The operator welcomes participants to the Genuine Parts Company's Fourth Quarter 2023 Earnings Conference Call, which is being recorded and will include a question-and-answer session. Tim Walsh, Senior Director of Investor Relations, introduces the speakers: Paul Donahue (Chairman and CEO), Will Stengel (President and COO), and Bert Nappier (EVP and CFO). A supplemental slide presentation can be found on the company's website and the call will be webcast with a replay available later. Non-GAAP financial measures may be discussed, and forward-looking statements may be made, with a disclaimer that the company's actual results may differ.

The company is not obligated to update any forward-looking statements made during the call. The CEO, Paul Donahue, highlights the company's strong performance in the fourth quarter and full year of 2023, with sales reaching $23 billion and a 50 basis point increase in profit margins. The company returned $788 million to shareholders and announced a 68th consecutive annual increase to the dividend. Donahue thanks the company's employees for their hard work and acknowledges the challenges and opportunities of the past year. He also mentions the successful integration of Kaman Distribution Group and exceeding synergy targets.

Motion is a leading industrial aftermarket solutions provider with a strong global presence. They have successfully implemented their fulfillment center strategy, resulting in cost efficiencies and improved customer service. Their International Automotive businesses, particularly in Europe and Australasia, have exceeded expectations through strategic acquisitions and organic growth. However, North American results fell short of expectations, but the company is taking steps to improve performance in the future.

In December, NAPA implemented initiatives and long-term investments to drive growth and expand their footprint through acquisitions. The company is confident in their ability to integrate future businesses and create value for shareholders. Industry fundamentals in both the Automotive and Industrial markets are supportive, but macroeconomic factors such as high interest rates and inflation are pressuring consumers and businesses. However, the majority of NAPA's products are non-discretionary and well-positioned for the current market.

The speaker discusses the importance of parts availability in their business and how they are using data analytics to ensure the right parts are in the right place at the right time. They mention the need to remain agile and take action to position the business for long-term success. They also mention a global restructuring initiative and thank their team for their dedication. The speaker then hands the call over to Will, who discusses the company's strategic initiatives and their progress in meeting their five foundational priorities.

In the fourth quarter, Global Industrial saw a 2% increase in total sales with 1% comparable sales growth and 18% growth over the past two years. Motion had mixed results in its end markets, with strength in iron and steel, chemicals, and mining, but underperformance in categories like equipment and machinery and oil and gas. The Motion team in Asia Pacific had a successful year, with double-digit sales and profit growth. Industrial segment profit also saw significant growth, up 19% in the fourth quarter and 24% for the full year, exceeding the 2025 target. The growth was driven by strategic initiatives such as pricing, productivity, and the integration of KDG. The company is confident in its ability to continue expanding margins in the Industrial segment.

The acquisition of KDG in 2021 resulted in $70 million of synergies, surpassing the target of $50 million. The Global Automotive segment saw positive sales growth in international markets, but a decline in the US. Total sales for the segment increased 1% in the fourth quarter and 4% for the full year. Inflation had a moderate impact on sales throughout the year. Profit for the segment decreased 1% and operating margin was down 50 basis points for the full year. In Europe, total sales grew 10% in local currency and 16% for the year.

The company is experiencing profitable market share gains in Europe due to strategic initiatives and acquisitions. In the Asia-Pacific region, sales and operating margins have increased, leading to four consecutive years of double-digit profit growth. In Canada, sales have also increased, with total sales growing by 5% and comparable sales increasing by 4% for the year. Overall, the company's global performance has been strong and the teams in each region have been commended for their success.

The Canadian team has shown growth and successful execution of strategic initiatives despite economic challenges. In the US, automotive sales and comparable sales have declined. Changes have been made to improve fill rates and in-store service levels, and a new role has been created to focus on commercial efforts. Tom Skov has been appointed to this role and brings extensive experience and knowledge to the position.

The fourth quarter results at NAPA were below expectations due to difficult year-over-year sales comparisons and the absence of inflation benefits. December's performance was impacted by warm weather and moderated purchases from independent owners. A week-long meeting with owners was productive and highlighted efforts to manage purchases in the current environment. The outlook for market fundamentals is positive and the NAPA competitive spirit is high. The company plans to evolve its operating model and own more stores in the future.

