Genuine Parts Company

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company fourth quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, Today's call is being recorded. At this time, I would like to turn the conference over to Sid Jones, Senior Vice President, Investor Relations. Please go ahead.

Good morning, and thank you for joining us today for the Genuine Parts Company fourth quarter and full year 2022 earnings conference call. With me today are Paul Donahue, our Chairman and Chief Executive Officer, Will Stengel, our President and Chief Operating Officer, and Bert Napier, 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 investor's page of the Genuine Parts Company 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 page 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 the call over to Paul for his remarks.

Thank you, Sid, and good morning. Welcome to our fourth quarter 2022 earnings conference call. We are pleased to report the GPC team capped off a record-setting year with a strong fourth quarter, highlighted by double-digit sales and earning growth, coupled with continued margin expansion. We are incredibly proud of the progress in our operations and thankful to our teammates across the globe for their ongoing commitment to excellence. With the support of strong industry fundamentals and resilience of our automotive and industrial businesses, our teams were focused on executing key initiatives to drive sales growth faster than the market, improve gross margin, and enhance operational efficiencies. As a result, we delivered in several key areas in the fourth quarter and full year. A few highlights in the fourth quarter would include Total sales of $5.5 billion, up 15%, and our seventh consecutive quarter of double-digit sales growth. Segment margin of 9.5%, up 80 basis points from the prior year, and adjusted earnings per share of $2.05, up 15% from 2021, and our 10th consecutive quarter of double-digit earnings growth. For the full year, our strong quarterly performance drove record total sales of $22.1 billion, up 17%, which follows a 14% increase in 2021. Segment margin of 9.4%, up 60 basis points from 2021. Adjusted earnings per share of $8.34, up 21% from the prior year, and a new GPC record. and strong cash flow with cash from operations up 17% and free cash flow up 14% from 2021 levels. Reflecting on the record year, which followed an outstanding 2021, we are confident that our transformation efforts, including the streamlining of our businesses to an automotive and industrial-centric business, along with our ongoing strategic initiatives, has been highly successful. Throughout 2022, our teams navigated the dynamics of the macro economy and have continued to deliver market share gains while delivering positive momentum across our core businesses. We continue to make significant investments in talent and technology to maximize the impact of our key initiatives. As examples, we made solid progress to advance our pricing strategies and optimize our supply chain and network footprint. Our execution in the field has proven effective in driving core improvement in gross margin and SVNA, as well as parts availability, all of which provide additional opportunities for us in the future. As we build on the competitive advantages of our size and scale, we continue to look for strategic M&A opportunities to further boost our product and service offerings and expand our automotive and industrial footprint. As you will hear from Will, last year's acquisition of Command Distribution Group has been transformational for our industrial segment. ADG had a significant impact on our industrial performance in 2022 and has elevated our capabilities as a premier industrial solutions provider. Our global automotive teams were also active with acquisitions including geographic expansion in Europe with the addition of operations in both Spain and Portugal. For the year, we added 138 net new stores across our global footprint, with the U.S. and Europe leading the way. Looking ahead, we have a healthy pipeline of acquisition targets, and M&A remains an important element of our global growth strategy. As we turn our attention to 2023, while the macro environment remains uncertain, we are confident in our strategic plans to drive ongoing market share gains with sustained sales and earnings growth, continued margin expansion, and strong cash flow. Looking at the operating environment more broadly, our automotive business is benefiting from several tailwinds, including the geographic diversity of our markets, the increase in vehicle miles driven, an aging vehicle fleet, and limited new car inventory. These tailwinds are driving steady levels of demand in the aftermarket, with particular strength in the DIFM segment. In industrial, we continue to see solid demand trends with new and existing customer activity and reshoring trends, each presenting growth opportunities. We believe the strong performance in our industrial business reflects the diversity of our product and service offerings, as well as our end markets, which all performed well in the fourth quarter. In addition, as you'll hear from Will, our growing capabilities in industrial solutions, including automation, fluid power and conveyance, are proving to be differentiators for our business. Collectively, we believe these strong fundamentals combined with a rock-solid balance sheet, positioned GPC with the financial strength and flexibility to continue to pursue strategic growth opportunities through both organic and acquisitive investments, while also returning capital to shareholders. So before I close, I'd like to remind our investor community that we will be hosting an Analyst and Investor Day on Thursday, March 23rd, here at our headquarters in Atlanta. We will be sharing more about our strategic initiatives and provide an update to our long-term financial targets. We look forward to hosting this event next month and hope to see you all here in Atlanta. We had an exceptional 2022, which included celebrating our 95th year of operations. Our accomplishments as one GPC team are evident in this milestone year, and we are proud to lead a company with such a long and rich history. that differentiates GPC across all of our marketplaces. So now, I'll turn the call over to Will.

