Operator:

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Second Quarter 2024 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, July 23rd, 2024. At this time, I would like to turn the conference over to Tim Walsh, Senior Director, Investor Relations. Please go ahead, sir.

Will Stengel:

Thank you, Tim, and good morning, everyone. Welcome to our second quarter 2024 earnings conference call. Before we turn to the results of the quarter, I'd like to share a few thoughts as part of my transition into the CEO role over the last 45 days. First and foremost, it's an honor and a privilege to serve as only the sixth CEO in Genuine Parts Company’s nearly 100-year history. GPC has a special culture which was founded on taking care of our people and offering solutions to our customers efficiently and consistently. This has served our business incredibly well over the years and will remain a core element of our foundation. As part of the transition over the last several months, I've spent time engaging with our teammates, customers, and suppliers around the world. I'll share a few key messages that have come out of those discussions and that are areas of emphasis as we move forward. First, leverage our culture as an advantage. We have a unique and differentiated culture. Our global engagement data shows the vast majority of our employees are incredibly proud to work for GPC. That's a fact of which we are proud and is a testament to our strong, consistent leadership over the years. We must nurture our culture to extend our unique advantage, but we must also continuously evolve with our customers and our markets. Second, build high-performing teams. Our talent strategies have been intentional as we continuously work to be an employer of choice. We have a capable group of leaders around the world that have aligned values and a clear understanding of our shared vision. But we amplify our impact when we relentlessly build high-performing teams throughout the organization, who are energized to work together, solve problems, and deliver results. Third, capture our exciting opportunities. We streamline GPC to focus on two core businesses with market-leading positions and significant exciting opportunities. We believe size and scale creates an advantage, and when we work together as we invest in capabilities and share best practices to solve common challenges, we act faster, we're more efficient, and we create value. Fourth, focus and execute our defined plans. We believe we have the right strategies and initiatives in place. We've worked together over the last three to four years as a global organization to understand our opportunities and prioritize the work that we're doing. We align globally around five key priorities, including talent and culture, sales effectiveness, technology, supply chain, and emerging technology, complemented by a disciplined acquisition strategy. This focused approach is not changing. We're intentional, we're disciplined, and we're leveraging expertise around the world to reduce complexity, improve the customer experience, deliver profitable growth, and increase productivity. And lastly, play to win and continuously improve. Thanks to the hard work of our teammates, we've made great progress as a company over recent years. But we're focused on continuous sequential improvement to build on our momentum. We can't be satisfied with good, instead striving to be great, always working to be better and faster in all that we do. Overall, it's fair to say I'm more energized than ever about the opportunities we have as a company and the future for Genuine Parts Company. I want to thank each of our over 60,000 global GPC teammates for their ongoing passion for serving our customers. In addition to serving our customers every day, our teams are executing and delivering on a broad set of initiatives while navigating a dynamic and challenging macro environment. Thank you to all, as always, for your good hard work. Now, let's turn to the specifics of our quarterly results. A few highlights for the second quarter include total GPC sales of $6 billion, which increased approximately 1% versus the same period in the prior year and included a tough start to the quarter with particularly weak sales month in April across both segments. Total company gross margin increased 50 basis points with continued execution of strategic sourcing and pricing initiatives. And in May, we announced the acquisition of Motor Parts and Equipment Corporation, our largest NAPA independent owner in the US with a network of 181 locations across Illinois, Indiana, Iowa, Michigan, Minnesota, and Wisconsin. It's a great example of our ongoing initiative to own more NAPA stores in priority markets. Our second quarter results were below our expectations. The variance can be attributed to three key themes. Weaker than anticipated customer demand in industrial, accelerated softness in Europe, and choppy demand in the automotive aftermarket in the US. Many factors outside of our control, including higher interest rates, geopolitical uncertainty, and persistent inflation are driving overall weaker customer demand. This weaker demand environment and ongoing cost inflation resulted in adjusted earnings flat year-over-year for the quarter, which Burt will cover in more detail shortly. Looking at our results by business segment. During the second quarter, total sales for global industrial were $2.2 billion, a decrease of approximately 1% versus the same period last year, and comparable sales were down 1.6%. When we look at the sales performance for our industrial business, the main headwind remains lagging industrial production activity. Over the past 20 months, manufacturing PMI readings continue to be in the longest period of contraction since the financial crisis in 2009, as represented by a PMI index below 50. While we saw a positive reading in March, during the second quarter, the monthly PMI readings reverted back into contraction territory versus our cautiously optimistic expectation of an improving backdrop coming out of the first quarter. From a cadence perspective, average daily sales were softer in April and relatively flat in May and June. In addition, the higher interest rate environment and election uncertainty is curbing larger capital spending decisions across our diversified customer base as they remain cautious. Looking at Motion's results across its end market served, we're still seeing mixed performance across the board. Five of our 14 end markets showed positive growth during the second quarter, which was in line with the first quarter, with relative strength coming from mining and chemicals, offset by weakness in equipment and machinery, fabricated metals, and aggregates and cement. Despite the market softness, Motion's corporate account customer base, which represents approximately 45% of the business, continues to perform well and is showing positive growth, which is a true testament to Motion's strong value proposition. Additionally, during the second quarter, the Motion team successfully renewed several key multi-year corporate account agreements and remains active with various well-defined field sales initiatives. Industrial segment profit in the second quarter was $277 million, down approximately 2% versus prior year and 12.4% of sales, representing an approximate 10 basis point decrease from the same period last year. Our business in North America performed well despite the softer sales performance, but was offset by pressure from our business in Australasia, given the challenging local economic environment and cost pressures. Turning to the global automotive segment, sales in the second quarter were $3.7 billion, an increase of 2%, with comparable store sales decreasing 0.6%. During the quarter, all of our automotive geographies showed positive sales growth in local currency. Similar to the first quarter, the global automotive sales benefit from inflation remained less than 1% in the second quarter, and we expect the same in the back half of the year. Global automotive segment profit in the second quarter was $314 million, down 4.7% versus prior year and 8.4% of sales, representing a 60 basis point decrease from the same period last year. Our second quarter results for the global automotive segment reflect pressures from a challenging sales environment across our geographies, combined with inflation driving higher costs and outpacing sales growth. Now, let's turn to our automotive business performance by geography. Starting in Europe, our team delivered total sales growth of approximately 8% in local currency and comparable sales growth of approximately 1%. We've seen a broadening in the moderation in demand across our geographies in Europe through the quarter. We believe this is driven by an incrementally more cautious consumer, as well as a reduced sales benefit from inflation, which is also now less than 1%. Despite this, our teams are focused on serving our customers, delivering on our strategic initiatives and delivering above-market performance. We're winning share with target key accounts and the NAPA brand expansion continues to be a differentiator. For 2024, we're on track to deliver sales of NAPA branded products in excess of EUR500 million, above our initial internal target. Our ongoing bolt-on acquisition activity also continues to have a positive impact and create value in Europe. In the AsiaPac automotive business, sales in the second quarter increased approximately 3% in local currency with comparable sales growth of 2%. Similar to last quarter, this performance compares to a high single-digit growth in the same period last year. Sales for both commercial and retail increased in the second quarter, with retail showing relative strength. The macro environment remains challenging in the region but the teams are executing well to grow in excess of market and take advantage of their industry leading position. In Canada, sales increased 1% in local currency during the second quarter, with comparable sales decreasing approximately 2%. Our Canadian team showed sequential improvement from the first quarter despite ongoing pressure from a more cautious consumer and difficult macro environment. Sales in automotive and heavy vehicle performed similarly during the quarter with both having slightly positive growth. In the US, automotive sales increased 0.5% during the second quarter, with comparable sales decreasing 1.5%. This represents a slight improvement in our reported results sequentially from the first quarter and was generally in line with our expectations. As we looked at our sales cadence through the quarter, average daily sales growth was pressured in April and then showed solid sequential improvement throughout the remainder of the quarter. Our overall results also benefited from our MPEC acquisition in May. From a customer segment perspective, sales to our commercial and do-it-yourself customers were both slightly down during the quarter with commercial outpacing do-it-yourself. For commercial, fleet and government, auto care, and other wholesale were all essentially in line, while major accounts underperformed the group, driven by continued cautious end consumer, as we’re seeing elevated levels of deferrals from customers on certain repairs. For sales into our independent store owners, we saw another quarter of more normalized buying behavior, which is a trend we believe will continue throughout the balance of the year. We have active initiatives across our US automotive business and we're encouraged by the progress in the improvements that they're delivering. During the second quarter we saw further improvements in inventory fill rates and stocking levels for specific categories where we had opportunity. Additionally, the team continues to elevate the execution in our stores and DCs, which is driving better customer service metrics. We're pleased with these results, but we're intensely focused on continuous sequential improvement. And finally, we're making good progress on our initiative to evolve our operating model at US automotive to own more stores in selected priority markets. Our recent acquisitions of independent stores are being integrated into the NAPA network with a focus on improved performance and synergy capture. In parallel, we continue to partner with our existing network of independent owners who play an important role to help us serve our local markets. Our current in-flight initiatives are designed to improve growth and operational excellence in both company owned and independently owned stores. During the second quarter we acquired 242 NAPA stores from our independent owners as well as competitive stores and key markets. We're leveraging our disciplined integration playbook as we integrate these stores into our own store base. We'll continue to make methodical progress with our strategy of owning more stores in the second half of the year as the pipeline remains active, although we don't expect the recent acquisition pace to be linear through the year. With all these evolving factors in mind, we moderated our 2024 outlook for sales and earnings per share. We believe it's prudent to adjust our expectations for the second half of the year based on the current information available to us, particularly as it pertains to the industrial and European market outlook. And Bert will provide further color in a moment. While our quarterly results reflect a softer economic backdrop than we anticipated, our in-flight initiatives and fundamental prospects for our business remain robust. Within automotive, industry fundamentals like miles driven, the age of the car park, and new and used vehicle prices remain supportive. We benefit from the fact that NAPA's core business serves the commercial customer where many repairs are non-discretionary and break fix in nature. We like this position as we view the commercial customer as the growth engine of the industry given the increasingly complex vehicle fleet. Within industrial, our business is well diversified across 14 and growing different end markets that cover a wide range of the manufacturing economy, and we’re positioned well to take advantage when economic conditions improved. Studying PMI cycles over time, we see a pattern of long periods of attractive growth once the index inflects into an expansion territory. Motion's highly technical sales expertise and solutions-based selling drives deep relationships with our customers and helps to keep their operations functioning effectively every day and in every market cycle. As the market leader, we believe we're well positioned to capitalize on the eventual improvement in the manufacturing economy, near and long term, as we expand our customer base and grow share of wallet in this fragmented market. Lastly, before I turn the call over to Bert, on behalf of the entire company, it's only fitting that I take a moment and extend our gratitude to Paul Donahue, not only for his tenure as CEO, but for his many contributions to Genuine Parts Company over his 20-year career. Under Paul's leadership as CEO, the company strategically evolved and transformed for the better. A few highlight accomplishments under Paul's leadership. He simplified the GPC business mix to enable strategic focus on our automotive and industrial segments. He championed the expansion of GPC around the world, growing our global footprint from six countries in 2016 to 17 countries in 2024, including the transformational acquisition of AAG in Europe. He led us through a pandemic and kept our team safe. He kept our culture thriving and he kept our teams operating to ensure we took care of our customers. He accelerated strategic investments of over $2 billion in growth capital, including the transformational acquisition of Kaman Distribution Group to extend our industrial leadership position, and obviously many other accomplishments. Altogether since 2016, GPC has grown its sales from $15 billion to approximately $24 billion. It goes without saying that Paul's positive impact on GPC has been remarkable. His ability to lead our teammates around the world has been inspiring and he's a tremendous steward of our GPC culture, importantly a good friend to all, and we certainly look forward to his continued counsel and his role as Executive Chairman. Thank you again to the entire GPC team around the world, and with that, I'll turn the call over to Bert.

Operator:

[Operator Instructions] Our first question comes from the line of Bret Jordan from Jefferies. Go ahead please.

Will Stengel:

Good morning, Bret.

Will Stengel:

Yeah, look, we've seen continuous sequential improvement on that topic. As I mentioned in my prepared remarks, all the initiatives that we're working on here in US automotive are affecting both company-owned and independent-owned stores. And so when we think about inventory strategies, service excellence, those initiatives are all relevant for what we're doing with the independent owners. And we've seen nice sequential improvement through the year. We would expect that to continue through the balance of the year. The math of how that works, I won't get into the specifics, but the tone is good, the relationships are good, the partnership’s good. We had a bunch of independent owners into Atlanta just last week, and everyone's got their hand in the huddle and committed to continuing to grow the business and compete in the local markets.

Will Stengel:

It's more widespread than it was probably 90 to 100 days ago. Just to be clear, we're really pleased with the European performance. I mean the business continues to grow and grow profitably. The M&A pipeline is having its effect with very accretive acquisitions. In particular, our Spanish and Portuguese businesses after their acquisition last year continue to perform really well. They're a standout. NAPA brand is a differentiator as part of that to help us compete in the market. But we've seen some softness earlier in the year in the UK and France, I would say. It's moderated growth through the balance of the business, call it Germany, Benelux, et cetera. But the business is still performing in excess of market and we think we're winning share. So, tougher times, but proud of what the team's executing over there.

Operator:

Thank you. Our next question comes from the line of Scot Ciccarelli from Truist. Go ahead please.

Will Stengel:

Good morning, Scot.

Will Stengel:

Yeah, Scot, thanks for the question. I think our pricing strategies are more holistic than just raising prices. And so as we've talked about before, we talked about it through the prism of category management which is the intersection between not just pricing but also sourcing and in some -- at the SKU level, and some SKUs are going up and many others you're going down as well and the challenge that we put to the category managers across the business has net-net positioned us in a better margin profile as we move forward both on the sourcing and pricing side. So we're being very thoughtful about being competitive in the market on certain categories and we're balancing that with a lot of very scientific and thoughtful technology work that we've done around data analytics to make sure that we've got visibility down at the local field level to compete and win.

Scot Ciccarelli:

Okay, thanks. And then kind of related to that, when you guys go, you've been on a pretty active sequence, trying to acquire some of your independence. When you guys own a store rather than selling product to an independent or wholesale relationship, can you give us some generalized color just regarding the sales and gross -- the profit dollar contributions once you own that business?

Scot Ciccarelli:

Thanks guys.

Bert Nappier:

Thanks, Scot.

Kate McShane:

Hi, good morning. Thanks for taking our questions. We wondered just within DIFM if you're seeing any notable strengths or weaknesses by customer segment? And also within automotive, if you could talk to product categories that were the strongest, and if there was any meaningful change when the warmer weather came in in late June, early July?

Kate McShane:

Thank you.

Operator:

Thank you. We have our next question coming from the line of Chris Horvers from JPMorgan. Go ahead please.

Bert Nappier:

Yeah, Christian, it's Bert. I'll take that one. And maybe as we think about guide, it's just important to refresh on how we thought about the year when the year started and then where things have moved. When we started the year, we expected a moderated first half, stronger second half and a lot of our second half view was based on better industrial production and that being stimulated by interest rates. That model wasn't overly precise, so we didn't have a specific rate cut time to industrial growth or timing of industrial growth, and I think it was more philosophical like many companies about easing interest rates would be supportive of industrial production. As Q2 developed, which included some softer market conditions across industrial, we really have updated our outlook on that side of the house based on that updated view. And we think that with some third-party data, the industrial production activity will continue to lag, it'll still be a headwind for the business as we move here into the third quarter and getting into the fourth quarter as well. We really expected at this point based on our original view to enter the second half of the year with some better kind of low single-digit mid-single-digit growth in Motion and in our industrial side of the house and that's obviously not happening. So we've pushed that out a bit. We -- operating this period of PMI that's been down for quite some time and so now as we look we think that comes much later in the year in terms of improvement. Again, a function of interest rate cuts and we all can take our own predictions on those. Q3, I think we would have parked in our old guidance at somewhere at mid-single-digit, exiting the year at high single-digit. I think we'll see the rest of this year play out in the low single-digit range at best, as we indicated at the top end of our sales guidance and look for improvement as we move through the back half of the year and into 2025.

