Good day, ladies and gentlemen. Welcome to the Genuine Parts Company's Fourth Quarter 2023 Earnings Conference Call. Today's call is being recorded on February 15, 2024. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. At this time, I would like to turn the conference over to Tim Walsh, Senior Director, Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to Genuine Parts Company's fourth quarter 2023 earnings call. Joining us on the call today are Paul Donahue, Chairman and Chief Executive Officer; Will Stengel, President and Chief Operating Officer; and Bert Nappier, Executive Vice President and Chief Financial Officer. In addition to this morning's press release, a supplemental slide presentation can be found on the Investors page of the Genuine Parts Company website. Today's call is being webcast, and a replay will be made available on the company's website after the call. Following our prepared remarks, the call will be open for questions. The responses to which will reflect management's views as of today, February 15, 2024. If we're unable to get to your questions, please contact our Investor Relations department. 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. Today's call also may involve forward-looking statements regarding the company and its businesses as defined in the Private Securities Litigation Reform Act of 1995. 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 today's call. With that, let me turn the call over to Paul.

Thank you, Tim, and good morning. Welcome to our fourth quarter and full year 2023 earnings conference call. We are pleased to report that Genuine Parts Company delivered on our financial commitments in 2023 and finished the year with a solid fourth quarter. Will and Bert will cover our results in more detail, but I'd like to share a few highlights. During 2023, total GPC sales topped $23 billion, an increase of nearly $1 billion from the prior year and in line with our expectations. We improved our total company segment profit margins by 50 basis points to nearly double digits, and we had our third consecutive year of double-digit earnings growth. And notably, we returned $788 million to our shareholders this year and today, we announced that our Board approved a 68th consecutive annual increase to the dividend. Our teams around the globe delivered a strong performance while remaining focused on our long-term strategic initiatives to profitably grow our business and deliver value for our customers. I want to take this opportunity to thank our more than 60,000 GPC teammates across the world for their dedication and hard work. Our fourth quarter and full year results again demonstrate the value of our complementary business mix paired with our geographic diversity. At our Investor Day back in March of 2023, we showcased our strategic initiatives and announced long-term financial targets for the first time in our history, all focused on delivering for our customers and delivering shareholder value. Clearly, this past year had its share of challenges and opportunities, but our performance in 2023 was a good start to achieve our three-year goals highlighted by the following. Our Motion team completed the integration of Kaman Distribution Group, and we exceeded our synergy target a full year ahead of plan. As…

Thank you, Paul. Good morning, everyone. I want to start by adding my thanks to the global GPC team for another great year and for their ongoing dedication to serving our customers. In addition to delivering solid financial results for the year, we also made significant progress on our strategic initiatives, many of which we shared at our Investor Day last March. Globally, we align our strategic initiatives around five foundational priorities, which include talent and culture, sales effectiveness, technology, supply chain and emerging technology complemented by disciplined and value-creating M&A. Our focus around these priorities drives global team alignment as we continuously improve the customer experience and deliver profitable growth. Turning to our results by business segment. During the fourth quarter, total sales for Global Industrial were $2.1 billion, an increase of 2% with comparable sales growth of 1% versus the same period last year and 18% on a two-year basis. Average daily sales were essentially flat in October with low single-digit growth in both November and December. Motion saw mixed results across its various end markets similar to last quarter, with particular strength in iron and steel, chemicals and mining. Categories like equipment and machinery and oil and gas were underperformers relative to the fourth quarter average. Motion continues to make excellent progress with initiatives, including sales excellence, pricing, e-commerce, technology and supply chain strategies that are helping to win profitable market share and improve productivity. For the full year, Motion sales grew $414 million or 5% with comparable sales of 5% and 22% on a 2-year basis. I'd like to take a quick moment to highlight our Motion team in Asia Pacific, who delivered a fantastic year. Sales and profit were up double digits in 2023 and the team continues to outperform our expectations. Industrial segment profit…

