Q4 2019 Earnings Call
Good day, ladies and gentlemen, welcome to the genuine parts company fourth quarter and full year 2019 earnings conference call.
Time, all participants are no listen only mode.
A question and answer session will follow the formal presentation.
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I would like to turn the conference over to said Jones Senior Vice President Investor Relations. Please go ahead Sir.
Good morning, and thank you for joining us today with the genuine parts company fourth quarter full year 2019 conference call.
Got the earnings results and outlook for 2020.
I'm here with called on to you, our chairman and Chief Executive Officer, He Carol Yancey, our executive Vice President and Chief Financial Officer.
Before we begin this morning. Please be advised this call may include certain non-GAAP financial measures, which may be referred to during todays discussion of our result as reported under generally accepted accounting principle.
Reconciliation of these measures is provided in yesterday's press release issued this morning, which is also posted in the Investor section of our website.
Today's call May have all forward looking statements regarding the company and its business is.
The company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest FCC filings, including this mornings 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 poll for his remarks.
Thank you said and welcome to our fourth quarter 2019 conference call. We thank you for taking the time to be with US This morning.
Earlier today, we released our fourth quarter and full year 2019 result.
I'll make a few remarks on our overall performance and then covered the highlights across our business units.
Carol will provide an update on our financial results.
And our outlook for 2020 after that we will open the call up your question.
Our financial results in 2019 reflect the positive impact of our strategic growth initiatives and continued focus on improving our operating performance.
Maintaining a strong balance sheet.
Driving meaningful cash flows and effective capital allocation.
Our strategic growth initiatives drove the third consecutive year of record sales for genuine parts company with positive comp sales and the benefit of several key acquisitions across our automotive and industrial platforms.
Additionally to further optimize our portfolio, we streamlined our operations with the sale of several noncore businesses, including auto in Mexico Eas and.
And the GCN Canadian operations of our business products group.
In 2019, we also accelerated our initiatives to improve our operating performance.
Our team executed well and we were successful in increasing our gross margin rate for the fourth consecutive year.
Additionally, in accordance with our cost savings initiatives announced last October.
We took accident a streamlined field management layers.
Restructure field support operations and consolidate facilities across the organization.
We also continue to us out to all areas of the business to identify and act on additional opportunities that increase efficiency and productivity as well as reducing cost.
As announced on November 18 will Stengel joined the company, a GBP and Chief transformation Officer.
In its first 90 days will as attractive talent and created a disciplined approach to help drive improved performance in partnership with the global operating teams.
Our efforts, thus far primarily reflect the savings associated with the company's voluntary retirement program.
Which we will begin to realize this quarter.
As a result of these initiatives there were a number of onetime items recorded in the fourth quarter, which Carol will touch on shortly.
We fully expect these steps to best position the company per improved profitability.
And we remain confident in our ability to achieve our targeted 100 million dollar cost savings run rate.
By the end up 2020.
Now turning to the result fourth quarter sales at 4.7 billion were up 2.2%.
Were nearly 7% excluding the impact of our divestitures.
Highlighted by approximately 3% comp sales growth in our automotive segment.
The strongest growth in automotive came from our U.S. and Australasia and businesses.
And these two groups also pop posted solid operating results.
In addition, we produced further gross margin improvement for the quarter and the industrial segment reported continued operating margin expansion.
In review of our business segment highlights global automotive sales, which represented 59% of our total fourth quarter revenues.
Were up 8.7% from last year and improved from 5.3% growth in Q3.
Comp sales were up 2.9%, which was a sequential acceleration.
From the plus 1.8% in Q3.
And acquisitions net of the auto divestiture another adjustment.
Added another 7.2% to sales.
In our North American operations, U.S. automotive sales were up 5.2% in the fourth quarter with comp sales up 3.3%.
And solid growth in operating profit.
This is improved from our 2.5% comp sales increase in the third quarter and is on top of the 3.3% growth in the fourth quarter of 2018.
In Canada, our automotive sales were up low single digits with flat comp sales.
Canada remains a large and strategic market for us.
And we expect to deliver positive sales growth in market share expansion in 2020.
Driven by key commercial programs, such as Napa Auto Chrome.
And Napa Autocare.
We're also competent and the ongoing strength of the North American automotive aftermarket.
We expect improving car park dynamics, such as the increase in the number of vehicles in the aftermarket sweet spot, an aging fleet and reasonable gas prices to further support continued industry growth.
In the U.S., we produced another quarter of positive sales growth with both our commercial and retail customers.
Likewise sales to the commercial segment.
Which is nearly 80% of our total automotive sales both in the U.S. and globally.
Outpaced our retail sales growth in the fourth quarter as well as for the full year.
Sales to our Napa Autocare Center and major account customer segments continue to drive our commercial sales growth.
Napa Autocare as an industry, leading commercial program, representing approximately 18000 independent repair shops in the U.S.
As well as another 2000 in Canada.
The major accounts group consist of national and regional customers, including fleet and government accounts.
National tire centers regional tire and repair chains and are we dealers.
Through our joint business planning, but these major accounts as well as expansive inventory.
Advanced technological offerings and best in class service capabilities.
Nap is well positioned to serve these large and growing customer groups.
And this holds true across all of our automotive operations similar to our strategy in North America, we serve the European and Australasia and commercial markets would affect the banner programs for the independent installer base and comprehensive products and services required by major account customers.
Globally, our capabilities and selling to these customers segments distinguish our automotive businesses from our competition and provide us with additional growth opportunities in years ahead.
