Q1 2020 Earnings Call
[music].
That's a genuine parts company first quarter and 2020 <unk> earnings Conference call today's call is being recorded.
All participants are in listen only mode question answer session will follow the formal presentation. If any what's required Operatorship just turn the conference. Please press star zero on your telephone keypad.
At this time I would like to turn the conference over to Steve Jones Senior Vice President Investor Relations. Please go ahead Sir.
Good morning, and thank you for joining us today for the genuine parts company first quarter 2020 conference call to discuss earnings result in Kobin 19 business update.
I'm here with POLT ought to you, our chairman and Chief Executive Officer, and Carol Yancey, Our executive Vice President and Chief Financial Officer.
Today's conference call and webcast are accompanied by a slide presentation that can be found on the genuine parts company Investor Relations website.
Before we begin this morning, please be advised to this call may include certain non-GAAP financial measures, which maybe referred to during todays discussion of our result 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 Investor section of our website.
Today's call me about forward looking statements regarding the company in this business is.
The company's actual results could differ materially from any forward looking statements due to several important factors described as a company later, that's easy 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 lever to pull for his remarks. Thank.
Thank you said and welcome to our first quarter 2020, <unk> earnings Conference call.
We hope you are staying safe and enjoying good health and these challenging times.
We appreciate you joining us today per our RIDEA this mornings release.
We would like to begin todays call what a few comments regarding the cobot 19 pandemic.
And it's significant impact around the world.
Our house, our Hearts go out to that millions of people affected by Cobot 19.
And we think those health care providers and first responders on the front lines of our fight against outbreak.
Their commitment to the care and protection of our communities is admirable and greatly appreciate it.
We also a data gratitude to our associates across the global GPC family.
Our team members that live a dart GPC values every day and stepped up with powerful displays of commitment to each other our customers and our communities.
Working as a team we rallied to navigate the crisis to ensure our employees stay healthy.
Our operations remain safe.
And our teams are well positioned to serve our customers critical needs.
Each of our three business segments are classified as essential businesses.
And we're proud to be able to take care of our customers. During these unprecedented times.
Like everyone knew protocols at our facilities require us to adjust the way we conduct business.
To highlight a few examples we now make mask sanitizer, another P.P. widely available for our teammates.
Direct movement patterns within buildings.
Mandate social distancing.
And implement temperature checks and many of our operations.
We created flexible operating policies for associates, and our customers implemented remote weren't plans and develop pays the 10 strategies to ensure a safe environment.
Importantly, we stepped up our communication approach with our global employee base.
We distribute daily and weekly updates to provide information a progress report on our collective effort.
Our technology platforms and talented I T team.
Work hard to enable a seamless transition to our new technological realities.
Despite all our new routines are 55000 associates remain positive productive and connected.
We're also exceptionally proud to recognize our colleague to have been so generous to get back to our communities throughout this crisis.
We have continued our support of numerous charitable organizations, including internal relief funds that support fellow GPC teammate the need.
And that many examples where we have donated P. P E and cleaning and safety supplies to hospitals and health care centers.
In addition, our employees volunteered their time to numerous worthy causes.
Giving back has and always will be a core GPC value.
Given the circumstances, we will start by sharing a few first quarter highlights and then we want to turn to won the business environment over the past 90 days into how our teams have responded.
After that I'll provide commentary on each of the business segment.
Before handing the call over to Carroll to detail the financial result.
So total sales for the first quarter were 4.6 billion up 1.1%.
Excluding the impact of divestitures were down approximately 3.7% on a reported basis.
For perspective sales were up over 2% through February despite mild weather and mixed industrial end market trends.
Sales in the first half of March were also strong up approximately 4% compared to the same period the prior year.
As the virus Empaque accelerated we experienced an approximate 16% sales decreased during the second half of March compared to the same period the prior year.
Net income in the first quarter 2020 was 137 million.
Earnings per share were 94 cents.
With adjusted net income is at 133 million.
Or 92 cents per share.
We estimate an approximate 3% negative impact the net sales.
And a 21 cents negative impact to EPS during the first quarter 2020 attributed to cope with 19.
Moving to the business or a block environment and our response.
You might recall from our February earnings call. We highlighted the strong momentum the teams were building with a solid fourth quarter and 2019 performance.
We entered 2020 focused on our strategic growth.
Improving our operating performance and capital allocation initiatives.
2020 was poised to be an exciting year for GPC.
In mid February when we released our 2019 result, we spoke to these plans and initiatives as well as commenting on supply chain operations in China, which at the time was impacted by the outbreak.
As the impact of Cobot 19 was more broadly felt around the globe.
We began to see declines in demand in mid March.
National Lockdowns in France, and New Zealand followed.
And broad shelter in place mandate impact that our operations.
That's a trend continued for the balance of the first quarter and throughout the month of April.
In response to the crisis, we have elevated the cadence in which we are managing the business I.
Hi, I'm proud of the coordinated and the strong leadership demonstrated across the company over the past two month.
Teams have stepped up acted urgently and executed with discipline.
We increased the frequency of our global leadership cadence.
And for him to cross functional Cobot 19 response team.
To accelerate decision making.
Analyze rapidly changing information.
And coordinate sharing best practices across the global teams.
As a result, we took rapid action to address our cost structures, given the new realities of sales volume and business activity.
