Q1 2021 Genuine Parts Co Earnings Call
Good day, ladies and gentlemen, welcome to the genuine parts company first quarter 2020 One earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad and all.
Today's call is being recorded at this time I would like to turn the conference over the 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 first quarter of 2021 earnings Conference call with me today are Paul Donahue, Our chairman and Chief Executive Officer will stay and who our president and Carol Yancey, Our executive Vice President and Chief Financial Officer.
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.
Please be advised this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results as reported under generally accepted accounting principles.
A reconciliation of these measures is provided and the earnings press release issued this morning, which is also posted and 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 Companys latest SEC filings, including this morning's press release the company <expletive>umes no obligation to update any forward looking statements made.
During this call.
Now I'll turn it over to Paul for his remarks.
Ted and good morning, welcome to our first quarter 2021 earnings conference call we.
We appreciate you joining us today and hope you are staying safe and well.
We are pleased with the strong start to 2021 and ongoing recovery and our automotive and industrial businesses.
The GPC team remain focused on solid execution, and and delivering strong financial results through improving sales trends, increasing operational efficiencies and enhancing customer value.
During the quarter, we operated thoughtfully with the physical and mental well being of our employees the top priority.
As our 50000, plus GPC teammates are the core of our success.
Turning now to our first quarter financial results total sales for the quarter were $4 5 billion up 9% from last year and significantly improved from the 1% sales decrease and the fourth quarter of 2020.
Gross margins was also a positive representing our 14th consecutive quarter of year over year gross margin expansion.
And our teams and the field continued to do a great job of managing our expenses through ongoing cost actions and the carryover of expense reductions implemented last year.
These results drove a 41% increase and operating profit and.
And and eight 1% operating margin, which is up 180 basis points from the first quarter of last year.
And our strong operating performance drove net income of $218 million and diluted earnings per share of $1 50 up 88%.
We also continued to fortify our balance sheet, ensuring ample liquidity and solid cash flow.
We are proud of our teams and we are encouraged by our results and we intend to build on this the momentum throughout 2021.
Turning now to our business segments automotive represented 66% of total sales and the first quarter and industrial was 34% by region, 73% of revenues were attributable to North America.
The 16% and Europe, and 11% and Asia Pac.
Total sales of our global automotive were $3 billion of 14% increase from 2020 and much improved from a 1% increase and Q4 of 2020.
Comp sales were up 8% and.
Proved from of 2% decrease and the fourth quarter and.
And segment profit margin was up 250 basis points, driven by strong operating results and each of our automotive operations.
Sales were driven by positive sales comps across all our operations with 15% comps in Europe, and Asia Pac, 7% comps and the U S and 3% comps and Canada.
And the ongoing global economic recovery, including financial stimulus and the U S improving.
Improving inventory availability.
Favorable weather conditions, and our focus on key growth initiatives, where all sales drivers in the quarter.
We would add debt, while we continue to expect a reasonable level of inflation as we move through 2020 one price.
Price inflation was not a factor on our first quarter sales.
And Europe sales were much improved from Q4 as our team capitalized on the strengthening of sales environment. Despite lockdown throughout the region and.
In addition initiatives to grow key accounts enhanced inventory availability and the ongoing launch of the Napa brand continue to prove effective and driving profitable growth and market share gains.
For the quarter, our teams and France, and the U K outperformed and the region with strong double digit sales comps. We would also call out of much improved performance by our team and the Benelux region.
The strong sales recovery combined with excellent expense controls.
Produced of 500 basis point improvement and operating margin so.
So of terrific start to the year for our European operations.
And Asia Pac our automotive sales remained in line with the mid teen growth, we experienced through the second half of 2020.
For the quarter, both retail and commercial sales held strong as the reach and operated through multiple lockdowns <expletive>ociated with the pandemic.
Retail sales, which represent over 40% of our total sales volume through our Rep co stores continue to outperform posting a 33% increase in March and plus 24% and the quarter.
Our commercial sales continue to accelerate as well posting double digit sales growth and the quarter.
We continued to benefit from the strength and online sales, which reached record highs of three ex pre COVID-19 levels.
Finally building on the Napa brand name has been well received and we remain focused on growing our Napa presence in the region.
Summing that up this group continues to perform at a very high level on both the top and bottom lines, resulting in a 150 basis point improvement and profit margin for the quarter.
And North America comp sales and the U S were up 7%, helping this business post day 180 basis point increase and profit margins and.
Canada, we operated through a variety of regional Lockdowns, which impacted our larger markets of Ontario and Quebec.
Comp sales were up 3% and operating margin was up 130 basis points.
Sales and the U S, which posted its strongest quarterly comp since the first quarter of 2015 were driven by solid growth on both the retail and commercial segments.
This was our first quarter of positive commercial comps.
Pre pandemic and our team produced record sales volumes and the month of March.
In addition, both ticket and traffic counts were positive on both our retail and commercial transactions.
Mark and our first increase in traffic counts and several quarters.
By region, the Atlantic Midwest and West groups posted the strongest growth. Although we would also call out of our northeast group, which.
Each produced solid growth and the quarter.
This is notable and this region of the U S has been most affected by the COVID-19, lockdowns over the past 13 months.
Likewise, we would add the product sales and categories, such as batteries tools and equipment and breaks were strong this quarter we.
We are especially encouraged to see the rebound and our brakes business.
Which generally is a positive indicator for our commercial business.
On the retail side, which continues to outperform with strong double digit growth.
We continued to drive sales via investments and retail specialists and store refreshes as well as targeted promotions and.
We would also call out of our ongoing omni channel investments and the increase and BDC online sales.
Which reached record levels and the quarter and were up 150% from the prior year.