And our retail segment, we continue to benefit from initiatives such as Napa rewards program now 12 million strong and growing every month.
And our retail impact store project.
Which we're rolling out across our independently owned store base.
Today, our company owned stores and approximately 200 or independent stores have been updated for this initiative and we have plans for another 300 plus remain remodeled stores in 2020.
In addition, our retail sales reflect the favorable impact of our promotional activity in the quarter.
Which offset some of the early headwinds we began to see in December related to the mild winter weather.
In Europe, we were pleased to experience improving market trends and report our second consecutive quarter of sequential progress in our copper and our comp sales performance.
Overall, our sales comps were flat in the fourth quarter, which has significantly improved from the mid to high single digit declines in Q2 and Q3.
While economic growth in UK was relatively unchanged with the previous quarter.
We were encouraged by stabilizing industry activity associated with higher competent in a Brexit agreement.
As a result comp sales were much improved from the third quarter.
In addition, our battery sales in UK outperformed in the fourth quarter.
And we continued to gain traction what the rollout of the Napa brand and categories such as battery.
Rotating electrical shocks and timing belt.
We anticipate continued growth the private label in this region will enhance our brand positioning and sales penetration with all of our customers.
In France comp sales growth was basically flat what the prior year and inline with the previous quarter, which had shown considerable improvement from the second quarter.
The acquisition of the Todd Group effective 10, 120, 19 also positively contributed to our total growth in the fourth quarter.
As a reminder, Todd as expected at 85 million, an annual revenues and positions AG as the market leader in the heavy duty segment across the French market.
Rounding out our European operations, we reported positive sales comps in Germany.
And our June acquisition of parts points in the Netherlands performed a plan.
We enter 20 820 excited for additional growth opportunities in both Germany, and the Benelux region of Europe.
Looking forward, we expect improving conditions for topline growth in Europe to positively impact our comp sales as well as leveraging our expense base.
And as discussed throughout 2019, our team continues to execute on a variety of initiatives.
To generate additional expense savings.
With these things in mind, we expect to improve Europe's profitability and operating margin in 2020 and beyond.
In Australia, New Zealand, we posted another quarter of mid single digit comp growth with solid operating profit and we had pointed out that our performance in this region was fairly consistent throughout 2019.
Our finished stood a year with especially encouraging given the trend of more challenging economic conditions over the last half of 2019.
In addition, the people of Australia have experienced one of the most devastating and widespread bushfires on record across the region.
We are proud of our team for their continued focus on safety and excellent customer service. Despite these incredibly difficult circumstances.
In response to this crisis. The company was pleased to contribute to the Australian Red Cross, which has been instrumental in serving in protecting the many individuals and families and the communities we serve.
So that's a recap of the global automotive group and our fourth quarter performance.
With these results and the many growth prospects, we see for this segment across our operations.
We are well positioned to produce additional sales growth and operating improvement in 2020.
Turning now to our global industrial parts group, which represented 31% of our total revenues fourth quarter sales were 1.5 billion.
Excluding the is sales were up approximately 7%.
With the benefit of and then Cowen Australasia and other industrial acquisitions, partially offset by a 1.2% comp sales decrease at motion.
And then co which we acquired in July operated well and inline with our expectations for the quarter as well as the first six months.
The growing pressure on our North American sales reflects the slowing trend in the industrial economy that persisted throughout the quarter and the second half of the year.
For perspective, three of our 14 product categories posted positive year over year sales in the fourth quarter.
This was down for made a 14 in the third quarter, while sales by industry sector held steady with Q3 with seven of 12 industry showing improvement.
These results aligned with our downward trend for indicators, such as manufacturer and industrial production and the purchasing managers index. Although the January PMI improved over 50 for the first time in five month.
We remain optimistic that the industrial economy will further strengthen over the course of 2020, primarily in the second half of the year.
In summary, the industrial group produced a solid quarter and performed well all year with operating margin improvement in each quarter. This flat despite slower sales comps in the second half of the year.
We entered 2020 with strategic plans to capitalize on our market presence in both North America, and Australasia and improve our operating results.
Now a few comments to update you on our business products group, which accounted for 9% of total revenues.
For the fourth quarter. This segment reported sales of 428 million down 6.3% with the decrease primarily due to the continued softening demand for traditional office supplies and technology categories competitive dynamics and lower volume with our national accounts group.
On a positive note we delivered another quarter of increase sales for facilities and safety supplies.
And this category has grown to represent 35% of total sales for this business segment.
While the growth in Fps is encouraging and represents an important element of our growth strategies for the business products group.
We will continue to evaluate our future plans for this business as we move forward in 2020.
With that in mind, we recently streamline this business segment with the sale of GCN.
Small non core operation in late 2019, and the sale of our business products operations in Canada on January Onest of this year.
So thats a recap of our consolidated and business segment results for the fourth quarter of 2019.
Before turning it over to Carol I'd like to make a few comments on the potential impact of the Corona virus outbreak in China.
While this situation is very fluid we thought it would be helpful to provide a few more details on our level of exposure to those seem to the impacted region.
From a top line perspective, we're not considering any sales weakness related to the outbreak as we do not have any sales exposure in China.
We do however have exposure to affected areas throughout our supply chain, including direct and indirect support sourcing from China for North American automotive, Australasia and business products with only minimal impact and industrial and European automotive.
And while we are in good standing today, and do not foresee any material product shortages based on the current situation.