Thank you, Will and thanks to everyone for joining us today. Our performance in the fourth quarter and full year continues to demonstrate our long history of delivering earnings and cash flow growth, while maintaining a strong balance sheet. Our results, which include double-digit earnings growth in the fourth quarter and for 2023 were achieved while navigating through a dynamic and challenging year. Before I walk you through the key highlights of our fourth quarter and full year performance, I would like to note that we had no nonrecurring items in the fourth quarter and 12 months of 2023. Our comparisons to prior year, however, exclude nonrecurring items in 2022, primarily related to the integration of KDG and an adjustment in the fourth quarter related to a remeasurement of our product liability reserve. As we look at 2023, sales totalled $23.1 billion, up 4.5% from 2022 and consistent with our guidance. In the fourth quarter, sales increased 1.1% and with a 2% contribution from acquisitions and a 0.3% favorable impact of foreign currency and other. These items were partially offset by a 1.2% decrease in comparable sales. During the quarter, we experienced low single-digit levels of inflation in both our automotive and industrial segments in line with our expectations. As Will outlined, our fourth quarter sales performance was highlighted by the growth in Europe, Australasia and industrial, offset by the decline in U.S. Automotive. During the fourth quarter, our gross margin expanded by approximately 70 basis points. And for the year, our gross margin was 35.9%, an 80 basis point improvement from our adjusted gross margin in 2022. Our gross margin expansion was primarily driven by the execution of our strategic pricing and sourcing initiatives through investments in technology that enabled us to leverage data and analytics to ensure we…

[Operator Instructions]. Your first question comes from Chris Horvers with JPMorgan. Please go ahead.

Thanks, good morning guys. So my first question is regarding the independent versus the company-operated stores. Can you talk at a high level what the comp look like between those two segments? And more importantly, do you have a sense of what POS is versus inventory at those independents. Presumably the deferral can only last so long. And would you expect that catch-up to happen relatively quickly?

Morning, Chris. Thanks for the question. I'll take your first part there to start. The independent owners and company-owned stores for NAPA through the quarter were relatively similar with the exception of December, where we saw a tail off as we noted in our prepared remarks, from the independent owner purchases. So I would say largely similar through the quarter with the exception of December. On the inventory levels and purchasing relative to sales out we did see a positive inflection as we went through the quarter towards the end of the year. And so we are encouraged that as we come into 2024, those inventory levels will better reflect the sales out activity.

Got it. And then I guess as a follow-up and thinking about that, there was bad weather in December, good weather in January. So and you had the destock, restock. So I guess in light of that, can you talk about how you're thinking about the trend of the business? What's January? Should we look at those 2 months together? And how does that inform the cadence of U.S. NAPA over the year?

Chris, it's Bert. I'll take that 1 a little bit and maybe pull it up first before I talk specifically about January and getting into '24. But in terms of guidance, as you heard in my prepared remarks, we're looking for 970 to 990 for the full year, 5% at the midpoint. Just to give you a little bit more color, we think the first half is a bit more moderated on both segments than the second half. Second half, we think will be a bit stronger. And that's really around how we're thinking about the interest rate environment, perhaps what could happen there in the second half and rebounding and improving industrial activity in the second half as well for the Motion business. Beyond that, you know the macro environment is pretty choppy. We've got high interest rates, stubborn inflation. We've got a lot of geopolitical considerations we're looking at, including an election here in the U.S. On the other side, we've got some of our own headwinds with some interest rate expense headwind for the year, and we'll be normalizing, as I said in my prepared remarks on inflation benefits against 23 million and looking at the cadence of the quarters, I don't want to give quarterly guidance. But as I just talked about, moderated first half, stronger second half and a few things specifically for Q1, we'll have some interest rate headwind -- interest expense headwind, excuse me, and a difficult comp promotion, they comped at 12% last year. Still strong industrial production Q1 of 2023. We'll come up against that here in the first quarter of '24. And for the NAPA U.S. auto business, we'll be looking at a comp against some high single-digit inflation from Q1 a year ago. Taking all that together, a long answer here, but taking all that together, we do expect the NAPA business to improve sequentially from Q4 on a reported basis even with that headwind from inflation. And we're encouraged, as Will said, with what's happening in January. We really feel like we're off to a good start, met our expectations for what we were looking for in January. But as you also look at the cadence of the year, I still expect Q1 to be our weakest earnings quarter of 2024, but remain very confident in our full year guidance.