Thank you, Paul. Good morning, everyone. I also would like to thank the global GPC team for an exceptional year in 2022 and the hard work to take care of our customers every day. Around the world, our teams are aligned on our strategic initiative pillars that include talent and culture, sales effectiveness, technology, supply chain, and emerging tech. Investment and focus in these areas translate into a better customer experience, profitable growth, operational excellence, and a differentiated team culture. During 2022, all of our teams made significant initiative progress, and we look forward to sharing more details about our progress and outlook at our upcoming Investor Day in March. Turning our attention to the fourth quarter performance, total sales for the global automotive segment were $3.4 billion, an increase of approximately $243 million, or 7.6% versus the same period in 2021. Our sales growth was consistent through the quarter, with a solid finish in December to close the year. On a comparable basis, automotive sales growth for the quarter increased 8.2%. Our global automotive teams delivered mid single digit to low double digit comp growth across each of our operations. As Paul mentioned, the automotive segment continues to be driven by solid industry fundamentals and team execution. For fiscal year 2022, global automotive segment sales were 13.7 billion, an increase of 8.9% from 2021. Global automotive segment profit in the fourth quarter was 295 million, and segment operating margin was 8.6%, an increase of 30 basis points versus the same period in 2021. For the year, global automotive segment profit was 1.2 billion, and segment operating margin was 8.7%, an increase of 10 basis points from 2021, and up 110 basis points from 2019. During the fourth quarter, our automotive business experienced mid to high single-digit levels of inflation, relatively consistent with the levels we saw in the second and third quarters. We continue to be pleased with the ongoing positive impact of our category management strategic initiatives. Now, let's turn to an overview of our automotive business performance by geographies. In the U.S., automotive sales grew approximately 10% during the fourth quarter, with comparable sales growth of approximately 6%. Sales were strong across each U.S. region and broadly across product categories, with batteries, motor oil, tools and equipment, heavy duty, and brakes all posting strong growth in the quarter. The team navigated various extreme weather events in December and kept teammates safe while taking care of customers. Sales to both commercial and retail customers were positive with low double-digit commercial growth outpacing retail, which had low single-digit growth. Our commercial business saw sales growth across all customer segments, including notable strength with our fleet and government channel and mid-single-digit growth in our NAPA Auto Care Network. Over the course of the year, we grew our NAPA Auto Care Network of professional repair centers to a record 18,500 customers. an increase of 670 locations, and further expanded our competitive advantage as America's largest network of parts and care. We also continue our investment in the industry as we trained over 34,000 technicians in 2022 and actively support 900 technicians in our apprenticeship program. Other select accomplishments in 2022 include investments in talent and enhancements to our data analytics and technology capabilities. These enhancements have improved our insights and are driving data-driven decisions around strategic pricing and sourcing, which has nicely contributed to margin expansion performance. We've also improved our inventory visibility and are taking action to ensure the right part is in the right place at the right time. We will continue to invest in these capabilities as we move forward. For the full year, our U.S. automotive business grew sales by approximately 11%, with comparable sales growth of approximately 8%. We're extremely pleased with the share gains and record results in 2022. In Canada, sales grew approximately 14% in local currency during the fourth quarter, with comparable sales growth of approximately 12%. The results in Canada continue to reflect solid industry fundamentals, strong team execution, and market share gains. Our field-oriented data analytics to assess and prioritize market, customer, and network opportunities has delivered returns. In partnership with global teams, the Canadian business also made progress with NextDrive, powered by NAPA, our leading offering that positions repair shops to serve as hybrid and electric vehicles. In a short period of time, the program has certified over 50 EV technicians, part specialists, and service advisors, with plans to have 100 certified service centers and nearly 400 trained part specialists over the next few years. For the year, our Canadian business grew sales approximately 15% in local currency, with comparable sales growth of approximately 13%. In Europe, our automotive team delivered another exceptional quarter, with total sales increasing approximately 22% in local currency and comparable sales growth of approximately 10%. For the year, our European team delivered sales growth of 19%, with comparable sales growth of approximately 8%. The strong growth in Europe continues to be driven by solid execution and coordinated teamwork across Europe. As examples, during 2022, our European team won business with numerous