For commercial sales our other wholesale category of independent garage customers continued to generate strong growth.
We have been encouraged by the number of new accounts, we are serving.
Clearly our investments and increasing the number of professional sales people on the street has been effective in attracting new customers to the Napa.
We were also pleased to see improved sales with our Napa auto care and major account customers, which posted positive sales growth for the first time and several quarters.
Sales to the fleet and government group are down year over year, but sequentially improved from the fourth quarter and we look for further improvement and sales because of this segment.
As we look ahead and we're excited for the growth opportunities, we see for our global automotive segment.
We expect further improvement and aftermarket fundamentals such as increased miles driven a growing vehicle fleet and an increase and vehicles age six to 12 years all favorable for the industry.
We can <expletive>ure you we remain focused on our initiatives to deliver customer value and ultimately sell more parts for more of cars.
These plans include further enhancing our inventory availability strengthening on our supply chain and investing and our omni channel capabilities.
In addition, we expect to expand our global store footprint.
And with additional bolt on acquisitions, changeovers, and new Greenfield stores to further enhance our competitive positioning.
So now let's discuss the global industrial parts group.
Total sales for this group of $1 5 billion flat with last year.
Comp sales were down 2% improved from the 4% decrease in Q4, and reflecting the third consecutive quarter of improving sales trends.
March was a breakout month with the North American motion team, posting a 7% increase and average daily sales and achieving record sales volumes.
And was a tremendous accomplishment and another turning point for GPC and our emergence from the pandemic.
The ongoing recovery over the last nine months is in line with the continued improvement and the industrial economy, which you can see and several key indicators for our business per perspective, PMI was $64 seven in March and an increase of four two points from December 31.
In addition, industrial production increased by two 5% and the first quarter the third consecutive quarter of expansion following the significant downturn and the second quarter of 2020.
Importantly, we can see these positive indicators translate into more activity with our customers, which are operating at higher run rates as well as releasing capital project orders the.
And the strengthening and sales environment, along with our initiatives to drive growth and control cost produced and 80 basis point margin improvement.
And with segment profit margin of eight 3% versus seven 5% last year.
Diving deeper into our Q1 sales, we would start by saying that in place and remains a non factor and our numbers thus far.
That said, we are seeing more pricing activity and expect another year of 1% to 2% price inflict and place and from our suppliers.
For the quarter, we experienced improving sales trend among virtually all product categories and industries served.
We were especially encouraged by the recovery and the equipment and machinery and.
<unk> and cement and.
Wood and lumber sectors, all key industry groups for us.
In addition, we continue to benefit from the build out of our omni channel capabilities.
With digital sales up two ex from the first quarter and 2020.
Key driver of our digital growth relates to our inside sales center, which is generating incremental sales to new motion and customers.
While still a relatively small percentage of total sales we are excited by the potential for future sales growth.
We also remain focused on growing our services and solutions businesses to expand our expertise and sales opportunities in areas, such as equipment repair conveyance and automation and.
We have made several bolt on acquisitions to build scale in these areas and our services and solutions capabilities remain a key consideration and our overall M&A strategy for the industrial business.
To further and share of profitable sales growth, we continue to enhance our price and and category management strategies.
In addition, we plan to continue to optimize our supply chain network and further improve our productivity, while delivering exceptional customer service.
Closing out our industrial comments, we remain bullish about our motion business and we're excited to see this team moving back into a growth mode.
So now ill conclude my remarks by providing a brief update on our ESG initiatives.
As outlined in our corporate sustainability report GPC embraces our responsibility to innovate and ways that provide per our environment, our <expletive>ociates and the communities and which we operate.
In Q1, we expanded our training and development programs to ensure of personal growth and enhance our comprehensive well being program focused on the emotional and financial and physical health of our GPC teammates.
Additionally, we continue to make progress on the advancement of our corporate commitment to diversity and inclusion.
We are actively recruiting talent that is representative of the communities we serve.
Training and our teammates to mitigate unconscious bias and model inclusive of behaviors.
The strengthening partnerships that support our DNI initiatives.
Finally, we remain focused on our mission to be good corporate citizens, where we both work and live.
Since 19, and 28, we have been giving back to communities and causes that make a difference and that legacy continues in 2021.
So now I'll turn it over to will for his remarks well.
Thank you Paul Good morning, everyone first I want to congratulate the global GPC team on the performance this quarter I'd.
And I'd also like to thank our customers for their loyalty and our suppliers for their partnership.
As Paul mentioned, our team delivered solid performance and the first quarter and have strong momentum the.
Environment has improved compared to 2020, but we remain cautious as global uncertainty continues to be of part of doing business each day and.
Areas of attention for its include Covid, 19, inflation global logistics and product and labor availability.
We also have more challenging year over year comparisons that will require sustained momentum during the second half of the year.
Despite the uncertainty of the GPC team is energized and focused to deliver performance.
I'll now share some additional perspective on our strategic initiatives and progress.
The foundation of our priorities is based on the customer experience and understanding their needs and working to exceed their expectations.
We are analyzing and listening to customer feedback and our corresponding strength and opportunities and the simplest terms our customers need us to be easy to do business with reliable and helpful.
This independent data reinforces our priorities and serves as the guiding principle in terms of required action and strategic investments.
To deliver a best in cl<expletive> customer experience, we have opportunities to simplify and integrate our existing operations the.
Global teams are executing multiyear plans to realign teams streamline processes improve operational productivity and reduce costs. These.
These initiatives will not only create operating efficiency, but also enable faster team execution day.
Oliver of better customer experience and accelerate profitable growth.
I'd like to highlight a few initiatives that illustrate our efforts to simplify and integrate for example, we're working to optimize facilities footprint and coverage simplify and integrate disparate legacy systems.
