Q4 2020 Genuine Parts Co Earnings Call
Yeah.
Good day, ladies and gentlemen, welcome to the genuine parts company fourth quarter and full year, 'twenty and 'twenty earnings conference call and.
At this time all participants are in a listen only mode and question and answer session will follow the formal presentation.
And if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad and.
As a reminder, on this conference is being recorded at.
At this time I'd like to turn the conference over to Sid Jones Senior Vice President Investor Relations. Please go ahead, Sir good morning, and thank you for joining us today for the genuine parts company fourth quarter and full year 2020 conference call with me today are Paul Donahue, Our chairman and Chief Executive Officer, Carol Yancey, our executive Vice.
Residents and Chief Financial Officer and.
And will stengel, our newly appointed President.
As a reminder, today's conference call and webcast include a slide presentation that can be found on the genuine parts company Investor Relations website.
Before we begin this morning. Please be advised that this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our reported as reported under generally accepted accounting principles.
A reconciliation of these measures is provided and the earnings press release issued this morning, which is also posted on the investors section of our website.
Today's call May also involve forward looking statements regarding the company and its businesses the company's actual results could differ materially from any forward looking statements due to several important factors described and the company's latest SEC filings, including this morning's press release the.
The company assumes no obligation to update any forward looking statements made during this call.
Finally, consistent with the prior two quarters, we've accounted for the business products segment S. P. Richards as discontinued operations for all periods presented.
Now I'll turn the call over to Paul for his remarks, Thank you Sid and good morning, everyone and welcome to our fourth quarter and full year 2020 earnings conference call.
We appreciate you joining us today and hope, you're all staying safe and well.
Our fourth quarter results reflect the benefit of our ongoing strategic actions. Despite the continued challenges of COVID-19.
The GPC team was agile and adapting to dynamic conditions and executed on our initiatives to deliver customer value operational efficiencies and strong financial result, we.
We are grateful to our 50000 associates for their unwavering commitment to excellence, while responding to unprecedented business and economic conditions.
Which if continued for nearly 12 months.
Our operational focus is on ensuring a safe work environment supporting our talented work force and further strengthening our strong culture.
In January we are pleased to promote will stengel the president and.
We now welcome well to this quarterly call.
As our Chief transformation Officer since 2019 will helped our business units worked to achieve a variety of strategic initiatives and significant cost savings in 2020.
Wilkes vast skill set and relevant experience and his previous career with HD supply and.
I've added tremendous value to our management team is.
And it's exceptional talent proven leadership and experience make well and excellent choice as our company's next president and we look forward to his future contributions.
You will hear from both will and Carol later in the call and then we'll take your questions.
And now turning to our fourth quarter financial results total sales for the quarter were $4 3 billion down 1% due in part to the continued challenges of COVID-19.
While our automotive sales were strong in Asia Pac the pace of recovery slowed and Europe, and North America relative to the previous quarter.
Industrial sales grew progressively stronger during the final three months of 'twenty and 'twenty and were much improved from the prior two quarters.
We further improved gross margin and in fact, the fourth quarter was our 13th consecutive quarter of gross margin expansion.
In addition, we successfully took action to reduce costs.
Lowering our year over year operating expenses for.
For the quarter, we generated an additional $40 million and permanent cost savings.
And realized another $40 million and temporary savings related to our response to COVID-19.
Our progress in these areas drove a 14% increase and total operating profit and and eight 8% operating margin.
110 basis point improvement and operating margin from the fourth quarter of 2019.
But supported by margin expansion and both the automotive and industrial segments.
Our strong operating performance drove adjusted net income of $221 million and adjusted earnings per share of $1 52 up 20%.
Due to ongoing working capital and debt financing initiatives. We also finished the quarter and year with a strong balance sheet ample liquidity and robust cash flow with $2 billion and cash from operations and 2020.
Turning now to our business segments automotive represented 66% of total sales and the fourth quarter and industrial was 34 per cent.
My region, 73% of revenues were attributable to North America, with 16% and Europe, and 11% and Asia Pac.
Total sales for the global automotive group are two 8 billion, a 1% increase from 2019 with comp sales down 2%.
Segment profit margin was up 130 basis points driven by improvement in each of our automotive operations.
Fourth quarter sales were led by strong growth in Asia Pac with continued retail and commercial sales momentum driving our second consecutive quarter of mid teens sales comps.
The Asia Pac team performed well all year and deserves a special shout out on their exceptional results.
So congratulations and a big thank you to Rob camera and and the entire automotive team down under.
And Europe, and North America, the surge in Covid cases led to more restrictions on mobility and.
And mild weather through most of the quarter pressured sales of seasonal items.
Second Lockdown and November significantly slowed sales activity across Europe.
Although sales gradually improve through December driving flat comps for the quarter.
We would add as well that despite the challenging conditions in Europe overall, our U K operations continued to outperform with solid results for the quarter.
Additionally, the positive impact of our cost savings initiatives more than offset the sales pressure and the European team produced a 100 basis point operating margin improvement.
This caps, a strong recovery and Europe's operating performance over the second half of 2020.
And North America, our U S automotive total sales and comp sales declined approximately 6%.
Despite the sales decrease the U S team generated a 200 basis point improvement and operating profit margin.
And Canada quarterly sales were down slightly comp sales declined 2% and operating margin improved by 40 basis points.
Growth and sales through our retail customers continued to outperform expectations.
While sales to the D. I F M segment remained challenged.
