Genuine Parts Co

NYSE:GPC

Earnings Call Transcript 2020-Q4

[Operator]

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

At this time, I’d like to turn the conference over to Sid Jones, Senior Vice President of Investor Relations. Please go ahead, sir.

[Sid Jones, SVP, IR]

Good morning. And thank you for joining us today for the Genuine Parts Company fourth quarter and full year 2020 conference call.

With me today are Paul Donahue, our Chairman and Chief Executive Officer; Carol Yancey, our Executive Vice President and Chief Financial Officer; and Will Stengel, our newly appointed President.

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.

Before we begin this morning, please be advised that this call may include certain non-GAAP financial measures which may be referred to during today’s discussion of our report 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.

Finally, consistent with prior two quarters, we’ve accounted for the Business Products segment, S.P. Richards, as discontinued operations for all periods presented.

Now, I’ll turn the call over to Paul for his remarks.

[Paul Donahue, Chairman and CEO]

Thank you, Sid, and good morning, everyone. Welcome to our fourth quarter and full year 2020 earnings conference call. We appreciate you joining us today and hope you are all staying safe and well.

Our fourth quarter results reflect the benefit of our ongoing strategic actions, despite the continued challenges of COVID-19. The GPC team was agile and adapting to dynamic conditions and executed on our initiatives to deliver customer value, operational efficiencies and strong financial results. We are grateful to our 50,000 associates for their unwavering commitment to excellence, while responding to unprecedented business and economic conditions, which have continued for nearly 12 months. Our operational focus is on ensuring a safe work environment, supporting our talented workforce and further strengthening our strong culture.

In January, we’re pleased to promote Will Stengel to President, and we now welcome Will to this quarterly call. As our Chief Transformation Officer since 2019, Will helped our business units work to achieve a variety of strategic initiatives and significant cost savings in 2020. Will’s vast skill set and relevant experience in his previous career with HD Supply, have added tremendous value to our management team. His exceptional talent, proven leadership and experience make Will an excellent choice as our Company’s next President. And we look forward to his future contributions. You will hear from both Will and Carol later in the call, and then we’ll take your questions.

So, now, turning to our fourth quarter financial results.

Total sales for the quarter were $4.3 billion, down 1% due in part to the continued challenges of COVID-19. While our Automotive sales were strong in Asia Pac, the pace of recovery slowed in Europe and North America relative to the previous quarter. Industrial sales grew progressively stronger during the final three months of 2020 and were much improved from the prior two quarters. We further improved gross margin, and in fact, the fourth quarter was our 13th consecutive quarter of gross margin expansion.

In addition, we successfully took action to reduce costs, lowering our year-over-year operating expenses. For the quarter, we generated an additional $40 million in permanent cost savings and realized another $40 million in temporary savings related to our response to COVID-19. Our progress in these areas drove a 14% increase in total operating profit and an 8.8% operating margin. This 110 basis-point improvement in operating margin from the fourth quarter of 2019 was supported by margin expansion in both, the Automotive and Industrial segments.

Our strong operating performance drove adjusted net income of $221 million and adjusted earnings per share of $1.52, up 20%. Due to ongoing working capital and debt financing initiatives, we also finished the quarter and year with a strong balance sheet, ample liquidity and robust cash flow with $2 billion in cash from operations in 2020.

Turning now to our business segments. Automotive represented 66% of total sales in the fourth quarter and Industrial was 34%. By region, 73% of revenues were attributable to North America, with 16% in Europe and 11% in Asia Pac. Total sales for the global Automotive Group were $2.8 billion, a 1% increase from 2019, with comp sales down 2%. Segment profit margin was up 130 basis points, driven by improvement in each of our Automotive operations.

Fourth quarter sales were led by strong growth in Asia Pac with continued retail and commercial sales momentum driving a second consecutive quarter of mid-teens sales. The Asia Pac team performed well all year and deserves a special shout out on their exceptional results. So, congratulations and a big thank you to Rob Cameron and the entire Automotive team down under.

In Europe and North America, the surge in COVID cases led to more restrictions on mobility, and mild weather through most of the quarter pressured sales of seasonal items. A second lockdown in November significantly slowed sales activity across Europe, although sales gradually improved through December, driving flat comps for the quarter. We would add as well that despite the challenging conditions in Europe overall, our UK operations continued to outperform with solid results for the quarter. Additionally, the positive impact of our cost savings initiatives more than offset the sales pressure, and the European team produced a 100 basis-point operating margin improvement. This caps a strong recovery in Europe’s operating performance over the second half of 2020.

In North America, our U.S. Automotive total sales and comp sales declined approximately 6%. Despite the sales decrease, the U.S. team generated a 200 basis-point improvement in operating profit margin. In Canada, quarterly sales were down slightly, comp sales declined 2%, and operating margin improved by 40 basis points.

Growth in sales for our retail customers continued to outperform expectations, while sales to the DIFM segment remained challenging. Through the quarter, DIY sales were strong, driven by COVID-related shifts in consumer behavior and stimulus payments, and stronger NAPA sales positioning, resulting from several key initiatives. These include our ongoing store refreshes, investment in retail specialists, the benefit of our NAPA rewards program with 12.5 million active members, targeted promotions and enhanced merchandising initiatives.