Streamline back office support functions offshore non customer facing functional activities and centralized GPC indirect sourcing processes as a few examples.
As we simplify and integrate we're simultaneously investing and our core business and positioning for the future.
Our strong cash flow solid capital structure and disciplined capital allocation provides the flexibility needed to continue to make these investments key.
Key pillars of our core investments include talent sales force effectiveness digital supply chain and emerging vehicle technologies.
A few highlights of our progress across the key pillars. During the quarter include one talent, we continue to take deliberate actions across the globe to recognize high potential talent and infused new capabilities into the organization and recruit diverse talent that is representative of the communities. We serve examples include.
Lori management digital emerging vehicle technology and field leadership roles to name a few.
Talent will always be of priority area of investment as we strive to be an employer of choice for teammates the share our GPC values and want to play a leadership role and our exciting future.
Sales force effectiveness.
Data and analytics to understand our unique customer segments, the different needs of each segment and <expletive>ociated strategies to serve the segment is a foundational element of sales force effectiveness.
The sales efforts reflect our omnichannel initiatives and include an increasing mix of both traditional selling and digital strategies.
As an example of the U S automotive team revamped it sales intensity with new reporting and tools to track customer visits digital tools to communicate with field sales team mates and enhanced virtual product and skills training. In addition in 2021, the U S automotive team adjusted compensation programs to better align.
Incentives of profitable growth.
Three digital as I mentioned digital is a foundational priority as we deliver of best in cl<expletive> customer experience and accelerate profitable growth.
Our businesses delivered excellent performance by the digital channels and the quarter, we continue to see strong increases versus prior year across our global digital channels.
Digital still represents a relatively small portion of our total sales and we're excited about the compelling digital vision of our teams are executing.
Related we continue to invest and foundational digital elements, including catalog search and other critical customer experience elements, such as ease of ordering pricing and analytics.
For supply chain, our supply chain initiatives are focused to ensure we have the right product available and the right market at the right time, we're continuously executing inventory facility productivity logistics and technology strategies to achieve this goal. One solid example is the success of the and U S industrial.
<unk> enjoyed with recent facility automation investments that delivered a 500% labor productivity improvement.
Other select examples would be enhanced workforce management and delivery tracking tools and the U S automotive business.
Lastly, emerging vehicle technologies, we aspire to lead as it relates to the opportunities that emerging vehicle technologies.
For our automotive industries.
We believe we have a unique position to leverage including our scale global footprint diverse portfolio, leading global brands established customer supplier relationships and one GPC team approach.
Through our planning process, we developed the multi dimensional strategy to address electric vehicle trends and a few select highlights include the.
And the alignment of talent of 100% dedicated to developing and executing strategies.
Product and category management strategies with existing and new Skus.
Global supplier of counsels with existing strategic partners advisory groups, leveraging our 25000 global repair center relationships and partnerships with strategic EV market participants.
While we acknowledged the focus on critical initiatives that deliver near and medium term performance, we're taking action to build out and act on and exciting future vision.
Lastly, strategic bolt on acquisitions are a key part of our GPC growth strategy, we utilize acquisitions to acquire new customers and further penetrate existing priority markets and our new geographies acquired product and service capabilities and acquire talent.
We also believe our acquisition capabilities position us well as we selectively consider and test new business models.
Our acquisition pipeline remains active and actionable given the fragmentation of our market.
We believe our scale market, leading brands global footprint and unique culture position us to be an acquirer of choice.
We remain selective and disciplined as we execute this important part of our strategy.
Similar to the approach utilized for our 2019 cost savings plan. The global teams developed pools and of monthly cadence to create visibility and status on initiatives. This approach not only helps drive performance, but also helps to share best practices around the globe as one GPC team and.
Summary, I hope today's remarks, reinforce our sense of focus and global teamwork.
We will remain agile as the global environment continues to evolve and we will remain focused on what we can control as we execute through the balance of the year and beyond and thank you and I'll now turn it to Carol to review the financial performance details.
Thank you well, we will begin with a review of our key financial information and then we will provide an update on our full year outlook for 2020 one.
Total GPC sales were $4 5 billion and the first quarter up 9% from last year and improved from the 7% decrease and the fourth quarter.
Gross margin was 34, 5% of 60 basis point improvement compared to 33, 9% and the first quarter last year.
Our steady progress on improving gross margin continues to reflect the positive impact of a number of initiatives, including our pricing and global sourcing strategy and we also benefited from the sales mix shift to higher gross margin operations, we would add that the level of supplier incentives and the quarter were in line with the last year.
And neutral to gross margin and.
And as Paul mentioned earlier, there was minimal impact on price inflation and our first quarter sales and this is true for gross margin as well.
As the nature of the year, we will continue to execute on our initiatives to drive additional gross margin gains and positive product mix shift strategic pricing tools and analytics global sourcing advantages and also the strategic category management initiatives.
Our selling administrative and other expenses were $1 2 billion and the first quarter at four 6% from last year or at five 3% from last year's adjusted SG&A.
This reflects an improvement of 26, 8% of sales this year, which is down nearly 100 basis points from 27, 7% last year, so tremendous progress and primarily due to the favorable impact of our cost savings generated in 2020 as well as the ongoing cost control measures and also improved.
Average on our stronger sales growth.
Our progress in these areas was slightly offset by rising costs and freight expenses, which were closely managing and planned increases and our technology spend which supports our strategic initiatives as well covered earlier.
Our total operating and non operating expenses were $1 3 billion and the first quarter of two 2% from last year or at two 1% compared to last year's adjusted expenses.
The first quarter expenses included the benefit of approximately $20 million related to gains on the sale of real estate and favorable retirement plan valuation adjustments that are reported to the other non operating income line.