Through the quarter DIY sales were strong driven by COVID-19 related shifts and consumer behavior, and stimulus payments and stronger Napa sales positioning resulting from several key initiatives.
These include our ongoing store refreshes investment and retail specialist.
The benefit of our Napa rewards program with $12 5 million active members.
Targeted promotions and enhanced merchandising initiatives.
In addition, our growing omni channel capabilities, including direct to customer shipping from select suppliers enabled our team to double our online sales volume from pre pandemic levels.
D. I F. M sales were down from 2019, as a slow recovery and miles driven mild temperatures and continued pressure on our large fleet and government customers segment weighed on sales demand.
To address these declines and build positive momentum in 'twenty and 'twenty, one and our team is focused on several initiatives, including <unk>.
<unk> sales force effectiveness by Repurposing, our field resources and doubling the number of professional salespeople, calling directly on our end customers and.
Professional repair garages.
Continued enhancement of our industry, leading commercial programs and promotions for the professional customer, including Napa Auto care and auto program.
Improving our inventory availability utilize and enhanced analytics to ensure more parts for more cars across our store network.
Strength in our supply chain, focusing on our global supplier relationships and.
As well as ensuring we have multiple suppliers by category.
While we are seeing gradual improvement with supply chain service issues. There is more work yet to be done and.
And finally further optimizing our network, including DC consolidations, increasing automation and our facilities and additional daily Shadow.
In 'twenty and 'twenty. One we will also continue to execute on several global initiatives and invest and our omni channel strategy, both beta b and B to C to enhance and build new digital catalog and search capabilities implement strategic pricing initiatives focus on value added services.
And continue our rollout of the Napa brand in Europe and Australasia.
We also have plans to expand our global store footprint with additional bolt on acquisitions, changeovers, and new Greenfield stores to enhance our competitive positioning across our automotive operations.
These initiatives are designed to deliver customer value sell more parts and capture market share.
To that and we are pleased to report a strong start in 2021 with January average daily sales up low double digits and the U S and for our global automotive group.
Backing out the positive impact of FX and acquisition revenues comp sales were up high single digits in January.
And we would add that we continue to see little impact of price inflation and our sales.
And though we expect to see more supplier increases and the coming months and quarters, possibly and the 1% to 3% range for the full year.
So in summary, we believe the improving product availability colder winter weather in North America, and Europe, and the gradual reopening of the economy, our current tailwind for automotive business.
In addition.
Bill industry fundamentals are growing total vehicle fleet.
And increase in vehicles, aged six to 12 years and.
And expectation for the gradual recovery and miles driven.
Give us confidence and our growth expectations for 2021, despite the ongoing uncertainties due to COVID-19.
So now let's discuss the global industrial parts group.
Total sales for this group of one 4 billion down three 3% from last year.
Comp sales were down four 4%.
Significant improvement from the 9% decrease in Q3, and a 17% decrease we saw back in Q2.
The steady recovery and sales over the last half of 'twenty and 'twenty is consistent with the gradual improvement and the industrial economy, which is evident and indicators such as the purchasing manager's index and industrial production.
And he and conditions combined with our ongoing initiatives to drive growth and lower cost resulted in a 70 basis point improvement and segment profit margin and our strongest quarterly return on sales.
Since the fourth quarter of 2007.
Sales in North America, and Australasia showed similar sales trends for the fourth quarter overall, although December was the strongest month and the quarter and North America.
In addition, most key product categories achieved positive sales growth in December with improved month to month sales trends among virtually all the industries we serve.
We expect to build on these favorable trends in 2021.
As we move forward into 'twenty and 'twenty, one, which is motion 75th year and business. The industrial team will continue to execute on strategic initiatives to drive profitable sales growth.
Prove operational productivity and deliver customer value.
These initiatives include building out our omni channel capabilities to drive organic sales optimize the value of the motion website and accelerate E commerce growth.
Growing our services and solutions business to expand our expertise in areas such as repair conveyance and automation.
Ongoing disciplined M&A to further boost our products and service offerings.
While expanding our global footprint and market presence.
Enhancing our global pricing and product category management strategies to ensure sales excellence margin effectiveness and a product offering that evolves the motion brand globally.
And optimizing our global distribution network.
The enhanced automation and facility rationalization to lower cost and.
Proved productivity and deliver excellent customer service.
We are confident that our focus on these key initiatives will optimize our competitive positioning as the industrial markets recover to full capacity.
We are encouraged to see releases of capital project orders that were on hold throughout most of 2020, which is a positive sign for our greater plant activity and the months and quarters ahead.
In addition, we are pleased that our supplier service levels are strong despite extended lead times on select items and.
And our inventories are in good position to meet expected growing demand.
Finally, we currently expect another year of reasonable, 1% to 2% price in place and from our suppliers, which compares to inflation of just under 1% in 2020.
For additional perspective, we experienced positive sales momentum in January with average daily sales up 2% for the month. This was better than the sales trends, we reported and the third and fourth quarter of 2020.
And as a test commenced and a great work done by the entire industrial team.
So despite the ongoing challenges of COVID-19, and its uncertain impact on the global economy and our markets.
We are confident and our plans for the industrial segment and look forward to a strong 2021.
So let me conclude by providing an update on our ESG initiatives.
At GPC, we embrace our responsibility to innovate and ways that also benefit our environment, our associates and the communities and which we operate.
Our ESG practices, including human capital management, and diversity and inclusion are discussed in our 2020 corporate sustainability report.