key customer accounts and continued to gain market share with the rollout of our differentiated Napa offering across the region. Sales of Napa product in Europe reached nearly 300 million euros, an annual increase of over 50% from their prior year, and now positively contribute to profitability. The impressive growth is a testament to the global strength of the NAPA brand. The NextDrive rollout is also strong in Europe, with approximately 150 certified workshops across seven countries. In addition, our European bolt-on acquisition efforts continue to create value and expand and add density to our market footprint. Despite a challenging environment, the performance over the last few years has been strong in Europe, and the momentum has continued to start 2023. In the Asia-Pac automotive business, sales in the fourth quarter increased approximately 10% in local currency from the same period in the prior year, with comparable sales growth of approximately 7%. For the year, our Australian team delivered sales growth of 12% and comparable sales growth of approximately 9%. Both commercial and retail sales continued to perform well with Repco, NAPA, and our motorcycle accessories division delivering profitable growth and share gains. The team continued its impressive performance in 2022 with a three-year sales stack of more than 30%. Repco's 100-year anniversary in 2022 marked an amazing achievement for this team, and it was only fitting that the team delivered another outstanding year. Turning to the global industrial segment, during the fourth quarter, total sales at motion were 2.1 billion, an increase of approximately 478 million, or 29.6%. The sales cadence was consistently strong throughout the quarter, with average daily sales growth at or above 30% for all three months of the quarter. Comparable sales growth, which excludes the benefit of KDG, increased approximately 17% in the fourth quarter versus last year. This marks our seventh consecutive quarter of double-digit comparable sales growth. As a reminder, we completed the acquisition of KDG in the first quarter of 2022. As a result, going forward, KDG sales growth will be included in comparable sales growth. The strong sales growth at motion during the quarter was broad-based, with double-digit growth across nearly all product categories and major industries served, with particular strength coming from industries such as automotive, oil and gas, food products, and aggregate and cement. For the year, sales at motion were $8.4 billion, an increase of $2.1 billion, or 33.2%. Industrial segment profit in the fourth quarter was 230 million, or 11% of sales, representing a 150 basis point increase from the same period last year. The profit improvement at motion is a result of strong and disciplined sales growth and operating performance, including the KDG synergy realization. For the year, global industrial segment profit was approximately $887 million, and segment operating margin was a record 10.5%, an increase of 110 basis points from 2021 and up 240 basis points from 2019. In 2022, the industrial segment now represents over 40% of GPC total profit, up 8 percentage points since 2021. For the fourth quarter, inflation in the industrial segment held in the low single-digit range, consistent with the levels we've seen throughout the year. The strong financial performance at motion is a direct result of their customer and sales intensity, focused strategic initiatives, and operating rigor. During the year, we enhanced our selling capabilities by further leveraging data and technology and continued to expand our value-added solutions offering for our customers. These solutions include products and services in categories like automation, conveyance, fluid power, and repair. These categories now collectively represent approximately $1 billion in annual revenue promotion. In addition, our strategic initiatives around pricing, category management, and supply chain are driving increased productivity and profitability, which is reflected in the strong margin expansion delivered in 2022. As we execute on our organic global growth initiatives, we continue to complement them with strategic acquisitions to capture share in our fragmented markets and create shareholder value. During the fourth quarter, we completed several bolt-on acquisitions primarily consisting of small automotive store groups that increase local market density in existing geographies. We also continue to make progress integrating our strategic acquisition of KDG with motions. When we announced this acquisition in January of 2022, we communicated a plan for approximately 50 million in annual run rate synergies to be achieved over a three-year period. We're pleased to report that thanks to the incredible teamwork from many, Motion realized over 30 million in synergies in just the first year, with more expected in 2023 and 2024. Our acquisition pipeline is active, and we will remain disciplined to pursue transactions that advance our strategy, deliver profitable growth, and create long-term value. In summary, our teams delivered an exceptional fourth quarter and record year for Genuine Parts Company. All our business units and geographies exceeded internal expectations, driven by supportive industry fundamentals and the focused execution of our key strategic initiatives. We're excited to build on our momentum, and we look forward to another great year in 2023. With that, I'll turn the call over to Bert.