All in our total expenses for the quarter improved to 28, 1% of sales down 190 basis points from 30 point out per cent in 2020.
Total segment profit and the first quarter was 361 million up of strong 41% on the 9% sales increase and our segment profit margin was eight 1% compared to six 3% last year of 180 basis point increased in comparison to 2019, our segment profit margin.
The improved by 100 basis points.
Solid improvement and our strongest first quarter profit margin since 2015, a reflection of the positive momentum we're building and our businesses.
Our net interest expense of $18 million was down from $20 million and 2020 due to the decrease in total debt and more favorable interest rates relative to last year.
The corporate expense line was 31 million and the quarter down from 55.002 million 20, due primarily to the favorable real estate gains and retirement plan of adjustment discussed earlier.
Our tax rate for the first quarter was 23, 8% in line with the reported rate last year and improved from the prior year adjusted rate of 26, 5%.
This improvement primarily relates to the favorable tax impact of the stock options exercised as well as the previously mentioned real estate gains and retirement plan of adjustment.
Our first quarter net income from continuing operations was $218 million with diluted earnings per share of $1 50. This compares to 84 per diluted share on the prior year or an adjusted adjusted diluted earnings per share of 80.
Four and 88% increase.
So now, let's turn to our first quarter results by segment, our automotive revenue for the first quarter was 3 billion up 14% from the prior year.
Net profit of $236 million was up a strong 65% with profit margin at eight point out per cent compared to five 5% margin and the first quarter last year the two.
250 basis point increase and margin was driven by the continued recovery in the automotive business and the execution of our growth and operating initiatives. We were pleased to have each of our automotive businesses expand their margins for the third consecutive quarter and.
In addition, we are encouraged that our first quarter margin also compares favorably to the first quarter of 2019.
120 basis points, so abroad, and the recovery across our operations and we look for continued progress and the quarters ahead.
Our industrial sales were $1 5 billion and the quarter flat with last year and improved sequentially for the third consecutive quarter, which is consistent with the strengthening industrial economy.
Our segment profit of $125 million was up 10% from the year ago and profit margin was up 80 basis points to eight 3% compared to seven 5% last year the.
The improved margin for industrial and flex the third consecutive quarter of margin expansion and both our North American and Australasia and industrial businesses and its also up by 90 basis points from the first quarter of 2019, so another quarter of strong operating results for industrial and which we expect to continue.
The stronger sales growth projected through the remainder of the year.
So now, let's turn our comments to the balance sheet.
We continue to operate with a strong balance sheet and ample liquidity and the financial strength to support our growth strategy.
At March 31, total accounts receivable is down 27% from last year, which is primarily a function of the $800 million of receivables sold in 2020.
Our inventory was up 6% from the prior year and accounts payable increased 14% and our AP to inventory ratio improved to 124% from the 116% and the last year.
We are pleased with our progress and improving our overall working capital position and we continue to believe we have opportunities for further improvement.
Our total debt is $2 6 billion at March 31 down $1 billion or 28% from last March and down 60 million from December 31 of 2020.
We significantly improved our debt position throughout the course of 2020 with the issuance of new public debt and a new revolving credit agreement that provides for an expanded credit capacity and more favorable rates.
With these positive changes to our debt structure of our total debt to adjusted EBITDA has improved to one eight times from two five times last year.
Additionally, we closed the first quarter with $2 6 billion and available liquidity, which is up from $1 1 billion at March 31 last year and in line with December 30 <unk>.
We also continue to generate strong cash flow generating $300 million.
And cash from operations and the first quarter, which is up from 28 million and the first quarter last year.
With the strong start to the year, including the increase of net income and the improvement in working capital. We continue to expect cash from operations to be on the $1 billion to $1 2 billion range and.
Free cash flow of $700 million to $900 million.
Our key priorities for cash and include the reinvestment in our businesses through capital expenditures M&A, the dividend and share repurchases.
We invested $48 million and capital expenditures and the first quarter and increased from 39.002 million 20.
Looking forward, we have plans for additional investments and our businesses to drive growth and improve the efficiencies and productivity.
We continue to expect total capital expenditures of approximately $300 million for the year.
As you heard from well earlier strategic acquisitions remain an important component of our long term growth strategy.
We continue to cultivate a strong pipeline of targeted names and we expect to make additional strategic bolt on acquisitions.
The complement both our global automotive and industrial segments and the months and quarters ahead.
And the first quarter, we paid a cash dividend of $114 million to our shareholders.
The company has paid a cash dividend to shareholders every year since going public in 19, and 28, and our 2021 dividend of $3 26 per share represents our 60 <unk> consecutive annual increase and the dividend.
We have actively participated in a share repurchase program since 1994.
And while there were no repurchases and the first quarter of the company is currently authorized to repurchase up to $14 5 million additional shares and we will resume share repurchases in the months and quarters ahead.
Turning to our outlook for 2021, we are updating our full year guidance previously provided in our earnings release on February 17th of 2021.
And arriving at our updated guidance, we considered several factors, including our past performance.
Current growth plans and strategic initiatives recent business trends and the potential for foreign currency fluctuations and inflation and the global economic outlook.
In addition, we considered the continued uncertainties due to market disruptions, such as with 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 five to plus 7% and increase from our previous guidance of plus four to plus 6%.
As usual these growth rates exclude the benefit of any unannounced future acquisitions.
By business, we are guiding to plus five to plus 7% total sales growth for the automotive segment and increase from plus four to plus 6% and.
And of total sales increase of plus four to plus 6% for the industrial segment and increase from plus three to plus 5%.