We developed a disciplined process to identify analyze and prioritize nearly 50 enterprise cost actions.
Select cost savings actions put in place include delayed merit increases headcount reductions.
Voluntary and involuntary leave of absence it.
Hiring freezes executive and office or pay reductions.
Reduce bonuses and commissions.
Government subsidies collections.
Reduction in hours of operations.
Rent relief professional fees and marketing expense reductions.
T any reductions and facility closures to name just a few.
We created detailed scenario models and built a refined financial forecast process to assess weekly for performance and adjust action to business realities.
Our teams continue to evaluate and implement cost savings measures to appropriately respond to the business conditions and are focused on maintaining cost discipline as our markets recover.
We should mention that our global supply chain is operating well, our supply chain, including foreign and domestic manufacturing capacity and logistics.
It is largely per for I mean at levels seen prior to covert 19.
We believe the power of our global operating scale.
Product and geographic diversification of supplier partners and intense teamwork across our business units create an advantage as we work to minimize any potential service disruption for our customers.
We continue to monitor a few geography, then specific product categories, such as pp that are still returning to pre crisis levels, but we're cautiously optimistic about the path to pull recovery.
We would be remiss, if we did not take the opportunity to publicly thank our GPC procurement team and our valued suppliers for their unwavering partnership and support.
Now, let's turn to our view of our business segments, beginning with our global automotive group.
For the first quarter. This group represented 57% of total revenues and had a sales decline of 1% excluding divestitures.
In our North American operations, U.S. automotive sales were down 3.8% in the first quarter.
Comp sales down 5.7%.
Primarily the sales decline reflects the combination of a slow start to 2020 due to the mild winter weather that pressured sales in January and February.
And the impact of covert 19, and the last half of March.
While sales started strong in March.
Up 7% through mid month.
Sales fell by 24% over the final two weeks of the quarter.
These headwinds drove sales declines in both commercial and retail segments of our business.
And while the DIFM segment, which represents 80% of our total U.S. automotive sales outperformed our D. I watch sales for the quarter overall.
This uplift in late March with de Iwai, showing more resilient throughout this crisis.
Under the current business conditions online orders have increased significantly and have been an important factor in driving DIY wide sales.
Our omni channel initiatives, such as buy online pick up in store curbside pickup and expanded ship to home capabilities, including next day delivery to every U.S. market allow our customers a variety of convenient options when making a purchase.
In addition, this environment has prompted us to provide additional services such as same day store deliveries on the deal why side and touch a lets delivery for our commercial customers.
We believe that these services will prove to enhance our customer value proposition in both the near and long term.
Before leaving our U.S. automotive operations, we thought we would share an update on the financial state of our independent owners and our good auto care customers.
As we mentioned in our April six the release, our Napa team along with several of our financial partners are working closely with these independently owned businesses to help them benefit from the financial assistance available to them.
He was involved continued education regarding several programs, including the cares that today. The vast majority of our independent nap owners have applied for PPP assistance with 60% receiving funding and expected decline.
The majority of our owners have also applied for other financial support.
Such as loan payment the pearls and standard SB eight loans for disaster disaster relief.
Importantly, we would emphasize that none of our nap owners that have closed their businesses due to cope with 19.
In addition, among our Napa Autocare center customers, most of which remain open for business.
More than 60% have filed for assistance with over 40% currently funded.
We are confident in the financial stability of these key partners and we'll continue to work with them to ensure they pull through these difficult times.
In Canada, we also experienced mid single digit comp sales declined which were partially offset by acquisitions.
Through February our Canadian business was trending slightly positive although sales began to gradually slow in early March before falling 25% over the last half of the month in accordance with provincial shelter in place orders.
In Europe, our automotive sales were up 14% driven by the incremental benefit from the parts point and Todd acquisitions in 2019.
Sales were offset by a high single digit decline in core sales driven primarily by cobot 19, as well as the impact of foreign currency.
After posting relatively flat comps through February sales in Europe slowed significantly in early March and were especially pressured following the March 17, preemptive governmental locked down in France.
France is our largest market in Europe, representing approximately 39% of total European revenues and we look forward to the easing of these are a strict speeds restrictions later this month.
In light of our earlier expectations for much improved results for Europe and 2020.
The current conditions represent a temporary setback, which our team is addressing via several measures.
Including aggressive cost reductions.
In addition, with a vast network of operations across several key regions, including France, The UK, Germany, Poland, the Netherlands and Belgium.
We continue to view, our expanded footprint and the large and fragmented European marketplace as an important competitive advantage.
We're committed to our growth strategy for these operations and expect this business to emerge from the pandemic well positioned to actively build on its market leading position and the recovery.
Our strongest automotive results were in Australia, New Zealand, where we posted low single digit comp growth and operating margin expansion. Despite a significant negative impact from foreign currency translation.
This region, what the least affected by Cobot 19 in March, Although New Zealand, which represents less than 20% of our Australasian automotive revenues was also wonder a mandatory locked out.
As in the U.S. online sales have been strong through this crisis and a solid driver of retail sales for this region.
We continue to support our customers through buy online pickup in store and deliver from store capabilities utilizing the rep co store fleet of delivery vehicles in all markets.
With the dramatic growth in online demand the timeliness of the spares box acquisition and 29 team has proven especially beneficial.
Spares boxes, Australia's leading online automotive parts and accessories business.