Thank you, Will, and thanks to everyone for joining us today. We are very proud of our teams and our outstanding performance, and I'm pleased to share the key highlights of our fourth quarter and full-year results. My comments this morning focus primarily on quarterly and full-year adjusted results, which exclude non-recurring items that I will cover in more detail shortly. Total GPC sales were up 15%, or $720 million, to $5.5 billion in the fourth quarter of 2022. The increase reflects an 11.1% improvement in comparable sales, including mid-single-digit levels of inflation and an 8% contribution from acquisitions. These items were partially offset by a 4.2% unfavorable impact of foreign currency, which was essentially in line with our assumption for the quarter. Sales for the full year were $22.1 billion, up 17.1% from 2021. As we continue to invest in organic and acquisitive growth initiatives for both of our segments, it was encouraging to see our core business, combined with acquisitions, including KDG, which added more than $1 billion in revenues for 2022, drive strong sales throughout the year. Our gross margin expanded approximately 50 basis points in the fourth quarter to 35.7%, primarily driven by ongoing investments in our pricing and sourcing initiatives that Will mentioned. These initiatives, along with others, contributed approximately 160 basis points of core gross margin improvement. These gains were partially offset by a few key factors. First, Moderating year-over-year supplier incentives pressured gross margin by approximately 30 basis points. Second, a shift in the mix of our sales based on the strength of our industrial business impacted gross margin by approximately 30 basis points. Finally, foreign currency and inflation impacted gross margin by approximately 50 basis points. With a strong fourth quarter, gross margin for the full year was 35.1%, slightly above our expectations, and essentially in line with the prior year. Our performance on gross margin reflects an excellent job by our team executing our strategies given the very dynamic market challenges. Our total operating and non-operating expenses in the fourth quarter, excluding adjustments, were approximately $1.6 billion, up 16.6% from 2021, and at 28.7% of sales, compared to 28.3% of sales in the prior year. Our expenses were up in the quarter, primarily due to inflation-driven increases in freight costs and overall investments in IT initiatives across our business units. For the year, total expenses were $6.2 billion, up 16.2%, and at 27.9% of sales, a 20 basis point improvement from 2021. Despite ongoing cost pressures in the fourth quarter, We continue to drive leverage on strong core sales growth across our businesses and execute on our initiatives to produce operational efficiencies. Segment profit in the fourth quarter was $526 million, up 25%, and our segment profit margin was 9.5%, an impressive 80 basis point increase from the same period in 2021. For the full year, segment profit was $2.1 billion, up 25% on a 17% sales increase. Our segment profit margin was 9.4%, a 60 basis point improvement from the prior year and up 160 basis points from 2019, which we believe demonstrates our transformation to an even stronger company and our ability to consistently perform through dynamic economic conditions. As outlined in our earnings release, our fourth quarter results include three adjustments, The first item relates to a $29 million adjustment to remeasure our product liability reserve. Secondly, we incurred approximately $13 million of costs related to the acquisition and integration of KDG. The third item relates to an $11 million loss on the divestiture of our remaining minority interest investment in S.P. Richards, which was finalized in the fourth quarter. For the full year, our non-recurring items include these fourth quarter adjustments as well as the 12-month impact of costs related to KDG and a gain on the sale of certain real estate recorded in the second quarter. Our fourth quarter adjusted net income, which excludes $40 million or $0.28 per diluted share in non-recurring items I just discussed, was $292 million or $2.05 per diluted share. This compares to adjusted net income of $256 million or $1.79 per diluted share in 2021, an increase of 15%. For the full year, adjusted net income was $1.2 billion, or $8.34 per diluted share, an increase of 21% from 2021. Reported net income was $1.2 billion, or $8.31 per diluted share. The continued execution of our initiatives allowed us to deliver back-to-back double-digit adjusted EPS growth in 2022 and 2021. With strong earnings growth and improved working capital, we generated $222 million in cash from operations in the fourth quarter and $1.5 billion for the full year, a 17% increase from 2021. Free cash flow was $1.1 billion, up 14% from 2021. and we closed the fourth quarter and year with $2.2 billion in available liquidity. Our debt to adjusted EBITDA is 1.7 times, which compares to our targeted range of 2 to 2.5 times and highlights our financial strength and flexibility. Our strong performance has allowed us to stay focused on four key priorities for capital allocation, including the reinvestment in our business through capital expenditures and M&A, and the return of capital to our shareholders through dividends and share repurchases. For the year, we invested $340 million in capital expenditures, including $96 million in the fourth quarter, primarily in technology and other projects to further automate and consolidate our distribution networks and drive productivity. We also invested $1.5 billion for acquisitions, including the $1.3 billion investment in KDG and returned $719 million to shareholders in the form of dividends and share repurchases. This includes $496 million in cash dividends paid to our shareholders and $223 million in cash used to repurchase 1.6 million shares. Our continued strong cash flow generation provides us the ability to manage our capital allocation through all business cycles. Turning to our outlook for 2023, we expect diluted earnings per share to be in the range of $8.80 to $8.95. which represents an increase of 6% to 7% from adjusted diluted earnings per share in 2022. Our outlook for earnings growth is driven by our expectations for continuous sales growth and another year of margin expansion. We expect total sales growth for 2023 to be in the range of 4% to 6%. As we look at the business segments, 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. For the industrial segment, we're expecting total sales growth of 4% to 6%, also with a 4% to 6% increase in comparable sales. We would add that our outlook for industrial assumes a much stronger first half relative to the third and fourth quarters of 2023. Turning to a few other items of interest. We will continue to drive growth through the reinvestment in our business and M&A. We currently expect CapEx to be in the range of $375 million to $400 million in 2023, reflecting incremental opportunities in technology and supply chain, among others. We also continue to have a healthy pipeline of acquisition targets and will continue to seek additional bolt-on acquisitions wherever they create value for us. In 2023, we will continue to return capital to our shareholders through dividends and share repurchases. Earlier this week, our board approved a $3.80 per share annual dividend for 2023, representing our 67th consecutive annual increase in the dividend. This represents a 6% increase from the $3.58 per share paid in 2022 and is above our 20-year average increase of 5.8%. Our total shareholder return performance of approximately 27% in 2022 placed GPC in the top 10% of the S&P 500. Taken together, we delivered sales growth of 17% and adjusted EPS growth of 21%, so a tremendous year in 2022. Our teams worked hard for these achievements, and we enter 2023 with strong momentum and are well positioned to continue to take share and deliver through an uncertain macro environment. We look forward to updating you on our progress as we move through the year. In closing, as both Paul and Will have mentioned, we look forward to hosting our Investor Day on March 23rd. We are excited to provide further insights on key growth initiatives and long-term financial targets and are confident you will find the day informative and productive. We'd love to see you here in Atlanta. Thank you, and we will now turn it back to the operator for your questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using the speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2.