In addition, our growing omni-channel capabilities, including direct-to-customers shipping from select suppliers enabled our team to double our online sales volume from pre-pandemic levels. DIFM sales were down from 2019 as a slow recovery in miles driven, mild temperatures and continued pressure in our large fleet and government customers segment weighed on sales demand. To address these declines and build positive momentum in 2021, our team has focused on several initiatives, including maximizing sales force effectiveness by repurposing our field resources and doubling the number of professional salespeople calling directly on our end customers to professional repair garages, continued enhancement of our industry-leading commercial programs and promotions for the professional customers, including NAPA AutoCare and Auto Pro, improving our inventory availability, utilizing enhanced analytics to ensure more parts for more cars across our store network, strengthening in our supply chain, focusing on our global supplier relationships, as well as ensuring we have multiple suppliers by category. While we are seeing gradual improvement with supply chain service issues, there is more work yet to be done, and finally, further optimizing our network, including DC consolidation, increasing automation in our facilities and additional daily shuttles.

In 2021, we will also continue to execute on several global initiatives and invest in our omni-channel strategy, both B2B and B2C to enhance and build new digital catalog and search capabilities, implement strategic pricing initiatives, focus on value added services, and continue our rollout of the NAPA brand in Europe and Australasia. We also have plans to expand our global store footprint with additional bolt-on acquisitions, changeovers, and new greenfield stores to enhance our competitive positioning across our automotive operation. These initiatives are designed to deliver customer value, sell more parts, and capture market share.

To that end, we are pleased to report a strong start in 2021 with January average daily sales up low double digits in the U.S. and for our global Automotive Group. Backing out the positive impact of FX and acquisition revenues, comp sales were up high single digits in January. We would add that we continue to see little impact of price inflation in our sales, although we expect to see more supplier increases in the coming months and quarters, possibly in the 1 to 3% range for the full year.

So, in summary, we believe improving product availability, colder winter weather in North America and Europe, and the gradual reopening of the economy are current tailwinds for automotive business. In addition, favorable industry fundamentals, a growing total vehicle fleet, an increase in vehicles aged 6 to 12 years and expectation for the gradual recovery in miles driven give us confidence in our growth expectations for 2021, despite the ongoing uncertainties due to COVID-19.

So, now, let’s discuss the global Industrial Parts Group. Total sales for this group are $1.4 billion, down 3.3% from last year. Comp sales were down 4.4%, a significant improvement from the 9% decrease in Q3 and the 17% decrease we saw back in Q2. The steady recovery in sales over the last half of 2020 is consistent with the gradual improvement in the industrial economy, which is evident in indicators such as the Purchasing Managers Index and industrial production. Strengthening conditions combined with our ongoing initiatives to drive growth and lower costs resulted in a 70 basis-point improvement in the segment profit margin and our strongest quarterly return on sales since the fourth quarter of 2007.

Sales in North America and Australasia showed similar sales trends for the fourth quarter overall, although December was the strongest month in the quarter in North America. In addition, most key product categories achieved positive sales growth in December with improved month-to-month sales trends among virtually all the industries that we serve. We expect to build on these favorable trends in 2021.

As we move forward into 2021, which is Motion’s 75th year in business, the Industrial team will continue to execute on strategic initiatives to drive profitable sales growth, improve operational productivity and deliver customer value. These initiatives include building out our omnichannel capabilities to drive organic sales; optimize the value of the Motion website and accelerate e-commerce growth; growing our services and solutions business to expand our expertise in areas such as repair, conveyance and automation; ongoing disciplined M&A to further boost our products and service offering, while expanding our global footprint and market presence; enhancing our global pricing and product category management strategies to ensure sales excellence, margin effectiveness and a product offering that evolves the Motion brand globally; and optimizing our global distribution network, the enhanced automation and facility rationalization to lower cost, improve productivity and deliver excellent customer service.

We are confident that our focus on these key initiatives will optimize our competitive positioning as the industrial markets recover to full capacity. We are encouraged to see releases of capital project orders that were on hold throughout most of 2020, which is a positive sign for our greater plant activity in the months and quarters ahead. In addition, we are pleased that our supplier service levels are strong, despite extended lead times on select items, and our inventories are in good position to meet expected growing demand.

Finally, we currently expect another year of reasonable 1% to 2% price inflation from our suppliers, which compares to inflation of just under 1% in 2020. For additional perspective, we experienced positive sales momentum in January, with average daily sales up 2% for the month. This is better than the sales trends we reported in the third and fourth quarter of 2020 and is a testament to the great work done by the entire Industrial team.

So, despite the ongoing challenges of COVID-19 and its uncertain impact on the global economy and our markets, we are confident in our plans for the Industrial segment and look forward to a strong 2021.

So, let me conclude by providing an update on our ESG initiatives. At GPC, we embrace our responsibility to innovate in ways that also benefit our environment, our associates and the communities in which we operate. Our ESG practices, including human capital management, and diversity and inclusion are discussed in our 2020 corporate sustainability report. In addition, our Board of Directors adopted a formal human rights policy, which communicates the Company’s commitment to upholding human rights in every location in which we operate as well as our expectation that our suppliers, partners and affiliates also respect human rights. Our Companywide commitment to sustainability is integral to our corporate growth strategy. We invite you to visit our GPC website to view these documents and learn more about our ESG initiatives.

So, with that, I’ll turn it over to Will for his remarks. Will?

[Will Stengel, President]

Thank you, Paul. Good morning, everyone.

First, I want to say that I’m incredibly proud to be a part of Genuine Parts Company. The Company has an impressive history of success, and it’s an honor to be on the GPC leadership team. I’d like to thank Paul and the Board for their vote of confidence.