In addition, our board of directors adopted a formal human rights policy, which communicates the company's commitment to upholding human rights and every location and which we operate as well as our expectation that our suppliers partners and affiliates also respect human rights.
Our company wide commitment to sustainability is integral to our corporate growth strategy.
We invite you to visit our GPC website to view these documents and learn more about our ESG initiatives.
So with that I'll turn it over to will for his remarks well.
Thank you Paul good morning, everyone.
First I want to say that I'm incredibly proud to be a part of genuine parts company.
The company has an impressive history of success and it's an honor to be on the GPC leadership team I'd like to thank Paul and the board for their vote of confidence.
As Paul mentioned I joined the company and late 2019 as Chief transformation Officer.
Previously I held executive leadership positions at HD supply, including time, as president and CEO of HD supply facilities maintenance and various other strategy and operating roles.
My experience and distribution related businesses fits well with Gpc's portfolio.
This model and strategic initiatives were consistent profitable growth operating leverage strong cash conversion and disciplined capital allocation are all key value drivers with the dividend and especially important part of the GPC capital allocation strategy.
I am excited about the future potential of genuine parts company.
Each of our GPC businesses enjoyed leadership positions within attractive fragmented markets with scale and capabilities to win.
We have leading global brands and long standing relationships based on reliable customer service and value added expertise.
And our unique culture that is based on a clear set of core values and purpose serves as an important common foundation.
Strategic actions taken in 2020 accelerated the transformation momentum built over recent years as we work to simplify the business and further define our critical focus areas.
The global teams executed well as we navigated the pandemic and demonstrated an ability to act quickly and deliver results.
Our strategic actions provided clarity for areas, where we want to increase our focus including profitable organic growth.
Driving operating productivity through simplification and integration.
Disciplined and strategic capital deployment.
And investments and talent to develop and build capabilities.
Despite a challenging and unprecedented year, our diverse businesses proved resilient and built solid momentum as we enter 2021.
And my new role I look forward to working with Paul and the global leadership team as we align resources within our focus areas to execute these initiatives and deliver value as a team.
I'm also looking forward to spending time, and our operations and with our customers and suppliers.
In addition, we will continue to further refine and advance our longer term strategic roadmap.
We're excited about the numerous potential opportunities that new technologies and emerging trends could present for GPC.
As we look to the future, we feel well positioned to execute our strategic priorities to the benefit of all our stakeholders and I look forward to working with the leadership team to drive results.
Thank you and I'll now turn it to Carol for her comments.
Thank you well as a reminder, our comments this morning, and primarily focus on adjusted results from continuing operations, which excludes restructuring inventory transaction and other costs and income will begin with a review of our key financial information and then provide our full year outlook for 'twenty and 'twenty one.
Total GPC sales were $4 3 billion and the fourth quarter down <unk> seven per cent from 2019.
Full year sales were $16 5 billion down five 6% or down two 3% excluding divestitures.
Our adjusted gross margin for the quarter was 35%.
40 basis point improve and that compared to 34, 6% and the fourth quarter last year.
Full year adjusted gross margin improved 100 basis points to 34, 5% from 33, 5% and 2019.
Our team is and focus on a number of margin enhancing initiatives and the fourth quarter and full year gains represent the 13th consecutive quarter and the fifth consecutive year and then prove gross margin for the company.
Our steady progress and expanding gross margin and the quarter and the year reflects a variety of factors, including the favorable impact on sales mix shifts to higher gross margin operations positive product mix shift strategic pricing tools and analytics global sourcing advantages and strategic category and managed.
And initiatives.
In addition, our full year gross margin also benefited from acquisitions and divestitures, which impacted our results through the nine months.
We would add these positive factors were partially offset by a decrease and supplier incentives due.
Due to lower purchasing volumes.
And finally, as we assess the pricing environment and the fourth quarter and 2020 overall, there was minimal impact of price inflation and our sales and gross margin.
As Paul mentioned earlier, and we'll see how this plays out in 'twenty and 'twenty, one, but we have not had any impact on oven flights and to this point and the year.
Our adjusted selling and administrative and other expenses were $1 1 billion and the fourth quarter down two 8% from last year and representing $26 six per cent of sales compared to 27, 2% last year.
For the year. These expenses were $4 4 billion down three 9% compared to last year and $26 five per cent of sales compared to 26% and 2019.
The decrease in operating expenses for the fourth quarter and full year reflect net favorable impact of our permanent and COVID-19 related cost actions implemented throughout 2020 as previously discussed.
As mentioned on our third quarter conference call and accordance with our 2019 $100 million cost savings plan and we successfully achieved the 100 million annual target ahead of schedule.
We are pleased to report an incremental $40 million and savings recognized and the fourth quarter and $150 million and permanent expense reductions for 'twenty and 'twenty.
In addition, our team continued to execute on a number of additional savings initiatives in response to the impact of COVID-19 day.
These initiatives contributed temporary cost savings of approximately 40 million and the fourth quarter and 300 million for the full year.
Combined we generated approximately $80 million and total savings during the fourth quarter and approximately $450 million for the full year, driven by a transformative and reductions in payroll and facility costs as well as temporary savings from furloughs and reduced travel and entertainment government subsidies and other and.
<unk> and response to Covid.
We expect our permanent cost savings to carry over into 'twenty and 'twenty, one and will continue to manage our expenses to further improve our cost structure and operating performance.