Bert Nappier:

And, Christian, just on the specific point about capital projects, I mean, the feedback from the customer is, look, there's a lot of uncertainty out there, high interest rates. Capital projects at this point are must-do activities. So we're really seeing some tempering there on that spend. And again, to Will's point, we're having great wins and renewals with customers. And as this interest rate environment, I think, eases, we'll start to see things move.

Will Stengel:

Yeah. I mean, look, I think April, as we've talked about, was super tough. I don't think that was new news for anybody. And so it's all relative. We were kind of working off a low base, and we saw sequential improvement. The initiatives are making a difference. The MPEC acquisition helped build some momentum through the quarter, and the weather did help. So that all being said, it's hard to extrapolate the trend out of the second quarter. I think that's some of the challenge with how we're thinking about the guide. July was a little bit choppy based on what we articulated. So pleased with the sequential improvement through the second quarter, but trying to make sense of the world and the macro environment that we find ourselves as we come into the second half.

Will Stengel:

Thanks, Christian.

Greg Melich:

Thanks. I wanted to follow up on that last point, guys. The start in July is choppy. So it sounds like -- was July as bad as April? Or is it something between the exit rate of June and April?

Will Stengel:

Yeah, Greg, I would just come over the top on that and emphasize the point that we feel good about the work that we're doing. And the tone of our meetings is positive. Everyone appreciates that it's a tough market, but the specific initiatives at NAPA or Motion or any one of our businesses is the right body of work. And at some point, hopefully soon, as the market recovers, we'll have a couple of nice tailwinds behind us.

Will Stengel:

We don't see it empirically in the data, but qualitatively, we have seen that. The other challenge that we put to the merchant is making sure that the good, better, best assortment logic kind of plays in every market condition and for every customer. And so we've seen some shifting around good, better, best. That's probably the closest data that we can look at to see the psyche of the consumer. And then you also anecdotally, you do hear that the consumer is if they needed to, maybe they only do one kind of phenomenon, with most of our big kind of major accounts. Those discussions are pretty consistent across the landscape. So we're seeing it, but I think we're well positioned in the market environment with how we're positioning our brands.

Will Stengel:

We feel good about what we're doing. Quarter-to-quarter, we're the first one out of the gate. Hard to kind of fixate on all things share. The feedback that we get qualitatively from the supplier community, honestly, as has never been better. And I think that's just a reflection of another data point to support that the work that we're doing is all the right stuff. We've just got to keep our head down and keep sequentially improving.

Will Stengel:

Thanks, Greg.

Henry Carr:

Good morning. This is Henry Carr on for Michael Lasser. Thanks a lot for taking our questions this morning. I wanted to ask, so assuming third quarter demand looks similar to second quarter, are you anticipating those pressure callouts of 50 basis points from increased salaries and wages, [Technical Difficulty] Are these pretty much going to be pretty consistent in third quarter, would you say?

Henry Carr:

Great. Thank you. And for a follow-up, I just wanted to ask about with the increased M&A of company-owned stores, I think it's increased to roughly 30% of mix. Does -- when we think about M&A as a contribution to sales growth moving forward, is that 1% target given at the Investor Day in 2023 still a good kind of benchmark to gauge with?

Henry Carr:

Thank you so much.

Seth Basham:

Thanks a lot, and good morning. First, congrats on the appointment of CEO Will, and best wishes to Paul.

Seth Basham:

My first question is just a follow-up to the last one. In terms of your goal related to acquiring independents, 30% of the mix of stores now I don't know that you have a stated goal necessarily, but do you expect continued strong acquisitions for the next couple of years?

Will Stengel:

Hey, Seth, maybe just a couple of other points. I mean I think we said in the script, it's not linear. So we started with the largest independent owner and transacted there. But obviously, we have a lot of smaller owners and so building nice momentum, but it's not linear. Just to make a finer point, we're 70-30-ish today. Three years ago, that was more like 20-80. So to help calibrate the last two to three years, we've made really nice progress. We continue to do that. That being said, the independent owner will always have a role in the NAPA operating model, and we value those relationships and look forward to working with those as we continue to align to win in the local markets.

Bert Nappier:

Yeah. We said that number was right around 30 basis points. So of the 50 basis points improvement in gross margin, all acquisitions contributed about 30 basis points.

Bert Nappier:

I didn't parse out the improvement for the rest of the year. We lifted the guidance for gross margin, primarily on the back of some of that goodness. So I'll let you guys kind of parse that out, how you want, but we're not being quite that specific in terms of how we thought about it. We know there'll be more benefit coming out of gross margin because of acquisitions, but also because of the great work we're doing across the business.

Will Stengel:

I wouldn't say we're giving up business, I would say we're having active discussions with customers to make sure that we've got a path to have it be a win-win. And as we think about incremental new business, we're bringing another level of perspective to that and defining what's helpful to the business. All of that obviously there's trade-offs to all things kind of pursuing new sales. And so each customer is a specific discussion and its own situation. We're just, I think, focusing a little bit more intently on making sure that we're doing right by the business and our customers.

Will Stengel:

Thanks, Seth.

Carolina Jolly:

Hi, thank you for answering my questions. Will, congratulations, and that was a really, really great tribute to Paul. So thanks for that as well.

Carolina Jolly:

First question is just around the modernization of supply chain you mentioning. Does that also require or imply more inventory?

Carolina Jolly:

And then just a quick question. Do you date on the regional disparity [Technical Difficulty]?

Carolina Jolly:

Thank you.

Operator:

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.

Operator:

Good day, ladies and gentlemen. Welcome to Genuine Parts' First Quarter 2024 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, April 18, 2024. At this time, I would like to turn the conference over to Tim Walsh, Senior Director, Investor Relations. Please go ahead, sir.

Paul Donahue:

Thank you, Tim, and good morning. Welcome to our first quarter 2024 earnings conference call. We are pleased to report our first quarter results for Genuine Parts Company and we are encouraged by the start to 2024, particularly when compared to our strong performance in the first quarter of 2023. Our results in the quarter reflect and highlight the value of our business mix paired with our geographic diversity. Our teams delivered results that exceeded our expectations while they stayed laser-focused on our strategic initiatives to enhance our businesses and drive profitable growth. This strong start to the year, along with the continued execution of our initiatives, gives us confidence to raise our outlook for adjusted earnings per share in 2024. Bert will provide additional details in his remarks. A few highlights of the first quarter include

Bert Nappier:

Thank you, Will, and thanks to everyone for joining us today. Our momentum from 2023 carried into the first quarter of 2024 as our teams delivered profit growth against the backdrop of low sales growth. We are pleased with the start to the year, which was ahead of our expectations, particularly as we anticipated this quarter to be the most challenging given the strong results we delivered in the first quarter of 2023. My comments this morning focus primarily on adjusted results which exclude non-recurring costs related to our previously announced global restructuring program. During the first quarter, we incurred approximately $83 million of costs on a pre-tax basis in line with our expectations, or $62 million after-tax related to our restructuring efforts. As we look at the first quarter, total sales were up slightly versus the prior year, reflecting a 1.9% contribution from acquisitions, offset by a 0.9% decrease in comparable sales and a 0.7% unfavorable impact of foreign currency and other. During the quarter, the contribution from inflation was less than 1% in both our Automotive and Industrial segments in line with our expectations. Our first quarter sales performance was highlighted by the continued growth in Europe and Australasia, offset by slight declines in Industrial and Canada. Sales in our U.S. Automotive business were flat in the first quarter and our performance reflects a more than 500 basis point improvement sequentially from the fourth quarter of 2023. During the first quarter, our gross margin expanded by 100 basis points to 35.9%, primarily driven by the ongoing execution of our strategic sourcing and pricing initiatives. Our investments in technology and category management capabilities are continuing to be beneficial in driving positive results and our gross margin performance. Adjusting for restructuring expenses, total adjusted operating and non-operating expenses were 28.8% of sales in the first quarter, an increase of approximately 90 basis points from total expenses in the prior year. Our higher operating expenses in the first quarter reflect a negative impact of approximately 20 basis points from planned investments in IT as we continue to invest in modernized technology to run our businesses, approximately 25 basis points of negative impact from rent expense as inflationary pressures are contributing to higher costs as we renew leases, and approximately 70 basis points of negative impact from salaries and wages as we lap the final quarter of our previously announced 2023 investments in team members and absorb continued mandatory increases in minimum wages in certain international markets. These headwinds were partially offset by discipline in other discretionary categories and looking ahead, our operating expenses will benefit from the actions taken under our global restructuring program. For the quarter, segment profit margin was 9.4%, a 30 basis point improvement year-over-year. Industrial delivered 70 basis points of margin improvement, while sales declined slightly. Our margin expansion in our Industrial business is a result of ongoing efforts to improve the efficiency of our operations combined with strong expense discipline. As Will outlined earlier, the actions we've implemented to improve our U.S. Automotive business are driving benefits and we are encouraged with the margin expansion at Global Automotive and expect further improvement throughout the year. Our first quarter adjusted net income, which excludes restructuring expenses of $62 million after tax or $0.44 per diluted share, was $311 million, or $2.22 per diluted share. This compares to net income of $304 million, or $2.14 per diluted share in 2023, an increase of 3.7%. Turning to our cash flows. For the quarter, we generated $318 million in cash from operations and $203 million in free cash flow. We closed the first quarter with $2.5 billion in available liquidity and our debt-to-adjusted EBITDA ratio was 1.8 times, which compares to our targeted range of two times to 2.5 times. During the first quarter, we invested $116 million back into the business in the form of capital expenditures and another $135 million in the form of strategic acquisitions, including bolt-on acquisitions in the U.S. to support our strategy to own more NAPA stores. In addition, we also made a small acquisition for our Motion business in North America, which expands our value-added service capabilities like fluid power and repair solutions. In the first quarter, we returned approximately $170 million to our shareholders in the form of dividends and share repurchases. This includes $133 million in cash dividends paid to our shareholders and approximately $37 million in cash used to repurchase 261,000 shares. Our global restructuring efforts kicked off in the first quarter as we implement actions to position us to achieve our long-term targets. We continue to expect costs of approximately $100 million to $200 million, most of which will be incurred in 2024, and we will report these as non-recurring expenses. Our restructuring efforts are expected to deliver a benefit of $20 million to $40 million in 2024 and $45 million to $90 million on an annualized basis. We incurred $83 million of costs in the first quarter related to our restructuring program, which can be categorized into two key areas, costs associated with our voluntary retirement program and facility optimization. Approximately 65% of the first quarter restructuring expenses were the costs associated with our voluntary retirement offer. The remaining costs are related to facility closures and start-up costs associated with new facilities that replace those that were shut down. Our first quarter restructuring activities, including the voluntary retirement offer, were completed in line with our expectations and we expect to start realizing benefits in the second quarter. Turning to our guidance. While the macroeconomic backdrop remains dynamic, industry fundamentals remain supportive and we are confident in our team's ability to drive results. With that in mind, we are raising our adjusted diluted earnings per share guidance for 2024 and reaffirming our sales guidance. For the year, we expect total sales growth to be in the range of 3% to 5%, with a more moderated first-half and stronger second-half for both Automotive and Industrial. Included in our outlook is the assumption that the benefit from inflation remains at more normalized levels, contributing less than 1% for both business segments. For gross margin, we now expect full-year gross margin expansion of 30 basis points to 50 basis points, primarily driven by our continued focus on our strategic sourcing and pricing initiatives. This compares to our previous guidance of 20 basis points to 40 basis points of gross margin expansion. Our outlook assumes that SG&A will deleverage between 20 basis points and 30 basis points, primarily from further investment in technology. We now expect the diluted earnings per share, which includes the expenses related to our restructuring efforts, will be in the range of $9.05 to 9.20, compared to our previous outlook of $8.95 to $9.15. We now expect adjusted diluted earnings per share to be in the range of $9.80 to $9.95, an increase of 5% to 6.6% from 2023. This compares to our previous outlook of $9.70 to $9.90. By business segment, we are guiding to the following

Scot Ciccarelli:

Good morning, guys. Scot Ciccarelli. Couple of clarifications, if I may, on the U.S. Auto. Did you guys say commercial comps were down a bit and DIY was flat? And if I heard that right, I thought you said U.S. Auto comps were up slightly. Can you just help reconcile that for us?

Scot Ciccarelli:

Okay, understood. And that does or doesn't include that 130 basis point drag you cited in the deck?

Scot Ciccarelli:

Okay, thanks. I'll save my follow-up questions for later. Thank you.

Operator:

Your next question comes from Chris Horvers with J.P. Morgan. Please go ahead.

Will Stengel:

Chris, I'll start just kind of commercially. The Motion team is doing excellent work. And so I think as we think about the recovery of the sales growth, it's going to come from market. We feel like we're outperforming the market with discrete initiatives. And so as you alluded to, as that recovery happens through the balance of the year, that would be a driver of improvement. The other thing I would just tell you, in the first quarter, we did call out the commentary around weather that impacted the business. We estimate around 80 basis points of impact to the top line associated with customers that had facilities closed in Q1. We don't want to make too big a deal of that. The other thing I would call out is the Easter holiday. We had the last day -- business day of the quarter on Good Friday, and so we saw some customer order sluggishness associated with the holiday weekend. You put that -- those two together, the Easter Holiday is probably another 80 basis points. So you got about 160 basis points of negative impact to the top line. And then you marry that together with macro acceleration through the year and we feel good about the revised guide that we gave everybody. And Bert, I don't know if you got any additional color.

Chris Horvers:

Understood. And then two quicks ones on the margin side. So first, on the vendor incentive program, how does that roll? So if it just change, do the benefits grow as the volumes grow? So would that be an accelerating tailwind to the gross margin over the year? And on the SG&A side, you talked about the restructuring. It's going to be $100 million to $200 million in costs, and you're basically saying it's only annualizing savings, slightly less than half of that. So why wouldn't it be something, I guess, more in line with the cost to restructure versus half of that rate? Thank you.

Chris Horvers:

Got it. Thanks very much.

Operator:

Your next question comes from Greg Melich with Evercore ISI. Please go ahead.

Bert Nappier:

Yes, Greg, it's Bert. So the inflation impact for the quarter was less than 1% for all GPC. Both segments were pretty much in line with each other. Very, very slightly positive. So when I say less than 1%, it was pretty de minimis. And our outlook for the rest of the year is for it to stay at that less than 1% level.