As Paul mentioned, I joined the Company in late 2019 as Chief Transformation Officer. Previously, I held executive leadership positions at HD Supply, including time as President and CEO of HD Supply Facilities Maintenance, and various other strategy and operating roles. My experience in distribution-related businesses fits well with GPC’s portfolio, business model and strategic initiatives, where consistent profitable growth, operating leverage, strong cash conversion, and disciplined capital allocation are all key value drivers, with the dividend an especially important part of the GPC capital allocation strategy.

I’m excited about the future potential of Genuine Parts Company. Each of our GPC businesses enjoy leadership positions within attractive fragmented markets with scale and capabilities to win. We have leading global brands and longstanding relationships, based on reliable customer service and value-added expertise. And our unique culture that is based on a clear set of core values and purpose serves as an important common foundation.

Strategic actions taken in 2020 accelerated the transformation momentum built over recent years as we work to simplify the business and further define our critical focus areas. The global teams executed well as we navigated the pandemic and demonstrated an ability to act quickly and deliver results. Our strategic actions provided clarity for areas where we want to increase our focus, including profitable organic growth, driving operating productivity through simplification and integration, disciplined and strategic capital deployment and investments in talent to develop and build capabilities.

Despite a challenging and unprecedented year, our diverse businesses proved resilient and built solid momentum as we enter 2021. In my new role, I look forward to working with Paul and the global leadership team as we align resources within our focus areas to execute these initiatives and deliver value as a team. I’m also looking forward to spending time in our operations and with our customers and suppliers.

In addition, we’ll continue to further refine and advance our longer term strategic roadmap. We’re excited about the numerous potential opportunities that new technologies and emerging trends could present for GPC. As we look to the future, we feel well-positioned to execute our strategic priorities to the benefit of all our stakeholders, and I look forward to working with the leadership team to drive results. Thank you.

And I’ll now turn it to Carol for her comments.

[Carol Yancey, EVP and CFO]

Thank you, Will.

As a reminder, our comments this morning primarily focus on adjusted results from continuing operations, which excludes restructuring, inventory, transaction and other costs and income. We will begin with a review of our key financial information and then provide our full year outlook for 2021.

Total GPC sales were $4.3 billion in the fourth quarter, down 0.7% from 2019. For the full year, sales were $16.5 billion, down 5.6% or down 2.3%, excluding divestitures. Our adjusted gross margin for the quarter was 35%, a 40 basis-point improvement compared to 34.6% in the fourth quarter last year. For the full year, adjusted gross margin improved 100 basis points to 34.5% from 33.5% in 2019.

Our team has been focused on a number of margin-enhancing initiatives, and the fourth quarter and full year gains represent the 13th consecutive quarter and the 5th consecutive year of improved gross margin for the Company.

Our steady progress in expanding gross margin in the quarter and the year reflect a variety of factors, including the favorable impact of sales mix shifts to higher gross margin operations, positive product mix shifts, strategic pricing tools and analytics, global sourcing advantages and strategic category management initiatives. In addition, the full year gross margin also benefited from acquisitions and divestitures, which impacted our results through the nine months. We would add these positive factors were partially offset by a decrease in supplier incentives due to lower purchasing volumes. And finally, as we assess the pricing environment in the fourth quarter and 2020 overall, there was minimal impact of price inflation in our sales and gross margins. As Paul mentioned earlier, we’ll see how this plays out in 2021, but we have not had any impact of inflation to this point in the year.

Our adjusted selling, administrative and other expenses were $1.1 billion in the fourth quarter, down 2.8% from last year and representing 26.6% of sales compared to 27.2% last year. For the year, these expenses were $4.4 billion, down 3.9% compared to last year and 26.5% of sales compared to 26% in 2019. The decrease in operating expenses for the fourth quarter and full year reflect the favorable impact of our permanent and COVID-related cost actions implemented throughout 2020, as previously discussed.

As mentioned on our third quarter conference call, in accordance with our 2019 $100 million cost savings plan, we successfully achieved the $100 million annual target ahead of schedule. We are pleased to report an incremental $40 million in savings recognized in the fourth quarter and $150 million in permanent expense reductions for 2020. In addition, our team continued to execute on a number of additional savings initiatives in response to the impact of COVID-19. These initiatives contributed temporary cost savings of approximately $40 million in the fourth quarter and $300 million for the full year. Combined, we generated approximately $80 million in total savings during the fourth quarter and approximately $450 million for the full year, driven by transformative reductions in payroll and facility costs, as well as temporary savings from furloughs, reduced travel and entertainment, government subsidies and other initiatives in response to COVID. We expect our permanent cost savings to carry over into 2021, and we’ll continue to manage our expenses to further improve our cost structure and operating performance.

Our total operating and non-operating expenses were an adjusted $1.2 billion for the fourth quarter, down 3.4% from last year. This represents 28.1% of sales, down 80 basis points from 28.9% in 2019. For the full year, these expenses were an adjusted $4.7 billion, down 3% from the prior year and representing 28.4% of sales.

Our total segment profit in the fourth quarter was $374 million, up 14% on a 1% sales decrease, and our segment profit margin was 8.8% compared to 7.7% last year for a strong increase of 110 basis points.

For the full year, segment profit was $1.3 billion, up 3% compared to 2019, and our segment profit margin was 8.2% compared to 7.8% in the prior year. This represents our strongest full year segment profit margin since 2015.

