Good day, and welcome to the Genuine Parts Company Fourth Quarter and Full Year Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I'd now like to turn the conference over to Sid Jones, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today for the Genuine Parts Company fourth quarter and full year 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 includes 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 the call over to Paul for his remarks.

Thank you, Sid, and good morning. Welcome to our fourth quarter 2021 earnings conference call. The GPC team finished the year with a strong fourth quarter, further building on the positive momentum of the first nine months of 2021. We are proud of our progress through the year and thankful to our 52,000 teammates for their hard work and ongoing commitment to excellence. With a tailwind of strong industry fundamentals, we executed on our key strategic priorities to accelerate sales, improved gross margin and enhanced operational efficiencies, which resulted in double-digit sales and earnings growth for both the quarter and full year. Our earnings growth and continued focus on working capital improvements also helped us to deliver strong cash flow. So just a tremendous effort by our global teams. They were laser-focused throughout the year and successfully navigated the ongoing challenges of the global supply chain, COVID disruptions and inflationary pressures. In early January, we successfully closed on our acquisition of Kaman Distribution Group, an industrial distributor of power transmission, automation and fluid power solutions. We are integrating this highly synergistic acquisition into our Motion business to enhance our scale and further strengthen our market-leading position. We are pleased to welcome the Kaman team to GPC and we look forward to creating significant shareholder value as a premier leader in industrial solutions. Turning to our fourth quarter financial results. Total sales were $4.8 billion, a 13% increase from last year with broad strength across all our businesses. We delivered our 17th consecutive quarter of gross margin expansion and our teams drove cost initiatives to enhance productivity and offset inflationary pressures. These efforts led to an 18% increase in the quarter in adjusted earnings per share. Total sales for the Global Automotive Group were $3.2 billion for the quarter, a 13%…

Thank you, Paul. Good morning, everyone. As we reflect on 2021 and pivot to 2022, I'd like to reiterate Paul's comments and thank the global GPC teams for an amazing performance in 2021. Passion for our customers, a team approach and relentless hard work translated into impressive results. We're incredibly proud of the entire GPC team. We also want to thank our strategic suppliers who closely partner with us in a challenging environment. As we discussed entering 2021, we wanted to catapult out of 2020 to deliver a great year. We're proud that each of our global business units delivered exceeding initiative and annual financial commitment in 2021. Our strong global performance is a great example of the power of one GPC team. When we focus on key priorities and collectively execute as a team. We enter 2021 with a clear strategy and focused business mix. Across the company, we identified strategic initiatives to further simplify and integrate our operations. We do this to enable a better customer experience and move at a faster, more efficient team pace. Our 2021 plans are part of a strategic vision that extends our leadership positions in attractive, highly fragmented markets. As part of our vision, our foundational priorities remain talent and culture, sales effectiveness, technology, including data and digital, supply chain and emerging technologies. Each business unit and functional teams are executing multiyear plans across these pillars. As Paul highlighted, 2021 offered numerous examples of great progress. Progress to simplify include our action to optimize facility footprints, realign team structures, offshore field support activities, reduce IT system complexity, streamline back-office processes, leverage shared global vendor relationships and centralized indirect sourcing activities to name a few. In each example, we reduced cost, increased efficiency and better positioned our business to scale growth. Our One…

Thank you Will, and thanks to everyone for joining us today. We're very pleased with our fourth quarter and full year financial performance. As a reminder, our comments this morning primarily focus on quarterly and full year adjusted results from continuing operations, which excludes the unusual items outlined in our press release. Recapping revenues, total GPC sales were $4.8 billion in the fourth quarter, up 13% from 2020. For the full year, sales were $18.9 billion, up 14%. Our gross margin for the quarter was 35.3%, a 30 basis point improvement compared to the fourth quarter last year. For the year, gross margin improved 70 basis points to 35.2% versus last year. For the quarter and the full year, our improvement in gross margin was primarily driven by the increase in supplier incentives due to strong sales volumes and the ongoing positive impact of strategic category management initiatives. Our total operating and non-operating expenses were $1.36 billion in the fourth quarter, up 14% from 2020 and at 28% of sales. For the year, these expenses are $5.31 billion, up 13% and also at 28% of sales. The increase in expenses for the quarter and the full year primarily reflect the increase in variable costs on our strong sales growth, including the impact of higher incentive compensation. In addition, we experienced inflationary cost pressures in areas such as base wages, freight and health insurance. And finally, our prior year results included benefits of temporary savings related to the pandemic. Our permanent cost savings achieved in 2020 helped to offset rising costs and difficult year-over-year comparisons. And as we've shared today and throughout the year, we continue to execute on our strategic initiatives to further reduce our expenses and to improve our operational efficiencies. This will be important in managing through the…