We are very aware of the potential for a worsening scenario and we remain in constant contact with our suppliers across the globe to plan for any disruption in supply should the virus continue beyond the near term.
So with that I'll hand, it over to Carol.
Thank you Paul will begin with a review of our key financial information and then we'll provide our full year outlook for 2020.
Total GPC sales at 4.7 billion in the fourth quarter at 2.2% from 2018 or up approximately 7% excluding the impact of divestitures.
These results drove the continued improvement in gross margin up 20 basis points to 33.7% from 33.5% in 2018.
For the full year sales of 19.4 billion increase 3.5% and our gross margin improved 65 basis points to 32.57 from 31.94 in the prior year.
The improvement in gross margin for the fourth quarter and full year reflect a variety of factors, including the benefit of enhanced pricing strategies and favorable product mix as well, so favorable impact from acquisitions and divestitures.
With that continued emphasis on our gross margin initiatives, we expect our 22 on a gross margin rate to remain relatively in line with full year rate for 2019.
This assumes reasonable inflation of now more than 1% to 2% and consistent levels of volume incentive.
In 2019, automotive and business products inflation, primarily reflects the impact of Kara.
And while Terrace Renata factor for industrial this segment experienced approximately 2% price inflation.
Throughout 2019, we were successful in passing on the price increases to our customers to protect our gross margin.
So we continue to believe the currently live inflation had been a net positive two iris.
Specific to terrorists their impact in the fourth quarter, primarily reflects the 25% tariff unless one through three items. Although business products was also impacted by the 15% tariff on less for items that was effective September 1st.
As expected Terasquare approximately two percentage of sales for both U.S. automotive in business products in Q4, and then the one to one and half percent range for the full year.
Looking ahead tariffs will be less significant in 2020 as their effective dates will anniversary throughout the year.
Turning to our selling administrative and other expenses. These expenses were 1.25 billion in the fourth quarter, which was up 3% from last year and 26.6% of sale.
The fourth quarter reflects the lowest percent increase in our SDMA in 2019.
For the year. These expenses were 4.9 billion up 7% from last year and 25.4% of sales.
So while we were encouraged by the progress and better aligning our fourth quarter expenses to sales and gross profit gross Rs DNA continues to be impacted by rising cost in several areas, including payroll Brighton delivery legal and professional IP in cyber security.
In addition, we remain challenged to leverage our expenses on low single digit sales comp.
These cost pressures and the lack of leverage let us to develop our 2019 cost savings plan, which we announced last quarter and Paul covered earlier.
Through these initiatives, which are well underway today, we expect to generate meaningful savings as we move forward in 2020, primarily in the areas of personnel and headcount associated with various organizational changes.
In accordance with the savings plan the company recognized 112 million and restructuring costs in the fourth quarter that are accounted for as a component of operating expenses.
These restructuring costs reflects severance and other employee costs, including a voluntary retirement program as well the facility and closure costs related to the consolidation of certain operations.
The company also recorded 43 million in special termination costs related to their retirement benefits provided to employees that accepted the voluntary retirement package.
These costs are presented as non operating expenses.
The combination of restructuring and special termination costs reflects the onetime expenses that were encouraged to generate annualized savings of $100 million by the end of 2020.
This is a significant return on our investment and we look forward to updating you on the positive impact of these initiatives throughout the year.
Separately in the fourth quarter. The company recorded an 82 million non cash goodwill impairment charge related to our business product script.
Several factors that developed in the quarter, including greater uncertainty associated with the longer term industry trends as well as the competitive environment led us to this decision, which effectively eliminates the goodwill for this business segment.
Rounding out our operating expenses, our depreciation and amortization expense was 73 million in the fourth quarter and 270 million for the full year.
Depreciation was 48 million at 173 million for the quarter end the year, respectively, and we expect this to increase to 180 290 million and 2020.
Which is due to the increasing capital expenditure.
Related to our ongoing growth plans for reinvesting in the company.
Intangible amortization was 25 million for the quarter and 97 million for the full year.
We expect intangible amortization to increased to approximately 100 million and 2020.
So I want to combine basis, we expect depreciation and amortization of approximately 280 to 290 million in 2020.
So now, let's discuss I'll discuss our fourth quarter results by segment.
Our automotive revenue for the fourth quarter was 2.8 billion up 8.7% from the prior year, an operating profit of 201 million was up 1% with an operating margin of 7.2% compared to 7.7% margin for the fourth quarter the prior year.
The 50 basis point decline reflects the headwinds in our European business and to a lesser extent.
For results in Canada.
Our U.S. and Australasian groups had solid operating margins for the quarter.
As we move forward, we expect a steady sales environment and additional cost savings to support our initiatives are improved operating results in 2020.
Industrial sales were 1.5 billion in the quarter, a 6% decrease from Q4 2018 or up approximately 7% excluding yet.
Our operating profit of 127 million was down 3% or at 9% excluding yes.
Operating margin improved to 8.6% from 8.3% last year with the 30 basis point increase due to margin expansion in the core industrial business as well as a favorable impact of the I ask divestiture.
In business product, our revenues were 428 million down 6.3% from the prior year.
They're operating profit was 14 million and the operating margin declined to 3.3%.
These results correlate to the decline in core sales for the quarter and further deleveraging of expenses.
Total company operating profit in the fourth quarter was 342 million and our operating profit margin was 7.3% compared to 7.7% last year.
We had net interest expense of 21 million in the fourth quarter and for 2019 net interest was 91 million, which is down slightly from 2018.
