Q1 2023 Genuine Parts Co Earnings Call
Good day, ladies and gentlemen, welcome to the genuine parts company first quarter 2023.
Conference call.
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At this time I would like to turn the conference over to Joe <unk> Senior Vice President Investor Relations. Please go ahead.
Good morning, and thank you for joining us today for the genuine parts company first quarter 2023 earnings conference call.
With me today are Paul Donahue, our chairman and Chief Executive Officer.
Will stengel, our president and Chief operating Officer and.
And Bert Napier Executive Vice President and Chief Financial Officer.
In addition to this morning's press release, the supplemental slide presentation can be found on the investors page of the genuine parts company website.
No we will not be playing the slides through the webcast.
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 in the earnings press release.
Today's call May also involve forward looking statements regarding the company and this businesses.
The company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest SEC filings, including this morning's press release.
The company assumes no obligation to update any forward looking statements made during this call.
Now I'll turn the call over to Paul for his remarks.
Thank you Sid and good morning, welcome to our first quarter 2023 earnings Conference call.
We were pleased with the continued strength and momentum in our businesses and to report results that exceeded our expectations for the quarter.
Before I share my comments on the first quarter I want to share a few thoughts from our 2023 Investor day, which we hosted just this past month.
We use this event to convey our confidence in the bright future of genuine parts company.
And update everyone on our strategy and the many opportunities we see for long term profitable growth.
During the course of the day, we highlighted our rich history.
Ongoing transformation and strategic priorities, which we showcased through several key initiatives and an interactive external.
Our panel discussion with our global business unit leaders.
Loud us to share specific business and market opportunity and provide insights to the collaboration among our leaders and synergies across the businesses.
Finally, we provided three year financial targets, including a compelling outlook for double digit EPS CAGR.
Double digit EBITDA and segment profit margin by 2025.
It was a great day for the GPC leadership team and hopefully an informative and productive day for all of our attendees and everyone in the financial community more broadly.
If you missed it we invite you to view the presentation on our Investor Relations website.
So now, let's turn to the first quarter.
We are proud of the outstanding work by our global GPC teammates with sales and earnings coming in ahead of our expectations.
Our first quarter performance was a clear example of how our strategic transformation to a global automotive and industrial company is.
The competitive advantage it advantage that distinguishes GPC in the marketplace.
We benefited from our business mix and the geographic diversity of our operations with continued strong performances in our international automotive businesses and in the industrial segment.
Few highlights in the quarter include.
Record quarterly sales of $5 8 billion up 9% from the prior year.
Segment margin of nine 1% up 50 basis points from 2022.
Earnings per share of $2 14.
Up 15% from adjusted EPS last year, and our 11th consecutive quarter of double digit adjusted earnings growth.
And finally, we strengthened our balance sheet, while generating solid cash flow to support our growth initiatives and capital allocation.
The global GPC team is focused on driving accelerated sales and earnings growth.
Continued margin expansion and strong cash flow through dynamic economic conditions.
Across our businesses, our teammates are aligned and executing on our strategic plans to deliver outstanding customer service.
Continued market share gains.
And industrial.
Demand trends held strong throughout the first quarter with new and existing customer activity and reassuring trends each presenting growth opportunities.
We believe our continued momentum in industrial is due to the diversity of our product and service offerings and end markets, which all performed well again this quarter.
Our acquisition of K D G and enhanced capabilities in industrial solutions, including automation fluid power and convenience are proving to be competitive differentiators and we remain bullish on this business in the near term.
Our global automotive business continues to benefit from the geographic diversity of our markets, which helped offset the headwinds of a warmer winter embolic kind of weather conditions at our U S automotive business in Q1.
In addition, the automotive aftermarket is benefiting from trends such as the ongoing increase in miles driven.
In aging and complex vehicle fleet and rising interest rates and continued high prices for new and used vehicles.
They are all key drivers to ongoing growth in demand, especially for the Difm's segment, which represents 80% of our global automotive sales.
So after delivering back to back record years, we are pleased with the solid start to 2023, and we continue to expect another strong year of profitable growth.
Looking ahead, we are confident that <unk> is well positioned with the right strategic plans.
<unk> fundamentals and rock solid balance sheet to pursue accretive organic and acquisitive investment opportunities.
While also returning capital to shareholders through dividend and share repurchases.
So again, we thank each of our <unk> T made for taking great care of our customers around the world.
So now I'll turn the call over to will.
Thank you Paul Good morning, everyone. I'd also like to thank the global GPC team for the strong start to the year. We appreciate all your hard work to take care of our customers every day.
As Paul referenced earlier, the pride in our business was on display at our Investor Day last month.
We were excited to share our vision unique advantages market opportunities and how we're winning as we execute strategic initiatives. Our initiatives are focused on talent and culture sales effectiveness technology supply chain and emerging technology, all complemented by a disciplined M&A strategy.