Our total operating and non operating expenses, where and adjusted $1 2 billion for the fourth quarter down three 4% from last year.
This represents a 28 1% of sales.
Down 80 basis points from 28, 9% and 2019.
For the full year. These expenses were and adjusted $4 7 billion down 3% from the prior year and representing $28 four per cent of sales.
Our total segment profit and the fourth quarter was $374 million.
14% on a 1% sales decrease and our segment profit margin was eight 8% compared to seven 7% last year for a strong increase of 110 basis points.
For the full year segment profit was $1 3 billion up 3% compared to 2019.
And our segment profit margin was eight 2% compared to seven 8% and the prior year.
This represents our strongest full year segment profit margin since 2015.
We had net interest expense of 21 million and the fourth quarter and for 'twenty and 'twenty net interest was $91 million, which is essentially flat from 2019.
And 2021, we expect net interest of $70 million to $72 million, which is down from 2020 due to lower interest rates related to our new debt agreements negotiated and the fourth quarter as well as the expectation for lower debt levels. The corporate expense line was 33 million and the fourth quarter down from 37.
And in 2019 and for the year. These expenses were 150 million.
We currently expect our corporate expense to be on $150 million range again in 'twenty and 'twenty one.
Our adjusted tax rate for the fourth quarter was 25, 1% and increased from 24, 6% and the prior year period.
For the year, our adjusted tax rate was 24, 5% and in line with 2019.
We are planning for our full year tax rate for 'twenty and 'twenty, one and the range of $24 five to $25 five.
Fourth quarter net income from continuing operations was 172 million with earnings per share of $1 18.
Adjusted net income was $221 million or $1 52 per share, which compares to 186 million or $1 27 per share and 2019 or a 20% increase from.
For the full year reported net income was 163 million $4 13 per share and adjusted net income was $765 million or $5.27 per share.
So now, let's discuss our fourth quarter results by segment.
Our automotive revenue for the fourth quarter was $2 8 billion up 1% from the prior year.
Segment profit of 240 million was up 19% with profit margin at eight five per cent compared to a seven 2% margin and the fourth quarter of 2019.
The 130 basis point increase and margin was driven by improved operating results across each of our automotive businesses for the second consecutive quarter.
So and excellent job of operating by our automotive team and we look forward to continued progress in 'twenty and 'twenty one.
Our industrial sales were $1 4 billion and the quarter at three 3% decrease from Q4, and 2019 and significantly improved from the sales declines and the second and third quarter.
Segment profit of 133 million was up 5% from a year ago.
And the profit margin was up 70 basis points to nine 3% compared to eight 6% last year.
The improved margin for industrial reflects gains and both our north American and Australasia and industrial businesses for the second consecutive quarter. So strong operating results for industrial which we expect to continue in 'twenty and 'twenty one.
So now I will turn our comments to the balance sheet.
We continue to closely manage our accounts receivable inventory and accounts payable to improve our working capital position.
And the fourth quarter, we sold 300 million and receivables for a total of 800 million sold in 2020 under and accounts receivable sales agreement.
Our total accounts receivable is down 36% from 2019, and we remain pleased with the quality of our receivables.
Our inventory at December 31, 'twenty, and 'twenty was up 2% from the prior year and accounts payable increased 5%, improving our AP to inventory ratio to 118% in 'twenty and 'twenty from 114% and 2019.
We are pleased with the progress our team is making to strengthen our supply chain and in 'twenty and 'twenty. These key accounts were a source of cash from operations and our total working capital was 7% of revenues.
We repaid $230 million of debt and the fourth quarter and our total debt of $2 7 billion. At December 31, 2020 is down $749 million or 22% from the $3 4 billion and 2019.
During the fourth quarter, we further improved our debt position with new public debt and a new revolving credit agreement that provided for expanded credit capacity and more favorable rate.
We closed the year with $2 9 billion and available liquidity, which is up from $1 3 billion at December 31 2019.
Through our efforts and these and other areas, we generated a robust 2 billion and cash from operations and 2020, which is up from 833.002 million 19.
Our free cash flow was $1 9 billion and increased from 555.002 million 19.
While we selectively scaled back our near term plans for capital deployment and early April of 'twenty and 'twenty chickens are cash through COVID-19, we were very committed to several key priorities for cash, which we believe serves to maximize shareholder value.
Our key priorities include the reinvestment in our businesses via capital expenditures M&A share repurchases and the dividend we have deployed $4 7 billion and capital across these areas over the last four years.
And 2020, we reduced our original $300 million and Capex plan by 50% and invested $154 million and essential capital expenditures, which was down from 278.002 million 19.
For 2021, we expect to resume more normal levels of Reinvestments and our businesses and are planning for total capital expenditures and the range of 275 million to $325 million for the year.
We also pulled back on M&A activity in 'twenty and 'twenty, although strategic acquisitions remain an important component of our long term growth strategy.
And 2020, we used 69 million and cash to acquire several small businesses and in 'twenty and 'twenty. One we expect to make additional strategic bolt on acquisitions and <unk>.
Complement our global automotive and industrial segments.
As a reminder, we have not considered any of these future acquisitions and our 2021 outlook.
The company has paid a cash dividend to shareholders every year since going public and 19 and 28.
Earlier this week, our board approved a $3 26 per share annual dividend for 2021, representing our 65th consecutive annual increase and the dividend.
This represents a 3% increase from the $3 16 per share paid in 2020.
And 2020, we repurchased one 1 million shares of our common stock prior to suspending our share repurchases amid the pandemic.