And we have utilized that special specialized expertise.
To enhance our understanding of the digital marketplace and improve our omnichannel capabilities and Australasia and across our global automotive operations. So that's a recap of the global automotive group and our first quarter performance headwinds, we experienced relative to covert 19 had a significant impact on them.
Man late in the quarter.
And despite our confidence in the long term fundamentals of the aftermarket.
We expect the decline in miles driven consumer spending and overall economic activity to continue to pressure this segment.
Over the near term.
Now turning to our global industrial parts group total sales were 1.5 billion up 4.7%, excluding the Eas divestiture.
North American comp sales were down 3.1%, including an approximate 1% decline in sales due to the impact of coven 19.
This was offset by the addition of and then Cowen Australasia as well as other acquisitions, which contributed 7.8% the sales.
And then co was acquired in July of 29 team and performed well in the first quarter. Despite the challenges of the locked down in New Zealand as well as southeast Asia.
Looking further at motion industries, our North American industrial operations, a slowdown in the industrial economy over the last five to six month in 2019 was showing the early signs of recovery in January and February.
Leading indicators such as the purchasing managers index and industrial production pointed to a stabilizing industrial economy.
Till March when Cobot 19 presented a new set of challenges for the industry.
The growing pressure on demand related to customer closures and the broad decline in economic activity over the last two weeks of March.
Led to just two of our 14 product categories posting positive year over year sales gains in the first quarter.
Yes of course includes our safety products category, which has benefited from the heightened demand for PDP and other safety supply throughout the crisis.
By industry sector, all 12 key groups posted year over year sales declined.
Ranging from slight decreases for the food processing, an aggregate and cement sectors.
The double digit declines for equipment, and machinery, iron and steel automotive and oil and gas.
Despite the current sales environment, the motion team operated well and delivered their eighth consecutive quarter of operating margin improvement.
Thus far in the second quarter, the economic pressure of Coven 19 has continued to impact the demand environment.
With that said, we sell to thousands of customers representing a diverse cross section of industry sectors, which should softened the level of sales declines for this business.
Likewise, we continue to expand our automation solutions capabilities and prepare for the surge in demand associated with incremental maintenance and repairs and a recovery.
We are actively tracking the status of our customers factory and see more customers returning to work and opening their plants.
This is a positive development for the industry, which we expect to drive improved demand for our core industrial categories, including power transmission and electrical product hydraulics pneumatic and convenience among others.
Rounding out our business segment update the business products group reported sales of 468 million down, 2.3% or up 1.5%, excluding the impact of its SPR, Canada and GCN divestitures.
The 1.5% sales increase reflects the positive impact.
Of especially strong sales of Jan San and safety supplies, which we began to see in connection with the covert 19 in early March.
This category was up 28% from last year and accounted for 46% of total revenues for this business segment in the first quarter.
Sales in this category of offset the declines in our core business products categories and while we expect these trends to continue as we battled through cobot 19.
We anticipate a more challenging second quarter relative to Q1.
Looking beyond these near term trends, we continue to evaluate our longer term plans for this business.
So with that I'll hand, it over to Carroll to give you a deeper look at our financials for the quarter Carol.
Thank you Paul <unk> GBC sales were 4.6 billion in the first quarter down 3.7% from 2019 are up 1.1%, excluding the impact of divestitures.
For the quarter, we were pleased to report our 10th consecutive increase in our quarterly gross margin with gross margin improving to 32.9%.
31.8% in 2019 or up 108 basis points.
The improvement primarily reflects the favorable impact of divestitures and acquisitions.
Higher gross margin businesses in automotive and industrial.
These items as well as favorable product mix, Jeff were partially offset by a decrease in supplier incentives due to lower purchasing volumes.
The pricing environment stabilize in the first quarter from relatively high levels of inflation in 2019, primarily associated with parents and automotive and business products.
In addition to this like carryover effect of these tariffs in the first quarter additional supplier price changes that are in 2020.
Ben flat and automotive.
0.4% and industrial end, 0.5% in office.
So overall pricing had a slightly favorable impact to sales for the quarter and we expect only minor price inflation through the balance of 2020.
Turning to our selling administrative and other expenses. This line item was 1.23 billion in the first quarter or up 2.4% from last year.
Our up an adjusted 2.7%, excluding the impact of transaction and other costs and this represents 27% of sale on both GAAP and adjusted basis.
These operating costs were up from last year due to several factors, including the loss of life. That's on our expenses related to the lower than expected sales volume.
And the impact of divestitures and acquisitions with higher cost model.
In addition, the effective rising cost in areas, such as bright and delivery insurance IP in cyber security also drove the increase.
With that said, we were pleased to see improving trends in several key areas, such as payroll and legal and professional expenses.
Costs in these categories were down from last year, which primarily reflect the favorable impact of our 100 million dollarss and cost saving initiatives announced last year.
We expect these improving France continues through the balance of the year given the positive a man of these initiatives as well as our new an accelerated cost actions that are taken in association with the covered 19 impact.
Combining the S. DNA line with our other operating a non operating expenses.
Total operating a non operating expenses were 1.32 billion for the first quarter. In 2020. This is an increase of 1.9% from last year or an adjusted increase of 4.6% and represents 29% of sale on both GAAP and adjusted basis.
Our total segment operating profit in the first quarter was 276 million down 14% on a 4% sales decreased.