As we shared during the sessions our team is well positioned with leadership positions in attractive fragmented markets with established customer relationships global supplier partnerships technical expertise and a scaled global infrastructure. We worked together with shared values is one GPC team to create customer success.
And shareholder value.
Turning our attention to the first quarter performance and our two business segments.
Total sales for global Industrial segment were $2 3 billion, an increase of approximately $240 million or 11, 9%.
Comparable sales growth increased approximately 12, 1% in the first quarter versus last year.
This marks motions eighth consecutive quarter of double digit comparable sales growth.
From a cadence perspective through the quarter January and February were the strongest two months on a one year basis, but on a two year basis sales were relatively consistent throughout the quarter in.
In March 2023 motion eclipsed our previous monthly sales and profit record set in March of 2022.
The sales growth at motion continues to be broad based with double digit growth across most product categories and major industries served.
During the quarter, we saw strength from industries, such as food products chemicals mining and oil and gas.
In addition motion continues to see solid performance with its corporate account initiatives as sales with these customers grew approximately 20% in the first quarter.
The corporate account strength is driven from not only new customers, but also strategic renewals of existing relationships.
In Asia Pac our motion business continues to build on its momentum posting sales and profit growth well over 20% for the quarter.
We realigned the leadership of the industrial business and Asia Pac by organizing under one automotive and industrial leadership team in the fall of 2020 to.
The team has made impressive progress to identify opportunities take action and deliver performance.
Industrial segment profit in the first quarter was approximately $262 million or 11, 6% of sales representing a 230 basis point increase from the same period last year.
The continued profit improvement for this segment reflects excellent operating discipline on strong sales growth both in North America and Asia Pac.
In addition, the team in North America continues to build on the synergies from the KCG acquisition last year.
As we reported at our Investor day, Thanks to the incredible team work for many motion realized over $30 million in synergies in the first year and we expect to achieve our target of over $50 million in total synergies by the end of this year one year earlier than our initial expectation.
For the quarter Global industrial represented 50% of total GPC segment profit.
Turning to the global automotive segment total sales were $3 5 billion, an increase of approximately $230 million or 7% versus the same period in 2022.
Total automotive sales benefited from our global diversification as our businesses outside the U S posted high single digit to double digit growth in local currency during the fourth first quarter.
From a cadence perspective through the quarter global automotive sales were strongest in February and March.
On a comparable basis global automotive sales increased approximately 7% with comps ranging from low single digits in the United States to low double digit growth in Europe and Asia Pac.
As Paul mentioned, we remain encouraged by the solid industry fundamentals and team execution, which we believe will continue to drive profitable growth.
Global automotive segment profit in the first quarter was 264 million essentially flat with last year and segment operating margin was seven 5% compared to eight 1% in 2022.
The strong performance of our European and Canadian in Asia Pac businesses helped to partially offset lower margins in our U S automotive business.
Profit in the U S automotive business was impacted by a sluggish start to the year on sales combined with planned investments in wages and elevated freight out expense.
Now, let's turn to an overview of our automotive business performance by geography.
In the U S. Automotive sales grew approximately 4% during the quarter with comparable sales growth of approximately 3%.
The first quarter represents the toughest year over year comparison of 2023 with an approximate 12% comp growth in the first quarter of 2022.
Looking at our average daily sales growth was relatively consistent throughout the quarter. However, milder winter temperatures combined with extreme weather events impacted automotive demand in certain product categories and periodically disrupted operations.
As examples sales of batteries were positive, but below internal plans during the quarter, particularly in the northeast.
More broadly, we offset sluggish categories, and heating and cooling and under car with strength in various core categories, such as filters brakes, and fluids, all of which had growth above the U S average.
Growth was consistent across our regions, except for our west region, which experienced a more pronounced negative impact from weather, which temporarily disrupted many of our operations.
Overall, we estimate that weather negatively impacted U S automotive sales by approximately 1% in the quarter.
Sales to both commercial and retail customers were positive with mid single digit commercial growth outpacing retail.
Our commercial business saw sales increase across all customer segments, including continued strength with our fleet and government channel and mid single digit growth in our Napa Auto care network.
The sales performance at U S. Automotive started the year slow relative to our expectations. As a result, the team acted during march to address cost while balancing its longer term investment priorities the.
The benefits of the actions will be weighted towards the second half of the year.
Sales have improved during the first half of April when compared to March and the team remains focused on delivering in 'twenty three despite the soft start to the year.
In Canada sales grew approximately 9% in local currency during the first quarter with comparable sales growth of approximately 9%.
Our Canadian performance reflects strong growth in several categories like brakes chassis and filtration all of which were up double digits in the first quarter.
In addition, we saw strong performance in our heavy duty business, which outperformed the total Canadian growth rate.
These categories helped to offset headwinds in certain weather related categories like batteries, which were pressured by a milder winter season.
We're pleased with the strong quarter in Canada, and we continue to see compelling opportunities for long term growth due to our leading market position solid industry fundamentals share gain initiatives and strong team execution.
