Genuine Parts Company (NYSE:GPC) Q4 2022 Earnings Call Transcript February 23, 2023
Operator: Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. . Please note, today’s call is being recorded. At this time, I would like to turn the conference over to Sid Jones, Senior Vice President, Investor Relations. Please go ahead.
Sid Jones: Good morning and thank you for joining us today for the Genuine Parts Company fourth quarter and full year 2022 earnings conference call. With me today are Paul Donahue, our Chairman and Chief Executive Officer; Will Stengel, our President; and Chief Operating Officer; and Bert Nappier, Executive Vice President and Chief Financial Officer. As a reminder, today’s conference call and webcast includes slide presentation that can be found on the Investors page of the Genuine Parts Company website. Please be advised this call may include certain non-GAAP financial measures, which maybe 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 issued this morning, which is also posted on the Investor page 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 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 the call. Now I will turn it over to Paul for his remarks.
Paul Donahue: Thank you, Sid. And good morning. Welcome to our fourth quarter 2022 earnings conference call. We are pleased to report the GPC team capped off a record setting year with a strong fourth quarter highlighted by double-digit sales and earnings growth coupled with continued margin expansion. We’re incredibly proud of the progress in our operations and thankful to our teammates across the globe for their ongoing commitment to excellence. With the support of strong industry fundamentals and resilience of our automotive and industrial businesses, our teams were focused on executing key initiatives to drive sales growth faster than the market, improved gross margin and enhance operational efficiencies. As a result, we delivered in several key areas in the fourth quarter and full year.
A few highlights in the fourth quarter would include total sales of $5.5 billion up 15%. And our seventh consecutive quarter of double digit sales growth. Segment margin of 9.5%, up 80 basis points from the prior year and adjusted earnings per share of $2.05 up 15% from 2021 and our 10th consecutive quarter of double digit earnings growth. For the full year, our strong quarterly performance drove record total sales of $22.1 billion up 17% which follows a 14% increase in 2021. Segment margin of 9.4% up 60 basis points from 2021. Adjusted earnings per share of $8.34 up 21% from the prior year, and a new GPC record. And strong cash flow with cash from operations up 17% and free cash flow up 14% from 2021 levels. Reflecting on the record year which followed and outstanding 2021, we are confident that our transformation efforts, including the streamlining of our businesses to an automotive and industrial centric business, along with our ongoing strategic initiatives has been highly successful.
Throughout 2022, our teams have navigated the dynamics of the macro economy and have continued to deliver market share gains while delivering positive momentum across our core businesses. We continue to make significant investments in talent and technology to maximize the impact of our key initiatives. As examples, we made solid progress to advance our pricing strategies and optimize our supply chain and network footprint. Our execution in the field has proven effective in driving poor improvement in gross margin and SG&A as well as parts availability, all of which provide additional opportunities for us in the future. As we build on the competitive advantages of our size and scale, we continue to look for strategic M&A opportunities to further boost our product and service offerings and expand our automotive and industrial footprint.
As you will hear from Will, last year’s acquisition of Kaman Distribution Group, has been transformational for our industrial segment. KDG had a significant impact on our industrial performance in 2022. And as elevated our capabilities as a premier industrial solutions provider. Our global automotive teams were also active with acquisitions, including geographic expansion in Europe, with the addition of operations in both Spain and Portugal. For the year, we added 138 net new stores across our global footprint, with the U.S. and Europe leading the way. Looking ahead, we have a healthy pipeline of acquisition targets, and M&A remains an important element of our global growth strategy. As we turn our attention to 2023. While the macro environment remains uncertain, we are confident in our strategic plans to drive ongoing market share gains, with sustained sales and earnings growth, continued margin expansion and strong cash flow.
Looking at the operating environment more broadly, our automotive business is benefiting from several tailwinds, including the geographic diversity of our markets. The increase in vehicle miles driven an aging vehicle fleet and limited new car inventory. These tailwinds are driving steady levels of demand in the aftermarket, with particular strength in the DIFM segment. In industrial, we continue to see solid demand trends with new and existing customer activity and reshoring threat trends, each presenting growth opportunities. We believe this strong performance in our industrial business reflects the diversity of our product and service offerings, as well as our end markets, which all performed well in the fourth quarter. In addition, as you’ll hear from Will, our growing capabilities and industrial solutions, including automation, fluid power and convenience, are proving to be differentiators for our business.