In 2020, we expect net interest of 86 to 88 million, reflecting lower interest rate and lower debt levels.
The corporate expense line was 36 million in the fourth quarter down from 41 million in 2018.
For the year. This was 138 million, which was flat with the prior year.
We expect our corporate expenses to be within 140 to 150 million range for 2020.
Our tax rate for the fourth quarter was 26.5% a slight decrease from the 26.6% rate in the prior year.
Excluding onetime restructuring costs, our adjusted rate of 24.2% was improved from the 26.9% in 2018, due primarily to geographical income mix Steph.
For the year, our effective tax rate was 25.2% or on an adjusted basis, 24.5%.
And we are planning for a full year tax rate of approximately 24% to 26% for 2020.
Our net income in the fourth quarter was 9 million and our EPS was six cents, while our adjusted net income was 197 million or $1.35 per share.
Net income for the full year was 621 million or $34.24 per share and adjusted net income was 833 million or $5.69 per share.
So now, let's turn to the balance sheet rates remain strong and in excellent condition.
We continue to closely managed our accounts receivable our inventory in our accounts payable to improve our working capital position.
We remain pleased with the quality of our receivables and the progress our team is making to enhance our supply chain, which has positively impacted our inventory investment and our gross margin trends.
At December 31, our APC to inventory ratio is 107% and our total working capital represents just 8% of revenues.
Our total data 3.4 billion at December 31st is unchanged from September Thirtyth and up from the 3.1 billion in 2018.
At December 31st our average interest rate on all our outstanding debt is 2.2%, which has improved from the 2.7% at December 30, Onest last year.
With a debt to EBITDA ratio of 2.34 times, we remain comfortable with our current that structure and we have a strong balance sheet and the financial capacity to support our future growth initiatives and our ongoing priorities for effective capital allocation.
In 2019, we generated another year of solid cash flows with approximately 900 million and cash from operations.
We expect another solid year end 2020, and we're currently projecting 1.0 to 1.1 billion in cash from operations with free cash flow after the dividend in the 300 to 350 million range.
Strong cash flows continue to support our ongoing priorities for the east of our cash, which we believe serves to maximize shareholder value.
Our key priorities for cash to remain reinvestment into the businesses.
Our topic acquisitions dividend and share repurchases.
We invested 298 million and capital expenditures in 2019, which was up from 232 million in 2018.
This increase reflects our growing operations and the incremental spend in areas such as technology and other productivity enhancing investments in our facilities.
For 2020, we have plans for continued investment in our businesses and we expect total capital expenditures to be in the range of 275 to 325 million for the year.
Acquisitions remain an important component of our growth strategy and in 2019, we used approximately 700 million and cash partially funded by the proceeds from divestitures to acquire new businesses and expand our global footprint.
In 2020, we expect to make additional strategic bolt on acquisitions in the automotive and industrial segment.
Although these future acquisitions have not been considered in our guidance for the year.
Turning to the dividend earlier this week, our board approved a three dollar and 16 cents per share annual dividend for 2020, which marks our 64th consecutive annual increase and the dividend paid to our shareholders.
This represents a 4% increase from the three dollar and five cents per share paid in 2019, and it's approximately 56% of our 2019 adjusted earnings per share, which is in line with our targeted payout ratio.
Finally, as part of our share repurchase program, we purchased approximately 800000 shares of our common stock in 2019.
And today, we have 15.6 million shares authorized for repurchase.
We expect to be active in the program again in 2020 and over the long term.
We continue to believe that our stock has an attractive investment and combined with the dividends serves to maximize the return to our shareholders.
So now let's discuss our outlook for 2020.
And arriving at our 2020 full year guidance, we considered our performance in 2019 as well as the recent trends and our current growth plans and strategic initiatives.
In addition, we took into account the current market conditions, and what we anticipate for the foreseeable future and each of our business segments and geographies that we operate.
With these factors in mind, we expect total sales for 2020 to be in the range to have flat to up 1% or plus three to plus 4%, excluding the impact of the Eas and SPR divestitures.
As mentioned earlier this guidance excludes the benefit of any unannounced future acquisitions.
Five business, we are guiding two plus Florida, plus 5% total sales growth for the automotive segment, which includes plus 200, plus 3% comp sales growth.
A sales decrease of minus six to minus 7% for the industrial segment or plus two to plus 3% excluding the impact of yes.
This reflects a decrease in comp sales of approximately 1.5% to 2%.
For the business product segment down four to down 5% total sales decline or down one to down 2% excluding divestitures.
On the earnings side, we currently expect earnings per share to be in the range of $5. An 80 to five dollar 90 cents. This.
This represents a 2% to 4% increase over our adjusted earnings per share in 2019, or a 5% to 7% increase excluding the earnings related to the divestiture of the IRS.
With this guidance, we move forward into 2020 confident that our management teams have this strategic plans and initiatives in place to meet or exceed these targeted results.
We're excited by the cost savings potential we've identified and encouraged that our transformation office is also focused on identifying additional opportunities for us.
In addition, we believe that the underlying fundamentals of our broad and growing business platform will continue to provide us with sustained long term growth opportunities.
So that's our financial report for the fourth quarter on full year 2019, as well as our outlook for 2020, we were pleased to finish the year with solid results and we look forward to reporting more progress in the coming quarters I'll now turn it back over to Paul.
Thank you Carol we're pleased to perform at the high end of our expectations in the fourth quarter and finished the year with solid results.
Allow me to recap a few highlights.