We had net interest expense of $21 million in the fourth quarter, and for 2020, net interest was $91 million, which is essentially flat from 2019. In 2021, we expect net interest of $70 million to $72 million, which is down from 2020 due to lower interest rates related to our new debt agreements negotiated in the fourth quarter, as well as the expectation for lower debt levels.

The corporate expense line was $33 million in the fourth quarter, down from $37 million in 2019, and for the year, these expenses were $150 million. We currently expect our corporate expense to be in the $150 million range again in 2021.

Our adjusted tax rate for the fourth quarter was 25.1%, an increase from 24.6% in the prior year period. For the year, our adjusted tax rate was 24.5% and in line with 2019. We are planning for a full year tax rate for 2021 in the range of 24.5% to 25.5%.

Fourth quarter net income from continuing operations was $172 million with earnings per share of $1.18. Adjusted net income was $221 million or $1.52 per share, which compares to $186 million or $1.27 per share in 2019 or a 20% increase. For the full year, reported net income was $163 million or $1.13 per share, and adjusted net income was $765 million or $5.27 per share.

So, now, let’s discuss our fourth quarter results by segment.

Our Automotive revenue for the fourth quarter was $2.8 billion, up 1% from the prior year. Segment profit of $240 million was up 19%, with profit margin at 8.5% compared to a 7.2% margin in the fourth quarter of 2019. The 130 basis-point increase in margin was driven by improved operating results across each of our Automotive businesses for the second consecutive quarter, so an excellent job of operating by our Automotive team, and we look forward to continued progress in 2021.

Our Industrial sales were $1.4 billion in the quarter, a 3.3% decrease from Q4 of 2019 and significantly improved from the sales declines in the second and third quarter. Segment profit of $133 million was up 5% from a year ago, and the profit margin was up 70 basis points to 9.3% compared to 8.6% last year. The improved margin for Industrial reflects gains in both, our North American and Australasian industrial businesses for the second consecutive quarter, so strong operating results for Industrial, which we expect to continue in 2021.

So, now, I will turn our comments to the balance sheet.

We continue to closely manage our accounts receivable, inventory and accounts payable to improve our working capital position. In the fourth quarter, we sold $300 million in receivables for a total of $800 million sold in 2020 under an accounts receivable sales agreement. Our total accounts receivable is down 36% from 2019, and we remain pleased with the quality of our receivables. Our inventory at December 31, 2020, was up 2% from the prior year and accounts payable increased 5%, improving our AP to inventory ratio to 118% in 2020 from 114% in 2019.

We are pleased with the progress our team is making to strengthen our supply chain. And in 2020, these key accounts were a source of cash from operations, and our total working capital was 7% of revenues.

We repaid $230 million of debt in the fourth quarter, and our total debt of $2.7 billion at December 31, 2020, is down $749 million or 22% from the $3.4 billion in 2019. During the fourth quarter, we further improved our debt position with new public debt and a new revolving credit agreement that provided for expanded credit capacity and more favorable rates.

We closed the year with $2.9 billion in available liquidity, which is up from $1.3 billion at December 31, 2019. Through our efforts in these and other areas, we generated a robust $2 billion in cash from operations in 2020, which is up from $833 million in 2019. Our free cash flow was $1.9 billion, an increase from $555 million in 2019. While we selectively scaled back our near-term plans for capital deployment in early April of 2020 to conserve cash through COVID-19, we were very committed to several key priorities for cash, which we believe serves to maximize shareholder value.

Our key priorities include the reinvestment in our businesses via capital expenditures, M&A, share repurchases and the dividend. We have deployed $4.7 billion in capital across these areas over the last four years. In 2020, we reduced our original $300 million in CapEx plan by 50% and invested $154 million in essential capital expenditures, which was down from $278 million in 2019. For 2021, we expect to resume more normal levels of our reinvestments in our businesses and are planning for total capital expenditures in the range of $275 million to $325 million for the year. We also pulled back on M&A activity in 2020, although strategic acquisitions remain an important component of our long-term growth strategy.

In 2020, we used $69 million in cash to acquire several small businesses. And in 2021, we expect to make additional strategic bolt-on acquisitions to complement our global Automotive and Industrial segments. As a reminder, we have not considered any of these future acquisitions in our 2021 outlook.

The Company has paid a cash dividend to shareholders every year since going public in 1928. Earlier this week, our Board approved a $3.26 per share annual dividend for 2021, representing our 65th consecutive annual increase in the dividend. This represents a 3% increase from the $3.16 per share paid in 2020.

In 2020, we repurchased 1.1 million shares of our common stock prior to suspending our share repurchases amid the pandemic. As of December 31, 2020, we were authorized to repurchase up to 14.5 million additional shares, and we expect to make additional opportunistic share repurchases again in 2021.

Turning to our outlook for 2021, we are reinstating our practice of providing full year guidance. In arriving at our full year 2021 guidance, we considered several factors, including our past performance, current growth plans and strategic initiatives, recent business trends and the global economic outlook. In addition, we consider the continued uncertainty of COVID-19 and its potential impact on our results.

With these factors in mind, we expect total sales for 2021 to be in the range of plus 4% to plus 6%. These growth rates assume a relatively neutral impact from foreign currency translation, minimal price inflation and as mentioned before, exclude the benefit of any unannounced future acquisitions. By business, we are guiding to plus 4% to plus 6% total sales growth for the Automotive segment, including plus 3% to plus 5% comp sales growth, and a total sales increase of plus 3% to plus 5% for the Industrial segment, including an increase in comp sales of plus 2% to plus 4%.