On the earnings side, we are raising our guidance for diluted earnings per share to a range of $5 and 85 to six five.
Which is up 11% of 15% from 2020.
This represents an increase from our previous guidance of $5 55 to $5 75.
We enter the second quarter focused on our initiatives to meet or exceed these targeted results and we look forward to reporting on our financial performance as we go through the year. Thank.
Thank you and I'll now turn it back over to Paul.
Thank you Carol looking ahead. The GPC team is excited for the ongoing recovery and the global economy and the growth prospects, we see for both auto and industrial.
Our strong balance sheet provides us the financial flexibility to pursue strategic growth opportunities.
And we remain focused on executing our plans to capture profitable growth.
Generate strong cash flow and drive shareholder value.
As a result, we are optimistic that we can deliver strong financial result, and the quarters ahead.
So in closing we want to thank each of our GPC teammates for their continued support dedication and commitment to be and the best.
So thank you for your interest and genuine parts company and with that we'll turn it back to the operator for your questions.
Okay.
And at this time, we will be conducting a question and answer the session if you'd like to ask the question. Please press star one on your telephone keypad. The confirmation tone will indicate your line is and the question queue.
And may price start to if you'd like to remove your question from the queue from <unk>.
Participants using speaker equipment and may be necessary to pick up your handset before pressing the star and keys one moment. Please while we poll for questions.
And our first question is from Christopher <unk> with JP Morgan.
Please proceed with your question.
Thanks, Good morning, everybody and good morning, Chris.
Can you talk about.
Well I guess on the comp basis, I think you have one less day. So the reported comps does that reflect are you, including that as a headwind and and how would you size it up.
For each segment and and then as just as a follow up and you talked about record selling performance and.
And motion and March I think it was plus seven on the per day basis was there something unique about that performance and and what of that sort of March comp look like on the on a two year basis.
Yeah, Chris on you're right. We did have one less day and the quarter and we did not reflect that and our comp sales numbers that are provided so it would be about a point and the half for each of our segments equally.
The good thing is the rest of the year, we really won't have that we will close the full year with the one less day, but we have not shown that or adjusted for it if you will and any of our comp numbers.
And Chris.
Relative to your question regarding motion and <unk>.
Thanks for your question on motion, we always like to talk about our industrial business day.
We had a breakout the had a breakout month and in March we.
We've been waiting for it honestly if you look at all of the indicators from PMI to industrial production and they've all they have all been going up into the right. So we knew it was just really a matter of time motion got they've got sidelined a little bit and February what the storms knocked out of lot of of our business down in the <unk>.
But they came roaring back in March and honestly.
This trend and we've seen it before with motion when they get on a positive trend as they are now on.
Our expectation that's going to carry through the balance of the year.
Got it.
And then on the gross margin of 34.5% and the first quarter.
And the up on the tier basis, some of that is divestiture and and so forth, but can you talk about the.
And the puts and takes going forward.
Do you think gross margin could still see some modest expansion over time, given the you know the the initiatives that you laid out or does the DIY versus commercial mix and inflation keep.
Keep that more and check.
Yes, Chris I would tell you we have fully anniversaried all of the impact of divestitures and discontinued so that is true core gross margin impact and we are actually modeling and have been and debt.
And what we did at our February and continue to model and improvement in gross margin for the full year 2021. It is a function of our initiatives I mean, you heard on well and and myself talk about the number of initiatives. So we have had some great progress and strategic pricing tools and analytics our cash.
Laurie management and global sourcing, we've had some product mix shifts as well our industrial team has done a tremendous job of just quarter after quarter increases our global sourcing team's global tenders are really working out well and we had really kind of a neutral impact on rebates for the quarter on so on.
Our full year, we do believe the gross margin will continue to improve and will be up for the full year.
Okay and then one last quick one you know looking at the balance sheet the.
And that's we haven't I don't.
I'd have to look back and I don't know if you've ever had this much cash sitting on the balance sheet. So typically you target 50 to 100 million dollar kind of bolt ons or are you thinking something bigger there or how are you thinking about the potential to be more aggressive around share repurchase.
Yes, Chris Great question, and I think youre spot on none of us for a call and having that much cash on the balance sheet, but as was prudent and 2020, we did look at conserving our cash and sort of prudently got ourselves and of great position. We do expect to return to more normal capital allocation. It is a little bit.
A timing thing right now so you will see our M&A pipelines is as well talked about when you will see the bolt on type.
Acquisitions that will come in and Youre going to stay on our capex getting up to the $300 million and share buyback again, we were somewhat precluded from buying and our shares with some of our debt agreements and where we had found ourselves we expect to be and they are buying.
Honestly right away.
We'll do our normal share repurchase and as if we have the opportunity and do more and we'll certainly do that so more normal capital allocation and youll see us putting that cash to use as we move ahead.
Understood and have a great spring day.
Thanks.
Okay.
And our next question is from Greg <unk> with Evercore ISI. Please proceed with your question.
Hi, Thanks.
Two questions I wanted to start with the the.
The cost reductions and I heard of 500 basis point improvement and labor productivity and just wanted to sort of understand that and sort of what part can be sustainable and we think about what the sustainable operating margin of the business could be.
Yes, it's a great question and thanks for asking it that was of Great case study and using technology inside the four walls of the distribution center as we think about getting more productive with the number of people, we have and have doing the work.
Relative to technology, so think vertical lift modules et cetera, and that's completely sustainable that technology and that investment is in the building.
And it will continue to improve as we move forward so and.
And Greg I would just add a comment on the operating margin improvement I mean again, our operating margin outlook and long term as sort of the eight 5% and 9% operating margin, we're implying about 30 basis point improvement this year and on.
