Good day, ladies and gentlemen. Welcome to General Parts Company First Quarter and 2020 Earnings Conference Call. Today’s call is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] At this time, I would like to turn the conference over to Sid Jones, Senior Vice President, Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us today for the Genuine Parts Company first quarter 2020 conference call to discuss our earnings results and COVID-19 business update. I’m here with Paul Donahue, our Chairman and Chief Executive Officer; and Carol Yancey, our Executive Vice President and Chief Financial Officer. Today’s conference call and webcast are accompanied by a slide presentation that can be found on the Genuine Parts Company Investor Relations website. Before we begin this morning, please be advised that this call may include certain non-GAAP financial measures, which may be referred to during today’s discussion of our 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 Investors section of our website. Today’s call may 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 welcome to our first quarter 2020 earnings conference call. We hope you are staying safe and enjoying good health in these challenging times, and we appreciate you joining us today for our review of this morning’s release. We would like to begin today’s call with a few comments regarding the COVID-19 pandemic and its significant impact around the world. Our hearts go out to the millions of people affected by COVID-19, and we thank those health care providers and first responders on the front lines of our fight against this outbreak. Their commitment to the care and protection of our communities is admirable and greatly appreciated. We also owe a debt of gratitude to our associates across the global GPC family. Our team members have lived our GPC values every day and stepped up with powerful displays of commitment to each other, our customers and our communities. Working as a team, we rallied to navigate the crisis to ensure our employees stay healthy, our operations remain safe and our teams are well positioned to serve our customers’ critical needs. Each of our three business segments are classified as essential businesses, and we are proud to be able to take care of our customers during these unprecedented times. Like everyone, new protocols at our facilities require us to adjust the way we conduct business. To highlight a few examples, we now make mask, sanitizer and other PPE widely available for our team mates, direct movement patterns within buildings, mandate social distancing and implement temperature checks in many of our operations. We created flexible operating policies for our associates and our customers, implemented remote work plans and develop phase attendant strategies to ensure a safe environment. Importantly, we stepped up our communication approach with our global employee base.…

Thank you, Paul. Total GPC sales were $4.6 billion in the first quarter, down 3.7% from 2019 or up 1.1%, excluding the impact of divestitures. For the quarter, we were pleased to report our tenth consecutive increase in our quarterly gross margin, with gross margin improving to 32.9% from 31.8% in 2019 or up 108 basis points. The improvement primarily reflects the favorable impact of divestitures and acquisitions of higher gross margin businesses in automotive and industrial. These items as well as favorable product mix shifts were partially offset by a decrease in supplier incentives due to lower purchasing volume. The pricing environment stabilized in the first quarter from relatively high levels of inflation in 2019, primarily associated with tariffs in automotive and Business Products. In addition to the slight carryover effect of these tariffs in the first quarter, additional supplier price changes thus far in 2020 have been flat in automotive, 0.4% in Industrial and 0.5% in office. So overall, pricing had a slightly favorable impact to sales for the quarter, and we expect only minor price inflation through the balance of 2020. Turning to our selling, administrative and other expenses. This line item was $1.23 billion in the first quarter or up 2.4% from last year. Or up an adjusted 2.7%, excluding the impact of transaction and other costs, and this represents 27% of sales on both a GAAP and adjusted basis. These operating costs were up from last year due to several factors, including the loss of leverage on our expenses related to the lower-than-expected sales volumes and the impact of divestitures and acquisitions with higher cost models. In addition, the effect of rising costs in areas such as freight and delivery, insurance, IT and cybersecurity also drove the increase. With that said, we were pleased to…

Thank you, Carol. We entered April well underway in our preparedness plans to protect our employees, customers and communities while also continuing to serve our customers and creating value for all of our stakeholders. Throughout the month, we were focused on the controlled execution of these plans and would highlight several key points. To date, we have been fortunate to have very few known COVID-19 cases among our 55,000 employees. A testament to the enhanced safety protocols we have implemented in our distribution centers, branches, stores and offices. Our operations are essential to our customers and remain substantially open across business segments and geographies. Our teams have been diligent and more frequent in their communications with employees and our supplier and customer partners. Our teams have been innovative in implementing new services that have proven valuable in driving sales. We have effectively realigned our capital allocation priority by reducing our capital expenditures and suspending share repurchases and M&A, while remaining committed to the dividend. And we have worked with our banks and other financial partners for additional forms of financing and amended debt covenants to provide ample liquidity through the crisis. Working together as one team, we believe the steps we are taking to stabilize our business in these unprecedented times, will position the company for strong sales and earnings growth as we exit this global pandemic. We acknowledge the unprecedented near-term challenges that we must navigate and corresponding hard work in front of us. With that said, we remain optimistic about the future as we’ve had significant learnings from the current business conditions. And the industry fundamentals across our automotive and industrial operations are strong and supportive of sustained long-term growth. The circumstances of COVID-19 have required us to assess and build on our existing capabilities. And in addition…

Thank you. [Operator Instructions] Our first question comes from the line of Liz Suzuki with Bank of America. Please proceed with your question.