At this time, we will pause momentarily to assemble our roster. And the first question will be from Christopher Horvath from JP Morgan.

Please go ahead.

Thanks. Good morning, guys. Can you share some more thoughts in terms of the cadence of the year? I know you talked about the first half being stronger on the industrial side from a comp perspective. I was curious. If you did add KDG into the 4Q comp base, like how accretive would that be or how accretive is KDG entering the comp base in 2023? And then on the margin front, do you expect margin expansion both segments in 2023? Thanks, Chris.

It's Bert. I'll take that one. I think in terms of the cadence of the year, and maybe I'll just pull it up a level and talk about the guidance in general. As I'm sure you can appreciate, the forecasting environment has its challenges right now, particularly with the mixed macro signals. We're very comfortable with our outlook, four to six top line driving EPS up six to seven percent in our range of 880 to 895, and we do expect margin expansion. That will come from both segments. We see industrial having a little bit more upside on margin expansion than the auto business, but we'll see nice improvement on both. When we looked at our guidance and talking about the cadence, We really try to be as thoughtful as we can in this environment. We've got solid industry fundamentals for both businesses. We have really good momentum in both businesses coming out of 2022. But we've had two exceptional years. And I think we're in an environment where we all expect not only GPC but others' growth to moderate a bit and normalize. And I think that's still good. And I think what we're doing this year and what we're forecasting for 2023 is a good outcome. There are headwinds. And we're staying very prudent with our eyes wide open on the key factors that are out there to watch. We can't ignore that there's recessionary pressure and inflation and the geopolitical landscape around the world are all things we're watching. As we look at the year, we really kind of broke it into two halves. The automotive grows consistently across the quarters. So I think the cadence will stay pretty nice across the year. And the two halves are four to six in both halves. On the industrial, we're a little stronger in the first half. more high single-digit outlook for the first half for industrial, and on the second half, more low single-digit. And that's really just some of the uncertainty on that side of the business, some decelerating PMI numbers and things like that. So that's what we can see right now, a little stronger view into the first half and a little less clarity on the second half. We think that lines up nicely for the full year. Again, you know, KDG has been accretive to the business for the full year. I think you saw in our release and our commentary that we had a nice synergy benefit from KDG. And we'll continue to get good synergy benefits as we look into 2023. So we like that acquisition. It's been a tremendous expansion of capability for the Motion business. And our team at Motion has done an absolutely brilliant job of integrating and executing that acquisition. So all that taken together, I think we feel really good about where we are. We're very bullish on GPC. And our size, scale, and momentum across both segments position us to be successful. And we're going to watch the landscape and continue to stay ready for what comes at us as the macro environment continues to move.

Got it. And my follow-up question is, on the motion side, you have a number of different end markets that you pursue. And I know there are some weakness in some of the consumer areas out there on the durable side. And you have some of your peers talking about that weakness. So can you help us understand, you know, one, are you seeing any indications of weakness within motion? And two, how is your mix sort of split out at a more higher level, you know, capital goods versus sort of consumer discretionary items versus more commodity and sort of, you know, ag type businesses?

Yeah, Chris, it's Will. Let me see if I can add some color to that. So as we commented in the prepared remarks, we really do continue to see very broad-based strength across our end markets to give you some perspective. I mean, we have, call it, 15 different industries that we would describe as our top industries. The range of performance for the fourth quarter in those industries range from high single digits to over 35%. So, and then I think we said in our comments, you know, through the quarter, the 30% per month comp, you know, where growth rate was pretty consistent as well. So it's consistent and broad. This is a B2B business. So it is quite industrial and less consumer oriented. There are a couple categories or industries here that perhaps you could extend to a broader consumer dynamic, lumber and wood being one, things around the construction industries. Those, if we had to point out one area of weakness to start the year, we saw some relative weakness there. I don't know if that's residential, commercial, real estate markets changing on us, but Again, generally, it's a very industrial, non-consumer oriented B2B type of business that's very well diversified.

Yeah, and Chris, I would just add, I think as you look at our more traditional end markets, food products, iron and steel, aggregate, automotive, all up well into the double digits in Q4. So, you know, as both Will and Bert have said, we remain incredibly bullish about our industrial business and pleased to say we're seeing double-digit growth right out of the blocks here in Q1. So, yeah, we're just going to keep on pressing forward. And look, there's a lot of reasons to be optimistic about the future. You've got manufacturing returning to the U.S., a lot of onshoring, reshoring. You've got a lot of investments and semiconductors, energy, battery storage, mining, all which play to our strength.

That's very helpful. Thanks very much. You're welcome.

Thanks, Chris. Thanks, Chris.

The next question is from Kate McShane from Goldman Sachs. Please go ahead.

Hi. Thanks. Good morning, and thanks for taking our question. I just had two questions, one with regards to operating expenses and some of your commentary around CapEx. I just wondered with regards to operating expenses in 23, what you're anticipating for freight and investments in IT and how that will look in 23 versus 22, and if there are some examples of the ongoing tech investment in the CapEx spend that was noted today.