We achieved another quarter of positive total sales growth driven by our 3% plus comp sales growth in our us automotive business.
Which represents our best comp in five years. So congratulations go out to our U.S. Napa team.
We further improved our gross margin by 20 basis points in the quarter and by more than 60 basis points for the full year, our fourth consecutive year of improved gross margins.
We experienced improving market trends in Europe.
And reported significantly improved sales comps relative to the second and third quarters.
Our industrial business continued to operate well generating a 30 basis point improvement in operating margins.
We streamlined our operations with the successful divestiture of several non core businesses.
We took action on our initiatives to achieve 100 million an annualized cost savings by the end of 2020.
And effective this week, our board of directors approved our 64th consecutive increase in the dividend up 4% from 2019.
So as you can see our team has been busy executing on our growth strategy as well as several key initiatives to improve our operating results.
Combined.
These efforts have served to further optimize our portfolio and we expect to continue our strategic transformation in 2020.
GPC enters a new year with strategic plans and initiatives to drive sales and profitability working capital improvement and significant value for all of our stakeholders.
We look forward to updating you on our progress towards these objectives as we move through the year.
So thank you for listening and with that we'll turn it back to the operator, and Carol and I'll take your questions.
Thank you at this time, we will be conducting a question and answer session.
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Our first question comes from the line of Christopher Horvers of JP Morgan. Please proceed with your questions.
Thanks, Good morning, everybody.
Good morning, Chris.
So I wouldn't start start with the comp acceleration and U.S. Snapple, which is impressive in light of what we've seen from your peers with.
Generally seem deceleration can you can you talk about where you saw that maybe break that down between DIY why and do it for me you didn't mention.
Promotional effectiveness in December around the whether that would seem to me like that's more of a de iwai.
Versus commercial benefit, but sure wanting to get your thoughts there and any comment in terms of was there any incremental inflation.
Benefit the clubs in the fourth quarter versus the third quarter.
Well, okay, Chris Thanks for the thanks for the question I'll I'll do my best to cover all those points and maybe have.
Carol weigh in on a bit of inflation discussion.
You know you mentioned commercial versus retail our our commercial business was solid.
Our two big programs major accounts auto care both were in line.
With our overall commercial sales in the quarter.
Which was up significantly over over 2018. So we're pleased im pleased with our commercial business and our retail business was was solid as well.
You mentioned in the from the promotional activities.
Chris So we had set out really to focus on all three of our big sales channels retail commercial as well as online.
And I think that some of the initiatives that we put into play maybe offset.
The impact of some of the mild temps.
We saw we saw a hit the business in December October November you know is still.
The weather was still fairly favorable December and January obviously, you have been a good bit warmer they're taking a bit of a toll on some of our more seasonal categories, but our hard parts.
Business remains solid and we're pleased with.
Pleased with the performance of our us automotive business in the quarter.
And just a comment on the tariff impact for our automotive business in the quarter. It was as expected about 2% related to tariff and so the second half being at 2% first half at 1% gave us the blended 1.5% for 29 team and then just as a reminder, as we go into 2020 will.
Anniversary some of that so we're looking for maybe a first half of 1% and a blended half a point for the full year and that excludes any further inflation.
Got it and so I'm not sure if you'd maybe as you think about relative to the third quarter here. The exit you saw acceleration and clearly in full sides of the business really impressive but did you see more anti why or did you see more on commercial and any any insights there.
Certainly I would say our commercial.
Outperformed our retail Chris even though both were.
We are solid and we continue to grow up rollout our impacts store initiative to now we're now working closely with our independent owners.
But commercial both Autocare and major accounts up performed performed well.
You haven't asked about Regionality, Chris, but I'll touch on it as I'm sure.
I'm sure some will ask the.
We saw a really strong growth up in the in the north certainly in the central part of the United States Midwest.
Mylan team had a at a really solid quarter.
Where we saw some of the softness was our west as well as in the northeast part of the us.
Got it and then as you think about.
2020, you gave guidance for the overall automotive division how are you thinking about.
The U.S. Napa business and you know any comment on should the how how the weather has impacted your business quarter to date and how it could how that could sort of way on these year overall.
Yes, well.
So Chris had been as it relates to the wetter weather just of.
Make a comment that we've got a fairly diversified business model and really if you start to break our business apart.
Only about 30% of our total revenues would really be susceptible to us weather patterns.
You know the industrial business of business products Group Europe, Australia.
Look we track, whether we track whether around the world I'm looking at floods in the UK and.
Mild winter in Europe record heat in Australia, So we look at whether around the world and honestly.
I would tend not to dwell on it that much anymore. Since there's not a heck of a lot. We can do about it we're six weeks into the new year.
Chris we'll see some ebbs and flows throughout the year, but I would tell you as we said right now we're confident in our full year guidance for automotive.
And Chris we are implying a comp increase for are you at business in 2020 of around 2% to 3%, which is very consistent with what we saw for 2019 and that's what we've modeled into our guidance.
Gotcha and one last one I'm not sure. If you have this but Harold you can you help us out with sort of the there's a lot going on with acquisitions and divestitures sizable ones.
Can you just help us as we think about 2020 versus what you just reported for 2019, what's the net impact at the operating profit and operating.
Margin line from the mixture of everything that's going on I'm not sure. If we had that but clearly thank you got some rate.
Benefit, but maybe some profit.
All or loss, so help us reconcile that thanks, so much.
Yes that for 2019 on that the core business. If you will with without the impact of the acquisitions and divestitures was something around 20 cents is what's factored in there.