Great. Thank you. So for the auto business, in the countries where you operate, that have started to see a slowdown of new cases of COVID-19 and have started to open back up maybe a few weeks ahead of where we are in the U.S., has there been a significant rebound in auto part sales or is it pretty gradual?

Liz, great question. We had a couple hour conference call with our European leadership team yesterday. And our markets where we have seen openings, i.e., in Germany, the Netherlands, Belgium, we are definitely seeing a resurgence in our sales top line. Those markets, they fared better than certainly our market in France and the U.K. France has been in lockdown for the longest period of time out of our markets, the U.K. locked down in late March. So those two have been dramatically impacted. We’ll see France. What we hope, France will begin gradual reopening on May 11. We think U.K. will probably be later in May. But directly to your question, Liz, we are seeing an uptick, a nice uptick in sales in both Germany and the Netherlands.

And do you think there could be a shift in consumer behavior? And maybe it’s already happening in those countries that are recovering, where commuting and vacation travel starts shifting more to the automobile as opposed to public transportation or air travel?

Well, as I mentioned in my prepared remarks, Liz, look, it’s anybody’s guess at this point. But we would certainly expect in the near-term that we will see folks gravitating to more driving, more utilization of their automobile versus jumping back on airplanes. So I would think we’ll see that in all our markets, AsiaPac, Europe as well as across North America.

Great. Thank you.

You’re welcome. Thank you, Liz.

Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.

Hey. Good morning, guys.

Morning, Bret.

Questions around the balance sheet, I guess, given the AP to inventory at 110 and likely higher leverage ratios just on the near-term lower EBIT. Is that something that you have to be concerned about the payables programs being at such high levels, given a higher leverage ratio with those lenders?

Yeah, Bret, when we think about our working capital, we are still quite comfortable with where we are with our supply chain financing, our accounts payable programs and all of our programs with our suppliers. Quite honestly, as Paul mentioned, we’ve had just a terrific working relationship with our procurement teams and our suppliers. And we’re still making further progress on extended terms globally across our businesses, even in these times. When we think about our leverage and the metrics that you mentioned, we’re comfortable with other levers we’re pulling. So we mentioned some of the things we’re doing in capital allocation, be it CapEx or be it our M&A or share repurchase, all levers we can pull quite easily. We also have some other working capital metrics we’re looking at and making progress on. So in the area of inventory management, and then keeping just a tight eye on AR. So no, we’re very comfortable with where we are, and we expect to hold on to that ratio as we move ahead and to still get working capital improvement.

And I guess, you mentioned participating maybe some asset-based lending is - what are your plans around the balance sheet as far as for the liquidity?

Yeah. So no, great question. As we did our modeling and worked with our banking and financial partners and did increase our covenant through the end of this year. And we’re quite comfortable that we’ll remain in compliance with that covenant without these other options. Again, with the capital allocation levers we pulled and some of our working capital improvement, we believe we’ll be in compliance without doing other asset-based lending. But having said that, our treasury teams work continuously looking at many different options and whether it’s an AR securitization or some real estate structure type transaction or quite honestly, we’re also pursuing some international loans that are being made available in some of the geographies we have in Europe that’s attractive financing. So we honestly believe we can be in compliance without doing those things, but we’re being prudent to continue to model and look at what may make sense as we move ahead during what will be probably the toughest quarter from a balance sheet standpoint in Q2.

Okay. Great. And then one macro auto question. You said that none of the NAPA U.S. independents had closed their doors. Do you see this event sort of driving some contraction in the total number of doors, whether it be other independent buying group members? But do you see this sort of being shocking enough that we’re going to shrink the total number of stores in the auto parts space?

Well, Bret, it certainly is possible. We - I don’t know that the automotive aftermarket is going to be that significantly different from other small businesses that have been impacted. I will tell you that, as I mentioned in my prepared remarks, our - many of our independent owners have already taken part in the PPP and are financially strong as well as many of our NAPA AutoCare centers, as well, have taken advantage. So we think that, if anything, Bret, there perhaps may be some acquisition opportunities down the road for a company like ours with as strong a balance sheet as we continue to maintain.