On the earnings side, we currently expect diluted earnings per share to be in the range of $5.55 to $5.75. This represents a 5% to 9% increase compared to our adjusted diluted earnings per share in 2020.

We move forward into 2021, confident in our strategic plans and initiatives to meet or exceed these targeted results and deliver value. In addition, we believe that the underlying industry fundamentals for our global Automotive and Industrial segments are favorable and will continue to provide us with sustained long-term growth opportunities.

So, that’s our financial update, and we look forward to reporting on further improvement in our financial performance throughout 2021. Thank you. And I’ll now turn it back over to Paul.

[Paul Donahue, Chairman and CEO]

Thank you, Carol.

Looking back on the quarter and the year, we are proud of our team for their continued focus on executing our strategic growth initiatives and cost actions. The GPC team and our Automotive and Industrial business proved resilient in meeting the challenges presented by the COVID-19 pandemic.

We closed the year strong with a strong financial performance. We want to thank each of our GPC team members for their continued support, dedication and commitment to serving customers and being the best. We entered 2021 as a stronger, more agile Company, with streamlined operations at a more optimized portfolio focused on the global Automotive and Industrial businesses. We are well positioned with a stronger balance sheet and strategic plan to capture profitable growth, generate strong cash flow and drive shareholder value.

We are off to a solid start to the year with global automotive sales growth and ongoing industrial recovery and operational improvements. With the continued rollout of COVID-19 vaccines, we look forward to a global recovery from the pandemic and a strengthening economy. For all these reasons, the GPC team is excited about 2021. And we look forward to reporting on our progress as we move through the year.

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]

Thank you. [Operator Instructions] Our first question comes from the line of Bret Jordan with Jefferies.

[Bret Jordan, Jefferies]

Hey. Good morning, guys. When you look at the NAPA U.S. trends, I guess, it wasn’t quite clear on the commentary. It sounded as if December ended flattish or December ended up. And I think, could you talk a little bit about regional performance as well as NAPA Company-owned stores versus independents in the fourth quarter?

[Paul Donahue, Chairman and CEO]

Happy to do so, Bret. And, let me start with the Company store versus our independents. Our Company stores slightly outperformed our independents in the quarter. We’ve seen that already reversed in the other direction in January. That’ll flip month-to-month, quarter-to-quarter. So, no real big news there.

Regionality, what we saw in the quarter was kind of consistent with what we’ve been seeing. We saw really good performance out West. I’m really proud of our Western division and the job that group is doing. Our Mountain team, as they have all year, had a solid quarter. And the Mountain, Bret, just FYI, they stretch from Colorado, Montana, all the way down to Texas. We saw some softness in the Southeast. We saw a little softness in the Northeast as well.

In relation to your question about the cadence of the quarter and December specifically, we started out the quarter okay. And I’m assuming that question was around U.S. Automotive, Bret?

[Bret Jordan, Jefferies]

Yes. That was U.S.

[Paul Donahue, Chairman and CEO]

Yes. October started out okay, pretty much in line with September. We saw softness in December, -- and then we saw softness in December as well. I think the first couple of months were probably more related to a little bit warmer weather than -- especially in November, plus we saw a little bit of a COVID resurgence in the U.S.

December is a bit unique, Bret. And if you remember, we had a big December a year ago, 2019. We were going up against some pretty tough comps. So, that certainly impacted December as well. But look, here is a good news, Bret, for us and the NAPA team is, we had a really strong rebound in January, both DIY and DIFM, which we’re really pleased to see the commercial business bouncing back in January. And that’s carrying into February as well.

[Bret Jordan, Jefferies]

Okay, great. And question is on the supply chain. It sounded as if you were saying maybe there is a couple of categories where stock levels could be better. Is there anything to call out there? I mean, it sounds like batteries have been a great category this winter, but maybe some supply constraints there. I mean, are there any standout categories we should be looking at?

[Paul Donahue, Chairman and CEO]

Well, you hit the first one, Bret. We have had -- and we did have a good year in our battery business. And I expect with this cold weather, we’re going to see even a greater surge in our battery business. But supply has been a challenge. And I think you’ve heard that elsewhere. Pleased to say, we’re not seeing that in Europe. We have a strong battery business. We actually just launched the NAPA battery across Europe. We have our suppliers taking good care of us over there. And we’re seeing really good business across Europe in the battery business.

But, that would be the call out. There’s a couple of other suppliers that are impacting us. And look, these guys are battling labor shortages due to COVID, some shortages of raw materials. So, I understand they got their challenges, and we’re hoping to see improvement here as we roll into ‘21.

[Bret Jordan, Jefferies]

And I guess, just a quick follow-up on your Europe comment. It sounded as if you said both the U.S. and Europe had sequentially softened a little bit from the third quarter. But, could you talk a little bit how you saw Europe roll through the fourth quarter and maybe there are trends into January?

[Paul Donahue, Chairman and CEO]

Yes. So, Europe, they started out really strong. As you know, they had a great third quarter, mid-double-digit increase, Bret. And we had a good October. They were up high single digits in October. We saw a big reversal in November, a double-digit swing from October as Europe locked down due to COVID. So, we saw the third wave come through and that just kind of knocked the wind out of our sales. December bounced back a bit from that softer November. But again, good news, much like North America, we saw a nice rebound in January, and our European team was up strong mid-single-digit.