In Europe , our automotive team delivered another exceptional quarter with total sales growth of approximately 22% in local currency and comparable sales growth of approximately 13%.
The strong growth and market share gains across Europe continue to be driven by solid execution of key initiatives.
During the first quarter, we saw high single digit to double digit growth across each of our geographies as our teams continue to win new business with key accounts drive higher share of wallet with existing accounts and expand the Napa brand in the region.
We're on track to grow our Napa branded sales from 300 million euros in 2022 to approximately 400 million euros in 2023.
Our entry into Spain, and Portugal in 2022 has exceeded our expectations and value creation plans as it benefits from the Napa brand in European scale advantage.
In addition, our teams expanding our next drive EV service shops to approximately 400 locations up from 150 shops in 2022.
We believe our next drive offering will position the European team to lead our industry in the growing E B aftermarket.
In the Asia Pac automotive business sales in the first quarter increased approximately 14% in local currency from the same period in the prior year with comparable sales growth of approximately 11%.
Both commercial and retail sales continued to perform well with both growing at a double digit rate in the first quarter.
In addition March saw record sales and profit results across several go to market channels, including Repko, Napa and our motorcycle accessories.
Asia Pac continued to make impressive progress on its talent and culture and customer centric growth initiatives.
We continue to complement organic growth with strategic acquisitions to capture share in our fragmented markets and create shareholder value.
During the first quarter, we completed several bolt on acquisitions, primarily consisting of small automotive store groups that increased local market density in existing geographies.
Our acquisition pipeline remains active and we will remain disciplined to pursue transactions that extend our leadership positions and create long term value.
In summary, the global GPC team delivered strong first quarter results and we remain confident in the outlook for the balance of the year, Despite a dynamic environment.
We will execute our near and long term initiatives and focus on what we can control.
Our investments in our people customer solutions technology supply chain and emerging Tech, we will continue to enhance our capabilities and leadership positions. Thank.
Thank you again to the entire GPC team for the hard work and performance with that I'll turn the call over to Bert.
Thank you will and thanks to everyone for joining US today, we are very proud of our teams as they continue to navigate a dynamic environment and I am pleased to walk you through the key highlights of our first quarter performance.
Before I get started on the details of our results I would like to note that we had no nonrecurring items in the first quarter of 2023 <unk>.
However, our comparisons to the prior year due excludes certain nonrecurring items in 2022, primarily related to the integration of KCG.
Total GPC sales increased eight 9% or $470 million to $5 8 billion in the first quarter of 2023.
This reflects an eight 7% improvement in comparable sales, including mid single digit level than inflation and a two 4% contribution from acquisitions.
These items were partially offset by two 2% unfavorable impact of foreign currency.
Overall, our balanced portfolio and global diversification drove a record total sales and strong earnings to start the year.
Our gross margin was 34, 9% in the first quarter, improving 30 basis points from our adjusted gross margin last year.
Primarily driven by ongoing investments in our pricing and sourcing initiatives.
The favorable impact of these and other initiatives contributed approximately 60 basis points of core gross margin improvement.
These gains were partially offset by two key headwinds.
First a shift in sales mix related to the strength of our industrial business, which impacted gross margin by approximately 15 basis points and second foreign currency, which also impacted gross margin by approximately 15 basis points.
As we highlighted at Investor day, our ongoing execution of key strategic initiatives around gross margin continued to drive strong results.
Our total operating and non operating expenses in the first quarter were approximately $1 6 billion up 9% from adjusted expenses in 2022 and in line with the prior year at 27, 9% of sales.
The increase in expenses in Q1 reflects the combination of solid discipline in managing core costs offset by planned investments in our teams due to inflationary wage conditions.
The increased spending in technology to support our ongoing strategic initiatives.
As will noted with elevated operating cost pressuring margins in the first quarter in our U S automotive business.
We have taken actions in March to address these headwinds, which we anticipate to persist into Q2.
We expect these cost actions combined with our ongoing discipline on cost across the remainder of the business.
And the execution of our broad base of strategic initiatives to drive further improvement in operational efficiencies and productivity for GPC.
Our performance in the first quarter generated total segment profit of $526 million up 16% and a segment profit margin of nine 1%, a 50 basis point improvement from last year, and our fifth consecutive quarter of segment margin expansion.
Our first quarter net income was $304 million.
Our $2 14 per diluted share.
This compares to adjusted net income of $266 million or $1 86 per diluted share in 2022, an increase of 15%.
Our ability to deliver our 11th consecutive quarter of double digit adjusted earnings growth is indicative of the hard work and crisp execution by our teams to implement our strategic initiatives across our global operations.
Turning to our cash flows we generated $198 million in cash from operations in the first quarter.
This compares to $399 million in cash from operations last year, which included the sale of 200 million and receivables under our AAR sales agreement.
Free cash flow was $109 million and we closed the first quarter with $2 1 billion in available liquidity.
Our debt to adjusted EBITDA is one seven times, which compares to our targeted range of two to two and a half times.