Will Stengel:

Yes, Greg, happy to. So Auto Care, obviously is a super important part of our commercial business and we've been incredibly intentional about making sure we're servicing that customer segment with a lot of excellence. So making sure that we've got the right sales coverage, the right economics to motivate those folks to grow and buy from us. And so we're seeing very nice traction in that part of our business, and we're encouraged by the trajectory of that. Major accounts, as we've talked about before is a pretty diverse book of business for us. It's about 15% to 20% of our commercial business. And inside that, there's four or five different flavors of accounts. We have very specific strategies for each one of those sub segments and focusing and being disciplined around making sure that our value proposition is upheld and intact. So I think as we think about the bigger national accounts, they are feeling some sluggishness from a cautious consumer. And so that's on top of the work that we're doing to make sure that we're covering the market in the major accounts and each of its segments in the right way with a lot of strategic intent. A - Will Stengel Hey, Greg. I would just add, we had the Auto Care Advisory Council in here very recently, the teams, that group is energized. We we've got a growing Auto Care base. The quality of our auto cares has never been better and that's a program now that's 18,000 members strong and growing. And our goal is just continue to capture more-and-more of their spend, which our team is doing a great job of executing. So that's a business that's been a hallmark of NAPA for many, many years. And certainly we're energized with the direction that group is going. Q - Greg Melich And if I could throw in one more. I think last year you bought in over 100 drivers, that was a real dial-up. I guess, is that -- are you continuing at that pace this year? How does that help all these initiatives to buy those folks in? A - Bert Nappier Well, look, Greg, it's Bert. We announced in Q1 or the year-end call that we were pivoting some strategy there around the independent owner model. Look, that model has been successful for many, many years and will continue to be. And both models work in our business and they'll stay in our business. We've refined the approach a little bit and we're going to lean into owning more stores where we can and see that mix shifting some over-time. And that's really around the opportunities we see in target priority markets. And so we're going to continue to accelerate the pace. We did so in the first quarter. We had 45 stores acquired from independent owners in the first quarter. That's against 33 stores in the fourth quarter and then that number in the prior year would have been 16. So we're excited about this opportunity and we think it's great for the business. It's going to allow NAPA to really control more of the transaction, the customer experience, the strategic priorities in key markets. And we think that's a real positive thing for the business. A - Paul Donahue Hey, Greg, and I'd also mention the acquisition of independent stores is not a new development for Genuine Parts Company. We've been doing that every year for as long as I've been here. As Bert mentioned, we see that accelerating in 2024, we saw it in Q1 and expect that to continue throughout the year. But our -- us buying and selling independently-owned stores is not a new phenomenon for GPC. Q - Greg Melich That's great guys, and good luck. A - Paul Donahue Thank you. A - Bert Nappier Thanks, Greg. Operator Your next question comes from Michael Lasser with UBS. Please go ahead. Q - Henry Carr Good morning. This is Henry Carr on for Michael Lasser. I just wanted to ask, I believe you said you've been seeing more positive buying behaviors from your independent owners. What exactly is driving that? Thanks. A - Will Stengel Yes, Henry, thanks for the question. Look, I think -- I think one of the things that we've been very clear about is all these initiatives that I detailed in my prepared remarks, those are not just relevant for our business, but also our independent owners. And so we've been very thoughtful and close in our partnership, working with them to make sure that they've got the right inventory, they're running their stores and their businesses the right way operationally. And so when we say that we're doing initiatives around NAPA, it's not only company-owned stores, but also the independent owners. And I think -- I think those programs are having an effect. A - Paul Donahue Hey, Henry, I'd just -- I'd add to Will's comment. I think it's also evident of the great job our ops team is doing in improving availability and improving our overall supply chain for U.S. Auto. Q - Henry Carr Thank you very much. Operator The next question comes from Bret Jordan with Jefferies. Please go ahead. Q - Bret Jordan Hey, good morning, guys. A - Paul Donahue Hey, Bret. A - Bert Nappier Hey, Bret. Q - Bret Jordan Could you talk about, I guess regional performance for the U.S. business? And then I guess my second question would be the cadence of the quarter as far as the progression through the months.

Bret Jordan:

Great. Thank you.

Seth Basham:

Thanks a lot. [Technical Issues] business. If you could just go a little bit deeper on the regularization of the field teams that you mentioned, how broad is this? And what customer segment are you focused on with this reorg?

Seth Basham:

Sorry, within U.S. auto and the regularization of the field teams that you mentioned, how broad is this across the country and what customer segment are these field teams focused on?

Seth Basham:

Got it. That's helpful. And then just a little bit more color around the changes in sales incentives. Are there changes for the independents that could be pulling forward any sales in the last couple of months?

Seth Basham:

Thanks, Paul, and good luck.

Operator:

The next question comes from Aaron Reed with Northcoast Research. Please go ahead.

Bert Nappier:

Yes, Aaron, it's Bert. Look, I mean, I think when we think about the period from a year-ago with wages and some of the competition around labor, the environment certainly has abated and gotten much softer year-over-year. We're seeing in terms of how we think about labor more in-line with historical averages in terms of increases, some of the things we were having to do to invest a little bit more a year-ago have abated and we're not seeing those. So I would say year-over-year much more normalized environment and we've got that reflected in our outlook for the year. Some of that headwind of investment that we made last year, we saw impact the quarter, as I mentioned in my prepared remarks. And some of those things where we were investing in our team members with a little higher wage increase and healthcare increases that we didn't pass on last year, well, we're seeing that pass by. And so I would just say that when we look at labor moving forward, a less intense and competitive landscape, easier ability to recruit and gain talent in a more normalized environment for wage increases.

Paul Donahue:

Yes, happy to, Aaron. The -- look, the launch of the NAPA brand which occurred about four years ago, we started in the U.K., we anticipated it would be well received in the UK markets. It exceeded our expectations and actually accelerated our strategy to expand the brand across Europe. And I would tell you, Aaron, we have and continue to be very bullish on the reception the NAPA brand has received across Europe. We rolled -- we're in the process of rolling out in Spain now as we -- as we speak. And we expect that this year we'll cross the $500 million mark in outbound sales of the NAPA brand and we've done that in five years. So it's gone amazingly well.

Paul Donahue:

You're welcome.

Carolina Jolly:

Great. Thanks for taking my question. I know you talked about the automotive cadence. I was wondering if you could touch anything on maybe industrial and anything you can talk about in terms of cadence there and any end-markets that might have done well in the quarter?

Will Stengel:

Hey, Carolina, thank you for the question. I would comment as well on the end-markets that you mentioned. Iron and steel performed very well. We also saw a good strength out of the automotive sector in the quarter. Chemicals was strong, mining was strong. So we saw a good balance across a number of end-markets, which really gives us good optimism, especially when you combine it with the positive PMI number that came across in March, it certainly gives us good optimism about our Motion business in the -- in the remaining quarters of the year. So all good on that front, and thank you again for the question.

Operator:

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Operator:

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company's Fourth Quarter 2023 Earnings Conference Call. Today's call is being recorded on February 15, 2024. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. At this time, I would like to turn the conference over to Tim Walsh, Senior Director, Investor Relations. Please go ahead, sir.

Paul Donahue:

Thank you, Tim, and good morning. Welcome to our fourth quarter and full year 2023 earnings conference call. We are pleased to report that Genuine Parts Company delivered on our financial commitments in 2023 and finished the year with a solid fourth quarter. Will and Bert will cover our results in more detail, but I'd like to share a few highlights. During 2023, total GPC sales topped $23 billion, an increase of nearly $1 billion from the prior year and in line with our expectations. We improved our total company segment profit margins by 50 basis points to nearly double digits, and we had our third consecutive year of double-digit earnings growth. And notably, we returned $788 million to our shareholders this year and today, we announced that our Board approved a 68th consecutive annual increase to the dividend. Our teams around the globe delivered a strong performance while remaining focused on our long-term strategic initiatives to profitably grow our business and deliver value for our customers. I want to take this opportunity to thank our more than 60,000 GPC teammates across the world for their dedication and hard work. Our fourth quarter and full year results again demonstrate the value of our complementary business mix paired with our geographic diversity. At our Investor Day back in March of 2023, we showcased our strategic initiatives and announced long-term financial targets for the first time in our history, all focused on delivering for our customers and delivering shareholder value. Clearly, this past year had its share of challenges and opportunities, but our performance in 2023 was a good start to achieve our three-year goals highlighted by the following. Our Motion team completed the integration of Kaman Distribution Group, and we exceeded our synergy target a full year ahead of plan. As an integrated business, Motion is a clear leader in their space, providing industrial aftermarket solutions with a compelling value proposition to more than 200,000 customers around the world. In addition, during 2023, Motion continued to roll out their fulfillment center strategy, which is driving cost efficiencies, inventory productivity and improved customer service levels. During the fourth quarter, I had a chance to visit our fulfillment center in Lakeland, Florida, and I can't say enough positive things about the team and their dedication to serving our customers. We're excited about the rollout of these facilities in 2024 and 2025. Within Automotive, our International Automotive businesses outperformed our expectations in 2023. Our European team continues to expand their presence and gained market share through both strategic acquisitions and organic growth. In 2023, we expanded our presence in Spain, Europe's fifth largest car park with the acquisition of Gaudi, securing our position as the leader in this strategic market. And finally, the rollout of NAPA branded product in the European market has continued to surpass our expectations, a testament to the strength of the NAPA brand. In Australasia, our team is profitably growing market share with their fourth consecutive year of double-digit profit growth on top of industry-leading sales growth. Our supply chain investments in the region have improved the customer experience while driving productivity in our business. In North America, while results fell short of our expectations, we remain focused on our strategic initiatives and continue to make solid progress. We've undertaken a comprehensive review of the NAPA business to identify key issues, and we have taken action to improve the performance at NAPA. We are confident we are focused on the right initiatives to positively impact our performance in the quarters ahead. These initiatives, along with plans for long-term investments, were rolled out to our field leadership teams and across our independent owner group in December. The teams' competitive drive and energy were on full display, and we know that the best days for NAPA are in front of us. And finally, as part of our long-term growth strategy, our teams continue to expand our footprint through bolt-on acquisitions. During the year, our global automotive store count expanded by 173 net new stores, up approximately 2% from 2022. We remain disciplined on our playbook for acquisitions and are confident in our ability to continue seamlessly integrating future businesses across all our segments and geographies to create value for our shareholders. As we look ahead to 2024, we are seeing supportive industry fundamentals in both the Automotive and Industrial end markets. Within our global Automotive business, we continue to see an increase in miles driven and aging and complex vehicle fleet and high vehicle prices and financing costs all supportive for the Automotive aftermarket, and we remain uniquely positioned in this space with our global footprint. Within our industrial business, macro indicators like industrial production, and the Purchasing Managers' Index continue to show improvement after 15 months of contraction. We stand to benefit from a highly diversified portfolio of customers and end markets and we are well positioned now and in the future to capitalize on reshoring trends. While industry fundamentals remain supportive, broader macroeconomic factors like high interest rates and persistent inflation in everyday purchases are pressuring the consumer and businesses alike. That said, the vast majority of parts and solutions we provide across both businesses are great fits and non-discretionary in nature. In our business, parts availability is paramount, and we are leveraging our enhanced data analytics and science to have the right part in the right place at the right time. As we continue to navigate the environment in 2024, it is imperative that we remain agile and move forward with a sense of urgency. Given current market conditions, we need to continuously take action to position our business for long-term success. This morning, we announced a global restructuring initiative to further simplify and streamline our business. Will and Bert will share more about the specific actions we are taking, along with the financial implications. So in closing, we are proud to have delivered on our financial commitments for 2023. We accomplished this while taking decisive actions to improve our NAPA business in the U.S. while at the same time, investing in our strategic priorities to drive profitable growth. We believe the execution of our strategic initiatives, along with our teams' relentless focus on our customers, will drive value for our customers and our shareholders, both now and for years to come. So with that, I'll turn the call over to Will.

Bert Nappier:

Thank you, Will and thanks to everyone for joining us today. Our performance in the fourth quarter and full year continues to demonstrate our long history of delivering earnings and cash flow growth, while maintaining a strong balance sheet. Our results, which include double-digit earnings growth in the fourth quarter and for 2023 were achieved while navigating through a dynamic and challenging year. Before I walk you through the key highlights of our fourth quarter and full year performance, I would like to note that we had no nonrecurring items in the fourth quarter and 12 months of 2023. Our comparisons to prior year, however, exclude nonrecurring items in 2022, primarily related to the integration of KDG and an adjustment in the fourth quarter related to a remeasurement of our product liability reserve. As we look at 2023, sales totalled $23.1 billion, up 4.5% from 2022 and consistent with our guidance. In the fourth quarter, sales increased 1.1% and with a 2% contribution from acquisitions and a 0.3% favorable impact of foreign currency and other. These items were partially offset by a 1.2% decrease in comparable sales. During the quarter, we experienced low single-digit levels of inflation in both our automotive and industrial segments in line with our expectations. As Will outlined, our fourth quarter sales performance was highlighted by the growth in Europe, Australasia and industrial, offset by the decline in U.S. Automotive. During the fourth quarter, our gross margin expanded by approximately 70 basis points. And for the year, our gross margin was 35.9%, an 80 basis point improvement from our adjusted gross margin in 2022. Our gross margin expansion was primarily driven by the execution of our strategic pricing and sourcing initiatives through investments in technology that enabled us to leverage data and analytics to ensure we have the right inventory for our customers to meet their needs. Total operating and non-operating expenses were 28.9% of sales in the fourth quarter, an increase of approximately 20 basis points from total adjusted expenses in the prior year. For the year, total expenses were 28.4% of sales, a 50 basis point increase from adjusted expenses in 2022. During 2023, we anticipated 60 basis points of deleverage related to our planned investments in team members and increased spending in technology, both of which came in line with our expectations. These investments were partially offset by cost actions throughout the year, particularly at U.S. Automotive. Despite the deleverage in SG&A, our fourth quarter gross margin expansion drove segment profit margin up 10 basis points to 9.6%. For the year, segment profit margin was 9.9%, a notable 50 basis point increase from 2022 and highlighted by our team at Motion driving an impressive 200 basis points of margin expansion on mid-single-digit sales growth with industrial now representing approximately 50% of GPC's profit pool. Our fourth quarter earnings were $2.26 per diluted share compared to $2.05 per adjusted diluted share in the same period last year, an increase of 10.2%. For the full year, earnings were $9.33 per diluted share compared to $8.34 per adjusted diluted share in 2022, an increase of 11.9%. Turning to our cash flows. For the year, we generated $1.4 billion in cash from operations and over $900 million in free cash flow, both in line with our guidance. During the quarter, we issued $800 million of senior unsecured notes and used $250 million of the proceeds to repay debt that matured in December 2023. We closed the year with $2.6 billion in available liquidity, and our debt to adjusted EBITDA ratio was 1.8x, which compares to our targeted range of 2x to 2.5x. Our capital expenditures in 2023, which totaled approximately $500 million or 2.2% of revenue, we're focused on driving the strategic initiatives we showcased at our March 2023 Investor Day. For 2023, 60% of our CapEx was growth capital centered on technology and supply chain capabilities, including projects related to distribution center expansion and modernization, fulfilment centers at Motion and using technology to enhance our catalogue and payment platforms. While modestly above our original expectations, the areas where we are investing are delivering good returns well above our cost of capital. We continue to make progress on the M&A front in 2023, a long-standing aspect of our growth strategy. During the year, we completed approximately 90 transactions, investing $309 million, with virtually all of these transactions in the Automotive segment. The blended EBITDA rate of the businesses acquired was over 9% on a pre-synergy basis and is accretive to our overall Automotive segment margin, demonstrating the discipline we have in the space. In 2023, we returned approximately $788 million or 55% of our operating cash flows to our shareholders in the form of dividends and share repurchases. This includes $527 million in cash dividends paid to our shareholders and $261 million in cash used to repurchase 1.8 million shares. Before we turn to our outlook for 2024, as you heard earlier from Paul and Will, this morning, we announced a global restructuring designed to reduce our SG&A costs, improve efficiency and accelerate investments. In 2024, we expect to incur costs of approximately $100 million to $200 million related to our restructuring efforts, and we will report this as a nonrecurring expense. Through these efforts, we anticipate a benefit of $20 million to $40 million in 2024 and $45 million to $90 million on an annualized basis. Our current restructuring activities reflect our discipline to continuously refine and improve our business and ensure we are taking the necessary actions to position us to achieve our long-term targets. As we turn to 2024, we are balancing solid industry fundamentals, which remain supportive for long-term growth across our businesses against a backdrop of mixed economic conditions, driven by high interest rates and persistent cost inflation. Despite this, we remain confident in the execution of our strategic initiatives and the benefits we expect to realize. For the year, we expect total sales growth to be in a range of 3% to 5%. We anticipate a more moderated first half and stronger second half in 2024 for both automotive and industrial. Included in our outlook is the assumption that the benefit from inflation remains at more normalized levels contributing less than 1% for both business segments. We are targeting full year gross margin expansion of approximately 20 to 40 basis points, primarily driven by our continued focus on our strategic sourcing and pricing initiatives. Our outlook assumes that SG&A will deleverage between 20 and 30 basis points from further investments in technology. Our technology investments are key to enabling our strategic initiatives. We expect diluted earnings per share to be in the range of $8.95 to $9.15 and adjusted diluted earnings per share to be in the range of $9.70 to $9.90, which represents an increase of 4% to 6% to last year. Our adjusted earnings per share guidance includes approximately $0.10 of EPS benefit related to our restructuring initiatives, which represents about half of the savings we are targeting for 2024. The successful execution of all our restructuring initiatives in 2024 provides an additional $0.05 to $0.10 EPS benefit, not included in our guidance. By business segment, we are guiding to the following; 2% to 4% total sales growth for the Automotive segment, with comparable sales growth in the 1% to 3% range. As we consider our sales guidance for automotive, our growth rate will be negatively impacted in 2024 and by approximately 100 basis points from new incentive programs associated with changes to certain supplier arrangements we previously announced in the U.S. Automotive business. Historically, these programs have been managed by our suppliers. Under the new arrangements, these will be managed by our U.S. automotive team. The new arrangements will be accounted for as a reduction of revenue, however, have a corresponding reduction of cost of goods sold and as a result, have no negative impact to gross profit. For Global Automotive segment margin, we expect 20 to 40 basis points of expansion year-over-year. For the Industrial segment, we expect total sales growth of 3% to 5% and with comparable sales growth in the 2% to 4% range. For 2024, we anticipate Global Industrial segment margin to expand by approximately 10 to 20 basis points year-over-year after finishing 2023 at 12.5%. Our performance in 2023 exceeded our long-term target of 12%, driven in part by our outstanding work to integrate KDG a year ahead of schedule. We will revisit our long-term target for Industrial in the future, but we see further opportunities for margin expansion in 2024 and beyond. And finally, we are targeting corporate expense to be approximately 1.5% to 2% of sales. Turning to a few other items of interest. With our strong balance sheet and cash flows, we are well positioned to take advantage of opportunities that fit with our long-term growth strategies regardless of the economic backdrop. In 2024, we will continue our long history of balanced capital allocation with four priorities; capital expenditures, M&A, our dividend and share repurchases. During the fourth quarter, we added a new capability and further flexibility to pursue strategic investments with our commercial paper program launched in December. Our cash flows will remain strong in 2024 as we expect cash from operations to be in a range of $1.3 billion to $1.5 billion with free cash flow of $800 million to $1 billion. As we outlined at Investor Day, investments in our supply chain and IT capabilities are central to our success. For 2024, we expect CapEx to be approximately $500 million or 2% of revenue, consistent with 2023. As we look at 2024, the growth capital we are deploying, which is approximately 55% of our forecast will drive modernization of our supply chain through automation and new DCs and fulfilment locations that are partnered with technology that enhances our customer experience like our investments in catalogue and search platforms through our partnership with Google. As we look at M&A, our global pipeline remains robust and we continue to remain disciplined pursuing opportunities that create value. Our strong track record of success, combined with our ability to put our balance sheet to work positions us well to further grow our global scale and footprint. In maintaining our focus on shareholder returns, this morning, our Board approved a $4 per share annual dividend for 2024, representing our 68th consecutive increase to our annual dividend. This represents a 5.3% increase from the $3.80 per share paid in 2023. In closing, our teams managed the business through a dynamic environment in 2023, including navigating unexpected pressures in our U.S. automotive business, while achieving mid-single-digit sales growth, gross margin expansion, segment margin expansion and double-digit earnings growth. As we look ahead to 2024, we will continue to strategically invest in our business for the long term while taking actions to better align our assets in the near term and maintain our strong balance sheet. We look forward to updating you on our progress as we move throughout the year. Thank you, and we will now turn it back to the operator for your questions.

Chris Horvers:

Thanks, good morning guys. So my first question is regarding the independent versus the company-operated stores. Can you talk at a high level what the comp look like between those two segments? And more importantly, do you have a sense of what POS is versus inventory at those independents. Presumably the deferral can only last so long. And would you expect that catch-up to happen relatively quickly?

Chris Horvers:

Got it. And then I guess as a follow-up and thinking about that, there was bad weather in December, good weather in January. So and you had the destock, restock. So I guess in light of that, can you talk about how you're thinking about the trend of the business? What's January? Should we look at those 2 months together? And how does that inform the cadence of U.S. NAPA over the year?

Chris Horvers:

And just a finer point on that, would you expect both Motion and Industrial and U.S. NAPA to be negative in 1Q on an organic comp basis?

Chris Horvers:

Got it. Thanks very much.

Operator:

Your next question comes from Scot Ciccarelli with Truist. Please go ahead.

WillStengel:

Yes. Thanks for the question. Listen, I think we've shared both last quarter and this quarter, a lot of specificity about the work that we're doing proud of the progress that we're making. The script laid out a lot of the actions that we've taken specifically around operational intensity, inventory technology investments, field leadership, store operations, a big body of work, and we're highly confident that the team is going to turn it around as we move forward. So there's a lot to like -- we know we've got opportunities to get better, and we've got a lot of confidence in the team.

Josh Young:

Got it. That's helpful. And then just one on margin. So if we think about the targets you outlined last year, obviously, you're running above that on industrial and you're talking about expansion for next year. But given what we've seen in auto for '23, how are you thinking about the target you laid out there?

Josh Young:

Yes. That's helpful. Thanks, guys.

Michael Lasser:

Good morning. Thank you so much for taking my question. On the Industrial segment, where do you think margins can go now that you've experienced such significant growth over the last few years? And is there any reason to believe that you should give some of the growth back in the coming years?

Paul Donahue:

And Michael, I would just tag on to what Bert said, we've been able to accomplish this while in the midst of the longest contraction on the PMI numbers, I think, since about '08. So we fully expect -- well, we're encouraged by the move in the right direction in the PMI numbers, we'll see industrial production, I think, today comes out. But we're expecting that manufacturing to shift back to a positive sometime in 2024. And that's just going to benefit the top line, which will benefit the overall business.

Bert Nappier:

Yes, Michael, it's Bert. So we gave comp sales guidance for Global Automotive segment of 2% to 4%. I don't want to get into too much geographic difference. But we'll say that the market, when you take all of our geographies together, is somewhere between flat to 2% up. We've already talked about inflation, that will be about one point or so. And we're assuming that we'll get one point or so from acquisitions as we look at the automotive segment when we move through 2024. So hopefully, that gives you a little bit of color on the breakdown of how we're thinking about sales growth.

Bert Nappier:

Thank you, Michael.

Bret Jordan:

Hi, good morning, guys. Morning, Bret. Could you talk a bit more about the strategy of expanding the NAPA company-owned store base? I mean it sounds like you've added reasonably substantially to that. And are there either sort of a profile of the target acquisition by market or size? And sort of how do we think about that from a CapEx and margin impact going forward?

Bert Nappier:

Look, on the capital allocation side, this will show up as M&A. These are small acquisitions. And so that won't really be a CapEx number, but more of an M&A number. And look, they're very attractive to us. We have got a great balance sheet a lot of financial strength and flexibility to be able to lean in here and we'll have the ability to do that. These are attractive in terms of being accretive almost immediately as we recapture some of the margin we were sharing previously with an independent owner. We get to reduce some of the structural costs and the way we serve our customers. We'll capture some SG&A synergies, particularly on the IT side and with some of the team members and the overhead and back office ranks. And we'll drive some incremental sales, as Will mentioned. We really have an ability to partner our commercial activities where also with an independent owner, they may not be fully NAPA sourced, we'll be able to increase that as well. These are asset deals and always and generally in high-performing markets. So we like the lean here, and we think there's a lot to love.

Will Stengel:

Bret, I think you nailed it. I think it was a cumulative effect of both of those cumulative effect of rates through the year, getting to year-end, closing the books, if you will, softer weather and then just getting ready for maybe a more robust 2024. So as we said in our comments, we're encouraged by the first 3 or 4 weeks of the year here and hoping for a more normal 2020 for as we move forward.

Will Stengel:

Thanks, Brett.

Greg Melich:

Hi, thanks. I'd like to circle back on the restructuring activity. So Bert, could you help us understand the $100 million to $200 million? Is it cash, noncash? What's the portion there? And in terms of the synergies, what segments do they show up? Where will we see that in the P&L over time?

Greg Melich:

Got it. I appreciate that. And I guess, back on the business, could you just level set us now I know we're up to the 1,500 stores that are company owned. Could you level set us on what isn't company-owned, Well, how many independents there are, what's company-owned and then also the mix of business that's NAPA AutoCare major accounts and then up and down the street.

Paul Donahue:

Greg, this is Paul. I'll jump in on the second part of your question regarding the business breakdown, major accounts roughly in the high teens, 20% range. NAPA AutoCare, which we're incredibly excited about the progress we're seeing in NAPA AutoCare. We've had a big surge in memberships over the last 90 days. That's about 20% of our overall commercial business. You mentioned small kind of mom and pop up and down the street. We've got a program as well in place where we're focusing in on getting back some of that business. That's about 20% roughly. And then you've got government and fleet, which for us, Greg, that's a significant part of our commercial business and one that -- we have long been incredibly strong and that's about the balance of your 40% of your commercial business. So I hope that helps.

Paul Donahue:

Thanks, Greg.

Seth Basham:

Thanks a lot, Anne. Good morning. My question is on sell-in versus sell-through to independents in 2024. So as we sit here today, are you anticipating your guidance, those to be pretty equivalent?

Seth Basham:

Sell-in versus sell-out for your independents. How they finished destocking from your perspective so that we should see more pressure on comps from that effect?

Seth Basham:

Got it. And then my follow-up is, Paul, you talked about the up and down the street customers. Perhaps that's 1 area where you've seen some of the most pressure on your business. Are there competitive dynamics there that you didn't anticipate? And what are your plans for getting back to that business specifically?

Seth Basham:

Got it. Thank you.

Operator:

Your next question comes from Daniel Imbro with Stephens. Please go ahead.

Paul Donahue:

Good morning, Daniel

Will Stengel:

Daniel, I'll take the first part of your question. I think previously, we've shared some commentary with you on the end markets that we track here internally. There are about 14 of them. And as I said in my prepared remarks, it's similar to Q3, it's a mixed mosaic as it relates to kind of growth versus contraction. Having said that, just maybe a few additional data points. As we look at the fourth quarter relative to the third quarter across those 14 in the fourth quarter, we had 9 of 14 in growth mode, which is an increase of 2 versus the prior quarter. And if you decomp that growth, we've got low single digits in 3 of them mid-single digits and 2 of them high single digits in 1 of them and double-digit growth in 3 of them. So on balance, we're encouraged by the sequential improvement versus third quarter and even in the 5 of 14 that are declining, we saw 3 of those 5 improve in the fourth quarter versus the third quarter. So hopefully, that gives you a little bit of perspective of, call it, the last 6 months' trends on all things end markets.

Daniel Imbro:

Great. I appreciate that. And then for a follow-up, I wanted to follow up on the restructuring. You talked about in the previous question, maybe where we're going to see it in the reported numbers. But I'm curious if we dig into like what kind of jobs are we actually reducing across the business? And how do you weigh that against the risk of service levels? It feels like some of your auto peers are investing into stores and into distribution. And so curious how you guys think about the competitive dynamics and how you view that risk in '24 as you try to maybe gain back some of the share?

Daniel Imbro:

Thanks, Bert. Good luck, you all.

Operator:

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Timothy Walsh:

Thank you, and good morning, everyone. Welcome to Genuine Parts Company’s third quarter 2023 earnings call. Joining us on the call today are Paul Donahue, Chairman and Chief Executive Officer; Will Stengel, President and Chief Operating Officer; and Bert Nappier, Executive Vice President and Chief Financial Officer. In addition to this morning's press release, a supplemental slide presentation can be found on the Investors page of the Genuine Parts Company website. Following our prepared remarks, the call will be open for questions. If we're unable to get to your questions, please contact our Investor Relations department. Please be advised, this call may include certain non-GAAP financial measures which may be referred to you 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 its businesses, as defined in the Private Securities Litigation Reform Act of 1995. 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. With that, let me turn the call over to, Paul.

Will Stengel:

Thank you, Paul. Good morning, everyone. I want to start by also thanking the global GPC team for their ongoing commitment to serving our customers. We appreciate the hard work every day to deliver parts and solutions that help keep the world moving. It's great to see the teams work together as one GPC team to deliver customer success. We do this with coordinated focus on our foundational priorities, including talent and culture, sales effectiveness, technology, supply chain, and emerging technology complemented by disciplined M&A strategy. To that end, I'd like to take a moment to specifically recognize the global teams for the progress on our numerous in-flight initiatives around the world. We're executing a broad set of initiatives across our global business and making strong and steady progress. The teams are simultaneously working to evolve the business for the better, while delivering on our day-to-day service commitments to our customers. As we detailed at our Investor Day, we believe we have compelling opportunities to invest back in the business and are excited about the progress and outlook. As Paul mentioned, we have great examples of progress around the world, specific examples range from state-of-the-art distributions centers with automation and next generation technology, enhanced data visibility and analytics capabilities, added talents and expertise, modernize technology platforms to enhance growth and productivity, and much, much more. We know the teams are working hard to execute the body of work, so thank you very much. Now, turning to the details of the business segment results. Before I get into the specifics, I should mention that the third quarter had one less selling day in the U.S. when compared to the third quarter last year. This impacted our total sales and comparable sales growth versus prior year, for both our industrial and automotive segments. During the quarter, total sales for Global Industrial were $2.2 billion, an increase of 0.6%. We estimate that the one less selling day negatively impacted Global Industrial sales growth by approximately 160 basis points. Total sales for Global Automotive were $3.6 billion, an increase of 3.9% with a negative impact to Global Automotive of approximately 100 basis points, due to the one less selling day. Now, turning to the Global Industrial segment. Our quarterly results were essentially in-line with our expectations, and we remain ahead of our year-to-date plans. Recall that our expectation was for industrial growth to be lower in the second half of the year compared to the first half. Comparable sales growth increased 0.3% in the third quarter versus the same period last year. The same period last year was our highest quarterly comp during the year at approximately 20%. The monthly average daily sales cadence through the quarter was relatively consistent with each month of the quarter up low single digits. During the quarter, Motion saw a more mixed result across its various end markets with the strongest growth coming from industries such as food products, iron and steel, and mining, offset by relative softness in equipment and machinery. As mentioned, Motion continues to make excellent progress with initiatives including sales excellence, pricing, e-commerce, technology, and supply chain strategies that are helping to win profitable market share. As one example, the inside sales team initially formed in 2020 now covers approximately 25% of active customer accounts. The proactive sales calls are helping to drive profitable double-digit growth across the selling channel with a lower cost to serve. Our technology investments supporting revenue growth are also helping deliver better customer experience, with nearly 30% growth across e-commerce channels year-to-date, and e-commerce now at over 30% of total sales, up approximately 6 percentage points since 2021. Motion's second new fulfillment center in Fort Mill South Carolina is another example of exciting progress. This supply chain initiative consolidates various older legacy facilities while improving productivity, efficiency, speed, and service to customers. Our first fulfillment center in Lakeland, Florida opened at the end of 2021 and has delivered outsized sales growth a 10% reduction in operating expenses and corresponding profit margin expansion. We'll continue to roll out this strategy with additional fulfillment centers opening scheduled for 2024. In Asia Pac, our Motion team delivered another strong performance in the third quarter with double digit sales and profit growth. Local teams are energized as reaffirmed by recent independent survey data showing high levels of team member engagement combined with market leading customer satisfaction rates. Motion is a trusted value-added advisor to its customers, and the team has detailed plans to win additional share in this fragmented market. Industrial segment profit in the third quarter was approximately $283 million up a strong 16.6% and a 12.9% of sales representing a 180 basis point increase from the same period last year. The profit improvement in industrial was driven by another quarter of excellent operating discipline in both North America and Australasia. The accelerated integration of the KDG acquisition has contributed to the strong performance and we will exceed our $15 million synergy estimate by the end of this year. Turning to the Global Automotive segment. Similar to the first half of the year, total automotive sales benefited from our global diversification with our international auto businesses outperforming with mid-single-digit to double-digit sales growth in local currency. Comparable sales for the Global Automotive segment increased 0.6% in the third quarter and by geography include low to mid-single digit growth in each of our international businesses in comparable sales of negative 2.9% in the US. The moderation in inflation continues to be a significant factor in our year-over-year performance. As expected, Global Automotive sales inflation moderated in the third quarter to low single digits from mid-single digits in the second quarter. By comparison, in the third quarter of 2022, Global Automotive benefited from high single digit levels of sales inflation, which includes a benefit in the US of approximately 10%. We expect sales inflation in Global Automotive to be low single digits in the fourth quarter. Global Automotive segment profit in the third quarter was $322 million up approximately 4% versus the same period last year, and segment operating margin was 8.9% flat with last year. In the quarter, each of our international geographies delivered margin expansion, while US Automotive segment margin was down due to expense deleverage related to planned investments and the impact of lower sales. Now let's turn to an overview of our automotive business performance by geography. In the US, as Paul outlined, automotive sales declined approximately 1% in the third quarter with comparable sales down 2.9%, which includes the negative impact of one less selling day year-over-year as I had previously mentioned. Further, the third quarter of last year included the benefit of sales associated with our NAPA Expo. A sales event held approximately every five years, which negatively impacted our year-over-year comparisons by an estimated 170 basis point. Collectively, these two factors represent approximately 340 basis points of headwind in evaluating our year-over-year growth performance in the US. In the third quarter, sales to both commercial and retail customers were down slightly with commercial and DIY essentially performing at similar levels. Our commercial business was mixed in the quarter as fleet and government outperformed and major accounts remained pressure driven by the impact of tighter market conditions on the end consumer. The average daily sales cadence by month was July, slightly up, August, down low single digits, and we exited the quarter with September up low single digits. It's fair to say that our performance in the US automotive business was below our expectations, and we believe the underperformance is a combination of execution and further tightening of market conditions. On the execution side, we have not been crisp enough in the field with service to our customers. In addition, while supply chains have improved significantly post pandemic. We've experienced some lingering issues with inventory availability in a few product categories. Finally, the impact of tightening market conditions, including higher interest rates and persistence levels of higher cost inflation, has created a more cautious trading environment for our customers. Despite the challenges we're taking action, first, in terms of service in the field, we've taken actions to intensify our operational rigor at stores, and DCs as well as further enhanced our inventory strategies powered by investments we've made in data analytics tools. Second, we've experienced fill rates below our acceptable levels in a few product categories. This fill rate performance has taken too long to remedy post pandemic and as a result, our merchandising teams partnered with alternative suppliers to address the issue to ensure our markets are properly stocked. Finally, while we can't control the overall market conditions, we are working closely with field sales to drive incremental growth opportunities and we continue to be disciplined on costs, including ongoing cost actions, which Bert will discuss further. As mentioned, we've underperformed our expectations at US Automotive in 2023, but with new leadership enrolled for 100 days now, the team has clarity of the priority opportunities as taken actions and are quickly moving to get where we need to be. With solid industry fundamentals and the team's competitive drive to win, we're confident our US automotive team is positioned to overcome our recent challenges and execute on our long-term strategy to profitably grow share. In Canada, sales grew approximately 4% in local currency during third quarter with comparable sales growth of approximately 3%. During the quarter, our automotive and heavy-duty businesses grew mid-single digits and low single digits, respectively. And we are pleased with the Canadian team execution of their strategic initiatives despite macroeconomic pressures and a cautious consumer. In Europe, our automotive team delivered another strong quarter, which total sales growth of approximately 11% in local currency and comparable sales growth of approximately 7%. We continue to drive strong growth in market share gains across our European markets due to the ongoing execution of our initiatives and strategic value creating acquisitions. During the third quarter, we delivered mid-single digit to double digit growth across each of our geographies driven by continued wins with key accounts, winning higher share of wallet with existing accounts, and expanding the NAPA brand in the region. In addition, the team's making excellent progress on our new National Distribution Center in France that Paul, Bert and I had a chance to visit. Scheduled to open in 2024, this 50,0000 square foot facility helps evolve the network's strategy and upgrades the level of technology and automation within our supply chain. This effort complements a similar investment in the UK, and the teams are working well to leverage best practices. We expect these facilities to further drive productivity and efficiency as well as increased service level to our customers. In the AsiaPac Automotive business, sales in the third quarter increased approximately 6% in local currency with comparable sales growth of approximately 5%. Sales for both commercial and retail were solid in the third quarter, with retail growth slightly above commercial. Having recently visited with this world class team, it's impressive to see the team consistently executing at such a high level and delivering another quarter of record sales and profitability. Our AsiaPac team is driving market share gains, improving profitability, increasing its employee value proposition all while executing strategic initiatives to create long term value. In closing, the global GPC team delivered solid third quarter results, driven by the benefit of our strategic business mix, and global geographic diversification. We remain committed to our plans for continued growth through the balance of the year despite a dynamic environment. We're confident our teams are focused on the right long term strategic initiatives that will deliver customer solutions and create value. Thank you again to the entire GPC team for your hard work, your performance, and your dedication to taking care of our customers. With that, I'll turn the call over to Bert. Bert Nappier Thank you, Will, and thanks to everyone for joining us today. Our performance in the third quarter reflects the operating discipline in our business, alongside the focus by our teams to serve our customers, which is evident with our double-digit earnings growth for the quarter. Before I walk you through the key highlights of our third quarter performance, I would like to note that we had no nonrecurring items in the third quarter and nine months of 2023. Our comparisons to the prior year, however, excludes certain nonrecurring items in 2022, primarily related to the integration of KDG. Double GPC sales increased 2.6% to $5.8 billion in third quarter of 2023. This reflects a 0.5% improvement in comparable sales, which includes low single digit levels of inflation, a 1.7% contribution from acquisitions, and a 0.5% favorable impact of foreign currency. Our sales performance reflects ongoing strength in international auto, continued, but moderating growth in industrial, offset by a decline in sales at US Automotive. Further, 1 less selling day in our US businesses negatively impacted sales growth by an estimated 120 basis points. Our ongoing execution of our strategic pricing and sourcing initiatives were the primary driver of our strong gross margin expansion. Gross margin was 36.2% in the third quarter, 130 basis point improvement from the same period last year. Given our performance year-to-date, we now expect our grow margin rate for the full year to improve 50 to 60 basis points from 2022, an increase from our prior estimate of 30 to 50 basis points of improvement. Our total operating and non-operating expenses in the third quarter were $1.6 billion or 28.2% of sales. This compares to total adjusted expenses of 27.5% of sales in the third quarter last year, or an increase of approximately 70 basis points. The SG&A deleverage in the third quarter is primarily attributable to a few key factors, planned investments in wages and benefits for our teams, and increased spending and technology to support our strategic initiatives. These investments in wages and benefits for our team members impacted SG&A by approximately 35 basis points, while investments in IT and digital impacted SG&A by approximately 25 basis points in the third quarter. As you heard earlier from Will, within SG&A, the US Automotive team has been working hard to execute on cost improvement actions. The team has been successful in reducing headcount, implementing a hiring freeze, and driving discipline around travel and other discretionary costs. These actions are on track and equate to approximately 15 to 20 basis points of benefit which is embedded in our annual guidance and year to date results. For the full year, we continue to expect SG&A deleverage of 30 to 40 basis points based on our investments in our team members and IT. Our third quarter revenue growth and gross margin expansion drove total segment profit of $605 million up 9.6%. Segment profit margin was 10.4%, a 70 basis point increase from last year and our seventh consecutive quarter of margin expansion. This quarter's segment margin expansion is a clear reflection of the value of our portfolio diversification, highlighted by Industrial, which now represents nearly 50% of GPC's segment profit. While we deliver strong overall margin expansion driven by industrial, our Global Automotive segment margin was flat due to US Automotive. We've demonstrated consistent improvement throughout 2023 as global auto segment margins improved again sequentially. Further, we have identified opportunities to improve execution at our US Automotive business and position the business to take share. With a combination of operating discipline and ongoing investments in strategic initiatives to drive further operational efficiencies and productivity for the year, we now expect GPC segment margin expansion of 40 to 50 basis points and increase of our previous outlook of 20 to 40 basis points of improvement. Our third quarter net income was $351 million or $2.49 per diluted share. This compares to adjusted net income of $317 million or $2.23 per diluted share in 2022, an increase of 11.7%. Turning to our cash flows. For the first nine months of 2023, we generated $1.1 billion in cash from operations and $733 million in free cash flow. We closed the third quarter with $2.2 billion in available liquidity, and our debt to adjusted EBITDA is 1.6 times, which compares to our targeted range of 2 to 2.5 times. Highlighting our flexibility and the strength of our balance sheet. We remain committed to our four key priorities of capital allocation, which include the investment in our business through capital expenditures and M&A and the return of capital to our shareholders, through dividends and share repurchases. During 2023, we have invested $350 million in capital expenditures, including $145 million in the third quarter. We remain disciplined investing in initiatives we believe will drive modernization and long-term growth for our business, as acquisitions remain a key element of our growth strategy we invested $211 million year to date for acquisitions, including the investment in Gaudi to expand our market leading position in Iberia. We continue to generate a robust pipeline of bolt on acquisition targets for our business. Thus far in 2023, we have also returned approximately $565 million to our shareholders in the form of dividends and share repurchases. This includes $393 million in cash dividends paid to our shareholders and $172 million in cash used to repurchase 1.1 million shares. We remain well positioned with solid cash flows and a strong balance sheet to effectively deploy our capital through any economic environment. Turning to our guidance. We continue to navigate a balanced mix of headwinds and tailwinds as we move into the fourth quarter. With that backdrop, we are reiterating our full year sales guidance and updating our diluted earnings per share guidance previously provided in our Q2 earnings release. We now expect diluted earnings per share to be in the range of $9.20 to $9.30 an increase of approximately 10.3% to 11.5% from 2022. This compares to our previous outlook of $9.15 to $9.30. 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 for the following, 4% to 6% total sales growth for the Automotive segment with comparable sales growth in the 2% to 4% range. Within this outlook, we expect international automotive to be at the high end or above this range with US Automotive below. We also expect Global Automotive segment margin to be flat to slightly down for the year. For the Industrial segment, we expect total sales growth of 4% to 6% with comparable sales growth also in the 4% to 6% range. As expected, the sales growth within this segment has moderated along with the industrial economy, and our outlook includes low-single-digit growth in the fourth quarter. For the year, we now expect Global Industrial segment margin to expand by at least 150 basis points year-over-year. We are reaffirming our outlook for cash from operations and free cash flow. We expect cash from operations to be in a range of $1.3 billion to $1.4 billion, and free cash flow to be in the range of $900 million to $1 billion. We continue to plan for capital expenditures of $375 million to $400 million for the full year, which includes incremental investments in technology, and supply chain, among others. In closing, our third quarter double-digit earnings growth demonstrates our ability to improve earnings and expand margins and low growth environments backed by a strong balance sheet and returns to our shareholders through our dividend. Our teams are delivering on what we said we would do for 2023, including our expectations for mid-single-digit sales growth, gross margin expansion, segment margin expansion and double-digit earnings growth for the full year. We look forward to closing the year strong and reporting on our fourth quarter and full year results on our call in February. Thank you. And we will now turn it back to the operator, for your questions.

Scot Ciccarelli:

Good morning, guys. Scot Ciccarelli. I know your Investor Day wasn't all that long ago, but you guys had outlined some margin targets for each of your divisions, and while we've seen great progress on the industrial side. How are you guys thinking about your automotive margin targets given the performance from the last few quarters?

Scot Ciccarelli:

Okay. That's, that’s helpful. And then given some of the near-term choppiness, and you guys are obviously implement -- implementing various improvement processes to improve the U.S. auto business. But, the way this business typically works is, once you lose market share, it's kind of hard to get back. So how are you guys thinking about -- can, can you actually -- are you guys thinking that you can call that market share back or, are the changes you're implementing really just kind of patching holes in the ship and stopping incremental share losses? Thanks.

Paul D. Donahue:

And Scot, I would, I would just add on to that. Look, we've been in this business a long, long time. There's nothing structural, that has shifted or changed in, in our business or in our, in our structure. We know the levers to pull, will hit on them. And trust me, there is a sense of urgency up and down, up and down the organization to get it done. I have no doubt we'll get it done.

Operator:

The next question comes from Michael Lasser of UBS. Please go ahead.

Paul D. Donahue:

And, Michael, can you repeat the last part of that question, you're, you're kind of fading in and out on it.

Paul D. Donahue:

That’s all right.

Bert Nappier:

Yes, Michael, I don't think it's getting worse. Listen, I think we're clearly disappointed with the recent performance. And as I said, that plus some of the performance of our credible competitors would indicate we've given back some share over the last couple of quarters. But maybe a few thoughts to elaborate on the whole, share thought, which is -- we've always had strong competition in this profit pool, both large and small. And as I said with Scot, it takes consistent execution everyday to serve those customers. And we just haven't performed to, our expectations in '23. I would tell you we have seen with the supply chain challenges moderating over the last 12 months, some of our smaller competitors have gotten more healthy, as it relates to inventory. And so, we're seeing them, playing from a different place of strength than they were maybe 12 months or 24 months ago. The good news is, is that we play in a huge market. It's very fragmented. And as, Paul said, we know what we need to do to return to a position where we're taking share. But we're not, we're not feeling like it’s getting worse. We've got a good line of sight of what we're working on and taking action as we talked about on the call.

Michael Lasser:

It’s just my mic problem. Thank you very much for that. And my follow-up question is [Technical difficult]

Michael Lasser:

So hopefully, that's better.

Michael Lasser:

All right. All right. Sorry. But my follow-up question is, some of the share dynamics influenced general parts -- Genuine Parts ability or willingness to do acquisitions in the U.S. auto business right now?

Michael Lasser:

Thank you. Sorry for the background.

Paul D. Donahue:

Thanks, Mike.

Greg Melich:

Hi, thanks. Some I'd love to go a little deeper in the trend through the quarter and the exit rate and particularly how, inflation may have impacted that.