So, we’re encouraged. And we got a lot of good things going on with AAG. I would really, Bret, call out our UK team. They had a really strong year, despite some pretty severe lockdowns during the course of the year. But, again, I couldn’t be more proud of our UK team.

[Operator]

Our next question comes from the line of Chris Horvers with JP Morgan.

[Chris Horvers, JP Morgan]

First of all, a follow-up question. So, as you talked about the year-to-date in the U.S., you mentioned, do-it-for-me, the pro business getting better. Did that turn positive so far in January and February?

[Paul Donahue, Chairman and CEO]

Yes, absolutely. Yes. We had a double-digit increase in January, and we saw it on both sides of the counter, Chris. We saw it in DIY, as we did most of 2020, our DIY business was strong, like most in the industry. But, where we struggled a bit in ‘20 was in our commercial business. And our commercial business I think is a bit unique compared to most. It’s very, very heavy commercial fleet, government municipalities, but again, really pleased to see that business turn positive in the month of January. And I’m hopeful, Chris, with this -- some of the weather we’re seeing and the reopening of the economies and the vaccines getting out there that -- and along with a little bit of a lift in miles driven, we’ll see some resurgence in our DIFM business.

[Chris Horvers, JP Morgan]

And then, following up there, as you think about the fleet business, how are you thinking about that? Obviously, there’s been some strain on colleges and governments. And are you seeing any sequential improvement in those businesses? Presumably, they remain negative. And, how are you thinking about the outlook in ‘21?

[Paul Donahue, Chairman and CEO]

Well, we do think we’ll see improvement overall in that fleet business in ‘21. And January certainly is a good indicator, Chris. Look, there’s a ways to go. By any stretch, we’re not out of the woods in relation to the upheaval caused by COVID. But, we are seeing green shoots, and we are pleased to see a real solid January.

[Chris Horvers, JP Morgan]

Yes, understood. And then, on the Industrial business, if you’re up 2% in January, that’s not stimulus-driven, and you’re guiding, I think, 3% to 5% comps -- or 2% to 4% comps in that business in 2021, and you did it down 8% in 2020. So, is there something that you’re seeing there that provides caution why you wouldn’t expect higher same-store sales in that segment, or is that -- you’re just trying to be conservative given the unknown of COVID?

[Paul Donahue, Chairman and CEO]

Well, look, Chris, there is a little certainly a bit of conservatism built into those numbers. We feel really good about the prospects for a strong recovery in our Industrial business in ‘21. We’ve seen now eight straight months of PMI. We generally trail that metric by a few months. So, yes, we feel good. Especially when you look back at 2020, Q2, we were down 17; Q3, down 9; and Q4, down 3 and then post a positive January. But, that conservatism that you kind of referred to, Chris, again, we’re not out of the woods. We’re still seeing some plants shut down just in the last couple of weeks. We do a big business with the OE automotive plants. We’ve seen a number of those shut down to raw material shortages. We’re still pressured in the Southwest with oil and gas. So, yes, we’re -- we feel good, but we’re also seeing still just a few headwinds out there on the Industrial side.

[Chris Horvers, JP Morgan]

Got it. And then, last question is, Carol, can you talk about how you’re thinking about gross margin rate in 2021 and as well as SG&A, given you did have a big COVID cost savings number that you’re going to lap against?

[Carol Yancey, EVP and CFO]

Yes, happy to. As far as gross margin, and look, the team, we couldn’t be more pleased with what we’ve done in the gross margin area. We have, and you saw we finally anniversaried the impact from acquisitions and divestitures. So, our core gross profit in Q4, really pleased to see our initiatives working. We do expect, as we look ahead to have continued improvement in gross profit, may not be at the level that it’s been, but we would expect to see continued gross margin improvement. And, we’ve called out the initiatives in that area before from product mix and strategic category management and even our pricing and global sourcing.

And then, I’ll make a few comments on SG&A, and then maybe let Will add and talk about what we’re going to see for 2021. And, you’re right. We did have the temporary cost savings, but more importantly our permanent cost savings of $150 million do roll in to 2021. And we expect to -- while some of those, certainly, the temporary savings come back in. When you look at our outlook for 2021 on SG&A, we have improvement when you go back to say the 2019 levels. So, we really have permanently reduced our cost structure, if you will. But having said that, there’s still things we’re working on that. We’re going to see headwinds in terms of payroll and freight. And I’ll maybe let Will talk about a few things we’re doing to maybe offset some of those headwinds.

[Will Stengel, President]

Yes, Chris. So, maybe just back on gross margin. I mean, gross margin is going to continue to be a focus for us as we move forward. I think, in the prepared remarks, we did a nice job of laying out kind of some of the details in terms of what that means. But category management around pricing, global sourcing, et cetera, will be important priorities for us as we move forward.

On the SG&A, there is really kind of two ways to think about it. First is, the importance, as Carol alluded to, of keeping these temporary cost savings out. So, converting them from temporary to permanent, and that’s a daily activity that we work on with the teams here. But then, obviously, very discrete productivity initiatives around the globe around SG&A, ranging from labor productivity in DCs, evaluating and analyzing indirect spend, low-cost country opportunities for back-office functions, et cetera. So, we’ve got a laundry list of very tactical actions. And we’re excited about the momentum that we’ve got.

[Operator]

[Operator Instructions] Our next question comes from the line of Michael Montani with Evercore.