And just a finer point on that, would you expect both Motion and Industrial and U.S. NAPA to be negative in 1Q on an organic comp basis?

Well, look, I don't want to get into giving you intra-quarter guidance since I'm not going to give you the quarterly guidance. I'll just kind of stick with where we are, not focus on 1 month since 1 month doesn't make a quarter but we're encouraged by January, particularly in the NAPA business, it improved sequentially from December and better expectations to start the quarter.

Got it. Thanks very much.

Thanks, Chris.

Your next question comes from Scot Ciccarelli with Truist. Please go ahead.

Hi. Good morning. This is Josh Young on for Scot. So if we look at the performance of the U.S. auto business, why do you guys think you're losing so much share there? And what do you need to do to gain back share given that it's typically pretty difficult to drive meaningful share shifts in this industry?

Yes. Thanks for the question. Listen, I think we've shared both last quarter and this quarter, a lot of specificity about the work that we're doing proud of the progress that we're making. The script laid out a lot of the actions that we've taken specifically around operational intensity, inventory technology investments, field leadership, store operations, a big body of work, and we're highly confident that the team is going to turn it around as we move forward. So there's a lot to like -- we know we've got opportunities to get better, and we've got a lot of confidence in the team.

Josh, I would just tag on to what Will said. We -- look, we own our results for '23. We've touched on that. It's now behind us. We've got new leadership at NAPA. We've got an improved supply chain -- we've got improved search capabilities, new sales structure in the field, and we're confident that business, as I think I said in my prepared remarks, our best days are in front of us. So we're encouraged, as Bert said, by the early days and early weeks of 2024. And again, looking for better days ahead.

Got it. That's helpful. And then just one on margin. So if we think about the targets you outlined last year, obviously, you're running above that on industrial and you're talking about expansion for next year. But given what we've seen in auto for '23, how are you thinking about the target you laid out there?

Yes. On the Automotive segment margin, we're guiding to 20 to 40 basis points of improvement for the coming year. We're building off of a continued strength in Europe and Australasia. We've got great businesses there with great share and good growth opportunities. And as Will outlined, we're optimistic about where both of those businesses are headed. When we turn back to the U.S., we've got a lot of actions in flight, and we're bullish on the things that are happening Will outlined all of those, but I don't want to be repetitive. But January is off to a good start for NAPA. We're encouraged by the result there. And we think that business improves, as I said, as we move throughout 2024. I would couple that with our restructuring, our restructuring activities that we announced this morning are intended to streamline the business and improve our efficiency, and we expect to get good benefits there as well.

Yes. That's helpful. Thanks, guys.

Your next question comes from Michael Lasser with UBS Securities. Please go ahead.

Good morning. Thank you so much for taking my question. On the Industrial segment, where do you think margins can go now that you've experienced such significant growth over the last few years? And is there any reason to believe that you should give some of the growth back in the coming years?

Thanks, Michael. Look, we guided to 10 to 20 basis points of margin expansion for industrial in 2024 coming off of 12.5% in 2023 and 200 basis points of improvement this past year. I would just say the last 2 years have just delivered exceptional margin expansion for that business. We had good industrial production over that period. And most importantly, we had an outstanding execution of the integration of KDG. We got that a year earlier than we expected and at a higher level of synergy than we expected. So that helped the result in 2023. I'll be a little bit outsized, which is probably what's a normal run rate for the business. As we look at 2024, we'll operate in a little tighter economic environment. We'll have a little less top line in the first half than we did a year ago in the first half. And we're also going to be lapping those same KDG benefits that I just mentioned a moment ago. So 2024, we see a little bit of a recalibration for industrial back to what would be more historical for GBC in terms of growth, always committing to that 10 to 20 basis points of improvement. But having said all that, we see a long runway here. The industrial business is something we love. That team is just executing at a very high level. Will mentioned their operating discipline. They're focused on gross margin and we expect that to continue, which is why we've guided to more improvement this year, and we'll see that as we move into 2024 and beyond.