Thank you, Carol. With the fourth quarter now behind us, we can safely say that 2021 was an exceptional year for GPC. Throughout the year, our team focused on advancing the strategic priorities for our global Automotive and industrial businesses. With the backdrop of our multiyear portfolio optimization strategy, the economic recovery and strong industry fundamentals, we generated double-digit sales and earnings growth and significantly improved our profit margin. We are proud of our strong financial performance and the many accomplishments of the GPC team. Our results drove strong cash flow, which further supported our balance sheet strength. Our capital allocation priorities continue to be investing for enhanced productivity and growth through capital expenditures, strategic acquisitions, dividends and share repurchases. In total, we were pleased to effectively deploy $1.35 billion for these key priorities in 2021. So now turning to 2022, we are confident in our plans for accelerated growth and profitability as we build on the underlying momentum in both our Automotive and Industrial operations, and realize the benefits from our acquisition of KDG. We are well positioned with the financial strength and flexibility to support our growth plans and provide for disciplined, value-creating capital allocation, and we look forward to sharing our progress with you. We thank you for your interest in and support of GPC, and we thank each of our GPC teammates for taking great care of our customers and delivering a terrific year for GPC. So with that, I'll turn it back to the operator for your questions.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Scot Ciccarelli from Truist Securities. Please go ahead, sir.

Hi, guys. Scot Ciccarelli. Just -- I guess, Paul, my question is, given the different levels of openness that we've seen in various states and geographies, have you seen a lot of variability in sales cadence across your business? And then related to that, does the Industrial segment also experienced regional variability or sales variance is usually driven just by end market activity? Thanks.

Hey, thanks, Scot. And hey, Scot, welcome back. Glad to have you back on the call. What I would tell you about US Automotive, Scot, when I go through region-by-region, first off, every region in Q4 was up double digit, which I don't recall that in a number of years. Both coasts were the strongest. When I look at the East Coast, up and down the East Coast, from Atlantic, Northeast, Southeast, all strong, West, really strong. But even that, it's hard to single out one of our regions, all were up double digits. So really, really terrific performance up and down. On the Industrial side, again, double-digit increases every month in Q4. And we really don't see much regionality on the Industrial side, either. It was, again, every region performed extremely well. And I will tell you, Scot, I couldn't be more proud of our team. In a pretty challenging environment, the increases they delivered were just outstanding.

And then Paul, when you assess the growth that you're also seeing in a bunch of your international markets, are there any nuances about the US market that might be a little bit different than international, whether it's rate of increase of used vehicle prices, et cetera, that is continuing to boost the US a little bit higher than what we're seeing here nationally right now?

Well, I would -- I guess what I would call out, Scot, if you look and compare the US and let's call out Europe. Europe is such a dominant DIFM market, 90% to 95% of our business in Europe is DIFM. So very, very little DIY business. And as we all know, we really saw the DIY segment spike during COVID and with all the monies that were being pushed out into the marketplace to consumers. So -- but I would also tell you Scot, we're seeing a bit more supply chain challenges in US Automotive than we're seeing either in Australia or Europe. So that would certainly be a callout. But look, again, I'm really pleased to tell you that while the US Automotive group led the way, we saw once again really strong performance in both Europe and Asia Pac as well.

Excellent. Thanks a lot, guys.

Yes. Thanks, Scot.

The next question comes from Christopher Horvers from JPMorgan. Please go ahead.

Thanks and good morning and congratulations, Carol, on your retirement. It's been a pleasure working with you all of these years.

Thank you, Chris.

My first question is a bit of a follow-up to Scot. As you think about 2022, how do you think about the relative comp potential in the different geographies in the NAPA business? And then specifically in the US, how are you thinking about your DIY business relative to the commercial business? Do you think DIY could be up? Obviously, you're very heavily weighted towards the commercial side.

Yes. So let me just clarify, Chris. When you talk about the different geographies, are you talking different geographies in the US or US compared to Europe and Asia Pac?

Yes, the global regions.

Yes. So as we look at our outlook for 2022, we're -- our expectation is we're going to continue to see solid growth across all of our markets. And I would tell you that while it's very early, we're six weeks into the year, we are seeing those trends carry over from 2021 into 2022. So -- but overall, our expectation is that we come in the year in all of our markets, somewhere in that five to seven range, which has kind of been our historical targets. So, -- but it certainly could be a bit stronger than that here in the U.S. And then your question, Chris, around DIY and DIFM -- and you mentioned it, our strength is certainly DIFM, and we had a terrific year in DIFM in 2021, both our NAPA AutoCare Center business, our major account business, our fleet business, all up double-digit. Our DIY business performed very well again. But we always remind ourselves, we're coming off a really small base. But I think some of the actions that our team has taken over the last couple of years in terms of really improving our store assortments, our store training, our hours all has really gone a long way in spiking our retail business. And we expect that to continue really strong as well.