Will Stengel:

Yes. Greg, it's for, U.S. auto cadence of the quarter. It was mixed through the quarter. July was slightly up, as I think we said in our, prepared remarks, August was down low-single-digits, and we exited the quarter with September up low-single-digits. We did call out the NAPA EXPO, year-over-year compare. That event was in July of last year. By the time all the sales had processed, it's probably, it's not scientific probably impacting August. So, if you think about that adjustment, it's probably mid-quarter, mid-to-end of the quarter.

Greg Melich:

Got it. And when did inflation peak last year. And maybe you've even brought it out some more like, average unit price, if you think about mix.

Greg Melich:

That's great. Thanks, and good luck guys.

Bert Nappier:

We appreciate it.

Christian Oberle:

Hi. Good morning. It's Christian Oberle on for Chris. So, Motion organic trends have had been outperforming the ISM and, and industrial production as the, industrial economy had slowed. So, as you digest, the outsized share deals following the KDG acquisition, do those indicators become more relevant again? And as you look ahead, are there any end markets where there's reasons to believe it should reflect positively or negatively?

Paul D. Donahue:

Hey, Christian, I would just tag on to what, Will said. We are encouraged. One, we'll mention the industrial production numbers, which we saw nice a lift in September. But we've tracked 14 different indicators in our Motion business. Christian, we saw five of those indicators improve in September. So, categories like, I mean, automotive has continued to be positive food products, DC logistics, equipment leasing, all are trending up, including mining. So, yes, to Will's point have -- has the industrial downturn has had reached a trough. I think if it hasn't, we're darn close. And what we generally find is, as we see the major indices like industrial production begin to bounce back, we generally follow that somewhere 60 to 90 days later, we'll see our business begin to shift. So, again, great team at Motion. They've had a phenomenal year, and, and we're looking forward to better days here in 2024 on the top line for that group.

Bert Nappier:

Hi Christian, its Bert. Nothing to call out, we had a really clean quarter on gross margin. Nothing related to some of the noise you just mentioned there. I'm super proud of the teams. They've executed at a very high level. So, our expansion of gross margin here in the third quarter of 130 basis points continues to come on the back of the investments we're making in sourcing and pricing.

Bert Nappier:

Thank you, Christian.

Seth Basham:

Thanks a lot, and good morning. My question is regarding the pricing strategy in the US Automotive business. Obviously, you've done a great job improving your gross margins there. But what gives you the confidence that your less aggressive pricing is not leading to some market share losses?

Seth Basham:

That's helpful color. And you mentioned responding to market dynamics you know, talked about some of your smaller competitors being better in stock. Last quarter, you talked about weighing the cost and benefits of the major account segment. Can you give us an update on that latter point? How you're thinking about major accounts at this point has become more price competitive there, and if you walked away for any business?

Bert Nappier:

Yes, Seth. Just a little additional color on that. We're, -- you know, as we break apart that major account business, which Will alluded to, where we see challenges in some of the big national tire chains. But on the flip side, we're seeing a good growth in our fleet and our government. We're seeing recent growth in the OE dealer segment, which we expect to continue as some of those challenges for that segment continues. So, there's puts and takes, but, again, our team is addressing those issues, and I think we'll see improvements here going forward.

Operator:

The next question comes from Daniel Imbro of Stephens. Please go ahead.

Will Stengel:

Hi, Daniel.

Bert Nappier:

Sure. Look, I don't think we've, think anything differently about the longer term, to follow-up on that earlier point. As I said, maybe we'll get there a little bit differently than we expected when we announced everything in March. This year's played out slightly differently, but we have two years ago, and gross margin, opportunities aren't going to be impacted by changes in suppliers. Actually, there are opportunities more than anything as we look continuing to be competitive going to market with our size and scale, looking at some of these opportunities, more globally and through a one GPC prism. So, I don't see those as limitations at all. They actually tend to be more of an opportunity for us. The pricing environment remains rational. We still think there's opportunity there. As I mentioned a few minutes ago, we've got great work and data analytics there that allows us to be flexible and nimble. And we haven't really seen a change in the way the competition is behaving in that space that would change our view on the longer term or the or the short term for that matter.

Daniel Imbro:

Great. That's helpful. And then just to clarify, Bert, I guess, you said you had one fewer selling day in the quarter. I guess, how did that happen? Was it timing of a holiday and what month did that fall in as we think about the cadency laid out? And then if there any makeup, if there are one more selling day in any quarter coming up, we should be aware of as a model.

Daniel Imbro:

You said one fewer selling day. Was it a holiday timing or kind of what drove that. And then what month did it fall into as we think about the cadence you gave us at month-to-month comps?

Daniel Imbro:

Got it. Thanks so much.

Kate McShane:

Hi. Thanks for taking our question. We had two quick ones. First, is there a way to delineate between the pockets of where inventory is maybe a little light versus some of the execution issues that you highlighted in automotive. And is there a timeline of when inventory availability improves?

Paul D. Donahue:

And Kate, I would just tag out to what Will said. Specific categories that were problematic for us, during the pandemic and even post pandemic, those new programs are rolling out as we speak. So, we would expect to see improvements in those product categories here going forward.

Bert Nappier:

Yeah, Kate, it's Bert. Of course, we knew the expo headwind and the selling day was there. So that wasn't a surprise to us at all. Remember, we don't guide to quarters. So, we weren't thinking about through that – through a Q3 lens. We were thinking about our guidance through the full year. And we, you know, as we guided, thought we would sell through that. And again, we've reaffirmed our top line guide for the year this morning. We did lower the comp guide for automotive. I think that's just being smart, about having to factor in. The slower and softer performance for US Automotive year to date and what it's going to mean for the full year. But at the end of the day, as we thought about expectations, sales recovery didn't progress quite as quickly as we thought in Q3, Will has given you a lot detail around the execution things we're working on. And again, we've reaffirmed our full year top line this morning.

Bert Nappier:

Thanks, Kate.

Paul D. Donahue:

Yeah. Thanks, Andrea. And, just to reiterate, we want to thank all of our teammates around the globe for their efforts, in the quarter and year to date. And, just to let them know how much we appreciate, all they do for the company and for our customers. I'd also like to thank all of you for joining us today and thanks for your combined and your continued interest in Genuine Parts Company. Have a great day.

Operator:

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Second Quarter 2023 Earnings Conference Call. Today's call is being recorded. [Operator Instructions]. At this time, I would like to turn the conference over to Sid Jones, Senior Vice President of Investor Relations. Please go ahead, sir.

Paul Donahue:

Thank you, Sid, and good morning. Welcome to our second quarter 2023 earnings conference call. We are pleased to report another solid quarter with record sales and double-digit adjusted earnings growth. Our second quarter once again highlights the value and benefit of our global automotive and industrial businesses and the mix and geographic diversity of our company which we believe are competitive advantages that differentiate GPC in the marketplace. A few highlights from our second quarter results include

Herbert Nappier:

Thank you, Will, and thanks to everyone for joining us today. Our teams continue to operate at a high level and perform through this dynamic environment. And I'm pleased to walk you through the highlights of our second 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 second quarter and 6 months of 2023. Our comparisons to the prior year, however, excludes certain nonrecurring items in 2022, primarily related to the sale of S.P. Richards Real Estate and the integration of KDG which represented a net $59 million benefit or $0.42 per diluted share. GPC revenues increased 5.6% or $313 million to $5.9 billion in the second quarter of 2023. This reflects a 4.9% improvement in comparable sales, including low single-digit to mid-single-digit levels in inflation and a 1.8% contribution from acquisitions. These items were partially offset by a 0.9% unfavorable impact of foreign currency. The value and advantage of our balanced portfolio and global diversification was highlighted again as we delivered another quarterly sales record. Our gross margin was 36.1%, a 110 basis point improvement from the second quarter last year, driven by the ongoing favorable impact of our pricing and sourcing initiatives. We believe the execution of key strategic initiatives around gross margin will continue to drive strong results. And for the full year, we now expect our gross margin rate to improve 30 to 50 basis points from 2022, an increase from our prior estimate of 20 to 40 basis points of improvement year-over-year. Our total operating and nonoperating expenses in the second quarter were $1.7 billion, up 9% from adjusted expenses in 2022 and at 28.4% of sales. This compares to total adjusted expenses of 27.6% of sales in the second quarter last year or approximately 80 basis points of deleverage year-over-year. The deleverage in SG&A in the second quarter is primarily attributable to a few key factors, 2 of which were planned, our investments in wages and benefits for our teams and increased spending in technology. Our investments in the IT and digital initiatives we showcased at Investor Day, impacted SG&A by 20 basis points in the second quarter. In addition, planned investments in wages and benefits for our team members impacted SG&A by 30 basis points, much of this as a feat of inflationary pressure on wages. Finally, during the quarter, we recorded charges related to cost improvement actions at our U.S. automotive business and a true-up of stock compensation expense for retirement-eligible employees totaling 30 basis points, both of which we would not expect to repeat in the future. For the full year, we continue to expect SG&A deleverage of 30 to 40 basis points, driven by investments in our team members and IT. Our second quarter growth and gross margin improvement drove total segment profit of $613 million, up 11.8%. Segment profit margin was 10.4%, a 60 basis point increase from last year and our sixth consecutive quarter of margin expansion. While we delivered strong overall margin expansion, margins in our Global Automotive segment were lower in Q2 due to pressure in our U.S. Automotive business. As we discussed in the first quarter, following the slow start to the year, we anticipated that the profitability of this business would remain challenged in the second quarter, and it did. However, our teams are making great progress as evidenced by the acceleration in the rate of gross margin expansion from the first quarter to the second quarter and the sequential improvement in segment margins. As Will mentioned earlier, we are executing cost improvement actions to address the elevated levels of operating costs in this business and to continue to improve profitability. We expect these actions, combined with our ongoing discipline on costs across the remainder of the business, and execution of our broad base of strategic initiatives to drive further improvement in operational efficiencies and productivity for GPC. Our second quarter net income was $344 million or $2.44 per diluted share. This compares to adjusted net income of $313 million or $2.20 per diluted share in 2022, an increase of 10.9%. This represents our 12th consecutive quarter of double-digit adjusted earnings growth and is a true testament to our team's hard work and continued focus to drive our profitability. Turning to our cash flows. We generated $457 million in cash from operations for the first 6 months of 2023. Recall that our cash flow in 2022 included a sale of $200 million in receivables under our AR sales agreement. For the first 6 months of 2023, free cash flow was $252 million, and we closed the second quarter with $2 billion in available liquidity. Our debt to adjusted EBITDA is 1.6x, which compares to our targeted range of 2 to 2.5x. We remain well positioned with the financial strength and flexibility to take advantage of future growth opportunities across GPC. Our key priorities for capital allocation remain unchanged. And includes investment in our business through capital expenditures and M&A and the return of capital to our shareholders through dividends and share repurchases. During 2023, we have invested $205 million in capital expenditures, including $117 million in the second quarter. These investments continue to support the initiatives we believe will drive growth and the modernization of our business moving forward. Acquisitions remain a key element of our growth strategy, and we invested $106 million year-to-date for acquisitions, and we continue to generate a robust pipeline of acquisition targets for our businesses. Thus far in 2023, we have also returned $395 million to shareholders in the form of dividends and share repurchases. This includes $260 million in cash dividends paid to our shareholders and $135 million in cash used to repurchase 841,000 shares. As we enter the second half of 2023, we are well positioned 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 April 20th. We are raising our guidance for diluted earnings per share to a range of $9.15 and to $9.30, an increase of approximately 10% to 11.5% from 2022. This represents a $0.20 increase from our previous guidance of $8.95 to $9.10. 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

Operator:

[Operator Instructions]. Our first question comes from Liz Suzuki of Bank of America.

William Stengel:

We did Liz, DIFM outperformed retail in the U.S. Automotive group for the quarter.

Herbert Nappier:

Liz, it's Bert. I don't think you have on part to Q2 as the proxy for industrial for the full year. As you -- as we've commented, we see that industrial growth rate moderating here in the second half. Having said that, we still will get margin expansion for the full year on the Industrial segment. But we're thrilled with where the business performed in Q2 that 12.5% rate is a proxy for we can go long term as we shared at Investor Day, but we still have a lot of work to do to continue to grow that business and would use -- not use that as a proxy, but look to still see expansion of margin for the full year.

Christopher Horvers:

Chris Horvers from JPMorgan. Sid we will miss you very much, and congratulations on your retirement and all the best in your future endeavors. My first question is just following up on the U.S. -- the U.S. NAPA comp, I think you implied in April that you're maybe running about a 4 and you imply that June was down. So was June down sort of low to mid. And can you talk about what you're seeing that you're encouraged by in July and how you're thinking about U.S. NAPA comps in the back half?

Paul Donahue:

And Chris, I would just tag on to that, that the fundamentals of the industry are still solid -- miles driven, going in the right direction as gas prices moderate a bit. New car sales being still a bit soft compared to historic numbers. And we're seeing the same across our international business as well. So as we reported our team in Europe had a phenomenal quarter, strong double-digit growth. Many of the fundamentals there, the same here across North America, rock solid. And our team in Asia Pac, Australia, New Zealand also had another really strong quarter. So fundamentals of automotive are still rock solid. And we certainly see improvement as we move forward through the back half of the year.

Herbert Nappier:

Chris, it's Bert. Look, I think we had a great quarter here. In the past couple of quarters, I've given you the offsets for gross margin. We had a clean number this time around. We had no offsets from some of the things we've talked about in the past, whether it's inflation or mix. So we're just thrilled with the work that the team is doing and so important in this environment when we've got all the different economic pressures out there. So we've got a great focus on sourcing and getting the right inventory in the right place at the right time. We also have great work happening on pricing across all of the business. And so that 110 basis point improvement for the quarter up to 36.1%, I think is a reflection of really, really hard work. We're going to continue to stay focused on gross margin expansion through those 2 prisms, through pricing and sourcing. I'm not going to call the bulges yet on where that number can ultimately end up. As I said in my prepared remarks, we're more bullish on where it can be for this year. We had originally been planning for 20 to 40 basis points of improvement, and we've got that to 30 to 50 basis points. Within that, again, benefit from the execution of our strategic initiatives. We do have a little bit of a benefit modeled in for ocean freight, which we see turning positive for us here in the second half. So those are the 2 things I'd call out with really no foreseen at this point impact from either FX or inflation or mix.

Scot Ciccarelli:

I have a follow-up on Christopher's question. So the slowdown you've experienced in U.S. auto, do you think there's any share shifts occurring given some of the strong results we've seen from a few of your competitors or would you really just point to weather as the headwind in 2Q?

Scot Ciccarelli:

Okay. So maybe some of the delta could be due to geographic differences potentially?

Scot Ciccarelli:

Well, no. I mean, within the U.S., like your results, like if we had positive results from both DIY and commercial. And obviously, you had a 1% comp, like neither was up very strongly, right? So on -- specifically on the commercial side, like could we potentially attribute -- or did you potentially see like significant geographic differentiation in your business, stronger in the South, weaker in the West, what have you?

Scot Ciccarelli:

Got it. And then just a quick housekeeping item. The $80 million or so that you guys highlighted for cost actions and the stock comp true-up. Were they the main drivers in the spike of corporate expense? And should we expect that line item to moderate in the back half?

Scot Ciccarelli:

Okay. But some of the margin expansion that we've seen at the segment level is because of that cost transfer, just to be clear.

Operator:

The next question comes from Bret Jordan of Jefferies.

William Stengel:

Bret, the good news is Randy is not on the call with us, but that's a tough question for him to answer. He loves both these businesses now. He's been out in the field and has a ton of energy and excited about the opportunities in front of us. So...

William Stengel:

He wouldn't have answered that question? He like them both.