And Michael, I would just tag on to what Bert said, we've been able to accomplish this while in the midst of the longest contraction on the PMI numbers, I think, since about '08. So we fully expect -- well, we're encouraged by the move in the right direction in the PMI numbers, we'll see industrial production, I think, today comes out. But we're expecting that manufacturing to shift back to a positive sometime in 2024. And that's just going to benefit the top line, which will benefit the overall business.

Got you. My follow-up question is on North American auto business. What if you assume for market growth for 2024 within that segment, just so we can get a sense for how you're assuming your market share will trend in the year ahead? And have you made any assumptions around acquisitions within your growth expectations for this year? Thank you.

Yes, Michael, it's Bert. So we gave comp sales guidance for Global Automotive segment of 2% to 4%. I don't want to get into too much geographic difference. But we'll say that the market, when you take all of our geographies together, is somewhere between flat to 2% up. We've already talked about inflation, that will be about one point or so. And we're assuming that we'll get one point or so from acquisitions as we look at the automotive segment when we move through 2024. So hopefully, that gives you a little bit of color on the breakdown of how we're thinking about sales growth.

Got it. All right, thank you very much and good luck.

Thank you, Michael.

Your next question comes from Bret Jordan with Jefferies. Please go ahead.

Hi, good morning, guys. Morning, Bret. Could you talk a bit more about the strategy of expanding the NAPA company-owned store base? I mean it sounds like you've added reasonably substantially to that. And are there either sort of a profile of the target acquisition by market or size? And sort of how do we think about that from a CapEx and margin impact going forward?

Yes. I'll take the first part, and then I'll pass it to Bert. Look, I think in 2023, as we mentioned in our prepared remarks, we reflected deeply on where we've got opportunities in the NAPA business here in the U.S. And part of that reflection was the strategic impact of owning more stores relative to independent owners. And that was accelerated as we talked about, based on some of the feedback that we heard from owners as they work through this kind of higher cost inflation and higher interest rate environment. And that led us to be very specific and strategic about market prioritization categorizing specific markets into different categories and then thinking about our operating model through that prism. And so the benefits of that, obviously, is takes some variation out of our network. It simplifies our network when we invest in initiatives the execution of those initiatives become easier throughout the network. And so I think there's a lot of qualitative and quantitative benefits that come from an evolution. The evolution will take time, obviously, but we think it's the right thing for us to do as we move forward. The good news, Bret, is that even when we look within our independent owner network and our company-owned network we've got great operations out there for us to replicate. And so while we will evolve over time, the value creation and operational opportunity in front of us is to get on both sides of the house, the underperforming stores up to best-in-class. And so that's a very actionable body of work. As it relates to capital allocation, I'll ask Bert to make a few comments.

Look, on the capital allocation side, this will show up as M&A. These are small acquisitions. And so that won't really be a CapEx number, but more of an M&A number. And look, they're very attractive to us. We have got a great balance sheet a lot of financial strength and flexibility to be able to lean in here and we'll have the ability to do that. These are attractive in terms of being accretive almost immediately as we recapture some of the margin we were sharing previously with an independent owner. We get to reduce some of the structural costs and the way we serve our customers. We'll capture some SG&A synergies, particularly on the IT side and with some of the team members and the overhead and back office ranks. And we'll drive some incremental sales, as Will mentioned. We really have an ability to partner our commercial activities where also with an independent owner, they may not be fully NAPA sourced, we'll be able to increase that as well. These are asset deals and always and generally in high-performing markets. So we like the lean here, and we think there's a lot to love.