The company's strategy of increasing the number of company-owned stores in targeted markets has improved their ability to serve customers. They are also working on aligning incentives with independent owners and have made strategic acquisitions from them. The company faced unexpected challenges in 2023, but new leadership and decisive actions helped improve operations and customer service. They also made investments in talent, technology, and supply chain, including a partnership with Google for analytics and search.

The paragraph discusses recent successes and future plans for NAPA and GPC, including the implementation of a restructuring program to simplify operations and increase efficiency. The program is expected to deliver positive results and is a similar approach to a previous successful program. The company has achieved its goals for 2023 and is focused on long-term growth and providing solutions for customers. The team is praised for their efforts and commitment to delivering results.

Bert Nappier, who is the speaker on the call, thanks everyone for joining and discusses the company's performance in the fourth quarter and full year. He notes that there were no nonrecurring items in the fourth quarter and 2023, but comparisons to the previous year exclude nonrecurring items in 2022. Sales in 2023 were $23.1 billion, up 4.5% from 2022, with a 1.1% increase in the fourth quarter. Gross margin expanded by 70 basis points in the fourth quarter and 80 basis points for the year, driven by strategic pricing and sourcing initiatives.

In the fourth quarter of 2023, total operating and non-operating expenses were 28.9% of sales, an increase of 20 basis points from the prior year. For the full year, expenses were 28.4% of sales, a 50 basis point increase. This was due to planned investments in team members and technology, offset by cost actions. Despite the increase in expenses, gross margin expansion led to a 10 basis point increase in segment profit margin. Earnings for the quarter and full year increased by 10.2% and 11.9%, respectively. The company generated $1.4 billion in cash from operations and $900 million in free cash flow for the year. They also issued $800 million in senior unsecured notes and used $250 million to repay debt. The company ended the year with $2.6 billion in available liquidity and a debt to adjusted EBITDA ratio of 1.8x. Capital expenditures for the year were $500 million, focused on strategic initiatives.

In 2023, 60% of our capital expenditures were focused on technology and supply chain capabilities, with good returns above our cost of capital. We completed 90 transactions in the Automotive segment, investing $309 million with a blended EBITDA rate of over 9%. We returned $788 million to shareholders through dividends and share repurchases. We also announced a restructuring plan to reduce SG&A costs and improve efficiency, which is expected to result in a benefit of $20 million to $40 million in 2024 and $45 million to $90 million annually. This reflects our commitment to continuously improve and achieve our long-term targets.

In 2024, the company expects solid industry fundamentals and execution of strategic initiatives to drive growth, despite mixed economic conditions. They anticipate a 3-5% increase in total sales, with a more moderate first half and stronger second half. Gross margin is expected to expand by 20-40 basis points due to sourcing and pricing initiatives, while SG&A is expected to deleverage due to technology investments. Diluted earnings per share are projected to be $8.95 to $9.15, with adjusted earnings per share of $9.70 to $9.90, representing a 4-6% increase from the previous year. The company also expects to see a $0.10 EPS benefit from restructuring initiatives, with the potential for an additional $0.05 to $0.10 EPS benefit if all initiatives are successfully executed. The Automotive segment is expected to see 2-4% sales growth, with comparable sales growth in the 1-3% range.

The company expects a negative impact on their automotive sales growth in 2024 due to new incentive programs for supplier arrangements. However, this will not affect gross profit. They anticipate margin expansion in their Industrial segment and plan to allocate capital towards investments, M&A, dividend, and share repurchases. They also added a commercial paper program for strategic investments.

In 2024, the company expects strong cash flows, with investments in supply chain and IT capabilities. They plan to spend $500 million on capital expenditures and continue pursuing M&A opportunities. The company also plans to increase their annual dividend by 5.3%. They will continue to strategically invest for the long term while maintaining a strong balance sheet. The call will now open for questions.