We are well positioned with financial strength and flexibility to take advantage of growth opportunities that may become available across the business.
We remain committed to our long history of disciplined capital allocation.
Our four key priorities for capital allocation are unchanged and include investment in our business through capital expenditures and M&A and the return of capital to our shareholders through dividends and share repurchases.
In the first quarter, we invested $88 million in capital expenditures, primarily around supply chain and technology.
These investments support many of the initiatives, we shared at Investor Day that we believe will drive the modernization of our business moving forward.
We also invested 40 million for acquisitions, which remains a key element of our growth strategy as will mentioned earlier, we continue to generate a robust pipeline of acquisition targets for our businesses.
For the quarter, we returned $194 million to shareholders in the form of dividends and share repurchases.
This includes $126 million in cash dividends paid to our shareholders and $68 million of cash used to repurchase 411000 shares.
We are well positioned with the cash flow to effectively deploy our capital through all business cycles.
Turning to our outlook for 2023, we are updating our full year guidance previously provided in our earnings release on February 23rd and reaffirmed on March 20, <unk> at our Investor Day.
We are raising our guidance for diluted earnings per share to a range of $8 95 to.
Two $9 10, an increase of approximately 7% to 9% from 2022.
This represents a 15% increase from our previous guidance of $8 80.
To $8 95.
Our sales guidance is unchanged and we continue to expect total sales growth for 2023 to be in the range of 4% to 6%.
By business segment, we are guiding to the following.
4% to 6% total sales growth for the automotive segment with comparable sales growth also in the 4% to 6% range.
For the industrial segment, we are expecting total sales growth of 4% to 6%.
Also with a 4% to 6% comparable sales increase and with the ongoing assumption of stronger first half year over year sales growth relative to the second half of 2023, although our view on Q2 and Q3 has improved modestly.
Turning to a few other items of interest.
We are raising our outlook for cash from operations to a range of $1 3 billion to $1 4 billion, an increase from $1 2 billion to $1 4 billion previously.
We are raising our outlook for free cash flow to a range of $900 million to $1 billion, an increase from our previous guidance of $800 billion to $1 billion.
We continue to plan for Capex of 375 million to $400 million for the full year, which includes incremental investments in technology and supply chain among others.
In closing we are very pleased with our strong start to the year and positive momentum in our business.
While our U S automotive business had a slow start to the year. We've started Q2 with good sales momentum and expect our team to execute build traction through the second quarter and have a solid second half of 2023.
Our outlook for the full year reflects the ongoing confidence in our strategic plan and our ability to execute through the dynamic economic environment.
GPC has truly differentiated with our business mix global footprint, our size and scale the execution of initiatives and our talent, we have a unique value proposition.
As we shared at Investor day, our team is well positioned to execute our plans to deliver our targets for a double digit EPS CAGR over the next three years and double digit margins by 2025.
Thank you and we will now turn it back to the operator for your questions.
Thank you we will now begin our question and answer session.
Ask a question you May press Star then one on your telephone keypad.
If you're using a speaker phone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question will be from Kate Mcshane from Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for taking our question.
Just one one housekeeping question it sounds like.
There was a little noisy during the quarter, but the fundamentals are still intact can you remind us what exposure you had to California or parts of the west.
Yeah, Kate it's a good question you know I would say, we don't have an outsized exposure to any one region.
The breakdown of the U S automotive revenues, probably directionally correct equally split across the regions.
Okay. Thank you and then I.
I think you mentioned in the prepared comments that.
Because of the sluggish start in January of your team.
Pivot into some new strategies that will impact the second half can you talk a little bit more about.
What that is and what impact do you think it will happen in the second half.
Yes, Kate this is Bert I'll talk a little bit about maybe.
Maybe I'll, maybe I'll start with the outlook as the starting point just to give you some context for the full year I'll talk a little bit about Q2, and then I'll flip it to will and we'll give you a little bit more color on the cost actions in U S auto specifically.
When we think about the full year, we did raise the outlook 15th.
That's a one 5% increase on the top end of our range really on the back of a better than expected first quarter and our expectations. As we've commented for U S auto to recover against some of these Q1 headwinds and a stronger view on motion performance over the coming two quarters. When we think about that do want to remind everyone that we do.
<unk> growth to moderate in 2023, we had exceptional growth in 2021 and 2022, although we're still looking at very solid earnings growth at 7% to 9% year over year with a new range. The business continues to perform well, we're going to continue to capitalize on size and scale and bullish against our execution of our own.
Strategic initiatives and I think we're off to a great start as we March towards our 2025 targets that we shared on Investor day, We're obviously being very balanced and being prudent against the external factors that are out there inflation levels.
Aaron currency and the geopolitical landscape just to name a few when I think about Q2 just to give you. Some color there about how we're thinking about the upcoming quarter. We started off in a good place global automotive.
In line with April 7% on the top line and within that as will stated in his prepared remarks U S. Auto has started off with good momentum in the month of April accelerating from March.