Or down 10% on a 1% sales increase excluding divestitures.
Our operating profit margin was 6.1% compared to 6.8% last year.
Our tax rate for the first quarter was 23.7%, which is a decrease from the 24.2% in the prior year.
And due primarily to the net effect of shifts in income mix as well as favorable valuation allowances related to the gain on the insurance proceeds for the Fcr fire.
Offset by less favorable stock option activity.
Excluding one time transaction restructuring and other costs and income our adjusted tax rate, which does not benefit from the valuation allowances just discussed was up from last year to 25.8%.
Our net income in the first quarter was 137 million an earnings per share of 94 cents compares to 160 melt and earnings per share of $1.10 last year.
Our adjusted net income of 133 million or 92 cents per stare compares to 87 million or $1.20, 8% for 2019.
Now, let's discuss our first quarter results by segment.
Automotive revenue for the first quarter was 2.6 billion down 1.6% from the prior year are down approximately 1%, excluding autotote, which we divested in March of 2019.
Our operating profit of 142 million was down 21% with operating margin of 5.5% compared to 6.8% reported margin in the first quarter 2019.
The decline in margin primarily reflects the cover 19 headwinds and our U.S. Canadian and European businesses. This was partially offset by the improved operating margin in Australasia, which delivered another solid quarter.
As we move forward, we expect to see additional pressure on sales and profitability in the near term related to covert 19, and the expected decline in miles driven.
Our industrial sales were 1.5 billion in the quarter at 7.7% decrease from Q1 of last year or up approximately 5%, excluding the I asked divestiture.
Operating profit of 114 million was down 6% from a year ago or up 5%, excluding yes, and the operating margin improved to 7.51st that from the 7.4% reported last year with the increase in the margin expansion due to our core North American industrial.
Business and the favorable impact of divestitures.
Our business products, our revenues were 468 million down 2.3% from 2019.
Were up approximately 1.5%, excluding Fcr, Canada NGC at.
Our operating profit of 20.2 million, an operating margin declined slightly to 4.3% from the 4.4% reported for the first quarter last year.
These results correlate to the decline in traditional office segment offset strong sales in the Jan San and safety category.
To complete their review of our segments. We wanted to share our April daily sales results, which reflects the continued impact of coven 19 on the overall economic environment.
Furthermore, our total daily sales were down an estimated 25%, including at proximate declined 30% in the automotive segment.
10% and the industrial segment and 20% in the business product segment.
While we expect these levels of declines and the second quarter and general to represent a low point for demand across our businesses, we cannot reasonably forecasts the full impact of cover 19 in the coming not.
As a result, we're planning accordingly, and as Paul discussed earlier, we will continue to implement substantial cost saving initiatives to sustain our operations during the current business conditions.
In addition, we've modified our near term plans for capital allocation and implemented initiatives to more effectively managed our working capital to further preserve our cash.
So now turning to the balance sheet, our accounts receivable at 2.7 billion is down 1% from the prior year and compares to our 3.7% total sales decrease for the quarter.
We remain pleased with the quality of our receivables and we continue to closely monitor on election trends in light of the current business conditions.
Our inventory at March 31 was 3.7 billion flat from March of last year due to effective inventory management and reduced purchasing volume.
Our accounts payable at 4.1 billion is flat from last year, which correlates to the change in inventory and the lower purchasing volumes for the quarter.
At March 31st our APC to inventory ratio was 110%, which is consistent with last year and improved from 107% at December 31st.
Total debt of 3.6 billion is up 6% from 3.4 billion in 2019, and we're in compliance with our debt covenants as of March 31st.
In addition, we closed the first quarter with 1.1 billion and total available liquidity and we continue to operate with 1.1 billion and available liquidity today.
Additionally, we are pleased to report that we have amended our debt agreements to expand our debt covenants to a maximum debt to EBITDA ratio of 4.0 time and our scenario planning support that continued compliance with our covenants as we move forward through the year and into 2021.
We also continue to work with our banking and other global partners for additional credit capacity and other forms of financing, including the utilization of asset based lending and other measures.
We expect to continue to work further on liquidity often in the quarter ahead, and we're confident that we have ample liquidity to withstand the uncertainty associated with kind of in 19.
In the first quarter, we generated 72 million in cash from operations at 20% increase from 2019.
Our history, a strong cash flows which of course includes the great recession continues to support our priorities for the use of cash, which we believe serves to maximize shareholder value.
In a three year period of 2017 through 2019, we deployed 4.3 billion and capital across four key areas, including the reinvestment in our businesses via capital expenditure M&A growth net of divestitures share repurchases and the dividend.
And while we remain committed to these priorities over the long term we have modify our current thinking in these areas to preserve cash as appropriate through the current business conditions.
For example, we have reduced our forecast for capital expenditures to 150 to 200 million and 2020, which is down from our previously announced plan for 300 million in spend.
In addition, we have temporarily suspended any plans for acquisitions and share repurchases combined we believe these near term changes and capital allocation will serve to enhance the company's cash position as we move through this downturn.
Our current stops to conserve cash through cost savings working capital initiatives and capital allocation reductions gives us confidence to continue to support the dividend, which we have increased for 64 consecutive years.
Our current annual dividend of $3.16 represents a 4% increase from 2019 and is approximately 56% every 2019 adjusted earnings which is within our targeted payout ratio.