20 cents headwind.
You're talking about 2019 or 2020.
2020 versus 29 team well I'm I'm, sorry, I was for 2020, Minot and that's Oh I'm sorry for that but for 2020, we have implied we will have operating margin improvement.
In our automotive and industrial businesses, and we have implied a 20 basis point improvement and our operating margin largely relates to the cost reductions that we talked about and the work that the transformation office is doing and that would be what would be in our numbers for 2020 and it would obviously be greater that then that going into 2021.
So that excludes all the impact from acquisitions and divestitures.
Got it thanks, so much best of luck. Thanks, Thanks, Chris.
Our next question comes from the line of live Suzuki of Bank of America. Please proceed with your questions.
Great. Thank you I'm first I just wanted to ask about capital allocation priorities in 2020, I know you laid out.
Four buckets, there, but it seems like you're you're kind of taken down the debt levels, a little bit despite very low interest rate. So I was curious if a deal if I if a large acquisition opportunity came up that would be in the auto or the industrial business, where you might have to lever up a little bit to do it do you have a threshold at which you would aim to.
So keep that leverage.
Yeah. That's a great question look you know we have certainly taken our leverage up and we're definitely comfortable and the two and a half to three times and definitely for the right acquisition opportunity.
That is something that when we think about a larger more strategic acquisition opportunity. You know those are things that you can always control the timing and there's nothing in the horizon right. Now, we'll we'll continue with our bolt ons, which are probably in the 1% to 2% range. As we look ahead, but we think the leverage that.
We have right now comfortable with that we know we have flexibility as we look ahead and we would again just take into account what we already have coming into our numbers for 2020, we have a carryover impact to this pretty nice on acquisitions, so probably more of just the bolt ons for 2020.
Great. Thank you and I'll just tack on one more if I. If you wouldn't mind did you guys I am I may have missed this and did you talk about transaction growth versus average ticket in the U.S. auto business and how that's trending versus the last couple of quarters No lives we.
Did not cover that but it's a similar trend as we've seen.
Over the last few quarters, which is nice growth.
In Q4.
In our in our invoice us in the size of our invoices. So nice mid single digit growth with a slight decrease in the number of invoices per store per day.
Great. Thank you.
You're welcome.
Our next questions come from the line of Matt Mcclintock Raymond James. Please proceed with your questions.
Yes, good morning, everyone.
Right.
I was wondering you brought up the impact project.
And you have now done that in 200 independence I was wondering if you give us a little bit of color or update us on what you saw in those independents in terms of lift et cetera. In 2019, and then how quickly can you accelerate that the to the adoption of new independents should you should you decide that this is were from work continued.
Efforts. Thanks.
Great question, Matt. We this has been a multiyear project for us.
We're at.
Between the last couple of years, we've done over a couple of hundred of our independent stores and its a.
The comprehensive upgrade it's everything from extended store hours, improving the retail storefront changing out some of the product assortments.
Probably one of the most important aspects of the program as adding.
Business development managers in the in the in the stores as well.
So we're expecting to ramp this project up in 2020 and actually looking for 300 plus stores in 2020 to sit on the independent side, we've we've fully completed and rolled out our company owned store group.
And we are seeing some significant increases.
Over our over our typical run rate when we when we do the full impact program.
Okay. Thanks for that color and then if I could have one more just on proto virus understand that for the industrial business I'm, probably limited impact on your supply chain, but I suspect there is probably potential meaningful impact on your customer supply chains and not could lead to less activity. Just wondering I noticed the tough question I asked but.
You are probably the better position to give us color or concept helps us to help us conceptualize.
How the impact on your customers supply chains could actually flow through to your own topline any color. There at all with would be helpful from a derivative standpoint, or a secondary standpoint. Thanks, yes.
I'd look at it is.
As you know and it is a tough question because it's an incredibly fluid situation. We've been on the phone daily with all of our business unit heads talking about not only our own supply chain, which I covered in my prepared comments, but also some.
Some of our good customers as well.
I would tell you it's early we have not.
Felt any.
Downward pressure on the on our numbers from from our customers at this point, but I would tell you that we're staying incredibly close to it and we'll continue to monitor the situation.
Thanks for that color I know, what's hard I appreciate it yes, that's all right. Thank you.
Our next questions come from a line of Daniel Ambrose Stephens Inc. Please proceed with your question.
Hi, Good morning, guys. Thanks for taking my questions.
Morning.
Well to hear an update on the European market. I think you noted that growth returned a relatively flat year over year pretty nice sequential improvement can you talk about what the primary drivers of that were maybe industry very company specific kind of how you're thinking about that growth as we had 2020.
Yes, Thanks Daniel were.
We're quite pleased with the with the progress we've made with our.
Our European business, we had no doubt a tough Q2 and Q3 in Europe, what's interesting if you as you dive into those numbers.
There there are different markets. So Q2, our French team had a challenging quarter Q3, our UK team had a challenging quarter.
Both rebounded nicely.
In Q4 to get us to a flat overall comp Germany on the other hand.
Showed growth in Q4, which certainly we were we were pleased to see I would tell you that.
From our perspective, you know our team in 2018, and then the first half a 29 team. They were very focused on integrating this business and doing all the things necessary.
To bring a privately held European business under the umbrella of a us publicly traded company.
I would tell you that that focus now has shifted in the second half a 19 and as we go into 2020 more on.
A growing this business taking market share and doing all the things that does this business has done for the past 30 years. So so despite some.