Okay, great. Thank you.

Yeah. Thank you, Bret.

Our next question comes from the line of Scot Ciccarelli with RBC Capital Markets. Please proceed with your question.

Hi. Good morning. This is actually Gustavo Gonzalez on for Scot. Thanks for taking our questions. So your comments suggest that kind of trend deteriorated further in April versus March. And I know it’s a limited data set, but the cadence in April stayed sort of relatively flat in all segments? Or did it improve or get worse from there sort of as the month progressed?

Okay. So I’ll take a shot at that. What we saw in the month of April is sequential improvement throughout the month that has now carried over into May. So really, what we saw here in the U.S. is as states reopened, we saw our business ramp back up. We expect to see the same in Europe, as I mentioned earlier, as we’ve already seen in Germany and the Netherlands. We certainly expect that in Asia Pac as well. And as France comes back online, the U.K., we fully expect to see our business ramp back up. In Asia Pacific, we - New Zealand was in a total lockdown mode. That country is now reopening, and we’ve seen a resurgence in business, both in automotive and Industrial.

Got it. That’s helpful. And then one more for me. So the declines in auto, the cadence has seen your end, your own stores and kind of what you’re seeing with your wholesale sales to your independents. How different is that? Is there any delta you guys are seeing there? And then I know you guys said no closures on the impendent front currently, but how solvent with the current sales volumes do you think they can kind of last 20%, 30% down in sales?

Yeah. So let me take the first question first. So between our company stores and our independent-owned stores, the numbers and trends were very similar, so not a big discrepancy between those two. What I would say and I’ll repeat what I said earlier, I believe the number that I’ve seen most recently is 60% of our independent owners have successfully applied for PPP funds. So to this point, our independent owners are in good shape. I believe over 90% have applied. And as you know, it’s the banking system. Some of the applications have moved a bit slower, but we do believe that the program that the Fed has put out will benefit. And as it’s designed to, should benefit small independent-owned businesses, like our good NAPA independent-owned stores as well as our NAPA AutoCare centers. So we think in the long haul, our group will be just fine.

Got it. That’s it from me. Thank you.

Yeah. Thank you.

Our next question comes from the line of David Bellinger with Wolfe Research. Please proceed with your question.

Great. Thank you. And I hope everyone is staying safe. Just following up on the U.S. auto business and the sequential improvement, you mentioned week to week. How are you thinking about the stimulus checks and the flow to consumers? How big of a factor was that to help the improvement? And can you talk about any regional differences that have stood out lately or a certain subset of stores that are performing better or worse than the overall automotive average?

Yeah, David. Welcome. We’re happy to have you on our account. I’ll tackle the second question first in terms of regional differences, probably no surprise where we have seen the most pressure from a regional standpoint is in the Northeast. So our good owners and company stores in and around New York, Boston, have really been challenged, again, should not be a surprise. The Mid-Atlantic region of the U.S. was pressured as well. On the flip side, our business has maintained relatively well in the Midwest as well as the Mountain area, which - those two regions of the country also had good fourth quarters as well. So we appreciate the great job our leadership teams are doing in both those markets. In terms of the stimulus checks, we would think that it can only be a positive. It’s hard to track, David, exactly to pinpoint if we’ve seen a lift week to week as a result of stimulus checks, but we have to believe that’s a positive. I would also mention that - and as I did in my prepared remarks, we have seen a big uptick in our online and digital business, all across the GPC businesses. So again, the stimulus checks can only benefit our business in the long haul.

Got it. That’s very helpful. Then just following up on the strong online sales you just mentioned to the DIY customers. Can you elaborate on what you’re seeing there? Maybe give us a sense of magnitude of how much that channel has picked up. And could this become a more substantial piece of the business going forward?

Yeah, great question. And look, we’ve been investing in our online efforts both here in the U.S. as well as Australia. You might remember, David, I mentioned it in my prepared remarks, we did an acquisition in Australia last year of the leading online purveyor of auto parts, a company called Sparesbox, very timely acquisition for us. They brought a tremendous level of expertise and knowledge around all things digital, but also great automotive knowledge as well. So our business in Australia is up three times here over the last couple of months. Our business in the U.S. is up two times. Now granted, it is a fairly small base that we’re coming off of. But we’re thrilled with what we’re seeing, and we’ll continue to invest in our digital efforts across all of our businesses.