Chris Horvers from JPMorgan asks about the comparison between independent and company-operated stores for NAPA, as well as the inventory levels and purchasing trends. WillStengel responds that the two segments were similar throughout the quarter, except for a decrease in independent owner purchases in December. He also notes that there was a positive trend towards the end of the year and expects inventory levels to reflect sales activity in 2024. Bert Nappier chimes in to mention that the company's guidance for the year is 970-990, with a 5% increase at the midpoint. He adds that the first half of the year is expected to be more moderate for both segments, with a stronger second half.

The company expects the second half of the year to be stronger due to anticipated improvements in the interest rate environment and industrial activity. However, there are concerns about high interest rates, inflation, and geopolitical factors. The first quarter may be weaker due to interest expense and difficult comparisons to the previous year, but the company remains confident in their full year guidance. They have seen positive results in January and expect sequential improvement in the NAPA business, but the first quarter may still be the weakest earnings quarter.

Bert Nappier and the team at NAPA are optimistic about the company's performance in January, which showed improvement from the previous month. They are not giving quarterly guidance, but are confident in their progress and the actions they have taken to improve the business, such as operational intensity, inventory technology investments, and new leadership. They are determined to turn things around and are looking forward to better days ahead.

The speaker asks about the company's margin targets and the Automotive segment's performance. The company expects a 20-40 basis point improvement in Automotive segment margin for the coming year, with strong growth in Europe and Australasia and positive developments in the US. The company also plans to streamline its operations and improve efficiency through restructuring. Another question is asked about the Industrial segment's margin potential, and the company expects a 10-20 basis point improvement in 2024 after a 200 basis point improvement this past year.

The industrial business has seen exceptional margin expansion in the last 2 years due to good industrial production and successful integration of KDG. However, 2024 may see a slight decrease in growth and benefits due to a tighter economic environment and lapping of KDG benefits. Despite this, the team remains confident in the long-term potential of the industrial business and expects continued improvement in gross margin. The North American auto business is expected to benefit from a shift to positive manufacturing in 2024.

The company is expecting a 2-4% growth in the Global Automotive segment for 2024, with a projected 1% increase from acquisitions. The strategy for expanding the NAPA company-owned store base has been accelerated due to the current economic environment and the potential benefits of owning more stores. The company has reflected on opportunities for growth and is considering the impact on margins and CapEx.

The company has prioritized specific markets and is working to simplify their network and improve operations. They plan to evolve over time and are focused on improving underperforming stores. They also have plans for M&A and believe it will be beneficial for their financials.

The company is planning to increase their partnership with independent owners and improve their commercial activities. They saw a decrease in independent volumes in December, which was attributed to high rates and weather. The company is hoping for a more normal 2020 and has seen encouraging results in the first few weeks. The restructuring activity will result in $100-200 million in savings, with the majority coming from reducing people costs. This restructuring is a global effort and will impact all business units.

The company has announced a voluntary retirement program in the U.S. which will primarily affect their U.S. business results in the second half of the year. The program is expected to result in mostly cash expenses and will be reported as a nonrecurring expense. The company currently has over 2,000 independent owners and 6,000 stores in the U.S., with a mix of company-owned and independent-owned stores. Around 20% of their business comes from major accounts and they are seeing significant growth in their NAPA AutoCare business.

The company has seen a surge in memberships, with 20% coming from small businesses and 40% from government and fleet clients. They are focusing on regaining business from smaller, independent customers and expect 2024 to be a more normal year. The sales force has been restructured to better target this type of customer.

The company's industrial growth continues to outperform the broader market, with 9 out of 14 end markets showing growth in the fourth quarter. This is an increase from the previous quarter, with growth ranging from low to high single digits and double digits in some markets. The company is encouraged by this performance and has programs and incentives in place to capture more business.

The company is encouraged by the sequential improvement in the fourth quarter compared to the third quarter, with 3 out of 5 declining markets showing improvement. The first quarter is expected to be the toughest comp of the year, but the industrial team is focused and expected to deliver. The restructuring is focused on protecting the customer-facing selling organization, and the voluntary program is targeted towards those closer to retirement.

The speaker discusses the company's efforts to balance serving customers and streamlining costs, particularly in management and back office departments. They express confidence in the thoughtfulness of their approach and thank the participants before ending the call.

This summary was generated with AI and may contain some inaccuracies.