And then, just as a follow-up to that, did you see -- you lapped through but just stimulus in January for the consumer. Did the DIY business see pressure during that period? Likewise, did it come down?

Not at all, not at all which gives me a lot of confidence as we move throughout the year.

Got it. And then, my last -- I have a ton of questions, but my last question here is, did you talk about what the inflation was in NAPA and in Motion in the fourth quarter? And how you're thinking about 2022?

Yeah. Happy to, look at that. When we look at Q4, and again, it was similar to what we alluded to when we came out of Q3 that it was certainly a little bit heavier in the quarter with a mid-single digit for Global Automotive and a little bit stronger, obviously, on the U.S. Automotive than International Automotive, giving us around a 3% for the full year. And it was low-single digit for Global Industrial. Again, theirs was pretty normal throughout the year. As we look ahead, we certainly see a planned carryover impact from Q3 and Q4 going into 2022. So we think first half 2022 will be similar to what we saw coming out of second half 2021. And then it moderates into the second half. So again, a bit stronger in the U.S. Automotive but -- and more normal in our international Automotive and Industrial, so you may see something like around a 3%-ish or again, a bit more than that in the U.S., and that's what we're contemplating in our 2022 numbers.

Got it. Thank you very much.

Thanks, Chris.

Thank you.

Our next question comes from Bret Jordan from Jefferies. Please go ahead.

Hey. Good morning. This is Ethan Huntley on for Bret. Thanks for taking my questions here. Just one here, surrounding market share within the Automotive Segment, I know one of your peers mentioned sort of taking price in an effort to gain share. Can you just sort of comment on sort of general industry dynamics you're seeing there and what you expect to see from a market share standpoint?

Yeah. Sure, happy to, Evan. We -- look, we have historically had a very rational environment across the automotive aftermarket in the U.S. And honestly, we don't expect that to shift in a dramatic way one way or the other. But that said, I would tell you that our teams are always looking at prices across the markets and market dynamics, and we'll look down to the SKU level and category level. But I would tell you at this point, Evan, we're focused on our actions. We intend to take good care of our customers. And we'll continue to compete in the marketplace on certainly, our NAPA product quality, our availability and really our great people that we've got in our stores and just continuing to deliver outstanding customer service to all of our great customers.

Great. That's helpful. And then just lastly here, on the European NAPA private label business, can you just sort of touch on how that's going? Are you sort -- continuing to see strong traction there and then maybe how inventory is faring related to the private label business?

Yes. Maybe Will and I tag team that. I would just give you from a high-level view, and we were over in Europe with the team a couple of weeks ago, the NAPA rollout continues very strong. As you may know, we kicked it off in the UK a couple of years ago. And we've now rolled out a number of product categories. We continue to expand into new product categories. So we're in chassis, brakes. We're looking at launching oil, have launched oil, steering calipers, toolboxes. So we continue to expand the offering, but we're also expanding into new markets. So we've gone beyond the UK into France. We've launched now Germany, Netherlands, and continues to perform very, very well. So I don't know, Will, is there anything you would add?

No. I would just say from an inventory perspective, we continue to feel good about having access to product in all of the markets that we're rolling now. So, continued success and exciting outlook for the future.

Great. Thank you very much for taking the questions.

You’re welcome.

The next question comes from Greg Melich from Evercore ISI. Please go ahead.

Hi, thanks. So Carol thanks for all the help, and I'm going to ask you for a little more help.

Okay. Thanks.

On SG&A, I mean if the dollars grew a lot, and I know you mentioned wage pressure, new bases there, incentive comp, et cetera. How should we think about SG&A leverage this year or not, other initiatives to sort of help offset that inflation as you look at your guidance?

Yes. I mean, look, Q4 -- and again, Q4 SG&A, we knew going into this quarter that we had a fair amount of headwinds. The temporary cost savings last year, roughly $40 million, mean that was almost 90 basis points on our SG&A in the quarter. The increase in incentive compensation was meaningful similar to the temporary cost savings. That was a meaningful number. And then just the normal inflationary pressures, which we called out in Q3 and continued into Q4, on wages and freight, really, freight was certainly a big headwind for us. And then, we've got investments in projects and technology supply chain. But on the tailwind side, I mean, again, I would call out our strong leverage with our strong growth and being able to leverage better than we have in the past. And then the ongoing benefit of our initiatives. So we continue to have terrific initiatives. There was a lot of puts and takes, but ultimately, we had a better year in our SG&A than what we started off with, and the teams have done a terrific job in a really tight labor market and really having to do more with less. And again, as we look ahead into 2022 and your comments, we are implying certainly operating margin improvement, and we would expect to hold on to our gross margin rate in a highly inflationary environment and have initiatives that may even bring that up a bit. And at the same time, we think we're going to get some improvement in SG&A as we go into 2022, and that's coming off of our initiatives.