Got it. Thank you very much.

Yeah. Thanks, David.

Our next question comes from the line of Greg Melich with Evercore ISI. Please proceed with your question.

Thanks. I had a question for Carol and then Paul. Carol, could you help us understand the - what you think the variable margin is the business now? Is it - can we still use something like 25% or 30%, as things come under pressure? And is that still a good number? Or does that come back out? And then, Paul, I guess, really thinking about those trends you talked about, how much stronger was DIY than do it for me? Was it possible that it’s actually up in April? And also in Industrial, if you could answer what the trends have been there since the second half of March and now into May, if it’s accelerating or still decelerating?

Yeah, okay. I’ll let Carol tackle the first question.

Yeah. So Greg, you’re still correct on the 25% to 30% on the variable, and that is still a correct assumption. And when you mentioned, just a comment on the Industrial, as we mentioned, what April sales were for the Industrial business. So we - as Paul mentioned, each one of our businesses were better second half of April than they were first half of April, and that applies to the Industrial business as well. So the number that we gave for April would be Motion and Inenco together, Motion being a bit more down than what we gave you on the total reported number for April. But know that markedly different between the second half of April and the first half of April. And as Paul mentioned, that sort of continues into May. We had a good report from our industrial business as they’ve seen plants start to reopening, and they’ve seen this gradual economic reopening across the states and across a lot of these plants. And again, we saw that in our late April results for the industrial business.

And Greg, related to your DIY versus DIFM, as mentioned. DIFM, for us, outpaced DIY in the first quarter. We did see that flip in April, as I’m sure most did as states locked down. That said, I would tell you that our DIY business was still slightly down in April, although it did outpace DIFM.

That’s great. Thanks and good luck, guys.

Yeah. Thanks, Greg.

Our next question comes from the line of Chris Horvers with JPMorgan. Please proceed with your question.

Thanks. Good morning, guys.

Morning.

So a question on the - one follow-up question on regionality. How did the South perform like Florida, Texas? Those areas were less impacted, it seems, by the virus. So how did that perform in U.S. NAPA? And then my follow-up is you have the $100 million cost program. How much of that flowed through in the first quarter? And any comments on how that sort of might rollout and benefit the business over the rest of the year. And with the new cost-out program, can you put some numbers around that in terms of how substantial that could be?

Okay. I’ll tackle the regionality question, Chris, and I’ll let Carol address the cost downs. Across the southern half of the U.S., our business was about in line with our overall business, certainly better than what we experienced in the Northeast, but not as good as what we saw in parts of the Midwest and the Mountain. So kind of in the middle of the pack. I think that’s partially, Chris, it’s probably fairly unique to our business. We have a large segment of business that’s down in the islands and the Caribbean. Those stores are big volume stores, those stores all locked down early in the pandemic, and that’s certainly swung, I think, a bit of the trend for us in the southern part of the U.S., but middle of the pack. And then I’ll let Carol tackle some of the cost reduction question.

Yeah, Chris, great question. We are on track. The $100 million of cost savings, that was largely related to as we talked about a voluntary retirement plan that was put in place at the end of last year, and we actually have tracked that. We know that a lot of those actions on and those reductions were coming out after Q1. And so we are on track with the $100 million cost savings. The accelerated actions that Paul talked about, and that’s across all of our global businesses, it’s 50 to 60 actions, and we listed out quite a few of those for you. We’re not going to get into quantifying what they are, but know that, that is on top of the $100 million, and you’re talking about some significant numbers as we look ahead that will help us as we get into what will be the toughest quarter. One favorable thing that we saw, and we called it out in our prepared remarks, for the first time in many quarters, our payroll was actually down in Q1, down slightly, excluding the impact of our acquisitions and divestitures. That’s directly related to the $100 million of cost savings, the VRP actions that we took. And we - again, we haven’t seen that in some time. We had reductions in legal and professional for, again, the first time in Q1. The other categories, big categories for us, such as freight and delivery and rent and facilities and IT and insurance. While those categories were up, they were not up as much as they were in the prior year. And so again, we had some improving trends in SG&A, but we had such a significant deleverage in the last part of March. That’s why we’ve taken the steps with the accelerated actions.

Thanks, understood. And then as a follow-up, you talked about DIY was still slightly down in the U.S. in April, and that trends improved throughout the month. It seems like these stimulus checks really picked up the DIY side of the business. So did DIY flip to the positive as we progressed into the end of April? And did you see any improvement on the commercial side over the month as well?