Recently, our board of directors approved the quarterly dividend payable July 1st and we remain committed to our dividend policy going forward.
In these difficult times is especially important to thank our colleagues for their tremendous commitment to their job entered GPC, our treasury finance I T and HR teams have all been working tirelessly to help navigate us through these uncertainties presented by covered 19, so we'd like to extend the big Bank.
So all of these teams and we appreciate all their efforts. So that concludes our financial update for the first quarter of 2020, and I will now I'll turn it back over to Paul. Thank you Carol we entered April well underway in or preparedness plans to protect our employees customers and communities. While also continuing to serve our customers.
And creating value for all of our stakeholders through.
Throughout the month, we were focused on the controlled execution of these plans.
I would highlight several key point.
Today, we have been fortunate to have very few known cobot 19 cases, among our 55000 employees a testament to the enhance safety protocols, we have implemented in our distribution centers branches stores and offices.
Our operations are essential to our customers and remain substantially open across business segments and geographies.
Our teams have been diligent and more frequent their communications with employees and our supplier in customer partners.
Our teams have been innovative and implementing new services that have proven valuable and driving sales.
We have effectively realigned our capital allocation priority by reducing our capital expenditures and suspending share repurchases and M&A, while remaining committed to the dividends.
And we have worked with our banks and other financial partners for additional forms of financing and amended debt covenants to provide ample liquidity during the crisis.
Working together as one team we believe the steps were taken to stabilize our business in these unprecedented times will position the company for strong sales and earnings growth as we exit this global pandemic.
We acknowledge the unprecedented near term challenges that we must navigate and corresponding hard work in front of us.
With that said, we remain optimistic about the future.
As we've had significant learnings from the current business conditions and the industry fundamentals across our automotive and industrial operations are strong and supportive of sustained long term growth.
The circumstances of cobot 19 of required us to assess and build on our existing capabilities.
And in addition to our immediate crisis response actions each business team has developed strategic recovery plans.
A detailed strategic investment and productivity priorities that we believe will accelerate our momentum following the crisis.
We have also accelerated the urgency.
And traction of various transformation initiatives that were in process, while identifying others as well.
This has led us to consider actions to further optimize our portfolio such as exiting underperforming operations.
And improve our operational profitability, such as with our cost savings initiatives.
Additionally, we discover new and better ways of serving our customers and managing our business.
Refined approaches to order fulfillment and logistics.
Field and functional staffing models digital sales and marketing programs or just a few examples.
The time to market of these efforts has been dramatically reduced as well.
Change, it's difficult for any organization, but the crisis has shown our teams we can move with discipline and urgency to make a positive difference.
So in closing while we are focused on what we can control. We do believe the long term industry fundamentals remain favorable across our business segment.
Importantly, each of our businesses compete and very large and fragmented markets.
In automotive low fuel prices that dramatic reduction in new vehicle production shifting travel preferences shifting personal versus public transportation behavior.
Potential deferrals of new car purchases and expectations for miles driven to ultimately recover and grow over the long term are all positive tailwinds for the industry.
In industrial our broad and diverse customer base changing philosophies on global manufacturing.
And the growing demand for plant automation solutions, all remain positive long term trends.
Through prior downturns, we have generated significant cash flows despite difficult sales environment, and our end markets and business model have proven resilient.
The strength of our operating model and cash flow profile over the years support our consistent track record of increasing the dividend for 64 consecutive years.
Moving forward, we will remain focused on taking care of our people our customers and our communities.
We will also combined urgent immediate action with activities that will position us for the future.
We're incredibly proud of the hard work of our global teams.
So thank you for lifting and what that will turn it back to the operator, and Carol and I'll be happy to take your questions.
Thank you at this time will be conducting a question and answer session. If you would like to ask your question. Please press star one on your telephone keypad confirmation till indicate your line is in the question to.
Let me first start to fuel at your move your question from the Q.
For participants using speaker equipment, and maybe Mr to pick up your head simple for questions Sarkies one moment, please as we pull for questions.
Our first question comes on line of Mississippi with Bank of America. Please state your question.
Great. Thank you so for for the auto business in the countries, where you operate that have started to see.
Slowdown of new cases of course 19 and has started to open back up maybe a few weeks ahead of where we are in the U.S. has there been significant rebound in auto parts sales or is it pretty gradual.
Lives Great question, we had a.
A couple our conference call with our European leadership team yesterday and.
You know our markets, where we have seen.
Openings I see in Germany, the Netherlands.
Belgium, we are definitely seeing a resurgence in our sales topline those markets.
They fared better than certainly our market in France.
And the UK, France has been in locked down for the longest period of time out of our markets. The UK locked down in late March.
So those two have been dramatically impacted we'll see brands what we hope.
France will begin gradual reopening the may 11th we think UK will probably be later in may but directly to your question lives. We are seeing an uptick a nice uptick in sales.
In both Germany in the Netherlands.
And do you think there can be a shift in consumer behavior and maybe that's already happening in those countries that are recovering where commuting and vacation travel starts.
Shifting more to the automobile as opposed to public transportation or air travel.
Well as I as I mentioned in my prepared remarks, Liz look it's anybody's guess at this point, but.
We would we would certainly expect in the near term.
That we will see folks gravitating to.
More driving more utilization of their automobile versus jumping back on airplanes. So I would think we'll see we'll see that an all our markets Asia Pac Europe as well as a across North America.