As of December 31, 2020, we were authorized to repurchase up to $14 5 million additional shares and we expect to make additional opportunistic share repurchases again in 'twenty and 'twenty one.
Turning to our outlook for 2021, we are reinstating our practice of providing full year guidance.
And arriving at our full year 'twenty and 'twenty, one guidance, we considered several factors, including our past performance.
Current growth plans and strategic initiatives recent business trends and the global economic outlook.
In addition, we considered the continued uncertainty of COVID-19, and its potential impact on our results.
With these factors in mind, we expect total sales for 2021 to be and the range of plus four to plus 6%.
These growth rates are staying on a relatively neutral impact from foreign currency translation minimal price inflation and as mentioned before exclude the benefit of any unannounced future acquisitions.
By business, we are guiding to plus four to plus 6% total sales growth for the automotive segment, including plus three to plus 5% comp sales growth.
And a total sales increase of plus three and a plus 5% for the industrial segment, including an increase in comp sales of plus two to plus 4%.
On the earnings side, we currently expect diluted earnings per share to be and the range of $5 and 55 to $5 75.
This represents a 529% increase compared to our adjusted diluted earnings per share and 2020.
And we move forward into 2021 and confident in our strategic plans and initiatives to meet or exceed these targeted results and deliver value.
In addition, we believe that the underlying industry fundamentals for our global automotive and industrial segments are favorable and we will continue to provide us with sustained long term growth opportunities.
So that's our financial update and we look forward to reporting on further improvement and our financial performance throughout 2021. Thank you and I'll now turn it back over to Paul. Thank you Carol looking back on the quarter and the year. We are proud of our team for their continued focus on executing our strategic growth initiatives and cost actions that <unk>.
<unk> team and our automotive and industrial business proved resilient and meeting the challenges for us.
Dented by the COVID-19 pandemic.
We closed the year strong with a strong financial performance and we want to thank each of our GPC team members for their continued support.
Dedication and commitment to serving customers and B and the best.
We entered 2021 is a stronger more agile company with streamlined operations and a more optimized portfolio focused on the global automotive and industrial businesses.
We are well positioned with a stronger balance sheet and strategic plan to capture profitable growth.
Generate strong cash flow and drive shareholder value.
We are off to a solid start to the year with global automotive sales growth and ongoing industrial recovery and operational improvements.
With the continued rollout of COVID-19 vaccines, we look forward to a global recovery from the pandemic and a strengthening economy.
For all these reasons the GPC team is excited about 2021 and.
And we look forward to reporting on our progress as we move through the year.
So thank you for your interest and genuine parts company and with that we'll turn it back to the operator for your questions.
Thank you ladies and gentlemen at this time, we will begin ducking your question and answer session. If you'd like to ask a question you May press star one on your telephone keypad a confirmation total indicate your long is and the question queue you.
You May press star two if he would like to remove your question from the Q4 participants using speaker equipment and may be necessary to pick up your handset before.
For pressing the star key.
Our first question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.
Hey, good morning, guys, born and bred wound growth when you look at the Napa U S trends I guess it wasn't quite clear on the commentary it sounded as if December ended.
Flattish or December ended off and I think could you talk a little bit about regional performance as well as Napa company owned stores versus independents and the fourth quarter.
Yes happy to do so.
And let me start with the company store versus our independence, our our company stores slightly.
<unk> outperformed our independence and the quarter, we've seen that already reversed and the other direction and January that'll that'll flip month to month quarter to quarter. So no no real Big news there regionalisation.
What we saw on the quarter was kind of consistent with what we've been seeing we saw really good performance out west and I'm.
I'm really proud of our Western Division and the job that group is doing our mountain team as they have all year has had a solid.
Solid quarter and the mountain Brett just FYI, they stretch from Colorado, Montana, all the way down to Texas, we saw some softness and the in the southeast we saw a little softness and the and the northeast as well.
And in relation to your question about the.
And the cadence of the quarter and December specifically.
We started out the quarter okay.
Assuming that question was around U S automotive, but yeah, yeah that was.
Yeah.
October started out okay pretty much in line with September we saw softness in December and.
And then we saw softness in December as well I think the first couple of months.
We're probably more related to <unk>.
Little bit warmer weather than especially in November plus we saw a little bit of a COVID-19.
Resurgence in the U S.
December is a bit unique bread and if you remember we had a we had a big December.
A year ago, 2019 were going up against some pretty tough comps so that certainly impacted December as well, but but look here is the good news for us and the Napa team is we had a really strong rebound in January both DIY and D. I F M, which we're really pleased to see the commercial.
Business bouncing back in January and and.
And that's carrying into carrying into February as well.
Okay, great and <unk>.
Question is on the supply chain it sounded as if you were saying maybe there is a couple of categories, where stock levels could be better is there anything to call out there I mean, it sounds like batteries have been a great category. This winter, but maybe some supply constraints. They are I mean are there any stand out.
Categories, we should be looking at well you hit that you hit the first one.
But we have had and we did have a good year and our battery business.
And and I expect with this cold weather, we're going to see even and a greater surge and our battery business.
But supply has been a has been a challenge and I think you've heard that elsewhere pleased to say, we're not seeing that in Europe, we have a.
We have a strong battery business, we actually just launched the Napa battery and across Europe.
And our suppliers, taking good care of us over there and we're seeing we're seeing really good biz.