That's a great summary. And then I guess my follow-up was, I don't care if it was Paul or Will, but I think in the prepared comments, you mentioned that supply chain is tougher in the US than rest of world. So I just love some more commentary on it. Like why is that? And why do you think that -- is it going to persist?

Yeah, Greg, it's largely a function of just the logistics of the global freight. And so if you think about the port congestion out on the West Coast, that's probably the most elevated area that's congested. So that's largely why we would describe it as more affected than Europe and just the magnitude of the volume of the products coming in through US and North America. So -- we're encouraged by cautiously optimistic, I should say, about what we're seeing in all things, global supply chain. Good news is it's being driven by good underlying growth and demand. The factories internationally seem to be handling that volume better. As I mentioned, the congestion at the ports is still something that is being slowly addressed with some work to do, but moving in the right direction. And then obviously, the cost of moving product around the world continues to be elevated relative to historical average. And so we'll continue to work through that as well. So cautiously optimistic as we look through into 2022.

And hey, Greg, I would just add to that, that we haven't seen the degradation in supply chain on the industrial side. Our industrial fill rates have, throughout this past 18 months or so, have remained pretty good, certainly better than what we've seen on the US Automotive side. So our challenge has largely relegated to US Automotive. But as Will said, we are beginning to see an uptick in our fill rates across most of our major suppliers. And look, we know our supplier partners, they have got challenges as it relates to COVID and labor and material shortages. So they're doing all they can for us. And we do believe with our size and scale, that if anybody is going to get product in this environment, it will be Genuine Parts Company.

That’s great. Good luck guys.

Thanks.

Thanks, Greg.

Thank you.

Our next question comes from Seth Basham from Wedbush Securities. Please go ahead.

Thanks a lot. Good morning and congrats on your retirement, Carol.

Thank you very much.

I have a follow-up question to the comment you just made, Paul. Just thinking about the supply dynamics for a lot of the smaller regional competitors in the US auto aftermarket business, how do you think the competitive environment can change as supply chain challenges ease, those players get more products? Do you think that it becomes more price competitive?

No, I don't think so, Seth. I mean, look, if you go back -- and I've been at this a long time in this automotive aftermarket, price has never been the primary driver in the automotive aftermarket, Seth. And as I think I mentioned earlier, we focus on just putting out a great product, a quality product, having it available when our customers want it, delivering an incredibly fast fashion, having great people on the ground. And then, yes, you've got to have a competitive price on top of it. But certainly, price is not going to be the number one driver nor has it ever been in the automotive aftermarket.

Understood. Okay. Thank you. And then I have a separate follow-up question around KDG. Can you just give us a sense of what the contribution you're anticipating is in terms of sales and EPS from the acquisition in 2022?

Yes. I'll walk through that. I mean, again, as we talked about on our December conference call with KDG, I mean, the sales of roughly $1.1 billion, our guidance of 21% to 22% and the core growth of 5% to 6%, the balance of that is KDG. So we've kind of given you the 5% to 6% with KDG being the difference there. And again, similar to what we gave you in December with the EBITDA margin, again, you're talking about in the 8% to 9% range. What you have to think about, and again, I've implied that and we've got segment operating profit improvement going into next year, both with and without Kaman, when you roll it all the way down to net profit and EPS, as we've talked about earlier, you have to take into account the incremental interest expense as well as the intangible amortizations. And again, it's early in the process, obviously, the pace of synergies is the significant driver here based on where we are now and what we know, that's all sort of rolling up to roughly a $0.10 impact for this year. But again, we're only six weeks in on the synergies, really highly encouraged by what the teams are going to do. But again, we do have the implied operating margin improvement in those numbers.

Hey, Seth, I would just add to that. We are very, very encouraged what we're seeing in the early days. As Carol mentioned, we're six weeks in, but the team is out of the blocks strong. We've met with the majority of our key customers, our key suppliers in this first six weeks. The team has put an incredible amount of effort. They got a great plan in place, and we're excited with having the Kaman team as a part of GPC and we know they're going to deliver great things for us in the next few years.

Got it. Thank you very much and good luck.