Great. And then you commented that December, in particular, you saw independent volumes down or purchasing down. Is there anything -- was that a weather impact? Was that a sort of compounding effect of high rates on their cost of carrying inventory, sort of what do you attribute that air pocket and the independence too?

Bret, I think you nailed it. I think it was a cumulative effect of both of those cumulative effect of rates through the year, getting to year-end, closing the books, if you will, softer weather and then just getting ready for maybe a more robust 2024. So as we said in our comments, we're encouraged by the first 3 or 4 weeks of the year here and hoping for a more normal 2020 for as we move forward.

Great. Thank you.

Thanks, Brett.

Your next question comes from Greg Melich with Evercore. Please go ahead.

Hi, thanks. I'd like to circle back on the restructuring activity. So Bert, could you help us understand the $100 million to $200 million? Is it cash, noncash? What's the portion there? And in terms of the synergies, what segments do they show up? Where will we see that in the P&L over time?

I'll start maybe with the second part of that. So in terms of where will they show up in the P&L, this is a global restructuring. So we'll have all the business units participating. In terms of breakdown of where you'll see things -- the biggest part of our SG&A cost is people cost. And so you'll see the vast majority of the benefit. About 2/3 of the benefit we expect to get will come out of the people side. It will be about half of the cost. It starts already. So we've announced last week, a voluntary retirement program here in the U.S. That is the preponderance of the activity, and you'll see that show up in our U.S. business results as we move forward. The offer period for that closes here in the first quarter. So we won't expect any Q1 benefits of that, but you'll see those build as we get through the second half or last 3 quarters of the year. In terms of cash, noncash, I would say it's predominantly cash. We do have DC and facility consolidation. Some of that will be a noncash charge. But I would say at this point, particularly with the voluntary retirement offer in the U.S., it's predominantly cash. And then we both report it all at the nonrecurring expense as we move forward and call that out for you guys.

Got it. I appreciate that. And I guess, back on the business, could you just level set us now I know we're up to the 1,500 stores that are company owned. Could you level set us on what isn't company-owned, Well, how many independents there are, what's company-owned and then also the mix of business that's NAPA AutoCare major accounts and then up and down the street.

Yes. So today, Greg, for the NAPA business here in the U.S., it's about 25%, 30% company-owned and the balance independent owned. We have over 2,000 independent owners roughly. So that gives you some perspective. In total, we've got 6,000 stores in the U.S. So that gives you all the math there. As you look around the world, we have the independent owner model in Europe, obviously, it's about 1/3, 2/3 company-owned to independent on and about that same ratio in our Canadian business. And then we're a 100% company owned in our Asia Pac business.

Greg, this is Paul. I'll jump in on the second part of your question regarding the business breakdown, major accounts roughly in the high teens, 20% range. NAPA AutoCare, which we're incredibly excited about the progress we're seeing in NAPA AutoCare. We've had a big surge in memberships over the last 90 days. That's about 20% of our overall commercial business. You mentioned small kind of mom and pop up and down the street. We've got a program as well in place where we're focusing in on getting back some of that business. That's about 20% roughly. And then you've got government and fleet, which for us, Greg, that's a significant part of our commercial business and one that -- we have long been incredibly strong and that's about the balance of your 40% of your commercial business. So I hope that helps.

It does. Thanks, and good luck, guys

Thanks, Greg.

Your next question comes from Seth Basham with Wedbush. Please go ahead.

Thanks a lot, Anne. Good morning. My question is on sell-in versus sell-through to independents in 2024. So as we sit here today, are you anticipating your guidance, those to be pretty equivalent?

Seth, I'm not sure I fully follow that. Run that one more time.

Sell-in versus sell-out for your independents. How they finished destocking from your perspective so that we should see more pressure on comps from that effect?