2021 resolved and that is coming from the combination of gross margin and SG&A and honestly that is probably a 50 to 70 basis point improvement over 2019 as well.
Right.
Total part effectively it sounds like that's great.
On the sort of pivot a bit on inflation and you mentioned it really wasn't material on the first quarter, but obviously theres a lot of rising input cost out there. So I'd just like to know what what inflation are you seeing on the Cogs are and your guidance are you, <expletive>uming and and what would you expect that also of what inflation numbers and the top line.
Yeah, I think Youre right, we had pretty modest inflation for Q1 and really no impact on our sales our gross margin as we look ahead, we do think that's going to come from and probably more second half weighted.
We're looking at a 1% to 3% on the automotive side and a 1% to 2% on the industrial side, but quite honestly with our initiatives. We believe we'll be able to continue to deliver on our improvement in gross margin and be able to p<expletive> that through but we have not modeled that if you will.
And to our guidance on sales and quite honestly, if it hasnt hit us yet and we'll look forward to that being a tailwind as we move ahead.
Got it so that's what you think but it's not and the guidance that and by the back half of it would be presumably at the upper end of those range. As you just gave that's correct and you know our back half we have sort of more normalized gross and the back half and it's also not modeled into the the cost side as well. So we'll update you as we move ahead.
On what we're seeing on the quarterly inflation, but we do expect thats coming.
Hey, guys.
Greg It's will I might just add on the cost side.
And I alluded to it and the prepared remarks, but like everybody else, we're watching and seeing SG&A inflation and different parts of the world and in different parts of the business ranging from.
Wage inflation and selective geographies, you've got global logistics inflation, you've got commodity.
Commodity inflation and so we're watching that and doing good work around the cost productive to offset some of that inflation, but that's definitely something that.
And we're working on actively every day.
That's great I'll, let someone else have a chance and good luck on the spring Thanks, Greg It's Greg.
And our next question is from Kate Mcshane with Goldman Sachs. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
And I Wonder if I could just ask about some of the contributors to comp I know there was improvement and the sleep business.
However, and what it was.
As a drag if you were able to quantify that and you didn't call out regional performance.
In the South East and I, just thought that would've been a place maybe where you would see more strength given that it seems more opened and the rest of the country. At this point. So just wanted to get your comment on that.
Yes, Kate Thanks for your question in terms of the breakdown fleet.
<unk> did come back in.
In Q1, which I think we referenced that and our last call. We did see and improvement our expectation is that the fleet will turn positive.
In Q2 and remain positive through through the balance of the year.
As you break down the various segments, our retail business was off the chart strong.
We were really encouraged by is seen and our both major accounts and Napa Auto care Center business turn positive both both close to mid single digit growth and those categories. So yes, we really saw improvements across the board and are especially encouraged to see.
And our heavy duty fleet business government municipalities, turning turning to a positive in Q2 and as far as Regionalisation.
Okay, I think I called out our northern regions I would also call on.
And in that mix. It includes our Atlantic Division and our Atlantic Division really led the way in in Q1 for Us and Atlanta It comes down to the Carolinas.
Virginia So.
Debt is close to the south of our southeast performed just fine, but but just was not as strong as what we saw in our northern regions as well as our western region.
Okay. Thank you and I have.
I'm wondering from a just follow up question you had mentioned that you were successful and signing up more commercial accounts. Thanks to your new sales effort and is there a way to quantify that or compare it to what you see on the last couple of quarters.
Well, if you look at our.
What we term other wholesale that's that's.
Describe it as the up and down the street smaller garage is one two bays.
That business was up.
7% and the quarter and again.
We have not seen that kind of growth and some time, we know we made significant changes and enhancements to our.
And to our sales force coming out of two.
2020, we we literally have doubled the touch points and we're getting out and we're seeing those customers and it's and is reflected in our business. So we.
We're we're bullish going forward and really pleased to see the <unk> category bounce back as we as we expected it would in 'twenty one.
Thank you.
Thank you.
And on our next question is from Scott <unk>.
Sara Lee with RBC capital markets. Please proceed with your question.
Hey, guys Scot Ciccarelli.
The.
Hey, Paul I guess at the the follow up on on <unk> question.
Would you or maybe more importantly, your customers attribute the <unk>.
The commercial business that you guys are seeing or sorry on the quarter.
And a better consumer mobility or given your regional commentary because it seemed like it was more affected by weather patterns and you know like the the harsh winter et cetera that we had.
Yes, I think it's all of the above the Scott.
And it.
As you know in these calls we tend to talk a good bit about weather and we did see a more normalized.
Winter this year, certainly that has an impact.
On our business the.
Bounce back and miles driven while while still not.
Anywhere near the levels it was.
Two years ago. It is coming back from where we were last year.
And and and then I think the efforts that our Napa team is making that will touched on with the with the many changes we made in.
And our.
And our sales force and how we're going to market. So I really think of.
Combination of our of our sales.
Sales strategy, our inventory availability at the at the Street level has improved so it's really it's not one thing that I would 0.2 of its really a combination of really positive factors.
Hitting the wants and.
And.
I think I'm most encouraged by.
Scott is.
We had this kind of quarter despite.
Still be and and Covid related lockdowns in many parts of the World Canada right now Scott is as you would know is in full lockdown.
And and.
And yet our business still trended positive.
And in the quarter.
And our service levels and our supply from our from our from our suppliers is not where it would traditionally be so look we are quite proud of the quarter, we had but I would tell you I think there's even upside when the when a few of these.
More headwinds, we put behind us.
That's super helpful. And then and I know, we kind of dug into gross margin SG&A. I guess my question is maybe a little bit more broad here you guys have had a combination of both permanent and temporary cost reductions are there still cost reductions that kind of need to be layered layered back in like you cut back for a period of time now that the.