Remaining.
Complicated economic issues and some of those markets we are.
Certainly more bullish going into 2020, just because our team is now focused on on all the right things and focused on grabbing market share and growing our business.
Got it and as a follow up on the it sounds like you know looking for more growth over there that should I would think we the margin leverage given the weaker sales was de leverage last year, but Carol I think your answer just said most of the auto expansion should come from cost cutting so I don't know reconciling be maybe those two statements and what kind of impact should we expect Europe to have.
On the automotive operating margin in 2020.
Yes, so for our automotive business and as Paul mentioned their comps were down something around 3% for the full year and in in the fourth quarter about 40 Bips of the 50 bed decline in our automotive margin was Europe and then the other smaller impact was data that slowdown in Cana.
Thank you for when you look at the full year 'em, we would say that that all of the decrease in the automotive margin was Europe. So stronger margin, obviously in north in our U.S. business and Australasia business. So when we look ahead and remember that team started on their cost cutting in Q2 and they have been.
Working very hard and we actually saw some progress on in the second half of the year and we're certainly seeing further improvement that'll come in 2020, we're modeling a comp offline to up 2% for Europe in 2020, and with all the cost reductions that they've done in the further changes they made at the end of the year.
That gives them a flattish margin on in 2020 and certainly as we look ahead, we would see that to be improved in 2021 and beyond.
Got it and then my last follow up Carol just switching to the industrial side I think you said the outlook calls for two or 3% growth, which include slightly positive comps one did I hear that correctly and then to what do you think the cadence of the growth should look like given you noted the recent inflection higher and Pmires, some leading indicators. Thanks.
Yes, so the 2% to 3% for the industrial outlet for 2020, and I would tell you.
You have to remember to take into account that excludes the eas amount. So the 2% to 3% implies something of a one and a half to down 2% comp.
And I would tell you that that is primarily our motion North American business I'm, probably more so in the first half a little weaker hopefully a little bit better in the second half our Australasian business in Enco. They have comps of around up 2% in 2020. So we have implied something of a one.
And I have to down to for 2020, having said that again with the cost reductions and the worried that the transformation team is doing and the work that that business has done all in 2019. They will have some operating margin improvement in 2020, despite having comps down 1.5% to 2%. So the teams done a great job in that area.
As we look ahead.
Got it that's what.
Our next question comes from the line of Bret Jordan of Jefferies. Please proceed with your questions Hey, Good morning, guys from Brett.
Carol I might've missed us, but did you talk about how you've done us on the payable side on the AG business.
We have not and as a great question, Brad we while you didnt necessarily see the impact directly in our Q4 I'm working capital I would tell you what the introduction of the private label and some of the work that our global procurement teams have done on day, we're able to achieve about 50 million in working capital.
I'll improvements in 2019, and then we look ahead in 2020, we think we'll have another 50 million and those are even greater than just Europe, because we're getting some go full savings global working capital savings as well and then on the other side, we're definitely on track and we will have hard.
25 million a procurement gross margin synergies by the end of 2020, and we were right on track with that as well and that does not take into account. The implied income statement benefit on these payable terms. So weve imply that in our 2020 working capital guidance to see that 100 million plus kind.
Going into 2020.
Okay, Great and then I guess when you look at Europe, what is the private label mix over there and I think Paul called out some real strengthen the UK battery business in the fourth quarter. It I think they have had a mild winter are you guys doing something differently there on the promotional side or market share shifts that you're saying.
Well you to your first question Brad the you know the private label.
Market in Europe is is minimal and AG our business there they had a number of different private labels in different product categories, but it was certainly not an impactful part of their overall product mix.
We have launched the Napa brand now and in a in a few categories in the UK. We're in the process of rolling that into Germany, I mean into France and ultimately.
Into the Netherlands, we're quite pleased with the acceptance we're seeing from our customers and you know we have a.
We have a separate battery business in the UK breadth that we acquired.
12 to 18 months ago called platinum.
And it is a strong player in the UK and the battery in the battery business. So it's it's a part of a agee, but that would account for some of the strength were CNN and again they have gotten behind the Napa.
The Napa logo and the Napa brand and and are doing quite well. So we're pleased and our goal will be to roll that Napa brand across Europe.
Okay. So the UK strength is more your strategy in the UK not the category in the UK correct that that would be accurate.
Thank you.
Our next question comes from the line of Seth Basham of Wedbush Securities. Please proceed with your questions.
Thanks, a lot and good morning wanting static.
A question just reverting back to the U.S. Napa business could you give a sense of the cadence of comps through the quarter, how you're thinking about the cadence of comps through 2020 that would be helpful.
Yes, the cadence.
For the for the quarter.
Seth if I look at.
If I look at GPC in and in total total automotive, we're pretty steady throughout the quarter with actually November and December.
Slightly stronger than than October automotive trended positive U.S. automotive trended positive.
Really every month with a with a with a solid December.
Probably unlike some of the other reports of we've heard but we did fine in December and again I think part of that goes back to some of the initiatives that that our team launched.
In the in that in the quarter I mean in in the month than in the quarter as I look across.
2020 hard to say SAP, we again I mentioned earlier, we're only six weeks ended the year.
We're going to see ebbs and flows as we go.
But.
One thing we are encouraged is we're seeing some really cold weather hit the Midwest This week and looks like some big snow up in the northeast so that will.
That will blow out a lot of the inventory that's a that's sitting in our customers shelves and.
And hopefully propel us into into a better spring.