Perfect. Thanks, Kate. Appreciate the question and give you some color on 23 as we're looking at it on the OpEx and CapEx side. On the OpEx, we're expecting a little bit of deleverage next year. We're going to invest in this cycle here, really focused on the long term on tech and talent. I know you asked about freight. We will see a little pressure there, an inflationary pressure like we saw in the fourth quarter on freight. But we expect that to abate as we get into the second half of the year. But back on our two big investments for next year, tech and talent, it's a competitive marketplace out there, and we're thinking about the long term. So on the talent side, we're making some smart investments in the business with our teams. We'll see a mid-single-digit wage increase this year, a tiny bit higher than 2022. And we're going to absorb some costs, particularly on the healthcare side. Healthcare inflation is pretty prolific, and we're going to absorb some of that cost at corporate. So we think those are the right investments for our team. The impact of 2023 of that basket of activities is about 30 basis points of deleverage on SG&A. And on the IT side, we're making investments that we need to make in the business to improve our capabilities. And this is really about modernizing our platforms. These are investments in data analytics, AI, and new systems. And some of those are pivoting to cloud-based systems. And those costs can't be capitalized. So we feel good about those investments and what they do for our business. It allows us to go faster. And those investments, we think, will be driving leverage outside of those investments and focused on efficiency. So if you take those out, we'd be levering the business. The IT investments, about 30 basis points as well. And our guide reflects all of this. And so we feel good about that as well. On capital, we'll see a little bit of an increase in capital next year. Not an outsized increase. At the low end of our range, 10%. Again, we're very energized about where we're focused on the business in terms of opportunities for automation and modernization of DCs in the supply chain and, again, on IT. There's IT platform investments and things that we want to do that we see benefit in. Many of those projects on the supply chain allow us to consolidate and close old DCs, and you can imagine that's got a big benefit. And so, taken all together, we think these are the right things to do for next year. We're still expecting margin expansion and a top-line guide of 6% to 7%. So, we think all of that together makes the right sense for where we are.

Thank you. And the next question will be from Greg Mellick from Evercore ISI.

Please go ahead.

Hey, thanks. Just wanted to clarify that last question that I had a follow-up on inflation and demand. The 30 and the 30 BIPs, the 60 BIPs of OPEX headwind, presumably that's offset by more than 60 BIPs of gross margin expansion? And I guess what's driving that?

Okay, and what's driving that? Yeah, so on the margin side, you know, we're going to carry the momentum that we had in the fourth quarter. Our teams are doing an absolutely brilliant job of executing our core strategies on pricing and sourcing capabilities. I think in my prepared marks I talked about 160 basis point increase in the fourth quarter just from the execution of category management, pricing and sourcing activities. That's going to continue. We expect that to continue into 2023. And so that success is what we have in our forecast. We're looking for gross margins to be up in the range of 20 to 40 basis points for 2023. We don't really see a lot of headwind there. Anything in terms of what we're looking at from FX or inflation or any of that is pretty negligible at this point. So we're bullish on our execution of our gross margin activities, and that helps us expand margin overall. The SG&A impacts on those two investment side are offset by other efficiencies. So when you look at the full year, We expect deleverage of 30 to 40 basis points in total. I gave you 60 basis points of deleverage, and so you'll see that we're making some ground up and driving leverage outside of those two investment categories where we can be more efficient and smarter in the business.

Got it. And then my question on top line is inflation last year, I think in the fourth quarter you said it was mid-single to high singles, so let's call it 6% or 7%. in auto and low singles and industrial. What's in your assumption this year when you did your four to six guide for each business?

Yeah, so inflation, you know, just kind of talk about it trend-wise. Our view is that it moderated in the fourth quarter. It ticked down slightly from Q3. And that, you know, monetary policy in the U.S. is working. It's having an effect around the world. But it does take some time for all of that to flow through supply chains and through the businesses. So As you said, Q4 and FY22 inflation levels overall were mid-single digits, high single digits in auto, low single digits in industrial. And as we look to 23, we expect for it to continue to moderate for the full year. We think monetary policy works and will work. We were at a peak of 9.1% in June. We've had seven straight months of easing. And when we look at that, the way we kind of thought about our forecast for the full year is that the full year would be at a low single digit, all up, remaining at low single digits for industrial and low single digit for auto. That obviously ticks down across the course of the year. So we step down Q1, Q2, Q3, Q4 as monetary policy continues to have an impact. Again, it's a little bit of a wild card, and we have to make an assumption when we give our guide, which is what we've done. So we'll still be watching the effect of monetary policy and other actions But that's our assumption base. Q1, just to be specific, we'll tick down from where we are to mid-single digit, I think, for auto. Industrial stays at low single digit and all up mid-single digit in Q1.

That's perfect. And then last, just DIY and Do It For Me. Do It For Me is still outpacing DIY by about 1,000 basis points. Is that the trend you're expecting this year to continue, or have we seen enough recovery in fleet and other that maybe those start to narrow?

I think they start to narrow, and so we would expect a DIY business. We're seeing some good strength in our DIY business, in particular our accessories, which is a small part of the business, but it continues to grow really nicely even on tougher comps. So we would expect the gap to narrow as we go through 2023.

Well, congrats, guys, on a good year, and good luck.

Thank you, Greg.

The next question is from Scott Ciccarelli from Truist. Please go ahead.

Hey, guys, Scott Ciccarelli. First question is, you have made a couple comments on the gross margin benefits you've been able to accrue from pricing. Is that both in auto and industrial? And then if at least some of it's in auto, Could some of those price increases create some competitive challenges down the road since some of your other major competitors have made selective price investments over the last year and a half to two years?

