Good day, ladies and gentlemen. Welcome to the Genuine Parts Company First Quarter 2021 Earnings Conference Call. [Operator Instructions]. 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 Stengel, our President; and Carol Yancey, 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 Investors 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 remain 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 continued 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…

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 had strong momentum. The environment has 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 strength 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 investments. To deliver a best-in-class customer experience, we have opportunities to simplify and integrate our existing operations. The global teams are executing multiyear 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…

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. Gross margin was 34.5%, a 60 basis point improvement compared to 33.9% in the first quarter last year. Our steady progress and improving gross 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 shift, 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…

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.

[Operator Instructions]. And our first question is from Christopher Horvers with JPMorgan.

Can you talk about, well, I guess on a comp basis, I think you have 1 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, I think it was plus 7 on a per day basis. Was there something unique about that performance? And what do that sort of March comp look like on a 2-year basis?

Yes, Chris. On -- you're right. We did have 1 less day in the quarter, and we did not reflect that in our comp sales numbers that are provided. So it would be about 1.5 points 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 1 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. We 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 into the right. So we knew it was just really a matter of time. Motion got -- they got sidelined a little bit in February with the storm. It's 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, 34.5% in the first quarter and up on a two year basis, some of that is divestiture and so forth. But can you talk about the puts and takes going forward? Do you think gross margin could still see some modest expansion over time given the initiatives that you laid out? Or does DIY versus commercial mix and inflation, keep that more in check?

Yes. 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, continue to model improvement in gross 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 gross margin will continue to improve and will be up for the full year.

Okay. Then one last quick one. 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 that much cash sitting on the balance sheet. So typically, you target $50 million to $100 million kind of bolt-ons. Are you thinking something bigger there? Or how are you thinking about the potential to be more aggressive around share repurchase?

Yes. 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.

And our next question is from Greg Melich with Evercore ISI.

I had two questions. I wanted to start with the cost reductions. I heard 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?

Yes. 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 in 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 a structural part, effectively, it sounds like. That's great. And 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 rise in 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?

Yes. You're right, we had pretty modest inflation for Q1 and really no impact on our sales or gross 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 gross 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 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.

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 wage inflation in selective geographies. You've got global logistics inflation. You've 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.

Our next question is from Kate McShane with Goldman Sachs.

I wondered 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 South East. 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 comments on that.

Yes. Kate, thanks for your question. In terms of the breakdown, 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 accounts and NAPA AutoCare center business turn positive, both close to mid single-digit growth in those categories. So yes, 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 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. And I was wondering from a, just a 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've seen in the last couple of quarters?

Well, if you look at our -- what we term other wholesale, Kate, that's -- some describe it as the up and down the street, smaller garages 1, 2 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 sales force coming out of 2020. We literally have doubled the touch point. 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.

And our next question is from Scot Ciccarelli with RBC Capital Markets.

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

Yes. I think it's all of the above, Scot. It -- 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 2 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 has 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 what I think I'm most encouraged by, Scot, is we had this kind of quarter despite still being in COVID-related lockdowns in many parts of the world. Canada right now, Scot, 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.

Yes. That's super helpful. And then I know we kind of dug into gross margin, s G&A. I guess my question is, it maybe a little bit more broad here. You guys have had a combination of both permanent and temporary cost reductions. Are there some 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 got to layer some certain expenses back into the P&L.

Yes. 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 capitalize 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. Team's 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.

Scot, it's Will. I might just add another kind of philosophical point, which is 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.

And our next question is from Bret Jordan with Jefferies.

When 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 the -- 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 like 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 and availability issues impacting? Or is that pretty much behind us?

No, it's not. I wish it were behind us, Bret. 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. I know our -- look, 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 1 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, Bret. Our retail business was up greater than 20% in the...

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

Percent of total, it's still 20-plus percent. It's -- look, we're still going to live and die on the DIFM side, Bret, but it is great to see that retail DIY business continuing to accelerate. And look, we -- 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've put a lot of effort behind it, and we've talked a lot about it on these calls through the years. So it's really great to see that segment continuing to perform really well.

Our next question is from Seth Basham with Wedbush.

Maybe we can come back to Seth at the end here. We can keep moving.

Can you hear me?

We got you now.

Paul, my question is around market share. I don't know if you can quantify how you think that your core NAPA business ex fleet is doing in the U.S. this quarter relative to recent quarters?

Well, look, it remains to be seen, right? So we're the first one out this quarter. We're pleased with our performance and certainly pleased as it stacks up against 2020. 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 Bret, that was solid. What we're pleased to see what we're pleased to see, Seth, is that the fleet business and what we referenced 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.

Got you. And I presume that you saw a balance 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?

Yes. 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.

And our next question is from Brian Sponheimer with Gabelli Asset Management.

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 ways to help with charging stations and support for the fleet as well?

It does. Yes. 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. And first off, good to hear from you again. welcome back. We -- with our presence in Europe, it's -- and the European Union having doubled down on EVs, 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 leading -- 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.

Our next question is from Daniel Imbro with Stephens, Inc.

Carol, I wanted to start on a follow-up on the guidance. I think you raised full year by about 100 bps. 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 raise 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?

Okay. Yes, 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 model 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 for -- in total and for each segment, we did the same thing on the comp store sales. So 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, 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?

Yes. There's not much else for us to point to, Daniel. When -- 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, 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. And I will tell you, we're off to a good -- a very good start in April. And our expectation is it's going to continue through the balance of the year.

And our last question will be from David Bellinger with Wolfe Research.

Just to follow-up on that. Yes, just to follow-up on my 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, as you know, many of these CapEx projects, there's long lead times with many of these projects. But they are rolling in. We -- 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 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 we'll continue to produce in '21.

That's very encouraging. And then just on the Auto Parts business, in your prepared remarks, improved inventory availability is 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 to sales that you're seeing?

Yes. It's a great question, and it obviously continues to be a priority focus for us, making sure, as I said in 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 our -- 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.

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 day.