with our performance and, and certainly pleased as it stacks up against 2020. You know, it, it, we've been, we've been, waiting for our commercial business to bounce back and really pleased to see that happen in the quarter. So I do believe that was a solid performance. The retail business I already touched on with Brett, that was solid. What we're pleased to see, Seth, is that the fleet business and what we reference as – our IBS business really beginning to bounce back. So I think we're doing quite well, and I'm really proud of the NAPA team for the quarter they put up. Gotcha.

And I presume that you saw a bounce in sales around some of the stimulus check distribution in January and probably even more so in March for your DIY business. But was there a pronounced bounce around those stimulus check distributions for your Do It For Me business as well, particularly as you look at the sales trends versus 2019?

Yeah, I guess one comment I would say is the trends, and Paul alluded to it. January started off really strong. February was a little softer. March was our strongest month in the quarter, and it was pretty even between the commercial and the DIY. So I think you laid it out as it happened. Got it.

Thank you very much.

Thank you.

And our next question is from Brian Sponheimer with Gavily Asset Management. Please proceed with your question.

Good morning, everyone. I'll be really quick. I just want to say hello. But also, the investment for next-generation vehicles, be it electric or otherwise, would this also include potentially investing in in ways to help with charging stations and support for the fleet as well?

It does. Yeah. I think we're doing a lot of work around all of our choices on this topic. And I think it's important to note, though, just to reemphasize that we are intensely focused on the part that we serve today. The ICE engine is going to be the main focus for us as we move forward. We just think it's prudent. to be doing work and understanding the facts and developing strategies as the business evolves. So we're open and looking at everything and refining the strategy as we move forward.

And, Brian, I would just add in, first off, it's good to hear from you again. Welcome back. You know, with our presence in Europe and the European Union having doubled down on EVs, And as Will rightfully pointed out, we're still majority of the time focused on our business at hand today with the internal combustion engine. But we do have an eye towards the future, and our European team will be certainly leading that effort because we believe we'll see it, the shift, the tipping point, if you will, in Europe most likely before we see it here in the U.S.

Agree. And I'm just pinch hitting. So it was nice to hop on for today. Thank you. Take care and have a great second quarter. Thank you.

Appreciate it, Brian. Our next question is from Daniel Nimbro with Stevens Inc. Please proceed with your question.

Hey, good morning, guys. Thanks for taking our questions. Carol, I wanted to start on a follow-up on the guidance. I think you raised full year by about 100 bits. I want to say, please correct me if I'm wrong, I think the last guidance didn't include any FX tailwinds, which were obviously a nice tailwind to 1Q. So can you maybe just parse out how much of the guidance raised is FX, and then maybe digging into it, have you made any changes to your underlying organic growth guidance for each segment based on the first quarter results? Thanks.

Okay, yeah, great question. So really talking about our guidance. So the stronger sales and earnings for the full year really reflects our accelerated recovery in the first quarter. So we did consider the favorable FX. We considered some of the other unusual items in the quarter, but we did not, if you will, assume what occurred in Q1. would be baked into those full year numbers for the rest of the year. So we have really taken sort of a more conservative, cautious approach, if you will, on the currency and not modeled that in. So again, that is contemplated. And then you asked about the same store sales guidance. So if you look at raising at 100 bps in total and for each segment, we did the same thing on the comp store sales. plus 4% to plus 6% on automotive, and plus 3% to plus 5% on industrial for the same-store sales.

Got it. That's helpful. And then maybe following up on industrial, Paul, I know you love to talk about it. I think you said last quarter of January was up 1%. I think you guys just said March was up 7%. To get the full quarter down to, I mean, February was down meaningfully. Is that all just weather-driven, or was there anything else that happened in February as we look at the first quarter industrial results?

Yeah, there's not much else for us to point to, Daniel. Again, when you look at January, we got out of the gates pretty good, low single-digit increase. And as we mentioned, March was a record month for the motion team. February, we were hit hard. We had over 100 branches that were shut down. And I think maybe a better way to look at it is if you were to combine Feb and March together, and that's probably a true picture of the first quarter. But as I mentioned earlier, you know, we've been through this cycle many times with motion, and when that business turns, the CapEx projects start to move, plants start to reopen, that business really, really takes off. I will tell you we're off to a very good start in April, and our expectation is it's going to continue through the balance of the year.

Got it. Well, I'll leave it there in the interest of time, but thanks so much and best of luck, guys.

Thank you. Appreciate it. Thank you. And our last question will be from David Bellinger with Wolf Research. Please proceed with your question.

Hey, everyone. Thanks for taking the question and really nice results today. Thank you. Just to follow up on that last question on the industrial side, it seems as though that segment has started to turn the corner in March. Can you talk about the line of sight you have into customer demand over the next several quarters, and are these potential supply constraints allowing for that growth expectation to extend out even into 2022 at this point?

Well, our line of sight is, as you know, many of these CapEx projects, there's long lead times with many of these projects, but they are rolling in. I was actually out in the field with our industrial team a couple of weeks ago. First time we've really been out visiting customers, and the universal feedback we get as we visit customers is factories are right now, they're humming. And if that's happening and they're moving back into full production, that's generally all very, very positive for the motion business. So our expectation as we look forward with motion is that, you know, we're going to have a solid year and it's going to continue and should continue on really into 2022. And that's further verified, David, when we look at the PMI numbers and the industrial production numbers all just further support the kind of growth numbers that we believe will continue to produce in 21.

Thanks for that detail. That's very encouraging. And then just on the auto parts business, in your prepared remarks, improved inventory availability was noted again this quarter. So can you give us more detail behind that and any ongoing initiatives there? Is there some way to quantify the improvement, either in terms of parts availability or the subsequent lift of sales that you're seeing?

Yeah, it's a great question, and it obviously continues to be a priority focus for us, making sure, as I said in those prepared remarks, that we've got the right product in the right market at the right time. So it's absolutely an ongoing initiative. We are watching and studying improvements in the global supply chain. We are encouraged that it's getting better. And so we are really watching that to improve as we think about by category all of the efforts to make sure that we got the right product. So it's getting better, but we're going to have to stay focused on it.

I would also add on to that, David, that we haven't really talked much about our business in Europe here this morning, but our European team had a great quarter, up 15%. And we're making great strides, great inroads across Europe. But I would tell you that I believe one of the real pluses for us this quarter was we had product and we had plenty of inventory and we had it. as Will said, at the right place at the right time, which I think enabled us to potentially grow outside of what the overall market grew in Europe in Q1. So really pleased with the progress we continue to make in that part of the world.

Always appreciate it.

Thanks so much. All right. Thank you. And we have reached the end of the question and answer session. I'll now turn the call over to management for closing remarks.

Thank you. We'd like to thank all of you for your participation in the Q1 earnings call today. We look forward to reporting out to you on our Q2 results, and we appreciate your interest and support of Genuine Parts Company. Thanks, and have a great day.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a great