Yes, Scott, it's Will. I'll take a cut at this. We're seeing great pricing work happening on both sides of the business, and in particular in U.S. automotive markets. I would say they're one of the most dynamic teams in terms of the things that they're doing around pricing. We've been at this now for 12 to 18 months in a pretty robust way, both in terms of the technology that we're using, the data, working with a third party, et cetera. And we are actively thinking through the right way to execute pricing strategies relative to the market. That's really at the core of the work that we're doing. So we feel good about what we're doing. We study it daily. It's at the SKU level. We go into different markets, and we've got really nice visibility to react accordingly with dashboards and weekly updates as a team to make sure that what we're doing is beneficial for our customers and our business. So it's definitely something that we're hyper-focused on.

And, Scott, I would just add to that that we're, you know, despite what you may be hearing in the marketplace, the pricing environment overall, as it generally has been in automotive, is rational. We're not seeing any huge swings one way or the other. And as you well know, having the product on the shelf and available when the customer needs it is still the primary driver. and not necessarily price.

Okay, that's helpful. And then just to follow up on the industrial side, I mean, the comp performance of the industrial piece, segment rather, has continued to significantly outpace the indexes. It's historically tracked really over the last, call it, 15 to 18 months. And, Paul, I think you've mentioned some of it is kind of the changing business mix that you previously highlighted. Are there other factors we should be thinking about, you know, to kind of explain the divergence from what's called historical trend that we've seen?

I don't think so, Scott. I know you and I talked about it on the last call. Look, we're not totally insulated from the effects of a downturn in PMI or industrial production, but I would tell you we are a whole lot more confident today given the diversity of our product and our service offering, the end markets we're servicing, you know, things like, you know, EV manufacturing plants. I mentioned earlier, you know, the opportunity with onshore, nearshoring, manufacturing coming back to the U.S. So all of that bodes very well for motion. And, you know, we've evolved, I guess, Scott, my time here, we've evolved from being basically a distributor of bearings and industrial supplies to a really world-class industrial solutions provider, one who provides solutions and automation, robotics, conveyance, hydraulics, fluid power. So, look, we're not totally immune to what's happening in manufacturing, but I like our I like our business, I like our team, and I like our chances. And again, we're off to another really good start here in Q1.

Hey, Scott, I might just add one other thought, which is the momentum that's behind the KDG and the motion combination. We get very active and positive feedback from customers on kind of the breadth and depth of the service offering, the value-add services, and I think that's really extended the leadership position of the combined business over the last 12 months.

Got it. Thanks. Very helpful, guys.

Yeah. Thank you.

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

Great. Thank you. I was hoping you could just comment a little bit about, you know, your leverage ratio, which is a bit below target. You know, are you kind of holding on to some dry powder So that if attractive acquisitions or buyback opportunities come up, you could act on that opportunity without taking on high rate debt? Or is there some hesitancy maybe about the economic outlook that's keeping you more conservative on leverage?

Liz, you're exactly right. We're being a little conservative here. We're holding some dry powder. Look, we are at 1.7 times, well below our stated range of 2 to 2.5 times. And we like that position. We think that it's really smart right now in this environment. We would look for opportunistic things across the board, whether it's CapEx or M&A. And so we really do think that we've been able to work that down post-KDG acquisition. You know, right after we bought KDG earlier in the year, we were closer to two. So I think nice performance to work it back down. And look across the landscape for whatever we might see come up. Nothing pressing or imminent, but we just like the financial flexibility that we have with our current cash balance, our total liquidity, and being very disciplined across our capital allocation structure.

Got it. Makes sense. Thank you.

Thank you.

And the next question is from Brett Jordan from Jefferies. Please go ahead.

Hey, good morning, guys. Good morning, Brett. On the NAPA private label program in Europe, you said, I think, what, 300 million euros you're doing. Could you talk about sort of what inning you are in and penetrating there? I mean, how many segments that you think you're going to run private label versus how many you're doing or what the potential market is?

Yeah, Brett, let me take a pass at that. We're in the very early innings. Obviously, the last 12 to 18 months, it has delivered really strong momentum. We're excited about that. We'd fully expect to continue to do that. We're in, call it, 10 to 15 categories. We've got opportunities to do more than that. Within the categories that we actually offer, that doesn't necessarily mean they're in each one of our local markets. even if we just stayed in our 10 to 15 primary categories, we'd have a great opportunity to continue to push that product. But we're excited about this and believe that it can be, you know, close to 20% of the revenue over the next two to three years. Hey, Brett.

I know we got into this discussion last time we were together. And so I would tell you, I think we're at about the bottom of the third, Brett, in terms of our In terms of our process here in private label, it's going extremely well. All the countries have jumped on board, and we haven't even rolled it out yet to the new markets we entered last year, Spain and Portugal. So, yeah, we're excited, and I know the team's excited, and the best part is our customers and the consumers are buying the product, and they love the product.

Okay, great. And then on the U.S. acquisition, you're talking about folding in some store, you know, acquisitions. Could you talk about what you're looking at there? Are these Napa independents? Are these other independents in other buying groups? And I guess sort of, you know, which regions are these more urban company-owned store markets you're looking at? You know, sort of what's the strategy on increasing this company-owned store base?