Business across across Europe, and the battery business, but that would that would be the call out theres. A couple of other suppliers that are impact on us and look these guys are battle and labor shortages due to COVID-19 some.
And some shortages of raw materials, so I understand they've got their challenges and we're hoping to see improvement here as we roll into 'twenty one and.
And I guess, just a quick follow up on Europe comment it sounded as if you had said both the U S and Europe sequentially softened a little bit from the third quarter, but could you talk a little bit how you saw Europe roll through the fourth quarter and maybe their trends into January.
Yeah, So Europe.
They started out really strong as you know they had a great third quarter mid double digit increase breadth and.
And we had a good October they were up high single digits in October we saw a big reversal in November.
And double digit swing from October as Europe locked down.
Covid. So we saw the third wave come through and that just kind of knocked the wind out of our sales December bounce back.
A bit from that softer on November but again good news much like North America, we saw a nice rebound in January and our European team was up strong mid single digits. So we're encouraged and and we got a lot of good things going on.
And with AA G. I would I would really bread call out our U K team.
They had a.
Really strong year despite.
And some pretty severe lockdowns during the course of the year, but again I couldnt be more proud of our UK team.
Great I appreciate it. Thank you you bet. Thanks, Brett.
Our next question comes from the line of Chris <unk> with J P. Morgan. Please proceed with your questions.
Thanks, Good morning, everybody.
A follow up question.
First of all follow up question. So as you talked about the year to day in the U S. You mentioned do it for me the pro business getting better and did that turn positive.
So far in January and February.
Absolutely yeah.
We had a double digit increase and in January and we saw it on both sides both sides of the counter Chris we saw it and DIY as we did most of two.
2020, our DIY business was strong like most and the industry.
But where we where we struggled a bit in 'twenty.
It wasn't our commercial business and our commercial business I think is a bit unique compared to most it's very very heavy.
Commercial fleet government municipalities, but again really pleased to see that business turn positive.
And the month of January and I.
I am hopeful Chris with this.
Some of the weather, we're seeing and the reopening of the economies and the vaccines getting out there that.
And along with a little bit of a lift and miles driven and we'll see we'll see some resurgence and our <unk> business.
Yeah.
And then following on bearing as you think about the fleet business.
How are you thinking about that obviously theres been some strain on.
Apologies and governments and are you seeing any sequential improvement and those businesses, presumably they they remain negative and how are you thinking about the outlook and 21 well.
Well, we do think we will see improvement overall in that fleet business and in 'twenty one in January.
And certainly as a good indicator.
Chris There's look there's a ways to go we are.
By any stretch, we're not out of the woods and in relation to the upheaval caused by by Covid.
But we are seeing green shoots and and we are pleased to see.
Real solid January.
Yes understood.
And then on the and the industrial business. If you were up 2% in January and that's not <unk>.
<unk> driven.
On.
And and you're guiding I think 3% to 5% comps are two 4% comps in that business and in 2021, and you did a down eight.
And.
In 2020, so is there something that you're seeing there that.
Provides caution why you wouldn't expect higher same store sales.
That segment or is that you just try and be conservative given the unknown of Covid.
Well look Chris there is a little.
Certainly a bit of conservatism built into those numbers, we feel really good about the prospects for a strong recovery and our industrial business and 21, we've seen now eight straight months of PMI, We generally trail that.
On that metric by a few months.
So yes, we feel good, especially when you look back at 2020 Q2 were down 17, Q3 down nine and Q4 down three and then and then post a positive January but.
Conservatism that you've kind of <unk>.
And you've kind of referred to Chris.
Again, we're not out of the woods, we're still seeing some plants shut down just in the last couple of weeks, we do have a big business with the OE automotive plants, we've seen a number of those shutdown to raw materials shortages were still pressured in the southwest with oil and gas so.
Yes.
We feel good but we're also seeing.
And I'm still just a few headwinds out there on the industrial side.
Got it and then last question is Karen can you talk about and how youre thinking about.
Gross margin.
Great and 2021 and as well as SG&A given you did have a big.
Covid cost savings number that youre going back to lap against.
Yeah happy to as far as gross margin and like the team we couldn't be more pleased with what we've done and the gross margin area, we have and and you saw we finally anniversaried the impact from acquisitions and divestitures. So our core gross profit in Q4 really pleased to see our initiatives working.
We do expect as we look ahead to have continued improvement in gross profit may not be at the level that its been but we would expect to see continued gross margin improvement and we've called out the initiatives and that area before from product mix and strategic category management, and even our pricing and global sourcing and then I'll make it.
On your comments on SG&A, and then maybe let will add to talk about what we're gonna see for 'twenty and 'twenty, one and Youre right. We did have the temporary cost savings, but more importantly, our permanent cost savings of 150 million do roll into 'twenty and 'twenty, one and we expect to while some of those certainly the temporary savings come back.
And when you look at R. R and outlook for 'twenty and 'twenty one on SG&A, we have improvement when you go back to say the 2019 levels.
So we really have permanently reduced our cost structure. If you will but having said that there are still things. We're working on it we're going to see headwinds in terms of payroll and freight and I'll, maybe let will talk about a few things, we're doing and maybe offset some of those headwinds yes, Chris. So maybe just back on gross margin gross margin is going to.
We need to be a focus for us as we move forward.
And the prepared remarks, we did a nice job of laying out kind of some of the details in terms of what that means but category management around pricing global sourcing et cetera will be important priorities for us as we move forward.
On the SG&A.