Thanks.

Thank you.

Thanks, Seth.

The next question comes from Daniel Imbro from Stephens. Please go ahead.

Hey. Good morning, guys. Thanks for taking my question. Hopped on late, but I hope that I -- didn't address this already. But I wanted to ask just on the status, obviously, your fill rates seem to be getting better, and you guys have improved that supply chain through the back half of the year. What do you guys do with the biggest risks from here to your supply chain? And related to that, one of your peers has talked more about direct sourcing straight from the Far East, kind of end rounding some of the suppliers. Would love to hear your thoughts around that strategy and potential. Would that be something GPC looks to do that expands margins or how you weigh the pros and cons of that strategy? Thanks.

Hey, Daniel, I'll hit the first piece of your question in terms of biggest risk, and Paul will maybe come on behind my comments. But I think the biggest risk is talent, and it's more a internal risk just having the talent into buildings to handle the increased product flow as we recover. We've talked a lot about the labor market and having access to people in the buildings, drivers, et cetera. So from our perspective, making sure that we continue to build on all the great momentum and progress we're making around all things people and making sure that we're staffed up on our end to handle the improving volume.

Yes. And Daniel, I'll just mention that, look, we've been on the ground with a full team in place in Shenzhen, China now for the better part of a decade. And we're sourcing product today, direct sourcing product for all of our automotive businesses around the world. We go to the same factories. We consolidate our purchases between Europe, Asia Pac and the US. So we've been there for the better part of a decade, and it's worked extremely well for us.

Great. And so the relationships with the suppliers, you still have polisher reads, those are value-added and where you direct source where you could direct stores you already do?

That's correct.

Perfect. That's helpful. And then again, I apologize if you addressed this and not to get too near-term focused, but just think about Europe, the two-year stack did slow a bit on the auto side. Obviously, Europe had some pretty strict shutdowns with COVID through the fourth quarter. Just curious what you're seeing in that market and whether some countries are maybe outperforming as they reopen or any competitive changes? We've heard anecdotes of smaller competitors closing over there. So just curious how you're thinking about that market into 2022 and 2023?

Yes. So Daniel, we're in seven different markets across Europe, including the UK. The UK and Benelux countries were our strongest performers in 2021. And really continue to deliver. The UK was also our initial launch point for our NAPA-branded product. So they've got a bit of a head start on the rest of Europe. All seven countries are positive, and we certainly expect that trend to continue into 2022. We've got a great team on the ground in Europe, and we're very bullish on the outlook for our business there.

Got it. Thanks so much for the color and best of luck

You bet. Thank you.

And we have time for one more question by Liz Suzuki from Bank of America. Please go ahead.

Great. Thanks for letting me on and I'll add my congratulations to you, Carol. It's been great working with you over the last decade.

Thank you, Liz.

So you guys have done some meaningful M&A recently and then your more standard tuck-in acquisitions. And would you categorize the M&A environment broadly as more attractive now than it has been for the last two years? Just with a lot of disruption in the market from inflation and supply chain constraints without the support of PPP loans that I think may have helped some of your smaller competitors during the height of COVID.

Yes, Liz, I think we would agree with that statement. The M&A pipeline continues to be very active. I think GPC and both on the Automotive and Industrial side of the business continues to be viewed as an acquirer of choice. And I think scale matters and especially in times where there's kind of an uncertain environment, joining the market-leading businesses and becoming part of the family is a pretty exciting proposition. So we expect that to continue and continue the good amount of activity that we've seen over the last 12 to 24 months.

Great. And I'll just tack on one more, which is, if you could just talk a little bit about the partnership with Wallbox. I mean, is this going to be an exclusive relationship where NAPA is the destination for the PULSAR plus and is this -- is the audience for these charges primarily the DIY customer, or will you have an opportunity to sell the dealerships and other large accounts as well?

Yes. It's a exciting opportunity for us. It’s not an exclusive relationship but it does have implications for both DIY and DIFM. And I think it's a real good example on kind of the opportunity that NAPA has to extend its business model. And so we talked about Arrival, we talked about Wallbox. But whether it's charging stations, service of the future, et cetera, we're excited about it and -- what it's also doing is creating a lot of buzz and momentum with other strategic partnerships. So, the discussions are active and the pipeline for more of these is pretty robust. So we're excited about it and looking forward. It's early days, but looking forward to what it could do for the business.

Great. Thanks very much.

Thank you, Liz.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

We'd like to thank you for your interest and participation in our fourth quarter and year-end earnings. We appreciate your support of Genuine Parts Company, and we look forward to reporting out our first quarter results in April. Thank you, and have a great day.

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