Continued strength in international auto in the global industrial business momentum has carried into Q2, but again, we do expect that to normalize against the Q1 rate.
Those cost pressures and U S auto I think will persist into the early part of Q2 for the balance of the quarter probably.
And we'll talk about those just in a moment on what we're doing to get us back to the expected level of performance that we're looking for in the second half.
One thing I'd remind you two on Q2.
As just as you think about your models recall that Q2 of 2022 represented.
Our strongest earnings growth last year and as a result, when we think about our guidance for the full year.
Second quarter of 2023 will be our our expectation will be that it'll be our lowest earnings growth rate for this year. So we'll maybe you want to just take that from there and fill in a little bit more specific on the cost actions.
Yeah happy to birth.
Hey, Dave I would say, obviously you know the teams around the world have been incredibly focused on costs. So.
I wouldn't say, there's any necessarily new actions or levers being pulled I think we're just stepping up.
The urgency and the focus at U S automotive they are predominantly around.
As you would suspect all things people in particular round.
More rigor on over time in stores and Dcs, just being super thoughtful to make sure that we're balancing costs with taking care of our customers TNA expense, we bought toe hold together some accelerated plans around merchandising and freight cost strategies.
Which will take a little bit of time to materialize here through the second half of the year, but.
We're going to balance near term cost actions with as we've talked about long term investments.
And make sure that we're doing the right thing for the business over the medium and long term.
Thank you.
And the next question will be from Bret Jordan from Jefferies. Please go ahead.
Hey, good morning, guys good morning.
On the U S. Auto I think you said the comp was plus three could you break out price versus units in that number.
Yeah.
So total GPC price.
Mid single digits.
Automotive slightly higher than that I would put U S automotive.
That category industrial slightly under the mid single digit low single digit.
So probably mid single digit plus is probably a good estimate for U S order.
And then you talked about margin benefits from pricing initiatives and you know could you talk about what youre seeing out there and I guess auto.
Industrial as well as sort of sort of market share dynamics and how the competitive pricing environment looks this year. Obviously, you guys were investing in price a year or so ago, but.
Auto and auto Pluses got chapter 11, so maybe there is some sort of change in dynamics out there as far as the competition.
Yeah, It's a good question Brett.
I would say generally speaking in U S. Automotive there we haven't seen any material change in the pricing dynamics as we've talked about.
Many quarters before it is a dynamic environment. That's why we're so focused on our strategic pricing initiatives and all the investments we're making there you know like every industry people are picking and choosing and executing strategies in the market just like we are but.
But it is a kind of a rational but dynamic market. So we're really not seeing anything materially different than what we've seen in the last few quarters, we're going to focus on what we think is right from a strategic pricing perspective, as you heard at Investor Day, we put a lot of investment into tools and talent.
And new rigor around collecting intelligence to make sure that we're in the right place for our customers. You also heard a lot about the Napa brand and the role that that plays in particular in Europe in our assortment strategy and all the great work that our merchants and sourcing teams are doing around the world. So we're being very thoughtful in this <unk>.
This environment, but I Wouldnt say theres a material change.
Despite some of the developments that you noted in your question and Brett This is Burton.
Brett I'll, just add a little bit to that and you see that effectiveness with our margin gross margin expansion here in Q1 up 30 basis points.
And within that as I mentioned in my prepared remarks, 60 basis points of improvement from these activities that will just outlined so the core is really performing well we had some headwinds from mix and FX, but we're really pleased with how all of that work is flowing through.
And delivering in terms of gross margin improvement.
And just sort of follow up on that point now that you've got Asia Pac sort of industrial and auto under one team.
The potential to leverage the sourcing buying products from the same suppliers for both segments is that something that you are seeing better traction in down there versus the broader portfolio.
I wouldn't I wouldn't isolate it to down in Asia Pac in fact, we just had our global sourcing team mates here in Atlanta from all around the world to continue to build on this exciting momentum where you know all geographies on both sides of the business will be better aligned to end.
More press, one where we have our opportunities so I wouldn't say that.
Asia Pac is benefiting now more on sourcing having said that they are benefiting from being together as a team and.
And that's a big part of how they're thinking about their business as they move forward and so whether you're talking about.
The organization design back office cost et cetera, I think theres a lot of opportunities for them to continue to work better as one organization.
When you do broader integration globally, if it works at Asia Pac, we just think about merging more of the overhead on both sides of the business.
I think I think we have an opportunity to work together to leverage our scale. The definition of what you mean by merge business units probably not.
But working together as a team you heard at Investor day, the importance of one GPC. That's the perfect philosophy around how do we work together to make sure that we're capturing all the opportunities as a global organization.
Alright, thank you.
Thanks.
And the next question will be from Scott Ciccarelli from Troy Securities. Please go ahead.
Hey, Good morning, this is Josh <unk> on for Scott.
Segment margins with automotive down 60 basis points in the quarter industrial up over 200 can you just unpack a little more what the drivers were there for each segment.