Business is recovering and we got to layer some certain expenses back into the P&L.
Yes, we had and it's a great question as volume comes back I mean, there is a level of variable expenses that do come back and but we did permanently lower our cost structure with the 2019 plan that we put in place and those permanent cost savings again.
And we capitalize on those and converted some of the temporary to permanent so we had about a $20 million benefit and the quarter that was of carryover from those savings.
<unk> done a tremendous job on payroll, but again contemplated and our outlook and I think Q of when we came out in February we had sort of flattish SG&A and now with the improvement we've seen in Q1.
And we've contemplated in our operating margin that SG&A does remain and is improved as we go throughout the year.
Scott I might just add another kind of philosophical point, which is as.
As we do productivity SG&A productivity work I mean, our intent is to reinvest some portion of that into growth initiatives and talent.
As an example, so.
We're not solely focused on driving productivity without reinvesting in the business philosophically.
Understood very helpful guys I appreciate it.
Thank you.
And our next question is from Bret Jordan with Jefferies. Please proceed with your question.
Hey, good morning, guys and good morning, Ryan.
And you talked about the strength and digital are you seeing a change and consumer behavior, where they are buying online and waiting for shipment or is this buying digitally and still expecting either of delivery or pickup and store.
I think it's both.
I think the coming out of Covid I would say.
And there has been a dramatic change and the use of digital.
And in every dimension medium frequency the way in which you use it.
And that whole concept of the easy to do business with.
And that means different things to different customers, but the foundation of it is having the digital skills to meet those needs.
And as they differ across the customer segment. So I would say, it's a mix of everything and we've done really good work.
Round setting up the foundation of meeting those different needs and we're going to continue to invest and then.
Could you maybe talk about like what percentage of digital is actually still going out and out the door versus and a box being shifts.
I'm not sure I have that number in front of me, Let me, let me circle back with you.
And then a question on <unk> on supply issues and.
The motion and auto I think there have been some.
Whether it's batteries or filters and the first quarter are you seeing any any stock availability issues impacting or is that pretty much behind us.
No I wish it were behind US Brad I know, you and I talked last quarter.
And we specifically called out batteries, while <unk> gotten better and we had a great quarter and our battery business.
There are still some pockets where we are.
We're struggling.
<unk> filters you mentioned.
Could be a whole lot better in terms of our in stock levels, but we're seeing it and other product categories as well so that's what I mentioned earlier.
Look I know the challenge of some of our suppliers are up against with raw materials with the global supply chain labor issues.
When that comes back up to more normal level levels, that's just going to be increased upside for our business.
Okay, Great and then one just housekeeping issue I guess, you didn't talked about off the charts on our retail and what was the percentage of retail versus commercial I guess in the U S. Napa of this quarter.
In terms of well and in terms of our percentage increase.
Brett our retail business was up.
Greater than 20% and I'd just as per.
And the sales sort of how the pie gets cargo per percent of total its still 20 plus percent.
Look forward, we're still going to live and die and on.
The <unk> side.
Brett, but it but it is great to see that retail DIY business continuing to accelerate and look we as you know we put a hell of a lot of effort into.
Improving our stores improving our.
Layouts, and our stores our store hours are folks in the stores.
So we've put a lot of effort behind it and we've talked a lot of about it on these calls for the year. So it's really great to see that segment continuing to perform really well.
Okay, great. Thank you alright, thank you.
And our next question is from Seth Basham with Wedbush. Please proceed with your other question.
Okay.
Okay.
Okay.
Hello, Seth as you lie and muted.
Yes, maybe we can come back the staff the.
At the end here and we can keep moving.
And you hear me or.
Well, we got and out.
One of them.
And.
Yeah.
Uh huh.
They're standpoint, Hello, Seth you.
You can go and how to speak now.
Oh, sorry about that and.
Paul My question is around market share I don't know if you can quantify how you think that your core Napa business ex fleet is doing and the U S. This quarter relative to recent quarters.
Well look it remains to be seen right, where the first one out this quarter.
We're pleased with our performance and certainly pleased as it stacks up against.
2020.
And we've been we've been.
Waiting for our commercial business to bounce back and really pleased to see that happened in the quarter. So I do believe.
That was the solid performance the retail business I already touched on with Brad debt was solid.
What we're pleased to see.
What we're pleased to see that is that the fleet business and.
And what we reference as well.
Our ibs business really beginning the bounce back so.
I think we're doing quite well and I'm really proud of the Napa team for the quarter they put up.
Gotcha, and I presume that you saw a bounce and sales around some of the stimulus check distribution and January I'm, probably the more so and March for your DIY business, but was there a pronounced bounce around the seamless track of distributions for your do it for me business as well, particularly as you look at the sales trends versus 2019.
Yeah, I I guess, one comment I would say is the trends and Paul alluded to it.
January started off really.
<unk> February was a little softer March was our strongest month and the quarter and it was it was pretty even between the commercial and the DIY. So I think you laid it out as it happened.
Got it thank you very much thank.
Thank you.
And our next question is from Brian Mannheim Route.
And I believe the <expletive>et management. Please proceed with your question.
Good morning, everyone. All the real learning as I, just want to say of low.
But also.
The the investments for next generation vehicles be the electric.
Electric electric or otherwise, but this also include potentially.
Investing in ways to help with.
Charging stations and support for the fleet as well.
It does yes, I think we're doing a lot of work around all of our choices on this topic and.
I think it's important to note, though just to reemphasize that we are intensely focused on the part that we serve today the ice engine and of course.
And there's going to be the main focus for us as we move forward. We just think it's prudent to be doing work and understanding of the facts and developing strategies.