Great. Thank you you're welcome thank you Liz.
Our next question comes on line and Jordan with Jefferies. Please state your question.
Hey, good morning, guys.
Hi, good morning, Brett.
Questions around the balance sheet I guess.
Given the Pete inventory of 110, and likely higher leverage ratios just on the near term lower either.
Is that something that you have to be concerned about payables programs.
Being at such high levels, given the higher leverage ratio would those lenders.
Yes, Brad what when we think about our working capital we are still quite comfortable with where we are with our supply chain financing our accounts payable program and all of our programs with our suppliers quite honestly as Paul mentioned, we had just a terrific working relationship with our procurement teams than ours.
Suppliers.
And we're still making further progress on extended terms globally across our businesses even in these times.
And we think about our leverage and metrics that you mentioned, we're comfortable with other levers for pulling so we mentioned some of the things are down and capital allocation bad cap Baxter be at our M&A or share repurchase all levers we can pull quite easily. We also have some other working capital metrics were lucky.
Looking at and making progress on so in the area of inventory management and then keep in just the tide eye on a are so now we're very comfortable with where we are and we expect to hold on to that.
Ratio as we move ahead and still get working capital improvement.
So I guess you mentioned participating maybe some asset based lending is what are your plans around the balance sheet.
As for the liquidity.
Yes, and no great question as we did our modeling and work with our banking and financial partners and did add on.
The increase our covenant through the end of this year and we're quite comfortable that well right remain in compliance with that covenant without these other option again with the capital allocation levers, we pulled and some of our working capital improvement, we believe will be in compliance without doing other.
Asset based lending, but having said that our treasury chain.
We're continuously looking at many different options and whether it's in a our securitization or some real estate structure type transaction.
We're quite honestly, we're also pursuing some international loans that are being made available and some of the geography geographies. We have in Europe. That's attractive financing. So we honestly believe we can be and compliance without doing those things that were being prudent to continue to model and look at what may make sense as we move ahead.
Saying, what will be probably the toughest quarter on from a balance sheet standpoint in Q2.
Okay, Great and then once one macro auto question, you said that none of the Napa U.S. independence at close their doors you see this event sort of driving some contraction untold number of doors, whether it be other independent buying group members, but do you see this sort of being shocking enough that we're going to shrink the total number of stores in the auto parts space.
Well Brett.
It certainly is is possible, we I don't know that the automotive aftermarket is going to be that.
That significantly different from from other small businesses that have been impacted I will tell you that as I mentioned in my prepared remarks are many of our independent owners have already.
Taken part in the PPP and are financially strong as well as many of our Napa Autocare centers.
As well as well have taken advantage. So we think that if anything Brad there perhaps may be some.
Some acquisition opportunities down the road for.
Company like ours with as strong a balance sheet as we as we continue to maintain.
Great. Thank you, yes, thank you Brett.
Our next question comes on line of Scott Group with RBC Capital markets. Please proceed with your question.
Hi, Good morning, essentially just tokens always on for Scott I think you're taking our question. So.
Your comments suggests that kind of trend deteriorated further in April versus March now, it's a limited data set but did the cadence in April space sort of relatively flat in all segments or did improve we get worse from there sort of estimate progressed.
Okay. So I'll take a shot at that what we saw in the in the month of April is.
Sequential improvement throughout the month that has now carried over into may so.
Really what we saw here in the us it as states reopened.
We saw our business ramp back up we expect to see the same.
In Europe as I mentioned earlier as we've already seen in Germany in the Netherlands.
We certainly expect that in Asia Pac as well.
And as you know as France comes back online the UK will we fully expect to see our business ramp back up.
In in Asia Pacific, We New Zealand wasn't a total lockdown mode that country is now.
Reopening and we've seen a resurgence in business both in automotive and industrial.
Got it Thats helpful. Thanks, and then one more for me so the declines in auto.
The cadence it seen your and your own stores and kind of what you're seeing what's your wholesale sales have been how different is that what is there any delta you guys are seeing there and then I know you guys said.
Closures on the independent fraud.
Currently, but how solvent all with the Crane sales volume do you think they can kind of last 20, 30% down in sales.
Yes so.
Let me take the first question for so between our company stores and our independent.
Owned stores the numbers and trends were very similar so not a not a big discrepancy between those two.
Those two.
What I would say Anna and I'll repeat what I said earlier.
Believed the number that I've seen most recently as 60% of our independent owners.
Have successfully applied for PPP funds.
So to this point our independent owners are in good shape.
I believe over 90% have applied and as you know it's the banking system. Some of the applications have moved a bit slower, but we do believe that.
The program that the fed has put out will benefit and as it's designed to should benefit small independent owned businesses like our good Napa independent owned stores as well as our Napa Autocare centers. So we think in the long haul.
Our group will be just fine.
Got it for me. Thank you, yes. Thank you.
Our next question comes on line of David Boudreau.
Research. Please proceed with your question.
Great. Thank you hope everyone. St say, just following up on U.S. auto business and the sequential improvement you mentioned week to week.
How are you thinking about the stimulus checks and the flow to consumers have how big of a factor was that the healthy improvement and can you talk about and regional differences that stood out lately or certain subset of stores that are performing better or worse than the overall automotive average.
Yes, David Thanks for the question and.