It's a great question. The short answer is it's all of the above on the store base. So a lot of thought has gone into the markets in which we want to add relative density. And so depending on the best way to do that, we'll consider either, you know, working with an independent owner or, you know, if it's another competitive store group, we'll consider that. But as you alluded to, it's strategic markets, adding that density, making sure that we've got the ability to cover customers well with the right inventory mix. And it's a very attractive ROYC lever for us as we bring a lot of value to those merged entities after we own them. Are there any particular reasons you're looking at, or is this sort of national? It's a national approach. We're doing it. It's the same M&A strategy, quite frankly, globally for our automotive business. We do the same work in Canada, and we do the same work in Europe as we do here in the U.S.

If you were to roll that forward, if you're sort of thinking out three to five years, is it a meaningful change in company-owned store mix versus independent?

It has the potential to be. It will take some time, just given the law of numbers. But, you know, that is a lever that we have to change that mix for sure.

Okay, great. Thank you.

And the next question is from Daniel Embro from Stevens, Inc.

Please go ahead.

Hey, guys. This is Joe Enderlin. I'm for Daniel. Thanks for taking the question. Looking at the industrial space, I think you noted reshoring as a tailwind in the prepared remarks and previous questions. Could you maybe provide some more thoughts on how you expect this to impact profitability or how you're thinking about the effects of reshoring?

Yeah. So thanks for the question, Joe. And look, it's It's a reality, and there's a number of reports that we've all reviewed of late commenting on the number of CEOs that are considering and have begun considering bringing manufacturing back here, not only the U.S., but across North America, and certainly Mexico would be a part of that, where we have a strong presence with the motion business. Look, it's a positive. It's more long, certainly more long range. It's not going to, certainly not going to happen overnight. But again, I think as these companies do return to North America, automation is going to play a significant role given some of the labor challenges and labor shortages. So automation in these operations is going to be significant. And again, we are extremely well positioned as it relates to our automation and robotics offerings.

That's helpful. Thank you. As a follow-up, you noted you realized there were $30 million of synergies from the KDG acquisition, with more expected in 23 and 24. Just to clarify, were these mainly revenue or cost synergies? And then, what are the primary drivers here? And then, do you maybe think there might be any upside to the $50 million goal?

Yeah, the synergies are in both buckets. So we have net sales synergies as well as cost synergies. So they interplay together. We do think there's some upside as we move forward. The business has really nice momentum. We committed to $50 million when we originally announced the transaction by year three. We're in a position to deliver $50 million by the end of year two. So with 30 realized through year one, an incremental 20 in year two, and I'm confident that the team will execute well and deliver on that commitment and potentially more.

That's all for us. Thank you.

Ladies and gentlemen, we have time for one more question, and that question is from Seth Basham from Wedbush. Please go ahead.

Thanks a lot for squeezing me in. Next quarter, I have a couple questions about the core U.S. Napa business. First, regarding the fourth quarter results, you mentioned strength to finish the quarter. I presume weather helped. I'm wondering if you can quantify how much weather was a help and how you're thinking about weather for the first quarter and 2023.

Yes, Seth, it's Will. I would say that weather... Might have helped slightly, but not material to close the year. You know, as we look forward, it's currently 80 degrees here in Atlanta. There's a couple feet of snow in different parts of the country. Hard to predict. I would tell you January feels like certainly in our North American markets, it's been a mild winter that's had some implications for some of our product categories. But I'm confident the team's going to work through that. We can't control it, so we're going to focus on what we can control and make sure that we're taking care of our customers and our teammates safely.

Fair enough. And then as you're thinking about the U.S. NAPA sales growth and comps for 2023, is that within the same 4% to 6% range that you're expecting for the global business?

Yes, Seth, this is Bert. That's right. We're thinking about that total automotive segment at a 4% to 6%. And within that, we would be in the same range for the U.S. business.

Okay. And then lastly, in terms of their miles-driven outlook, how are you thinking about miles-driven, obviously a key driver of U.S. NAPA sales?

Well, I would tackle that, Seth. We're hoping to see a little bit of a lift, which we did see. in the latter part of the year as fuel prices started to abate a bit here in the U.S. So I still think there's a bit of a reluctance for mass transit, not to mention air travel and airfares are at all-time highs. So I think that... you know, a 1% lift would not be out of the realm of possibility. So we think it'll be a tailwind in 23 for sure. Wonderful.

Thank you very much for your answers. Okay.

Good luck. Thanks. Appreciate it, Seth.

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

Yeah, thanks, Chad. We appreciate it and appreciate all the questions and everyone joining us this morning. As you've heard, we're incredibly pleased with the report of record year for GPC. And, you know, we could not be prouder of the great work done by all of our teammates around the world. We continue to be excited with the momentum this business continues to generate. And I would just conclude by saying the future is very, very bright for GPC. Hope you all have a great day wherever you are and hope to see you at our Investor Day meeting here in March. All the best.

Thank you. The conference has now concluded. Thank you for attending today's presentation.