Well, as we said earlier, Chris, we saw our business trend up the entire month. So week to week to week. And including now into the first week in May, we’ve seen our business improve. That said, our DIY business, I think your specific question, did it trend positive? It did not because we still had a significant decline in our footsteps into our stores, which, I guess, should not be surprised given how many cities and states were in total lockdown. There weren’t a lot of folks out of shopping, unfortunately. Hence, the nice lift we saw in our digital and online business.

Got it. Thanks very much and best of luck.

Thank you, Chris.

Thank you.

Our next question comes from the line of Seth Basham with Wedbush Securities. Please proceed with your question. Seth, is your line muted?

Okay. I guess we lost that.

Yes. Our final question comes from the line of Daniel Imbro with Stephens Inc. Please proceed with your question.

Hey. Good morning, guys. And thanks for squeezing me in here late.

Morning.

Paul, apologies if I missed this, but maybe just to clarify. Where did total organic growth shake out to for Europe? I don’t - I didn’t see a total number. I know you mentioned the geographies. But do you have that on hand?

Yeah. So the organic growth for Q1 was down high single digits. And we had some acquisitions that were in there that related to the reported number being up 10%. And obviously, currency was a big impact in the quarter as well at a down 3%. So high single-digit down comps for March.

And Daniel, we should mention, and you all know this, but certainly, Europe was hit much earlier with the pandemic than certainly North America. If there’s any good news to report, as we spoke to our teams yesterday, we do believe the worst in Europe is now behind us. We have peaked out. And again, we are now making plans to reopen in France and the U.K. We’ve already reopened and are doing well in Germany and the Netherlands. So the good news is the worst is behind us. The peak, we’ve crossed the peak, and we have better days in front of us in Europe.

That’s great. And yes, hopefully, we’ll play out here, too. And then just a follow-up. So really helpful color earlier on the independents and the health of those. But if I recall, one of your plans this year for comp drivers was kind of rolling out the remodel programs across the independent chain. And the capital for that, I think, is fronted by the independent. So any update or color you can share on the pace of what we should expect for that initiative? How the independents are maybe pushing back on that? Any kind of update on how we stand on the remodel program?

Yeah. And Daniel, it’s a good question. And look, that initiative is still high on our priority list. I would tell you with what we’re faced with and what our independent owners are faced with right now. We have put that essentially on hold. There are a few projects going here and there. But the large-scale rollout we have essentially put on hold, but it’s temporary. And my hope will be that we see that ramp back up in the second half of the year.

Got it. Thanks so much, guys. Best of luck.

Okay. Thanks, Daniel.

We do have Seth back on the line. Well, Seth Basham with Wedbush Securities. Please proceed with your question.

Yeah, hi. This is Nathan Friedman on for Seth. Apologies for that earlier. First question is on - regarding your April sales trends. You noted that they were down 30%. Is there any sort of differences between U.S. and Europe versus the rest - versus the chain? Any color there would be appreciated.

Yeah. The 30% for the automotive, it ranges from a low of 20% to a high of 40%, 20% being Australia, Europe being more in the 40%. Canada being a little bit - Canada is similar to the 30%, U.S. being around 25%. Now that’s the blended month. So in all of our geographies, as we’ve mentioned previously, if the blended number is 30%, that is down something greater than 30%, the first two weeks and down something less than 30%, the second two weeks.

Got it. That’s very helpful. Helpful color. And then my second question is just on the auto operating margins. Can you speak to any sort of year-over-year differences or the rate of declines in the U.S. and Europe versus I guess, the positive change that you reported in Australasia?

Yes. So our Australasian business in Q1, they actually had favorable comps in the quarter, and they had slight margin improvement at about 20 bps. We mentioned that was the positive bright spot. They operated really well. As we mentioned previously, North American and our Europe business, with the decline in their core sales, primarily in late March related to COVID-19, about half of the automotive margin decline is Europe and about half is North America auto, and that would all be SG&A leverage. And really, again, related to the $140 million or so of sales decline related to COVID-19. Having said that, they held their gross profit dollars. Their dollars were down proportionately, but they held the gross margin and actually had slight improvement. So all a loss of leverage related to the declines in Europe and North America.

Great. Appreciate the color and best of luck going forward.

Thank you.

Thank you.

Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the floor back over to management for any closing remarks.

We’d like to thank you for your participation in today’s earnings call. We appreciate your support of Genuine Parts Company. And we look forward to updating you in the future. Thank you.

This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.