Bret Jordan:

That's easy. Question on price, I guess. We were talking about sort of low mid-single-digit benefit from inflation in Q2. How do you see the second half cadence? The bar gets higher, I guess, year-over-year, but maybe you've got some incremental price passing along some of the rate inflation from your suppliers. How do we think about the organic price comp second half?

Bret Jordan:

Okay. And then one follow-up on another pricing question. I guess one of your auto peers reported pretty rough Q1 and talked about price competition in the market. I guess could you comment about what you see, I guess, from pure pricing, any cadence of change in pricing in year-to-date '23?

William Stengel:

Well, I would just say, operationally, what the teams are working on is incredibly helpful in this environment as it has been for the last couple of years, hence, the investment and focus on it. And more importantly, the teams globally are learning from each other. And so I think in one of our previous calls, we've talked about all the great work that's happening in U.S. automotive. We're sharing that work over in Europe. And so these are some of the benefits of working together as a team and sharing all the learnings from an environment that's very similar around the world and gross margin performance in the total company. I think, is a good data point to suggest that we're having some success. So it's an important part of distribution business and it's especially important part of navigating this environment, and we're going to continue to get better at it and invest in it so that we can make the right decisions for our customers.

Gregory Melich:

I wanted to -- one question on the U.S. auto business and then follow-up on industrial guidance. I just want to understand a little bit better with that inflation number, I think we're still seeing mid-single digits. Would it be fair to say a 1 comp would translate into negative 4 units. And then could you give us a little more color on the non-fleet and government business, how the independent dealers did and how NAPA AutoCare did?

Gregory Melich:

Did the company stores do materially different than the jobbers?

Gregory Melich:

Yes, okay. Just maybe DIY, do-it-for-me mix a little bit, but no difference in that cut. The -- I guess the follow-up is on industrial. I just want to make sure I got that right. I mean, with obviously the big numbers continue to come through it. But the margin, the 12.5% margin, I just want to make sure I'm not -- do we assume that industrial margins will actually be down in the back half or that was -- they'll still be up for the year? Was that -- interpret that wrong, Bert?

Gregory Melich:

Got it. Thanks for piecing that together. And I guess I will say said, thanks for everything, and I didn't realize 83 quarters you must have started in college. So...

Operator:

The next question comes from Daniel Imbro of Stephen Bank.

William Stengel:

Yes. Thanks for the question. Look, I think, as I said in my prepared remarks, Randy is a proven leader. He is well understood by our organization and brings a lot of relevant expertise to the NAPA business. As we've talked about often, at the end of the day, these are distribution businesses. And while -- they obviously have a different customer and product catalog. The value creation initiatives are all the same. And so Randy's progress and momentum and building a great team there at Motion that is incredibly deep, I think, it's all relevant and has spoken for itself in terms of the performance. And so I think it's more about how do we quickly build on the momentum of the business. And I think Randy brings is a great opportunity to do that. So I don't think it's operationally, meaning that we're putting the 2 business. In fact, I know it's not. We're not putting the businesses together, but I think it's just going to allow us to be a little bit more efficient and at pace to work together as kind of a One GPC team, which is a philosophy that we've been talking about as an organization. And I think an advantage that we have, given the similarities of all the initiatives that we're doing around the world to go at pace and drive impact faster than perhaps if we were not together as a company.

Daniel Imbro:

And then follow up on the automotive guidance, not to get too into it, but trying to reconcile the 4% to 6% comp guide and the 4% to 6% total revenue guide on the automotive side. I think FX rates just as we sit today are at least a few points better than what you initially guided. So trying to reconcile how that wouldn't be more of a tailwind. Are you hedging out some of that translational benefit in the back half? Or is the right interpretation, it will be more FX benefit? And maybe lighter organic growth just within that same guidance range. Just trying to square away how FX rates can change the guide, kind of gets maintained.

Daniel Imbro:

Just one follow-up on the comp guide. You just mentioned you called the back half conservative on the outlook. But in the U.S., you're calling for an acceleration. Inflation is moderating. So clearly, you're implying traffic is going to further accelerate to get the total comp up. I guess, what are the specific buckets? Or what are you looking at in the business that gives you guys the confidence that the traffic will be ultimately accelerating from here through the back half of the year to get that acceleration towards the low end of the 4% to 6% comp guide in the U.S.

Operator:

We have time for one last question, and that question will come from Seth Basham of Wedbush.

William Stengel:

I think the comment that we made in the first call was true. In April, we did accelerate from the March performance. And as you articulated, and as I think we said, April and May were close to each other in this quarter and then June was the deceleration, and we called it flattish. So call it low single digit, low single digit, flattish for the quarter.

William Stengel:

I'm not sure I'd go that far. I would say, first and foremost, this part of the business is always discussing price, obviously, because they're big scale accounts. So I wouldn't say that those types of discussions are more intense today than they were before. I think we're just bringing a fresh perspective to making sure that our value prop is being appreciated. And we're also doing work with smaller regional "major accounts" that we can really drive a lot of value with given all the capabilities that we bring to them. So I think it's just a stepped-up level of focus and strategic discipline about taking care of our customers.

Paul Donahue:

Yes. Thank you. And I just want to reiterate, we are super proud of our team, the way they continue to operate and in a challenging environment around the world. I'd also like to thank all of you for joining us today, and thanks for your combined and continued interest in Genuine Parts Company. We'll look forward to hosting another call in the third quarter and report on our results. So we'll have another call on October 19th. In the meantime, stay cool and enjoy the rest of your summer. Thank you.

Operator:

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event 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.

Paul Donahue:

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 in an interactive expo. Our panel discussion with our global business unit leaders, allowed us to share specific business and market opportunities 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 and a 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 full 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 a competitive 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. A few highlights in the quarter include; record quarterly sales of $5.8 billion, up 9% from the prior year, segment margin of 9.1%, 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 plan to deliver outstanding customer service and continued market share gains. In industrial, demand trends held strong throughout the first quarter with new and existing customer activity and reshoring 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 KDG and enhanced capabilities in industrial solutions, including automation, fluid power and conveyance 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 to offset the headwinds of a warmer winter and volatile weather conditions in our US automotive business in Q1. In addition, the automotive aftermarket is benefiting from trends such as the ongoing increase in miles driven and aging and complex vehicle fleet and rising interest rates and continued high prices for new and used vehicles. These are all key drivers to ongoing growth in demand, especially for the DIFM 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 GPC is well-positioned with the right strategic plans, strong fundamentals, and rock-solid balance sheet to pursue accretive organic and acquisitive investment opportunities while also returning capital to shareholders through dividends and share repurchases. So again, we thank each of our GPC teammates for taking great care of our customers around the world. So now I'll turn the call over to Will.

Bert Nappier:

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'm 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 non-recurring items in the first quarter of 2023. However, our comparisons to the prior year do exclude certain non-recurring items in 2022, primarily related to the integration of KDG. Total GPC sales increased 8.9% or $470 million to $5.8 billion in the first quarter of 2023. This reflects an 8.7% improvement in comparable sales, including mid-single-digit levels of inflation and a 2.4% contribution from acquisitions. These items were partially offset by a 2.2% unfavorable impact of foreign currency. Overall, our balanced portfolio and global diversification drove 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 continue 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 and increased spending in technology to support our ongoing strategic initiatives. As Will noted, with elevated operating costs pressuring margins in the first quarter in our US 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 costs 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 9.1%, 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 or $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 in receivables under our AR 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 1.7 times, which compares to our targeted range of two to 2.5 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 411,000 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 23rd at our Investor Day. We are raising our guidance for diluted earnings per share to a range of $8.95 to $9.10, an increase of approximately 7% to 9% from 2022. This represents a $0.15 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 sale increase, and with the ongoing assumption of stronger first half year-on-year sales growth relative to the second half of 2023, although our view on Q2 and Q3 have 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 [ph] 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 the strong start to the year and positive momentum in our business. While our US 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 plans and our ability to execute through the dynamic economic environment. GPC is 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.

Kate McShane:

Hi, good morning. Thanks for taking our question. Just one housekeeping question. Just it sounds like weather was a little noisy during the quarter, but the fundamentals are still intact. Can you remind us what exposure you have to California or to the West?

Kate McShane:

Okay. Thank you. And then I think you mentioned in the prepared comments that because of the sluggish start in January, your team pivoted to 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 have in the second half?

Will Stengel:

Yes. Happy to, Bert. Kate, I would say, obviously, 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 US Automotive. They're predominantly around as you would suspect, all things people, in particular around more rigor on over time in stores and DCs, just being super thoughtful to make sure that we're balancing cost with taking care of our customers, T&E expense. We've also pulled 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.

Operator:

And the next question will be from Bret Jordan from Jefferies. Please, go ahead.

Paul Donahue:

Good morning, Bret.

Bret Jordan:

On the US Auto, I think you said the comp was plus 3%. Could you break out price versus units in that number?

Bret Jordan:

Okay. And then, you talked about margin benefits from pricing initiatives. And could you talk about what you're seeing out there? And, I guess, auto and industrial as well, as 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 Plus has gone Chapter 11, so maybe there's some sort of change in dynamics out there as far as the competition.

Bert Nappier:

And Bret, this is Bert Nappier. 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.

Will Stengel:

I wouldn't isolate it to down in Asia-Pac. In fact, we just had our global sourcing teammates here in Atlanta from all around the world to continue to build on this exciting momentum where all geographies on both sides of the business will be better aligned and more press on 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 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 there's a lot of opportunities for them to continue to work better as one organization.

Will Stengel:

I think we have an opportunity to work together to leverage our scale, the definition of what you mean by merged 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.

Will Stengel:

Thanks.

Josh Young:

Hey, good morning. This is Josh on for Scott. So, on the 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?

Josh Young:

Got it. Okay. That's helpful. And then could 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?

Josh Young:

Okay. Got it. Very helpful. Thank you.

Christopher Horvers:

Thanks. Good morning everybody. So a couple of follow-up questions. First, is it fair to say that you were expecting US NAPA to be more like a 4% comp for the first quarter, considering you pointed out a point of on the weather side? And is that a fair interpretation of where the business is running in April?

Christopher Horvers:

Okay. And so dovetailing back to the US NAPA division, you talked about 20 to 40 basis points of segment margin expansion. So was it -- is the original plan that you would deleverage the NAPA operating margin due to the investments?

Christopher Horvers:

Got it. And then just on the freight front understanding that there's some wage cost being pass-through and driver shortages, fuel prices surged in March of last year and all your freight out, I'm assuming it's a periodic expense. So should the freight start to be a tailwind here in the second quarter? And then how long before maybe some of the capitalized freight costs turned to a tailwind later in the year? Thank you.

Christopher Horvers:

Got it. Thanks very much. No, thank you so much.

Operator:

And the next question is from Liz Suzuki from Bank of America. Please go ahead.

Will Stengel:

Yes, Liz, 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 our capabilities in this part of the business positions us pretty well as the environment gets tougher. We're going to be really disciplined on whether they're a good business or a challenged business. But if we can create value and it makes sense for our strategy, I think the power of our balance sheet and our liquidity position is that's exactly the type of environment that we want to operate in, so we can leverage our scale.

Bert Nappier:

Hi, Liz, it's Bert. Look, there's nothing in the near-term that has really changed or really for the balance of the year in terms of how we're 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 and our capital allocation for the year, it's still pretty balanced. We don't have anything different than what we shared at Investor Day and no different plans. The only thing that's on the horizon is we've got a debt maturity at the end of the year. And obviously, we'll want to be thinking about the environment that the capital market brings to us as we get closer to that and 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.

Bert Nappier:

Yes.

Operator:

And the next question is from Greg Melich from Evercore ISI. Please go ahead.

Bert Nappier:

That's fair to say.

Bert Nappier:

Greg, this is Bert. I wouldn't say there's anything fundamental that's changed other than just continued strong momentum and building on the actions in that business over the last couple of years. You build on industrial team that -- and the Motion team that is executing at a very high level, their core business, a stellar integration of KDG and how we've achieved synergy, which was transformational in 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 we're on the right track to hit that 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.

Greg Melich:

Very well. Congrats guys and good luck.

Will Stengel:

Thanks, Greg.

Operator:

Next question is from Seth Basham from Wedbush Securities. Please, go ahead.

Will Stengel:

Hey, Seth, it's Will. Listen, I don't -- I'm 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 impact from weather.

Seth Basham:

Understood. And in terms of the 100 basis points drag from weather in the quarter, was it more pronounced on the DIY side than the do-it-for-me side?

Seth Basham:

Fair enough. Thank you.

Will Stengel:

Thanks, Seth.

Daniel Imbro:

Yes. Hey, 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 talked about kind of 12% guidepost. If I look at 1Q, really strong expansion, but the growth was up double digits. Obviously, the guide is calling for growth to slow to get to that 5% midpoint for the year. It's your expectation, just to make sure we understood that correctly, margins would still be up year-over-year for the coming quarters, just maybe 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?

Daniel Imbro:

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 investment and kind of I think you mentioned it in the question, the cost of doing business has gone up. I guess, what inning are we in, in terms of those wage investments as and when do we begin to lap these and we could return to levering that wage line on a low to mid-single-digit type comp? Just what's that kind of outlook look like on those investments you're planning on making in the business?

Daniel Imbro:

Yes, makes a lot of sense. Thanks so much for all the color.

Operator:

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Operator:

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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. [Operator Instructions]. 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.

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.

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

Christopher Horvers:

Thanks. Good morning, guys. Can you share some more thoughts on -- in terms of the cadence of the year? I know you talked about the first half being stronger on the industrial side from a comp perspective. I was curious, if you did add KDG into the 4Q comp base, like how accretive would that be? Or how accretive is KDG entering the comp base in 2023? And then on the margin front, do you expect margin expansion both segments in 2023?

Christopher Horvers:

Got it. And my follow-up question is on the Motion side. You have a number of different end markets that you pursue, and I know there's some weakness in some of the consumer areas out there on the durable side and you have some of your peers talking about that weakness. So can you help us understand, one, are you seeing any indications of weakness within Motion? And two, how is your mix sort of split out at a more higher level, the capital goods versus sort of consumer discretionary items versus more commodity and sort of ag type businesses?

Paul Donahue:

Yes. And Chris, I would just add. I think as you look at our more traditional end markets, food products, iron and steel, aggregate, automotive, all up well into the double digits in Q4. So as both Will and Bert had said, we remain incredibly bullish about our industrial business. I'm pleased to say, we're seeing double-digit growth right out of the blocks here in Q1. So yes, we're going to -- we're just going to keep on pressing forward. And look, there's a lot of reasons to be optimistic about the future. You've got manufacturing returning to the U.S., a lot of onshoring, reshoring. You've got a lot of investments in semiconductors, energy, battery storage, mining, all of which play to our strength.

Operator:

The next question is from Kate McShane from Goldman Sachs. Please go ahead.