Hey, Josh it's Bert I'll take that one and I'll start kind of at the GPC level, when we think about.
Margin expansion for gross margin really where we're focused on some of that drag is in SG&A SG&A was up 10 basis points year over year that is really a mix of three factors inflation planned investments in the business and then offset by really strong leverage across the business outside of the U S auto for.
For the quarter, when we think about how to really think about the elements I would say, we had SG&A pressure about 50 basis points from those planned investments that we shared at the beginning of year of the year and again at Investor day and at.
And talent now some of the talent cost is certainly going to be inflation, driven but we're making.
Thoughtful investments in talent in it which.
Which we see as critical for the future when you look at U S auto the core.
<unk> was impacted by higher personnel costs, there and flight freight delivery costs. So that's the outbound freight from a DC to a store.
The waste side was really again the impact of planned investments we made to ensure we're staying competitive I think everybody is facing that across all businesses.
Talent is a key part of our long term success on the freight side, we're seeing the impact of higher rates from our carriers as they're looking to do the same thing we are looking to cover higher wages due to driver shortages. So those two things on the automotive side, where we're part of the equation.
Other thing I would just say as I've turned back to this weather consideration. We did really didn't anticipate that as you would expect neither are forecasters here in terms of weather, but.
We didn't anticipate some of those weather impacts, particularly coming off the very strong December we had and U S. Auto Saar staffing models, we're set to align to our sales run rate, where we exited 2022 and that was probably a little bit higher than we needed to support Q1 softer sales levels. So all of that together compressed margin in U S auto.
And was a bit of a headwind for us.
As we look ahead you know the cost of business is doing a little of doing business is a little higher.
<unk> conditions are certainly contributing to that we're reducing where we can and again investments we're making in the business that we shared in Investor day are a big part of driving efficiency. So what I'll do is kind of take that back to the top level again, and maybe talk about these wage investments in it and why we think there is so important and important to us on the <unk>.
Side, we're making investments to improve our capabilities and modernize our platforms and to being sure that extensively last.
Last month, we think those are the right things to do but in certain cases, the pivot in that space is to cloud based technology and as many of you know that changes the dynamic from a capital costs and operating costs and as I shared earlier. This year, that's about a 30 basis point drag for us for the year.
On the talent side, it's a very competitive market out there for talent and were making smart investments with our people with a mid single digit wage increase I think that's in line with most businesses.
Slightly higher for us in 2022, and we also made the decision to take some of the health care costs, we were seeing and absorb them here at the corporate level, rather than what we might normally do and pass those on to our employees through higher contributions from them and Thats. The right thing for our team right now so I think that altogether, we got a little bit of deleverage for the year 30.
30% to 40 basis points. Those two things are $60. So you can see we're really leveraging outside of that U S auto business right now and with that we expect the segment margin for the full year to be up 20 to 40 basis points and as you saw in Q1, we were up 50 basis points.
Got it Okay. That's helpful. And then can you just walk us through what you saw in terms of inflation during the quarter and what your expectations are for the balance of the year here.
Sure Yeah, I'll take that one as well.
As we look at Q1 inflation moderated slightly during the quarter that was in line with our expectation again, we think monetary policies here in the U S and around the world are having the desired effect, but that does take a little time to flow through Q1 inflation in sales all GPC total was mid single digit.
Auto was high single digit and again industrial which has been very consistent low single digits Rx.
Our expectation for inflation for the rest of the year is for it to continue to moderate.
That's pretty consistent with the view I just shared at Investor day, obviously, the actual impact is yet to be seen but our assumption is that the automotive business will tick down from high single digits to low single digits to close out the year.
Industrial stay in that low single digit range in that for GPC that translates and us going from mid single digit to low single digit.
Okay got it very helpful. Thank you.
Okay.
And our next question will come from Christopher <unk> from Jpmorgan. Please go ahead.
Okay.
Christopher Your line is open perhaps your line is muted on your own.
Thanks, Good morning, everybody. So a couple of follow up questions. First is it fair to say that you were expecting U S. Napa to be more like a 4% comp for the for the first quarter considering that you pointed out a point of headwind.
On the weather side and is that a fair interpretation of of where the business is running in April .
The first part of your question is fair.
And the second part of your question is fair.
Okay.
So you know dovetailing back to the U S. Napa.
Napa Division you talked about.
20 to 40 basis points of segment margin expansion. So was the original is the original plan that you would deleverage.
The Napa operating margin due to the investments.
Chris This is Bart so when the when I talked about 20 to 40 basis points of segment margin improvement I'm talking about GPC consolidated.
I don't really want to get into parsing, the onion too finely between the elements of that but we were not expecting margin declines in either segment for the year.
Math would be difficult to achieve 20 to 40 basis points being up consolidated for either of the two segments to be down year over year look we had a we had a softer start to the year in U S auto.
We've got a great plan here in place with some cost actions, we're taking that will take a little time to build traction and auger and through the quarter. We're looking for a really solid second half there and building that momentum across and we feel good about that.