Yes, I think we're expecting 2024 to be a more normal year coming off of 2023, which was clearly challenged and different than our expectations.

Got it. And then my follow-up is, Paul, you talked about the up and down the street customers. Perhaps that's 1 area where you've seen some of the most pressure on your business. Are there competitive dynamics there that you didn't anticipate? And what are your plans for getting back to that business specifically?

So I think Will mentioned, Seth, in his prepared remarks, he made some comments about our sales force restructuring more of and also taking an opportunity to learn a bit from our industrial team with an inside sales group that is focused on that type customer. There's nothing new on the competitor said, look, Seth, we've got great competitors, and they're tough and they ultimately raise the bar on us and make us better. And that's exactly how we're responding. So we think there's an opportunity to go back and capture some of that business, and we've got programs, incentives and people in place to make that happen. So again, encouraged 6 weeks into the year, early days, but we are encouraged with what we're seeing.

Got it. Thank you.

Thank you.

Your next question comes from Daniel Imbro with Stephens. Please go ahead.

Yes, hi. Good morning, everybody. Thanks for taking our questions.

Good morning, Daniel

Well, I want to start on the industrial side. I did get disconnected during Q&A, so apologies if you said this but obviously, industrial growth continued to outperform, I think, the broader market. I guess, what end markets are showing the most relative strength? And is that just share gains? And then when we look at the monthly cadence, this low single digit, is that the right exit rate as we think about 1Q and organic growth in the industrial side?

Daniel, I'll take the first part of your question. I think previously, we've shared some commentary with you on the end markets that we track here internally. There are about 14 of them. And as I said in my prepared remarks, it's similar to Q3, it's a mixed mosaic as it relates to kind of growth versus contraction. Having said that, just maybe a few additional data points. As we look at the fourth quarter relative to the third quarter across those 14 in the fourth quarter, we had 9 of 14 in growth mode, which is an increase of 2 versus the prior quarter. And if you decomp that growth, we've got low single digits in 3 of them mid-single digits and 2 of them high single digits in 1 of them and double-digit growth in 3 of them. So on balance, we're encouraged by the sequential improvement versus third quarter and even in the 5 of 14 that are declining, we saw 3 of those 5 improve in the fourth quarter versus the third quarter. So hopefully, that gives you a little bit of perspective of, call it, the last 6 months' trends on all things end markets.

And then, Daniel, you asked about Q1. As you know, we don't give out quarterly guidance. What I would tell you, Q1 will be our toughest comp of the year, Daniel. And I think as Bert mentioned in his prepared remarks, we're looking for really a strong -- much stronger second half. But I will tell you this, our industrial team is focused, you hit it in your question. I do believe we're taking share. We've got the best team in the industry, and I have no doubt they'll deliver for us in Q1 as well.

Great. I appreciate that. And then for a follow-up, I wanted to follow up on the restructuring. You talked about in the previous question, maybe where we're going to see it in the reported numbers. But I'm curious if we dig into like what kind of jobs are we actually reducing across the business? And how do you weigh that against the risk of service levels? It feels like some of your auto peers are investing into stores and into distribution. And so curious how you guys think about the competitive dynamics and how you view that risk in '24 as you try to maybe gain back some of the share?

Daniel, thanks for the question. Look, I would tell you that the big construct here is to protect the field customer-facing selling organization. It's super important to how we go to market how we can stay very competitive. And so as we look at the voluntary program in the U.S., which is, as I said earlier, the substantial majority of all the activity we're taking that voluntary program is very thoughtful. It's targeted to those that are closer to retirement, which is why it's a voluntary retirement offer. And mostly focused on management and back office spans and layers. And so I would just say that we feel really good about the thoughtfulness that was put in by our teams of how to make sure that we strike the balance here between continuing to serve our customers and deliver every single day, but at the same time, do the right thing for the business for the long term and streamline some of our costs.

Thanks, Bert. Good luck, you all.

Thanks, Daniel.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.