Welcome we're happy to have you are on our account.
I'll tackle the second question first in terms of regional.
Differences probably.
No surprise, where we have seen the most of pressure from a regional standpoint is in the northeast.
So our are good owners and company stores and in and around New York Boston have have really been challenged again should not be a surprise the mid Atlantic region of the of the U.S. was pressured as well on the flip side our businesses has maintained relet.
Typically well.
In the Midwest.
As well as the mountain area, which those two regions of the country also had good fourth quarters as well so.
We appreciate the great job our leadership teams are doing in both those markets.
In terms of the stimulus checked we would think that it can only be a positive it's hard to track David exactly.
You know to pinpoint if we've seen a lift a week to week as a result of stimulus checks, but we have to believe that positive I would also mentioned that in and as I did in my prepared remarks.
We have seen a big uptick in our in our online and digital business all across the.
The GPC businesses so.
Again, the stimulus checks can only benefit our business in the long haul.
Got it that's very helpful. Then just following up on the strong online sales you just mentioned to the DIY customers can you elaborate on what you're seeing there maybe give us a sense of magnitude how much that channel it picked up and.
This become a more substantial piece of the business going forward.
Yeah, Great question and.
Look we we've been investing in our online efforts both here in the U.S. as well as Australia, you might you might remember David I mentioned it in my in my prepared remarks, we did an acquisition in Australia last year of the leading online purveyor of auto.
Parts, a company called spares box.
Very timely acquisition for us they brought up.
Tremendous level of expertise and knowledge around all things digital but also a great automotive knowledge as well so our business in Australia.
Is up three X here over the last couple of months our business in the US is up to act now granted it is a fairly small base that we're coming off of but we're thrilled with what we're seeing and we'll continue to invest in our digital efforts.
Across all of our businesses.
Got it thank you very much yes, thanks, David.
Our next question comes on line or Greg Miller with Evercore ISI. Please proceed with your question.
Hi, Thanks said a question for Carol and then Paul.
Carol could you help us understand the.
What you think the variable margin as the business now as we still use something like 25 or 30%.
As things come under pressure and is that still a good number as they come back out.
And then.
Paul I guess really.
Speaking about those trends you talked about.
How much stronger was VI why than do it for me was a possible that it's actually up in April.
And also in industrial if you could could answer what the trends have been there since the second half of March now and so in some may if it's accelerating are still decelerated yep, Okay, let carol tackle the first question, yes, So Greg your.
We're still contract on the 25 at 30% on the variable and that is still correct.
Option and when you mentioned just comment on the industrial as we mentioned what April Sarah sales were for the industrial business.
So we as Paul mentioned, each one of our businesses were better second half of April than they were first half of April and not applies to the industrial business as well so that the number that we gave for April would be motion then and then co together most nbn.
A bit more down than what we gave on the total reported number for April but know that markedly different between the second half of April in first half a April and as Paul mentioned that sort of continues into May we had a good report from our industrial businesses, they've seen plant start to reopening and they've seen this growth.
As real economic reopening across the state that across a lot of these plants and again, we saw that NR late April results for the industrial business.
And Doug.
Greg related to your DIY versus DIFM as as mentioned DIFM for us outpaced.
DIY and the first quarter.
We did see that slip in April as I'm sure.
Most did is as states lock down.
That said I would I would tell you that our DIY business was still slightly down.
And in in April although it did outpace DIFM.
That's great. Thanks, and good luck guys, yes, thanks, Greg.
Our next question comes on line of Chris Horvers with JP Morgan. Please ask your question.
Thanks, Good morning, guys.
Okay.
So a question on the.
One follow up question on Regionality, how did the south perform like Florida taxes, the those areas or less impacted it seems by the virus. So how did that perform in the west Napa and then my follow up is the 100 million dollar cost program, how much of that flowed through in the first quarter and.
In any comments on how that.
From my.
Rollout and benefit the business over the rest of the year and within new cost out program.
Can you put some numbers around that in terms of how substantial that could be.
Okay, I'll I'll tackle the Regionality question, Chris and I'll, let Carol address the.
The cost downs across the southern.
Southern half of the U.S., our business was about in line with our with our overall business.
Certainly better than the than what we experienced in the northeast, but not as.
Not as good as what we saw in parts of the Midwest and the mountain so kind of in the middle of the middle of the pack I think thats.
Personally.
Yes, it is probably fairly unique to our business we have.
We have a large segment of business that's down in the and the islands in the Caribbean those.
Those stores are big volume stores those stores all locked down early.
In the pandemic and that's certainly swung I think a bit of the trend for us and the in the southern part of the U.S., but middle of the pack and then I'll, let I'll, let carol tackle some of the cost reduction question, Yes, Chris Great question, we are on track the 100.
Million dollars of cost savings that was largely related to as we talked about a voluntary retirement plan that was put in place at the end of last year and we actually have tracked that we know that a lot of those actions on and those reductions more coming out after Q1 and so we.
We are on track with a 100 million our cost savings.
The accelerated actions that Paul talked about and that's across all of our global businesses.
It's 50 to 60 actions and we lifted out quite a few of those on for you were not going to get into quantifying what they are but know that that is on top of the hundred million and year, you're talking about some significant numbers as we look I had that will help us as we get into what will be the toughest quarter.
Our one one favorable thing that we saw in we called it out in our prepared remarks further first time and many quarters.