Collectively, we believe these strong fundamentals, combined with a rock solid balance sheet, position GPC with the financial strength and flexibility to continue to pursue strategic growth opportunities through both organic and inquisitive investment, while also returning capital to shareholders. So before I close, I’d like to remind our investor community that we will be hosting an Analyst and Investor day on Thursday, March 23, here at our headquarters in Atlanta. We will be sharing more about our strategic initiatives and provide an update to our long-term financial targets. We look forward to hosting this event next month and hope to see you all here in Atlanta. We have an exceptional 2022, which included celebrating our 95th year of operations.
Our accomplishments as one GPC team are evident in this milestone year. And we are proud to lead a company with such a long and rich history that differentiates GPC across all of our marketplaces. But now I’ll turn the call over to Will.
Will Stengel: Thank you, Paul. Good morning, everyone. I also would like to thank the global GPC team for an exceptional year in 2022, and the hard work to take care of our customers every day. Around the world, our teams are aligned on our strategic initiative pillars that include talent and culture, sales effectiveness, technology, supply chain and emerging tech. Investment and focus in these areas translate into a better customer experience, profitable growth, operational excellence and a differentiated team culture. There in 2022, all of our teams made significant initiative progress, and we look forward to sharing more details about our progress and outlook at our upcoming investor day in March. Turning our attention to the fourth quarter performance total sales for the global automotive segment were $3.4 billion, an increase of approximately $243 million or 7.6% versus the same period in 2021.
Our sales growth was consistent through the quarter with a solid finish in December to close the year. On a comparable basis automotive sales growth for the quarter increased 8.2%. Our global automotive teams delivered mid-single digit to low digit comp growth across each of our operations. As Paul mentioned, the automotive segment continues to be driven by solid industry fundamentals and team execution. For fiscal year 2022, Global Automotive segment sales was $13.7 billion, an increase of 8.9% from 2021. Global automotive segment profit in the fourth quarter was $295 million and segment operating margin was 8.6%, an increase of 30 basis points versus the same period in 2021. For the year Global Automotive segment profit was $1.2 billion and segment operating margin was 8.7%, an increase of 10 basis points from 2021 and up 110 basis points from 2019.
During the fourth quarter, our automotive business experienced mid to high single digit levels of inflation, relatively consistent with the levels we saw in the second and third quarters. We continue to be pleased with the ongoing positive impact of our category management strategic initiatives. Now let’s turn to an overview of our automotive business performance by geography. In the U.S. automotive sales grew approximately 10% during the fourth quarter with comparable sales growth of approximately 6%. Sales were strong across each U.S. region and broadly across product categories, with batteries, motor oil, tools and equipment, heavy duty and brakes all posting strong growth in the quarter. The team navigated various extreme weather events in December and kept teammates safe while taking care of customers.
Both commercial and retail customers were positive with low double digit commercial growth outpacing retail, which had low single digit growth. Our commercial business saw sales growth across all customer segments, including notable strength with our fleet and government channel and mid-single digit growth in our NAPA AutoCare Network. Over the course of the year, we grew our NAPA AutoCare Network of professional repair centers to record 18,500 customers, an increase of 670 locations, and further expanded our competitive advantage as America’s largest network of parts and care. We also continue our investment in the industry as we trained over 34,000 technicians in 2022 and actively support 900 technicians in our apprenticeship program. Other select accomplishments in 2022 include investments in talent, and enhancements to our data analytics and technology capabilities.