[Michael Montani, Evercore]

I also just wanted to offer congratulations to Will on the promotion.

[Will Stengel, President]

Thank you, Mike.

[Michael Montani, Evercore]

So, if I could start off -- just was on the SG&A front first off. Is there a way to think about the potential dollar growth year-over-year and/or the kind of organic comps that we would need to see to get natural leverage there? Carol and Will, I think, historically, kind of 2% to 3% was the number organic growth, but if you could give us an update there?

[Carol Yancey, EVP and CFO]

Yes. Look, we have -- and as you have seen, we are guiding to organic growth at -- in the 3% to 5% range. We certainly expect to have margin improvement with that organic growth. And again, we’re looking at getting ourselves back to certainly to a sales level at where 2019 was but a profit and operating margin level that’s greater than that. So, I think, it’s at the low end of the 3% that we can have margin improvement. And I certainly think that you’ll see that with some of the initiatives we talked about.

[Michael Montani, Evercore]

Okay, great. And, if I could, just on the NAPA front, just wanted to parse out, in the fourth quarter, if there’s any extra color you can share, Paul, on DIY versus DIFM comps? And then, if you could help us just to understand the traffic and ticket split for the comp.

[Paul Donahue, Chairman and CEO]

Yes. Thanks, Mike. Let me take the latter part of that question first. As we look at ticket comps and we look across the globe, I’m really pleased with the trends we’re seeing in Australia -- our Asia Pac business was up strong in both average ticket size and traffic. Canada, we were up both average ticket size and traffic. U.S., our average ticket was up, which has been a trend we’ve seen for a number of quarters now. Traffic was down a bit in the U.S., again, not a surprise because we saw a real surge in our digital online, deliver-to-store, pick up at curbside. So, folks are still a little bit reticent I think to walk into stores.

And then, the other question, Mike, you asked was around DIY, DIFM in the quarter, in Q4. What we saw was much like we had seen throughout the year with -- or the latter part of the year, I should say, with DIY held up strong and DIFM was certainly pressured in the quarter. But again, as I think I mentioned earlier in a question, really pleased to see both trending up in January. So, we’re cautiously optimistic that we’re going to see our DIFM return to solid growth in 2021.

[Operator]

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

[Beth Reed, RBC Capital Markets]

Hey, guys. This is Beth Reed on for Scot. I just had a question on the acceleration in the U.S. auto business that you’re seeing into January and February. Is there any way to kind of quantify the impact of stimulus on that acceleration? And any other factors you would call out that you think are the main drivers?

[Paul Donahue, Chairman and CEO]

Yes. Thanks, Beth. Look, stimulus monies are definitely impacting the DIY business, I think, not only for us, but our peer group. But, we are a dominant DIFM business. That’s 80-plus-percent of our business at. So, I don’t really believe we see much impact, if any, stimulus on our DIFM business.

Yes, I think, if I were to point to perhaps some of the lift that we’re seeing early in the year. Look, the weather is a factor. There is just no two ways about it. And, we’re seeing a return to a more normalized winter that we haven’t seen in a few years. What’s unfortunate, Beth, and we don’t want to take this lightly. There are lots of folks out there in the Texas region that are without power. They’ve been without power for a couple of days. So, we don’t mind seeing winter. I just wish it wasn’t quite as extreme and the impact that it’s having. We’ve got a number of distribution centers, branches, stores that are closed throughout Texas, Oklahoma, Tennessee, Mississippi, Alabama. So, it’s definitely taken a toll here this week. We’ll see the long-term impact of a really cold weather, and it will show up months down the road when parts begin to fail as a result of some of this really brutally cold winter.

[Beth Reed, RBC Capital Markets]

All right. Got it. And then, just a quick clarification. Did you say January trends have largely kind of continued into February?

[Paul Donahue, Chairman and CEO]

Well, they certainly did. But, what we’re seeing right now is with the number of DC closures were across Texas and the other states I just mentioned, along with many of our Industrial branches. I think the number I saw yesterday, Beth, we had about 90 of our Industrial branches were closed. So, it’s going to have a little bit of an impact probably for a couple of days. But, again, we’ll recover. And I expect that will have a positive impact longer-term on our business.

[Operator]

Our next question comes from the line of Daniel Imbro with Stephens.

[Daniel Imbro, Stephens]

Yes. Thanks. Good morning, guys. And yes, I’ll pass my congrats on to Will.

[Will Stengel, President]

Thanks, Dan.

[Daniel Imbro, Stephens]

Carol, I wanted to start -- and apologies if I missed this, trying to screw away the cost cutting last year with maybe some of the organic growth slowing. You targeted $100 million. Obviously, you exceeded that meaningfully. I think, you said $150 million in permanent cost cuts. As you look back with hindsight, is it possible, in some places, you may have cut too deep, and that’s part of the reason for the organic growth slowdown? And then, if not, can you maybe share some detail on where you did remove the cost, so we can better understand why that isn’t impacting service levels?

[Carol Yancey, EVP and CFO]

Yes. Look, we -- as you look at our cost savings, and again, this was done early on in response to the very-drastic declines in volume that we saw from Europe starting at the end of Q1 to North America and other geographies. We had -- Q2 was one of our worst quarters ever in the Company’s history. And with that, there was actions that needed to be taken. And as related to reducing payroll, reducing positions, we had furloughs, we had deferred travel and entertainment, we looked at facility and lease reductions, we looked at our facility costs, we looked at -- I mean, we looked at anything and everything. And it was -- again, we did that without impacting our service, but we did it to adjust to the lower volumes. And then, as volumes have come back, we looked at those costs. Again, some of those costs had to come back in.