Payroll was actually down in Q1 down slightly excluding the impact of our acquisitions and divestitures that's directly related to the $100 million a cost savings the ERP actions that we tuck and we again, we haven't seen that in some time, we had reductions in legal and professional for again the first time.
In Q1.
The other category big categories for us, such as freight and delivery and rent and facilities and IP and insurance, while those categories were up they were not up as much as they were in the prior year and so again, we had some improving trends and ask DNA, but we had such a significant.
The leverage in the last part of March.
That's why we've taken the steps with the accelerated action.
Thanks understood and then as as a follow up you talked about DIY was still slightly down in the U.S. and April.
And that trends improve throughout the month it seems like the stimulus checks really picked up the DIY side of the business. So de iwai flip to the positive as as we progressed into the into April.
And did you see any improvement on the commercial side.
Over the month as well.
Well as as we said earlier, Chris we saw we saw our business.
Trend up the entire month, so week to week to week and including now into the first week in May we've seen our business.
Improve.
That said, our DIY business I think your specific question did a trend positive.
It did not because we still had had a significant.
Decline in our footsteps into our stores, which I guess should not be surprised given how many.
Cities in states, where in total locked down there weren't a lot of folks.
Shopping unfortunately, hence the nice lift we saw in our in our digital and online business.
Got it thanks, very much and best of luck. Thank you Chris Thank you.
Our next question comes on line of Sir.
Push Securities. Please proceed with your question.
That does your line unit.
Okay, I guess, we lost I guess, we lost Seth.
Our final question comes on line of Daniel Enbrel with Stephens, Inc. Please proceed with your question.
Hey, good morning, guys and thanks for squeezing me in here late.
Good morning.
So apologies if I missed this maybe just to clarify our where to total organic growth shake out soon for Europe I don't see a total number I know you mentioned the geographies, but do you have that I'll hand.
Yes, the they organic growth for Q1 was down high single digit and we had some acquisitions that were in there.
Related to the reported number being up 10% and obviously currency was a big impact in the quarter as well it ended down 3%. So high single digit down comps from March and Daniel We we should mention.
And you all know this but.
Certainly Europe was hit much earlier with the with the pandemic done than certainly North America.
If theres any good news to report as we spoke to our teams yesterday, we do believe.
The worst in Europe is now behind US we have.
We have peaked out and.
Again, we are now making plans to reopen in France, the new UK, we've already reopened.
And are doing well in Germany in the Netherlands. So the good news is the worst is behind US the peak weve crossed the peak and.
And we have better days better days in front of us in Europe.
Yeah, that's great and I hope it played out here too and then just a follow up really helpful color earlier on the independence in the health of those if I recall one of your plan. This year for count drivers was kind of rolling out the remodel program across the independent Jane and the capital for that I think its fronted by the independence. So.
Any update or color you can share on the.
The pace of what was expected that initiative, how the independents, there maybe pushing back on that and you kind of update on how we handle the remodel program, yeah and Daniel its a good question and.
It looked at that.
That initiative is still high on our priorities our priority list I would tell you what we're faced with and what our independent owners are faced with right. Now we have put data essentially on hold there that there are a few projects going here and there, but but the the large scale rollout we have.
Essentially put on hold.
But it's temporary Anna and I am I hope will be that we see that ramp back up in the second half of the year.
Got it thanks, much guys best of luck, Okay. Thanks Daniel.
We do have said, thank a lot Seth basham with Wedbush Securities. Please proceed with your question.
Yes, Hi, this is a nascent suit the non success so apologies for that earlier.
First question.
Regarding your April sales trends you noted that there were down 30% is there and you sort of.
Differences between us and Europe versus.
The rest versus the chain any color there would be appreciated.
Yes, the 30% for the automotive it ranges from a lot of 20% too high a 40%, 20% being Australia Europe being more in the 40%.
On Canada, being a little bit Canada similar to the 30% you at the end around 25% now that's the blended mine so in in all of our geographies as we've mentioned previously if the blended number is.
Is 30% that is down something greater than 30%. The first two weeks and down something less than 30% the second two weeks.
Got it so very helpful. Helpful color and then my second question is just on me.
Auto operating margins can you speak to any sort of year over year differences for three of declines in the U.S. and Europe versus.
I guess the positive change you reported in Australia.
Yeah, So all our Australasian business in Q1 on they actually had favorable comps in the quarter and they had slight margin improvement at about 20 Beth.
We mentioned that was that positive bright spot they operated really well as we mentioned previously North American and our Europe business with the decline in their core sales primarily in the in late March related to cover 19.
About half of the automotive margin decline is Europe and about half is North America auto and that would all be asked DNA leverage and really again related to the hundred 40 million or so of sales decline related to Kevin 19, having said that they held their gross profit dollars.
Dollars were down proportionately, but they held the gross margin and actually had slight improvement. So all a loss of leverage on related to the declines in Europe and North America.
Great appreciate the color and the best of luck going forward. Thank you. Thank you.
Ladies and gentlemen, we have reached the end of our question Mitch decision and I would like to turn the call back over to management for any closing remarks.
We'd like to thank you for your participation in todays earnings call. We appreciate your support of genuine parts company and we look forward to updating you any future. Thank you.
This concludes today's teleconference. You may now disconnect your lines at the time. Thank you for your participation have a wonderful day.
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