These enhancements have improved our insights and are driving data driven decisions around strategic pricing and sourcing, which has nicely contributed to margin expansion performance. We’ve also improved our inventory visibility and are taking action to ensure the right part is in the right place at the right time. We will continue to invest in these capabilities as we move forward. For the full year our U.S. Automotive business grew sales by approximately 11% with comparable sales growth of approximately 8%. We’re extremely pleased with the share gains and record results in 2022. In Canada sales grew approximately 14% in local currency during the fourth quarter, with comparable sales growth of approximately 12%. The results in Canada continue to reflect solid industry fundamentals, strong team execution and market share gains.
Our field oriented data analytics to assess and prioritize market customer and network opportunities has delivered returns. In partnership with global teams, the Canadian business also made progress with next drive powered by NAPA, our leading offering that positions repair shops to service hybrid and electric vehicles. In a short period of time, the program has certified over 50 EV technicians, part specialists and service advisors, with plans to have 100 certified service centers and nearly 400 trained part specialists over the next few years. For the year, our Canadian business grew sales approximately 15% in local currency, with comparable sales growth of approximately 13%. In Europe, our automotive team delivered another exceptional quarter, with total sales increasing approximately 22% in local currency and comparable sales growth of approximately 10%.
Photo by Rahul Bhogal on Unsplash
For the year our European team delivered sales growth of 19% with comparable sales growth of approximately 8%. The strong growth in Europe continues to be driven by solid execution and coordinated teamwork across Europe. As examples, during 2022 our European team won business with numerous key customer accounts and continue to gain market share with the rollout of our differentiated NAPA offering across the region. Sales of NAPA product in Europe reached nearly €300 million, an annual increase of over 50% from the prior year and now positively contribute to profitability. The impressive growth is a testament to the global strength of the NAPA brand. The next drive rollout is also strong in Europe with approximately 150 certified workshops across 7 countries.
In addition, our European bolt-on acquisition efforts continue to create value and expand and add density to our market footprint. Despite a challenging environment, the performance over the last few years has been strong in Europe and the momentum has continued to start 2023. In the Asia Pac automotive business, sales in the fourth quarter increased approximately 10% in local currency from the same period in the prior year with comparable sales growth of approximately 7%. For the year, our Australian team delivered sales growth of 12% and comparable sales growth of approximately 9%. Both commercial and retail sales continued to perform well with Repco, NAPA and our motorcycle accessories division delivering profitable growth and share gains.
The team continued its impressive performance in 2022 with a 3-year sales stack of more than 30%. Repco’s 100-year anniversary in 2022 marked an amazing achievement for this team, and it was only fitting that the team delivered another outstanding year. Turning to the Global Industrial segment. During the fourth quarter, total sales at Motion were $2.1 billion, an increase of approximately $478 million or 29.6%. The sales cadence was consistently strong throughout the quarter with average daily sales growth at or above 30% for all three months of the quarter. Comparable sales growth, which excludes the benefit of KDG, increased approximately 17% in the fourth quarter versus last year. This marks our seventh consecutive quarter of double-digit comparable sales growth.
As a reminder, we completed the acquisition of KDG in the first quarter of 2022. As a result, going forward, KDG sales growth will be included in comparable sales growth. The strong sales growth at Motion during the quarter was broad-based with double-digit growth across nearly all product categories and major industries served with particular strength coming from industries such as automotive, oil and gas, food products and aggregate and cement. For the year, sales at Motion were $8.4 billion, an increase of $2.1 billion or 33.2%. Industrial segment profit in the fourth quarter was $230 million or 11% of sales, representing a 150 basis point increase from the same period last year. The profit improvement at Motion is a result of strong and disciplined sales growth and operating performance, including the KDG synergy realization.
For the year, Global Industrial segment profit was approximately $887 million, and segment operating margin was a record 10.5%, an increase of 110 basis points from 2021 and up 240 basis points from 2019. In 2022, the Industrial segment now represents over 40% of GPC total profit, up 8 percentage points since 2021. For the fourth quarter inflation in the Industrial segment held in the low single-digit range consistent with the levels we’ve seen throughout the year. The strong financial performance at Motion is a direct result of their customer and sales intensity, focused strategic initiatives and operating rigor. During the year, we enhanced our selling capabilities by further leveraging data and technology and continue to expand our value-added solutions offering for our customers.