Got it. Thank you and then as a follow up question you guys have been doing a great job on gross margins with improvement in the past four years, you talk to a flattish gross margins in 2020 can you just help us understand why we're likely to see a slowdown in that progress.
Yeah, you know I would say that our team has done a great job, especially in this tariff environment and really pleased to see yet on that cross the automotive and industrial businesses lot of our pricing strategies and a lot of our supply chain initiatives we're doing.
We believe there still is some opportunities for that to increase were just sort of modeling a flattish and maybe a bit of improvement now remember some of the improvement.
This year is related to the net improvement from acquisitions and also honestly acquisitions and divestitures. So some of it is coming from that which we would anniversary that next year.
Understood. Thank you very much and good luck. Thanks. Thanks.
Our next questions come from the line of Scot Ciccarelli of RBC capital markets. Please proceed with your questions.
Hey, guys Scot Ciccarelli. So quick question on kind of the 2020 guidance I guess I'm trying to understand your expectations for let's call. It core margins in auto and industrial versus what's the impact from cost reduction actions like if you're to kind of take a step back how would you expect kind of core auto and industrial to have.
Flat core margins and the 20 basis point lift for the full year comes from layering in the those costs efforts or are you expecting some deterioration because at the low topline growth, but it's more than made up for further cost reductions I think that will help everyone understand kind of the cadence for both 2020 and then how these trends may roll through into.
2021 thanks.
Yes, so as we mentioned on when you look at our automotive and industrial business, we are implying an operating margin improvement there.
That is coming from.
The the majority of that is coming from the improvements in their cost saving so you would say without the cost savings. It would have been now are like flat I would tell you. What we're really pleased to see is especially like in the automotive business. For example, with comps of 2% to 3%, we're able to leverage that improve operating margins for the first.
His time and a couple of years.
So again this this cost reduction in the transformation that we're talking about is giving us something better than a flattish margin with some of these low comps and remember the industrial business has got a comp of down one and a half down too and yet they will as well have operating margin improvement well you I and this is gets back to the gross.
Good thing you're going to see that more in the ask DNA line and that's why we've kind of implied a flattish gross margin with our improvement coming through rest DNA.
Got it Thats very helpful and so you know as as you kind of think about the amount of cost savings that flow through that you actually capture in 2020, because it's a run rate by the end of 2020 that gets you the 100 million, you're capturing what about half kind of 40 to $40 million to $45 million would be michaela, that's reasonable the $100 million and savings is about.
Got a 2% decrease in our EPS DNA. So we're modeling about half of that in our S. DNA about a 1% decrease and so then again as you look ahead in 2021, we would have the full benefit of that and the other thing I'd mention our transformation office and transformation team, they're hard at work identifying other opportunities that were not.
Stopping with this first list if you will have the 100 million.
They've got a pretty exciting on packet with all of our businesses and a team that's working on a lot of different new initiatives that we have to be able to speak about in the quarters ahead.
Yes, all makes sense. Thanks, a lot guys. Thank you Scott.
Our final question comes from the line of Chris Bottiglieri of Wolfe Research. Please proceed with your questions.
Hi, Thanks for taking the questions.
Just one follow up on Scott's question for that so that 40 to 45 familiar that you're anticipating for 2020.
What is like the cadence so that seems like you took a lot of like knocked out cost in Q4, which I think would be the costs are taken out at this point that.
Do they get a sense of the cadence of how you see the caustic that's plenty.
Throughout the year.
Yeah, I mean, I guess it will be you know that we did you write with annual remember a majority of these first round of the hundred million add a majority of that is headcount because as you know 60, 65% of our US DNA is headcount.
With the payroll we did recognize those costs in Q4, the payroll start to you start to see that in Q1, but you definitely some of the other things will come a little bit later in the year.
So thats why we have some of the initiatives that come maybe in Q2 Q4. So.
It's not exactly divided by four quarters, but again it we've got some facility consolidation amongst branches and operations those would come later in the year.
Got you okay.
And then more of a longer term question.
As you have these discussions with her dependence on making the necessary historical up on investments.
Position their businesses for the future.
Have you been to kind of to rethink your long term store potential.
We still expect the majority of your stores will be independently owned versus company owned or do you foresee the opportunity for some of these conversations to precipitated like higher store ownership of the company.
Yes.
Interesting question, Chris We look we're always evaluating our store models and in store mix today of our.
6000 stores roughly 5000, our independently owned we've had that mix.
For a number of years, we do not see any massive shift here in the in the quarters or even.
Year or two to two to come we've got some great independent owners, who are investing in their business expanding their business, we have new owners coming into our.
Model all the time and so at this rate at this point in time, Chris There is no. There is no strategy to to shift to.
50, 50 mix per se of independent and company stores.
We're pleased with the progress we're pleased with with some of the new talent that we're bringing into our independent store group I would also tell you that it is our intent.
To expand our company store group and to continue to open New company owned stores and if you look at our recent history, Chris. We've we've we've closed a number of underperforming and Nonprofitable stores.
We think a good bit of that heavy lifting while there is always some of that to be done a good bit of that is now behind this and it's our intent to grow our company owned store base here going forward.
Gotcha, that's really helpful. Thanks for the time alright. Thank you.
We have reached the end of the question and answer session I will now turn the call back over to management for any closing remarks.
We'd like to thank you for your participation in today's yearend conference call. We appreciate your support it and investment and genuine parts company and we look forward to reporting out on our Q1 results. Thank you and have a great day.
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