During this time, we also didn’t let up on our investments in productivity and automation. So, we had a number of automation projects that we continue to work on that would help us with productivity improvements, where we rationalize facilities and put in more automated conveyor systems. That helped us as well.

So, again, we -- the permanent savings go back to a year ago. Those were largely payroll related, the $150 million. Again, we were very comfortable to how those were done. The temporary ones were just that. They were temporary in nature. And remember, part of that temporary was government subsidies. So, again, we had about $60 million in government subsidies that are nonrecurring. The fact of the matter is we go into 2021 with a lower overall cost base and excitement about the initiatives we have in place to keep our cost structure down.

[Paul Donahue, Chairman and CEO]

Hey Daniel, I’ll just add a comment to that as well because it’s been mentioned before, and I touched on it in my prepared remarks. But just to call out, in our NAPA business here across the U.S., we have over 3,000 sales professionals between our Company stores and our independent stores that are working with our shops and professional garages every day. So, the thought of did we cut too deep, we don’t believe so. And again, I think, what we saw were some transitory challenges in ‘20 that are going to bounce back in ‘21.

[Daniel Imbro, Stephens]

Got it. That’s helpful. Thank you guys for that. And then, I wanted to ask a clarifier on the comp growth you said earlier, Carol. I think, you said within Auto, 3% to 5% comps with 4 to 6 total revs, and then Industrial is 2 to 4 with total revs in 3 to 5. Most of those would imply roughly only 100 basis points of FX headwind. I guess, can you help me understand how they have a similar amount of headwinds between the segments when Automotive has a much larger European footprint? So, I would think, FX is more of a tailwind to the Auto business. So, trying to reconcile, yes, the magnitude of FX impact. Thanks.

[Carol Yancey, EVP and CFO]

Yes. Just to be clear, the same-store sales guidance that we gave in relation to the total sales is more of the impact of the carryover of acquisitions from 2020. So, we had a number of bolt-on acquisitions in the automotive space and then we also had three Industrial acquisitions late in 2020. So, the 1% differential is the carryover of M&A. Our implication for foreign currency is really neutral. And we also have inflation neutral in these numbers. As Paul mentioned, we expect we will see some inflation at some point. But, this is truly just what we know today as far as organic growth, plus a little bit of carryover from acquisitions that’s in that guidance.

[Operator]

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

[David Bellinger, Wolfe Research]

I want to follow-up on January, but a bit of a different context. So, a few of your auto parts competitors have indicated comparable sales accelerating into the double digits, maybe since its January. It seems as though NAPA comp sales are up high single digits at this point. So, is there anything that’s changed versus your peers from the last few quarters? Is there something strategic on your part that helps them to narrow the gap versus competitors, or is it really the mix of business that’s driving that better delta now?

[Paul Donahue, Chairman and CEO]

Well, look David, it’s a reasonable question. We’ve been working on a number of initiatives throughout the course of 2020 that I would tell you I think are really beginning to take hold. We are not nearly as weighted towards the DIY side. So, even though we’re seeing some nice lift in DIY, it’s not going to move the needle for us like DIFM. So, what I would point to and how we’re narrowing that gap is the slight recovery we’re seeing from COVID, markets opening back up, I think, we’re going to see miles driven tick back up. We haven’t seen any official numbers out of December, January yet. But that coupled with some winter weather is all going to help spike our DIFM business. And again, we’re really, really pleased to see that spike in the month of January.

[David Bellinger, Wolfe Research]

Got it. Okay. And then, my follow-up here, how are you thinking about the pace of parts inflation throughout 2021? You mentioned a limited benefit last year, maybe a low single-digit rate coming this year. Are you getting ahead of that now and flowing some price to both DIY and commercial, given strengthening demand? And, do you expect to fully offset any cost increases through price this year?

[Carol Yancey, EVP and CFO]

Yes. Look, we are getting early indication from our suppliers. I mean, look, our suppliers, as Paul mentioned, they’re facing raw material increases, freight and ocean cargo and just the significant increases that our suppliers are facing, labor shortages, labor inflation. We are hearing that our suppliers are discussing price increases, we believe, certainly in Automotive, it’s been very rational. And as these price increases come that they will get passed through.

Also on the Industrial side, our teams are trying to stay ahead of that and doing a lot of things to make sure that those can -- when they do get the pricing, they can pass them along. I would tell you that will probably be more second half weighted. Again, some of this is managing through the uncertainty right now, but probably more second half weighted. So, the 1% to 2%, 1% to 3%, if you will, is on a full year basis, but probably more second half. But again, that’s not in any of our numbers.

And the last thing I would just add, and you heard Will talk about it, our teams have so many terrific initiatives going on in the gross margin area, especially in terms of pricing. So, we’re a lot more agile today. We have a lot more analytics and a lot more strategic pricing initiatives that will help us offset this as well.

[Operator]

There are no further questions in the queue. I’d like to turn the call back to management for closing remarks.

[Carol Yancey, EVP and CFO]

We’d like to thank you for your participation in our year-end and Q4 conference call. As always, we appreciate your interest and support of Genuine Parts Company. And we look forward to reporting out to you on our first quarter results in April. Thank you. And have a great day.

[Operator]

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.