These solutions include products and services in categories like automation, conveyance, fluid power and repair. These categories now collectively represent approximately $1 billion in annual revenue promotion. In addition, our strategic initiatives around pricing, category management and supply chain are driving increased productivity and profitability, which is reflected in the strong margin expansion delivered in 2022. As we execute on our organic global growth initiatives, we continue to complement them with strategic acquisitions to capture share in our fragmented markets and create shareholder value. During the fourth quarter, we completed several bolt-on acquisitions primarily consisting of small automotive store groups that increased local market density in existing geographies.
We also continue to make progress in integrating our strategic acquisition of KDG with Motion. When we announced this acquisition in January of 2022, we communicated a plan for approximately $50 million in annual run rate synergies to be achieved over a 3-year period. We’re pleased to report that thanks to the incredible teamwork for many, Motion realized over $30 million in synergies in just the first year with more expected in 2023 and 2024. Our acquisition pipeline is active, and we will remain disciplined to pursue transactions that advance our strategy, deliver profitable growth and create long-term value. In summary, our team delivered an exceptional fourth quarter and record year for Genuine Parts Company. All our business units and geographies exceeded internal expectations, driven by supportive industry fundamentals and the focused execution of our key strategic initiatives.
We’re excited to build on our momentum, and we look forward to another great year in 2023. With that, I’ll turn the call over to Bert.
Bert Nappier: Thank you, Will, and thanks to everyone for joining us today. We are very proud of our teams and our outstanding performance, and I’m pleased to share the key highlights of our fourth quarter and full year results. My comments this morning focused primarily on quarterly and full year adjusted results, which exclude nonrecurring items that I’ll cover in more detail shortly. Total GPC sales were up 15% or $720 million to $5.5 billion in the fourth quarter of 2022. The increase reflects an 11.1% improvement in comparable sales, including mid-single-digit levels of inflation and an 8% contribution from acquisitions. These items were partially offset by a 4.2% unfavorable impact of foreign currency, which was essentially in line with our assumption for the quarter.
Sales for the full year were $22.1 billion, up 17.1% from 2021. As we continue to invest in organic and acquisitive growth initiatives for both of our segments, it was encouraging to see our core business combined with acquisitions, including KDG, which added more than $1 billion in revenues for 2022 drive strong sales throughout the year. Our gross margin expanded approximately 50 basis points in the fourth quarter to 35.7%, primarily driven by ongoing investments in our pricing and sourcing initiatives that Will mentioned. These initiatives, along with others, contributed approximately 160 basis points of core gross margin improvement. These gains were partially offset by a few key factors: first, moderating year-over-year supplier incentives pressured gross margin by approximately 30 basis points; second, a shift in the mix of our sales based on the strength of our industrial business impacted gross margin by approximately 30 basis points; finally, foreign currency and inflation impacted gross margin by approximately 50 basis points.
With a strong fourth quarter, gross margin for the full year was 35.1%, slightly above our expectations and essentially in line with the prior year. Our performance on gross margin reflects an excellent job by our team, executing our strategies given the very dynamic market challenges. Our total operating and non-operating expenses in the fourth quarter, excluding adjustments, were approximately $1.6 billion, up 16.6% from 2021 and a 28.7% of sales compared to 28.3% of sales in the prior year. Our expenses were up in the quarter, primarily due to inflation-driven increases in freight costs and overall investments in IT initiatives across our business units. For the year, total expenses were $6.2 billion, up 16.2% at a 27.9% of sales, a 20 basis point improvement from 2021.
Despite ongoing cost pressures in the fourth quarter, we continue to drive leverage on strong core sales growth across our businesses and execute on our initiatives to produce operational efficiencies. Segment profit in the fourth quarter was $526 million, up 25%, and our segment profit margin was 9.5%, an impressive 80 basis point increase from the same period in 2021. For the full year, segment profit was $2.1 billion, up 25% on a 17% sales increase. Our segment profit margin was 9.4%, a 60 basis point improvement from the prior year and up 160 basis points from 2019, which we believe demonstrates our transformation to an even stronger company and our ability to consistently perform through dynamic economic conditions. As outlined in our earnings release, our fourth quarter results include three adjustments.