And there is really kind of two ways to think about first is the importance as carol alluded to of keeping these temporary cost savings out.
So converting them from temporary to permanent and that's a daily activity that we work on with the teams here.
But then obviously very discrete productivity initiatives around the globe around SG&A, ranging from labor productivity and Dcs.
<unk> evaluated and analyze and indirect spend and low cost country opportunities for back office functions et cetera. So we've got a laundry list of very tactical actions and we're excited about the momentum that we've got.
Understood Thanks very much.
Thanks, Chris Thanks.
Ladies and gentlemen, and the interest and time if you can please limit yourself to one question and one follow up question. So we can get to everyone's questions.
Our next question comes from the line of Michael <unk> with Evercore. Please proceed with your question.
Hey, everyone. Good morning, and thanks for taking the questions.
Also just wanted to offer congratulations to well on them.
Promotion.
So if I could start off.
Thank you just was on the.
On the SG&A from our first off.
Is there a way to think about the potential dollar growth year over year and or the kind of organic comps that we would need to see to get natural leverage there Caroline will I think historically kind of 2% to 3% was the number organic growth, but if you could give us an update there.
Yeah look we have and and as you as you have seen we are guiding to organic growth and you know and.
And.
Three to five per cent range, we certainly expect to have margin improvement with that organic growth on <unk>.
And again, where we're looking at getting ourselves back to certainly to our sales level at where 2019 was but about a profit and operating margin level that is greater than that so I think it's at the low end of the 3%.
And that we can have margin improvement and I, certainly think that youll see that with some of the initiatives we talked about.
Okay, Great and initiative.
And just on the Napa from.
Just wanted to parse out and the fourth quarter and if theres any extra color you can share Paul on DIY versus Gis and comps and then and <unk>.
You could help us just to understand the traffic and ticket split for the call.
Yes.
Thanks, Mike.
Let me take the latter part of that question first.
As we look at ticket comps and we look across the globe I'm really pleased with.
The trends, we're seeing and Australia, our Asia Pac business was up strong and both.
Average ticket size and traffic, Canada, we were up.
Both average ticket size and traffic.
Our average ticket was up which is which has been a trend we've seen.
For a number of quarters now.
Traffic was down a bit in the U S again, not a surprise because we we saw a real surge and our digital online and delivered a store to pick up but pick up and curbside. So.
Folks are still a little bit reticent, I think to walk into into stores.
And then the other.
Other question, Mike you asked was around DIY, <unk> and the quarter and Q4.
And what we saw was much like we had.
We had seen throughout the year.
On the latter part of the year I should say with DIY held up strong.
And D. I F. M was certainly pressured in the quarter, but again as I think I mentioned earlier and our question and really pleased to see both trending up in January. So we're cautiously optimistic that we're going to see <unk>, a return to solid growth in <unk> and <unk>.
2021.
Great. Thank you and good luck thanks, Mike.
Our next question comes from the line of Scot Ciccarelli with RBC capital markets. Please proceed with your question.
Hey, guys. This is Beth Reed on for Scott.
And on the acceleration and the U S auto business that Youre seeing and into January and February and is there any way to kind of quantify the impact of stimulus on that acceleration and any other factors you would call out that you think are the main drivers.
Thanks Pat.
Look stimulus monies are definitely impact on the DIY business, I think not only for us but our.
But our peer group.
And we but we are a dominant DFM business Thats 80, plus percent of our business that I don't really believe we see much impact.
Any stimuli.
Stimulus on our <unk> business.
I think if I were to Paul.
Two.
And perhaps some of the lift that we're seeing early in the year.
Look the weather the weather is a factor there is just there's just no two ways about it and.
And we're seeing.
A return to a more normalized.
A winter that we havent seen and.
And a few years.
And whats unfortunate Bath and we don't we.
We don't.
I wanted to take we don't want to take this lightly there are lots of folks out there and the and the Texas region that are without power and they've been without power for a couple of days so.
We don't mind seeing winter I, just wish it wasn't quite as extreme.
And the impact that it's had and we've got a number of distribution centers branches stores that are closed throughout Texas, and Oklahoma, Tennessee and.
Mississippi, Alabama, and so it's definitely taken a toll.
Here. This week, we'll see the long term impact of a really cold weather and it you know it wont show up.
Months down the road when parts begin to fail as a result of some of those really brutally cold winter.
Alright got it and then just a quick clarification.
Did you say January trends had largely kind of continued into February.
Well they certainly did.
On.
But what we're seeing right now is with the number of DC closures were across Texas and the other states I just mentioned.
Along with many of our industrial branches I think the number I saw yesterday, but we had about 90 of our industrial branches were closed.
And so it's going to have a little bit of and impact probably for a couple of days, but again will recover and I expect that will have a positive impact longer term on our business.
Got it appreciate the color guys you are welcome.
Our next question comes from the line of Daniel Enbrel and with Stephens. Please proceed with your question.
Yeah, Thanks, and good morning, guys and Paul Congrats on the well Q1 start and apologies if I missed this trial and square away the cost cutting last year with maybe some of the organic growth slowing you targeted $100 million. Obviously, you exceeded that meaningfully I think you said 150 and permanent cost cuts as you look back with hindsight.
Is it possible and some places you may have cut too deep and that's part of the reason from your organic growth slowed down and then if not can you maybe share some detail on where you did remove the cost. So we can better understand why that isn't impacting service levels.
Yeah look we as you look at our cost savings and again. This was done early on and response to the very drastic decline and volume that we saw from Europe, starting at the end of Q1.