As the business evolves. So we're open and looking at everything and refining the strategy as we move forward and.
And Brian I would just add and first of all of its good to hear from the again welcome back.
We.
With our presence in Europe.
It's.
And the European Union have and double down on on Evs.
As will rightfully pointed out we're still.
The majority of the time focused on and on our business at hand today with the internal combustion engine, but we do have an eye towards the future and our European team.
And will be leading certainly leading that effort because we believe we will see it.
The shift the tipping point, if you will and Europe, most likely before we see it here and the U S.
I agree and I'm, just pinch hitting so.
And I used to hop on for today. Thank you I'll take care and have the AR.
And.
Great second quarter. Thank you appreciate it Brian.
And our next question is from Daniel <unk> with Stephens Inc. Please proceed with your question.
Hey, good morning, guys. Thanks for taking our questions.
Carol and I wanted to start on a follow up on the guidance I think you raised full year by about 100 bps of.
And one of the please correct me if I'm wrong I think the last guidance didn't include any FX tailwind, which we're obviously a nice tailwind of <unk>. So can you maybe just parse out how much of the guidance range.
And then maybe digging into it and have you made any changes to your underlying organic growth guidance for each segment based on the first quarter results.
Okay. Yeah, great question, so really talking about our guidance so the stronger sales and earnings for the full year really reflects our accelerated recovery and the first quarter. So we did consider the favorable FX, we considered some of the other unusual items and the quarter, but we didn't we did not if you will.
We'll <expletive>ume what occurred in Q1.
And would be baked into that as full year numbers for the rest of the year. So we have really taken sort of and.
The more conservative cautious approach if you will on the currency and non modeled that and so again that that is contemplated and then you asked about the same store sales guidance. So if you look at raising at a 100 bps for in total and for each segment. We did the same thing on the comp store sales so platform and of plastics.
The sign on automotive and plus the rate of plus 5% on industrial for the same store sales.
Got it that's helpful. And then maybe following up on industrial and Paul I know you love to talk about it.
I think you said last quarter January was up one I think you guys. Just said March was up seven to get the full quarter down to.
February was down meaningfully is that all just weather driven or was there anything else that happened in February as we look at the first quarter industrial results.
Yes, there is.
There's not much else for us to point to.
Daniel.
Again, when you look at the January we got out of the gates pretty good low single digit increase and as we mentioned March was a record month for the motion team.
February we were hit hard we had over 100 branches that were shut down and I think of.
And maybe a better way to look at it is if you were to combine fab and March together and.
That's probably a true picture of.
Of the first quarter, but as I mentioned earlier.
We've been through this cycle, many times with motion and when that business turns the capex projects start to move.
Plants start to reopen.
That business really really takes off and I will tell you we're off to a good a very good start and and.
On April and our expectation is it's going to continue through the balance of the year.
Got it well I'll leave it there and the interest of the time, but thanks for the most of and best of luck guys. Thank you appreciate it.
And our last question will be from David Bellinger with Wolfe Research. Please proceed with your question.
Hi, everyone and thanks for taking the question and really nice results today.
Thank you just the follow up on that.
The follow up on my last question on the industrial side. It seems as though of what segment of it's already turned the corner and March.
You talk about the line of sight.
Some of the demand over the next couple of quarters and.
The potential supply constraints, along for that growth expectation to extend out moving into 2022 at this point.
Well on our line of sight as you know many of these.
Capex projects.
There's long lead times.
Many of these projects.
But they are they are rolling and we.
I was actually out in the field with our industrial team.
A couple of weeks ago first time, we've really been out visiting customers and <unk>.
And the the universal.
The feedback we get as we visit customers as factories are right now they are humming and.
And if that's happening and they're moving back into full production. That's generally all very very positive for <unk> for the motion business. So so our expectation as we look forward.
Motion is that we're going to have a solid a solid year.
And it's going to continue and should continue on really end of 2022, and Thats and Thats further verify David when we look at the.
And the PMI numbers and the industrial production numbers all just further support.
The kind of growth numbers, and we believe we will continue to produce and 'twenty one.
Thanks for that detail on that's very encouraging and.
And then just on the auto parts business and in your prepared remarks.
The inventory availability of as noted again this quarter.
So can you give us more detail behind that and any ongoing initiatives. There is there some way to quantify the improvement either in terms of parts availability of yours.
The sounds like Youre, saying.
Yes, it's a great question and obviously continues to be.
Priority focus for us, making sure as I said and as those prepared remarks that we've got the right product and the right market at the right time, so it's absolutely and ongoing initiatives.
We are watching and studying improvements and the global supply chain.
We are encouraged that it's getting better.
And so we.
We are.
Really watching that to improve as we think about by category.
Of the.
Efforts to make sure that we've got the right products. So it's getting better, but we're going to have to stay focused on it.
I would also add on to that David debt, and we haven't really talked much about our business and Europe.
Here this morning, but our European team had a great quarter up 15%.
And we're making great strides great inroads across across Europe, but I would I would tell you that I believe one of our one of the real.
Pluses for US this quarter was we have product and we had plenty of inventory and we had it as will said at the right place at the right time, which I think enabled us to potentially grow.
Outside of what the the overall market grew in Europe and the.
In Q1, so really pleased with the progress we continue to make on that part of the world.
Always appreciate it thanks, so much alright. Thank you.
And we have reached the end of the question and answer session of and I'll now turn the call over to the management for closing remarks.
Thank you we'd like to thank all of you for your participation and the Q1 earnings call. Today, we look forward to reporting out to you on our Q2 results and we appreciate your interest and support of genuine parts company, Thanks and have a great day.
And this concludes today's conference and you may disconnect your lines at this time.
Thank you for your participation.
Good day.
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