The first item relates to a $29 million adjustment to remeasure our product liability reserve. Secondly, we incurred approximately $13 million of costs related to the acquisition and integration of KDG. The third item relates to an $11 million loss on the divestiture of our remaining minority interest investment in S.P. Richards, which was finalized in the fourth quarter. For the full year, our non-recurring items include these fourth quarter adjustments as well as the 12-month impact of costs related to KDG and a gain on the sale of certain real estate recorded in the second quarter. Our fourth quarter adjusted net income, which excludes $40 million or $0.28 per diluted share in nonrecurring items I just discussed, was $292 million or $2.05 per diluted share.
This compares to adjusted net income of $256 million or $1.79 per diluted share in 2021, an increase of 15%. For the full year, adjusted net income was $1.2 billion or $8.34 per diluted share, an increase of 21% from 2021. Reported net income was $1.2 billion or $8.31 per diluted share. The continued execution of our initiatives allowed us to deliver back-to-back double-digit adjusted EPS growth in 2022 and 2021. With strong earnings growth and improved working capital, we generated $222 million in cash from operations in the fourth quarter and $1.5 billion for the full year, a 17% increase from 2021. Free cash flow was $1.1 billion, up 14% from 2021, and we closed the fourth quarter and year with $2.2 billion in available liquidity. Our debt to adjusted EBITDA is 1.7 times, which compares to our targeted range of 2 to 2.5 times and highlights our financial strength and flexibility.
Our strong performance has allowed us to stay focused on four key priorities for capital allocation, including the reinvestment in our business through capital expenditures and M&A and the return of capital to our shareholders through dividends and share repurchases. For the year, we invested $340 million in capital expenditures, including $96 million in the fourth quarter, primarily in technology and other projects to further automate and consolidate our distribution networks and drive productivity. We also invested $3 billion investment in KDG and returned $719 million to shareholders in the form of dividends and share repurchases. This includes $496 million in cash dividends paid to our shareholders and $223 million in cash used to repurchase 1.6 million shares.
Our continued strong cash flow generation provides us the ability to manage our capital allocation through all business cycles. Turning to our outlook for 2023. We expect diluted earnings per share to be in the range of $8.80 to $8.95, which represents an increase of 6% to 7% from adjusted diluted earnings per share in 2022. Our outlook for earnings growth is driven by our expectations for continuous sales growth and another year of margin expansion. We expect total sales growth for 2023 to be in the range of 4% to 6%. As we look at the business segments, 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% increase in comparable sales.
We would add that our outlook for Industrial assumes a much stronger first half relative to the third and fourth quarters of 2023. Turning to a few other items of interest. We will continue to drive growth through the reinvestment in our business and M&A. We currently expect CapEx to be in the range of $375 million to $400 million in 2023, reflecting incremental opportunities in technology and supply chain, among others. We also continue to have a healthy pipeline of acquisition targets, and we’ll continue to seek additional bolt-on acquisitions wherever they create value for us. In 2023, we will continue to return capital to our shareholders through dividend and share repurchases. Earlier this week, our Board approved a $3.80 per share annual dividend for 2023, representing our 67th consecutive annual increase in the dividend.
This represents a 6% increase from the $3.58 per share paid in 2022 and is above our 20-year average increase of 5.8%. Our total shareholder return performance of approximately 27% in 2022 placed GPC in the top 10% of the S&P 500. Taken together, we delivered sales growth of 17% and adjusted EPS growth of 21%, so a tremendous year in 2022. Our teams worked hard for these achievements, and we enter 2023 with strong momentum and are well positioned to continue to take share and deliver through an uncertain macro environment. We look forward to updating you on our progress as we move through the year. In closing, as both Paul and Will have mentioned, we look forward to hosting our Investor Day on March 23. We are excited to provide further insights on key growth initiatives, and long-term financial targets and are confident you will find the day informative and productive.
We’d love to see you here in Atlanta. Thank you, and we will now turn it back to the operator for your questions.
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