To North America, and other geographies. We had you know Q2 was one of our worst quarters ever and the Companys history and with that there was actions that needed to be taken and is it related to you know reducing payroll reducing positions. We had furloughs we have.
You know deferred to travel and entertainment, we looked at facility and and lease reductions we looked at our facility costs. We looked at like I mean, we looked at anything and everything and it was again, we did that without impacting our service, but we did it to adjust to the lower volumes.
And then as volumes have come back we looked at you know those costs you know again some of those costs have to come back in during this time, we also didnt, let up on our investments and productivity and automation and so we had a number of automation projects that we continue to work on that would help us with productivity and.
Prove months, where we rationalize facilities and put in more automated conveyor systems and.
That helped us as well so again, we the permanent savings go back to a year ago, those were largely payroll related to $150 million.
And we were very comfortable to how those were done the temporary ones, where just that they were temporary in nature and remember part of that temporary was government subsidies. So again, we had about $60 million and government subsidies that are nonrecurring and the fact of the matter as we go into 2021 with a lower overall cost base.
And excitement about the initiatives, we have and plays to keep our cost structure down.
Hey, Daniel.
Hey, Daniel I'll, just add a comment on that as well because it's been it's been mentioned before and and I touched on it and my prepared remarks.
But just to call out and our and our Napa business here across the U S. We have over 3000 and sales professionals between our.
And between our company stores and our independent stores that are.
Working with our shops and professional garages.
Every day so.
The thought of did we cut too deep we don't believe so and.
And again I think.
And what we saw were some transitory challenges and in <unk> that are going to bounce back and 21.
Got it that's helpful. Thank you guys for debt and then I wanted to ask a clarifier on the comp growth you'd said earlier Carol I think you said within auto 3% to 5% and comps with 46 total revenue and an industrial two to four with total Reds and three to five both of those would imply roughly only a 100 basis points of FX headwind.
Can you help me understand how that they have a similar amount of headwinds between the segments. When automotive has a much larger European footprint, while we think FX is more of a tailwind too.
The auto business, so I'm trying to reconcile that the magnitude of FX impact.
Yeah, just to be clear the the same store sales guidance that we gave in relation to the total sales is more of the impact of the carryover of acquisitions from 2020. So we had a number of bolt on acquisitions and the automotive state space and then we also had three industrial acquisitions late in 2020.
So the the 1% differential is the carryover of the M&A our implication for foreign currency is really neutral and we also have inflation neutral and these numbers as Paul mentioned, we expect we will see some inflation at some point, but this is truly just what we know today as far as.
Gannett growth plus a little bit of carryover from acquisitions Thats in that guidance.
Got it really helpful. Thanks, so much.
Thank you.
Our next question comes from the line of David Bellinger with Wolfe Research. Please proceed with your question.
Hey, Thanks for taking the question here I wanted to follow up on January but instead of a different context.
A few of your auto parts competitors have indicated.
Payable sales accelerating and into the double digits.
January it seems as though Napa comp sales are up high single digits. At this point. So is there anything that's changed versus your peers from the last few quarters and there's something strategic on your part that is helping and narrow the gap versus competitors or is it really the mix of business, that's driving that better Delta now.
Well.
Look David it's a reasonable question.
We've been working on a number of initiatives throughout the course of 2020 debt.
I would tell you I think are really beginning to take hold.
We are we are not nearly as weighted towards the DIY side. So even though we're seeing some nice lift and DIY, it's not going to move the needle for us like Difm's, So what what I would point to and how we're narrowing that gap is there.
The slight recovery.
Seeing from Covid markets, helping opening back up I think we're going to see miles driven ticked back up we haven't we haven't seen any official numbers out of December January yet, but that coupled with some winter weather is all going to help spike our DIY FM business and and again.
And we're really really pleased to see that.
Spike and the month of January.
Got it Okay, and then my follow up here.
How are you thinking about the pace of parts inflation throughout 2021, you mentioned on limited benefit last year, maybe a low single digit rate coming. This year are you getting ahead of that now and pulling some price to both DIY and commercial give and strengthening demand and do you expect to fully offset any cost increases through price sits here.
Yeah look the are we are we are getting early indications from our suppliers I mean look our suppliers as Paul mentioned, there they are facing raw material increases freight and ocean cargo and just the significant increases that our suppliers are facing.
Labor shortages labor inflation.
We're hearing that our suppliers are discussing price increases, we believe certainly and automotive it's been very rational and as these price increases come that they will get pass through and also on the industrial side are our teams are trying to stay ahead of that and doing a lot of things to make sure that those can when they do get the price.
And they can pass them along I would tell you that it will probably be more second half weighted them again.
Some of this is managing through the uncertainty right now, but probably more second half weighted so the one to two 1% to 3%. If you will on a full year basis for probably more second half, but again, that's not in any of our numbers and the last thing I would just add and you heard well talk about it our teams have so many terrific initiatives.
Going on and the gross margin area, especially in terms of pricing. So were lot more agile today, we have a lot more analytics and a lot more strategic pricing initiatives that will help us offset this as well.
Thank you I appreciate the detail.
Thank you.
There are no further questions and I think two I'd like to turn the call back to management for closing remarks.
Wed like to thank you for your participation and our year end and Q4 conference call as always we appreciate your interest and support of genuine parts company and we look forward to reporting out to you on our first quarter results and April Thank you and have a great day.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.