Got it and then just on the freight front understanding that Sir some wage cross cost pass through and driver shortages.
Fuel prices surged.
In March of last year, and now all your freight out I'm, assuming is a periodic expense so should the freight start to be at.
Tailwind here in the second quarter, and then you know.
How long before maybe some of the capitalized freight costs turned to a tailwind later in the year. Thank you.
Thanks, Chris It's Bert again look on the on the cost of Ocean freight those that are included in our inbound and cost of goods sold.
Gross margin projection for the year and our guidance assumes we get a bit of a tailwind of that in the second half Thats clearly our expectation I think that's in line with the market on the outbound freight.
Diesel fuel is still up year over year, just slightly in the quarter.
It started out January I think in the north of 20% moderated a bit in February into the teens and then turn positive in March the net some of that was about a 3.5% increase for the quarter and fuel costs.
And so we had a bit of a headwind there on top of the rates, we're getting from the carriers in terms of fuel as it relates to diesel and that is <unk>.
Primary that's the primary component of that delivery.
Cost as we think about fuel when it goes from the DC to the store, we would expect that.
March is an indicator that that will start to tick down a bit and could be a benefit to us will mention that we've got some actions related to that on the labor side I think it's pretty sticky, though when we think about these carriers and we're all facing higher wages year over year. The cost of doing business is undeniably higher because of wage rates and I don't think those.
The date that we might get a little bit of a tailwind here on the fuel aspect.
And see how that maps itself out over the next couple of quarters.
Sorry, if I got it thanks very much. Thank you so much.
Thanks, Chris.
And the next question is from Vince.
<unk> from Bank of America. Please go ahead.
Great. Thank you.
I guess this is more of a theoretical question about acquisition opportunities I mean, historically, you've acquired businesses that are performing well, but can bring some synergies to your core operations in both industrial and automotive, but if there were underperforming competitors in either a category, where you saw an opportunity to bring gpc's distribution capabilities.
To that business would that ever be considered as an acquisition target.
Yes, it's a great question and the answer is yes.
We're going to do deals that create value that align with our strategy, regardless of how they're performing and I would say you know.
Our capabilities in this part of the business positions us pretty well as the environment gets tougher.
To be really disciplined.
On whether they are a good business or a challenged business, but if we can create value and it makes sense for our strategy.
The power of our balance sheet and our liquidity position.
That's exactly the type of environment that we want operate in so we can.
Leverage our scale.
Got you and then just on on the guidance for the year Yeah. The interest expense came down just a little bit. So it sounds like there are no near term plans to take on additional leverage but just wanted to get your thoughts about that and on.
Current debt level and any near term plans for cash outside of the opportunity that you've laid out already and here in the slides.
Hi, Elizabeth Bert look there's nothing in the near term that hasnt really changed or really for the balance of the year.
Or how we are thinking interest expense has come down a bit we've had a little less need to borrow against our revolver intra month, which has been a bit of a benefit to us and intentional.
And then when we think about the uses of cash in our capital allocation for the year, it's still still pretty balanced.
I don't have anything different than what we shared at Investor day, and no different plans. The only thing thats on the horizon as we've got a debt maturity at the end of the year.
And obviously, we will want to be thinking about the.
The environment that the capital market brings to us as we get closer to that on how we think about refinancing or paying back or some of the various options. We might have so again, just being really disciplined as we always are being faithful to our four priorities on capital allocation and no surprises for you guys.
Perfect. Thank you yep.
Thanks Liz.
And the next question is from Greg knowledge from Evercore ISI. Please go ahead.
I had a follow up on auto and then trying to industrial I just want to make sure on the auto margin. It looks like the decline was pretty much all in the U S business.
Is it fair to say that both Europe , and Asia Pacific segment Auto margins were up year on year.
That's fair to say.
Got it and then the I mean.
The industrial side.
How sustainable is the the expansion rate, but also just the level that you've gotten to an industrial or something.
<unk>, they're about the fundamental profitability of that side of the business.
Greg This is Bert I wouldn't say, there's anything fundamental that's changed other than.
Just continued strong momentum in building on the actions in that business over the last couple of years.
You build on.
Industrial team that in the motion team that is executing at a very high level of their core business.
Stellar integration of Kt G and how we've achieved synergy.
<unk> was transformational and driving additional size and scale and creating opportunity that combination has allowed us to continue to improve margin in that business as we shared at Investor day, we're looking at that business being at a 12% level and so we're marching towards that.
As a target and obviously this quarter gave you a glimpse of our progression in that regard.
And I think run the right track to hit that.
The level of profitability as we shared at Investor day.
Based on what we see right now and what we see for the next several quarters.
Hey, Greg This is Paul I would just cap off both those comments when you think about the two businesses.
Auto and industrial and we've talked about this a good bit in the past we talked about it during investor day.
If you go back a few years, we laid out our multi year diversification strategy.
And I would tell you. This is a classic quarter, where that strategy is really paying dividends and it's.
And hats off to our teams our industrial team. Our international teams are really delivered in Q1, we could not be more proud of them.
Okay, well, congrats guys and good luck. Thank.
Thank you Greg Thanks, Greg.
The next question is from Seth Basham from Wedbush Securities. Please go ahead.
Thanks, a lot and good morning. My first question is just on the weather effects going forward I'm Caramel Gyrations you saw through the winter do you expect the weather.
To be a drag on sales through the balance of the year.
Hey, Seth it's will.
Listen I don't not in the I don't think any of US are in the business of forecasting the weather as we move forward.
So no we haven't modeled in any of our forward commentary or outlook impacts from weather.
Seth.
I've been at this a number of years it was a crazy crazy.
Quarter, when I look back at our call in January we are sitting here in Atlanta, and it was 80 degrees.
Yet.
Many parts of.
The country were shut down with incredible of snowfall.
At this point in time, all we're going to do is we're going to focus on what we can control.
And our businesses are all performing at a really high level, we expect that to continue regardless of.
What mother nature has in store for us the balance of the year.
Understood and in terms of the 100 basis points drag from weather in the quarter or was it more pronounced on the DIY side and the do it for me side.
Seth I don't think we can make a distinction between DIY.
DIY and <unk> from a weather perspective, I mean, 80% of our businesses do it for me so.
But there is no distinction between the two.
Fair enough. Thank you.
Thanks, Jeff Thanks.
And our final question for today will come from Daniel <unk> from Stephens, Inc. Please go ahead.
Yes.
Good morning, everybody, thanks for taking our questions.
I wanted to start as a follow up on the industrial margin kind of outlook you guys provided Bert talks about that 12% guideposts, if I look at <unk> really strong expansion, but when growth was up double digits. Obviously, the guide is calling for growth to slow to get to that 5% midpoint for the year is your expectation just to make sure we understood that.
Correctly margins would still be up year over year for the coming quarter, just may be up less than the first quarter or how would you think about the pace of industrial expansion as that headline growth flows through the year.
Well I don't want to get into giving quarterly guidance on the industrial segment, but I will just talk about the full year and tell you that.
When you think about the industrial business, we've got as we I think we've said repeatedly high single digit.
Topline growth modeled for the first half that moderates down to low single digits in the second half based on our expectation of economic conditions, which could obviously change even with all of that even with a low single digit outlook for the second half we're expecting this segment to.
To improve its margin for the full year.
Will it be at the same rate as Q1, no. We're not we're not modeling that and you know that from our full year guidance, but.
In a low grade in a lower growth moderated environment in the second half.
That business will still perform well on a margin basis, and we expect that margin to expand for the full year, which is why we are we're looking at overall GPC margin expansion for the full year as well.
Great I appreciate that color and then to follow up on the automotive margin not to beat a dead horse but.
You mentioned the wage investments and kind of I think you've mentioned in your question. The cost of doing business has gone up I guess, what inning are we in in terms of those wage investment as and when do we begin to lap these and we could return to levering that wage line on a on a low to mid single digit type comp is what's that kind of outlook look like on that.
Investments, you're planning on making into business.
Well look I'll just tell you that we've spent the last two.
12 months or so moving down the P&L in terms of inflation impacts starting with the topline and cost of goods sold I think all businesses. So I don't want to put us in some unique camp I think all businesses are starting to feel the impact of inflation.
The heart of the P&L.
And that's now moving into freight lines SG&A personnel costs and some of those things to call. The inning on that is really tough my dad was a baseball coach and I'd like to say that on baseball ready, but to call. The inning on that one is a little difficult I just go back to the point that in this highly inflationary environment.
There's no question. The floor has been raised on the cost of doing business is not just here in the U S. It's around the world.
The best indicator for that is what all companies are facing right now with inflation on wages.
I wanted to give you a precise estimate on a range of.
Leverage I think historically the company has been talking about a three to four if it's been three to four is probably floating closer to the high or higher end of that range.
The thing we're focused on and I think it underscores and emphasize the importance of doubling down on these investments and initiatives, we're making in productivity and efficiency.
Modernizing our operations and the things you heard about in Investor Day will help US and then we're always going to be faithful to driving leverage and reducing costs, where we can.
And you saw a great example of that in the business this quarter with the leverage we gained in the motion business and the international automotive businesses.
So I think Thats a great data point on how we're thinking about modeling this going forward and obviously my guidance contemplates that as do our 2025 targets.
Yes makes a lot of sense. Thanks, so much for all the color this morning.
Thanks Daniel.
And I hope you've heard we're incredibly pleased with the strong start to the year.
And we could not be more proud of the great work being done by all of our GPC teammates around the world.
We continue to be excited with the momentum. This business is generating so I hope you feel that and heard that today in our in our comment so.
Listen all of you have a great day wherever you are and Doug and thanks for your interest in <unk>.
And thank you Sir.
<unk> has now concluded. Thank you for attending today's presentation you may now disconnect.