Will Stengel:

Thanks, Kate. Appreciate the question and give you some color on '23 as we're looking at OpEx and CapEx side. On the OpEx, we are expecting a little bit of deleverage next year. We're going to invest in the cycle here, really focused on the long term on tech and talent. I know you asked about freight. We will see a little pressure there in inflationary pressure like we saw in the fourth quarter on freight, but we expect that to abate as we get into the second half of the year. But back on our two big investments for next year, tech and talent, it's a competitive marketplace out there, and we're thinking about the long term. So on the talent side, we're making some smart investments in the business with our teams. We'll see a mid-single-digit wage increase this year a tiny bit higher than 2022, and we're going to absorb some costs, particularly on the health care side. Health care inflation is pretty prolific, and we're going to absorb some of that cost at corporate. So we think those are the right investments for our team. The impact of 2023 of that basket of activities is about 30 basis points of deleverage on SG&A. And on the IT side, we're making investments that we need to make in the business to improve our capabilities, and this is really about modernizing our platforms. These are investments in data analytics, AI and new systems and some of those are pivoting to cloud-based systems, and those costs can't be capitalized. So we feel good about those investments and what they do for our business. It allows us to go faster. And those investments we think driving leverage -- will be driving leverage outside of those investments and focus on efficiencies. So if you take those out, we'd be levering the business. The IT investment is about 30 basis points as well and our guide reflects all of this. And so we feel good about that as well. On capital, we'll see a little bit of an increase in capital next year, not outsized increase at the low end of our range, 10%. Again, we're very energized about where we're focused on the business in terms of opportunities for automation and modernization of DCs in the supply chain, and again, on IT. There's IT as platform investments and things that we want to do that we see benefit in. Many of those projects on the supply chain allow us to consolidate and close old DCs, and you can imagine that's kind of big benefit. And so taken all together, we think these are the right things to do for next year. We're still expecting margin expansion and a topline guide of 6% to 7%. So we think all of that together makes the right sense for where we are.

Operator:

And the next question will be from Greg Melich from Evercore ISI. Please go ahead.

Bert Nappier:

Yes. So on the margin side, we're going to carry the momentum that we had in the fourth quarter. Our teams are doing absolutely reliant job of executing our core strategies on pricing and sourcing capabilities. I think in my prepared remarks, I talked about a 160 basis point increase in the fourth quarter just from the execution of category management, pricing and sourcing activities, that's going to continue. We expect that to continue into 2023, and so that success is what we have in our forecast. We're looking for gross margins to be up in the range of 20 to 40 basis points for 2023. We don't really see a lot of headwind there. Anything in terms of what we're looking at from FX or inflation or any of that, it's pretty negligible at this point. So we're bullish on our execution of our gross margin activities and that helps us expand margin overall. The SG&A impact on those two investment side are offset by other efficiencies. So when you look at the full year, we expect deleverage of 30 to 40 basis points in total. I gave you 60 basis points of deleverage, and so you'll see that we're making some ground up in driving leverage outside of those two investment categories where we can be more efficient and smarter in the business.

Paul Donahue:

Yes. So inflation, just to kind of talk about it trend-wise, our view is that it moderated in the fourth quarter. It ticked down slightly from Q3, and that monetary policy in the U.S. is working. It's having an effect around the world, but it does take some time all about the flow through supply chain and through the businesses. So as you said, Q4 and FY '22 inflation levels overall were mid-single digits. High single digits in auto and low single digits in industrial. And as we look to '23, we expect for it to continue to moderate for the full year. We think monetary policy works and will work. We were at a peak of 9.1% in June. We had 7 straight months of easing. And when we look at that, the way we kind of thought about our forecast for the full year is that the full year would be at a low single-digit all up, remaining at low single digits for industrial and low single digit for auto. That obviously ticks down across the course of the year. So we step down Q1, Q2, Q3, Q4 as monetary policy continues to have an impact. Again, it's a little bit of a wildcard, and we have to make an assumption when we give our guide, which is what we've done. So we'll still be watching the effect of monetary policy and other actions, but that's our assumption based. Q1, just to be specific, we'll tick down from where we are to mid-single digit, I think, for auto. Industrial stays at low single digit and all up mid-single digits in Q1.

Will Stengel:

I think they start to narrow, and so we would expect the DIY business. We're seeing some good strength in our DIY business, in particular, our accessories, which is a small part of the business, but it continues to grow really nicely even on tougher comps. So we would expect the gap to narrow as we go through 2023.

Operator:

The next question is from Scot Ciccarelli from Truist. Please go ahead.

Will Stengel:

Yes, Scot, it's Will. I'll take a cut at this. We're seeing great pricing work happening on both sides of the business, and in particular, in U.S. automotive. I would say, they're one of the most dynamic teams in terms of the things that they're doing around pricing. We've been at this now for 12 to 18 months in a pretty robust way, both in terms of the technology that we're using, the data, working with a third party, et cetera. And we are actively thinking through the right way to execute pricing strategies relative to the market. That's really at the core of the work that we're doing. So we feel good about what we're doing. We study it daily. It's at the SKU level. We go into different markets, and we've got really nice visibility to react accordingly with dashboards and weekly updates as a team to make sure that what we're doing is beneficial for our customers and our business. So it's definitely something that we're hyper focused on.

Scot Ciccarelli:

Okay. That's helpful. And then just a follow-up on the industrial side. I mean the comp performance of the industrial piece segment rather has continued to significantly outpace the indexes. It's historically tracked really over the last, call it, 15 to 18 months. And Paul, I think you've mentioned, some of it is kind of the changing business mix that you previously highlighted. Are there other factors we should be thinking about to kind of explain the divergence from, let's call it, historical trend that we've seen?

Will Stengel:

Scot, I might just add one other thought, which is the momentum that's behind the KDG and the Motion combination. We get very active and positive feedback from customers on kind of the breadth and depth of the service offering, the value-add services. And I think that's really extended the leadership position of the combined business over the last 12 months.

Operator:

And the next question is from Liz Suzuki from Bank of America. Please go ahead.

Paul Donahue:

Liz, you're exactly right. We're being a little conservative here. We're holding some dry powder. Look, we are at 1.7 times, well below our stated range of 2 to 2.5 times. And we like that position. We think that it's really smart right now in this environment. We'll look for opportunistic things across the board whether it's CapEx or M&A. And so we really do think that we've been able to work that down post KDG acquisition right after we bought KDG earlier in the year, we were closer to 2. So I think nice performance to work it back down. And look across the landscape or whatever we might see come up. So nothing pressing or imminent, but we just like the financial flexibility that we have with our current cash balance, our total liquidity and being very disciplined across our capital allocation structure.

Operator:

And the next question is from Bret Jordan from Jefferies. Please go ahead.

Will Stengel:

Yes, Bret, let me take a pass at that. We're in the very early innings Obviously, the last 12 to 18 months has delivered really strong momentum. We're excited about that. We fully expect to continue to do that. We're in, call it, 10 to 15 categories. We've got opportunities to do more than that. Within the categories that we actually offer that doesn't necessarily mean they're in each one of our local markets. So even if we just stayed in our 10 to 15 primary categories, we'd have a great opportunity to continue to push that product. But we're excited about this and believe that it can be close to 20% of the revenue over the next 2 to 3 years.

Bret Jordan:

Okay. Great. And then on the U.S. acquisition, you're talking about folding in some store acquisitions. Could you talk about what you're looking at there? Are these NAPA-independents? Are these other independents in other buying groups, and I guess, sort of which regions are these, more urban company-owned store markets you're looking at? Sort of what's the strategy on increasing this company-owned store base?

Bret Jordan:

Are there any particular regions you're looking at? Or is this sort of national?

Bret Jordan:

If you were to roll that forward, if you're sort of thinking out three to five years, is it a meaningful change in company-owned store mix versus independent?

Operator:

And the next question is from Daniel Imbro from Stephens Inc. Please go ahead.

Paul Donahue:

Yes. So thanks for the question, Joe. And look, it's a reality, and there's a number of reports that we've all reviewed of late commenting on the number of CEOs that are considering and have begun considering bringing manufacturing back here, not only the U.S., but across North America. And certainly, Mexico would be a part of that where we have a strong presence with the Motion business. So look, it's a positive. It's more long -- it's certainly more long range. It's not going to -- certainly not going to happen overnight. But again, I think as these companies do return to North America, automation is going to play a significant role given some of the labor challenges and labor shortages. So automation in these operations is going to be significant, and again, we are extremely well positioned as it relates to our automation and robotics offerings.

Will Stengel:

Yes. The synergies are in both buckets. So we have net sales synergies as well as cost synergies. So they interplay together. We do think there's some upside as we move forward. The business has really nice momentum. We committed to $50 million when we originally announced the transaction by year three. We're in a position to deliver $50 million by the end of year two. So with $30 million realized through year 1, an incremental $20 million in year 2. And I'm confident that the team will execute well and deliver on that commitment and potentially more.

Operator:

Ladies and gentlemen, we have time for one more question and that question is from Seth Basham from Wedbush. Please go ahead.

Will Stengel:

Yes, Seth, I would -- its Will. I would say that weather might have helped slightly, but not material to close the year. As we look forward, it's currently 80 degrees here in Atlanta. There's a couple of feet of snow in different parts of the country. It's hard to predict. I would tell you, January feels like -- certainly, in our North American market, it's been a mild winter that had some implications for some of our product categories, but I'm confident the team is going to work through that. We can't control it. So we're going to focus on what we can control and make sure that we're taking care of our customers and our teammates safely.

Bert Nappier:

Yes, Seth, this is Bert. That's right. We're thinking about that total automotive segment out of 4% to 6%. And within that, we would be in the same range for the U.S. business.

Paul Donahue:

Well, I would tackle that, Seth. We're hoping to see a little bit of a lift, which we did see in the latter part of the year as fuel prices started to abate a bit here in the U.S. So I still think there's a bit of a reluctance for mass transit, not to mention air travel and air fares are at all-time high. So I think that a 1% lift would not be out of the realm of possibility. So we think it will be a tailwind in '23, for sure.

Operator:

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Operator:

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Third Quarter 2022 Earnings Conference Call. Today’s call will be recorded. [Operator Instructions] At this time, I would like to turn the conference over to Sid Jones, Senior Vice President, Investor Relations. Please go ahead, sir.

Paul Donahue:

Thank you, Sid and good morning. Welcome to our third quarter 2022 earnings conference call. Before diving into the details of the quarter, we want to say that our hearts go out to our teammates, suppliers, customers and all those affected by the devastating impact of Hurricane Ian in late September. GPC is committed to providing care and support through our GPC Relief Fund and our partners at the American Red Cross. So now turning to the quarter. We are pleased with the continued strength of our results for 2022 and we are proud of the great work by all of our 53,000 GPC teammates who are at the core of our success. Our team delivered record results with double-digit sales and earnings growth driven by the execution of effective strategies and continued resilience of our automotive and industrial businesses. Let’s review several of our Q3 highlights. Total sales of $5.7 billion, up 18% and adjusted earnings per share of $2.23, up 19% from last year. Record quarterly sales for the automotive and industrial segments and our sixth consecutive quarter of double-digit sales growth. Operating margin expansion in both segments and for GPC overall, record quarterly earnings and our ninth consecutive quarter of double-digit earnings growth. The ongoing integration of KDG, which continues to create significant value. And finally, continued strong cash flow generation and the further strengthening of our balance sheet. Our teams are executing on key strategic initiatives to deliver market share gains and drive ongoing momentum in our top and bottom line results. We remain agile in navigating a dynamic operating environment created by inflation and economic conditions, the geopolitical landscape and supply chain challenges. We continue to benefit from the competitive advantages of our size and scale and we remain focused on advancing our technology to optimize inventory availability, enhance network productivity and maximize the effectiveness of our pricing strategies. We are making significant progress in our operations through our efforts in all these areas as evident in the expansion of operating margins again in the third quarter. Our automotive and industrial businesses continue to take advantage of several industry tailwinds. In automotive, the increase in year-to-date miles driven and aging car park, limited new car inventory and elevated used car prices are all supportive of healthy demand in the aftermarket. In industrial, the manufacture and economy remains expansionary with PMI holding at greater than 50%, while industrial production just had its ninth straight quarter of growth, up 2.9% year-over-year. Our teams continue to operate well in a challenging environment. And as we wind down the year, we remain focused on driving our strategic initiatives across all of our global operations. This past quarter, we spent considerable time in the field visiting stores and branches, meeting with many of our strategic suppliers and customers and we came away encouraged by the general outlook for continued growth in the automotive aftermarket and industrial space. In addition, during the quarter, our global leadership team met to review our near-term initiatives and collaborate on our long-term strategic roadmap. Our teams are well aligned and we are confident in our strategic plans to deliver long-term sales and earnings growth and margin expansion. Our strong cash flow generation and exceptional balance sheet position GPC with the financial strength and flexibility to pursue strategic growth opportunities via investments in both organic and acquisitive growth, while also returning capital to shareholders through the dividend and share repurchases. So before I pass the call over to Will, we would like to highlight our 2022 Sustainability Report, which we published earlier this month. The new report advances GPC’s long-term sustainability strategy and expands our reporting and disclosure to reflect the extent of our global operations. We do this through a focus on three key areas, including improving diversity, equity and inclusion, reducing carbon emissions and enhancing ESG governance. Two highlights from the report include

Bert Nappier:

Thank you Will and thanks to everyone for joining us today. As Paul and Will have shared, we are very pleased with our third quarter results. As I review the key highlights for the third quarter, our comments this morning focused primarily on our adjusted quarterly results, which excludes the non-recurring costs related to the integration of KDG. Total GPC sales were $5.7 billion in the third quarter, up $856 million or 17.8% from last year. Our increase in total sales reflects a 12.7% increase in comparable sales, including mid-single-digit levels of inflation, and a 9.1% contribution from acquisitions. These items were partially offset by a 4% unfavorable impact of foreign currency, in line with our assumptions. Hurricane Ian did not have a material impact on our third quarter financial results. Our gross margin was 34.9%, a 60 basis point decrease compared to the third quarter last year. Gross margin was negatively impacted by three key factors

Greg Melich:

Thanks. Congrats, guys. Some good numbers. I guess my first question is on the gross margin performance. Could you just give us a little more insight as to by segment in both the quarter given that you’ve got increase in costs, you said it’s passing through price remains rational, but it is starting to fall. So just if you could sort of walk us through each segment as to what’s driving that.

Greg Melich:

Got it. I guess my follow-up would be on that fourth quarter. If I sort of back into it, it seems like there is a pretty meaningful deceleration in organic growth with the new guidance. I think it’s maybe 500 or 600 bps in auto and maybe double that in industrial. Is there – is that actually happening in October? Or is that just conservatism?

Will Stengel:

Yes, Greg, maybe just to answer your question, I mean, we’re encouraged by the trends that we’re seeing through October across the global business. So if that’s any indicator, we’re not seeing a slowdown. We’re proud of the teams for continuing to build on that momentum into the fourth quarter. Just maybe some other thoughts. As you think about kind of what’s implied in the Q4, I’d just remind you, Q4 ‘21 for auto had a big comp, high teens. So the guide for auto on a 2 year is kind of close to that 20%. And that holds true for U.S. auto and kind of each of the pieces of global automotive. So still really solid performance. And as I said, encouraged by what we’re seeing through October.

Will Stengel:

Thank you, Greg.

Operator:

Our next question comes from Christopher Horvers. Please go ahead with your question.

Paul Donahue:

Yes, Chris, thanks. This is Paul. I would tell you, and we have spent a good bit of time in the field late. I traveled with the Motion team I don’t know, a few weeks back. And we spent a good bit of time with that group this week. The overall sentiment from our Motion team, Chris, remains really strong, optimistic. They are seeing increases across just about every customer segment in every product segment. So I’m aware of the other industrial group, you mentioned that reported earlier this week. But I have to tell you, we’re not seeing it on our side, Chris. And I would just remind you, we’re still seeing expansion in PMI, which we generally track pretty closely with through the years anyway. And industrial production came out earlier this week in industrial production, again, post a good result in September. So I would tell you, overall, our Motion team continues to perform at an incredibly high level. And as Will said, early numbers in October point to that continuing well into Q4.

Christopher Horvers:

Thank you for that. Will, I think at a recent conference, you mentioned the ability to take segment margins to the double-digit range. Can you talk a little bit more about that – do you see that – is that more of a blended of NAPA and Motion or could you see that potential for the NAPA segment to also reach double digit and what do you think the big drivers are to get there?

Christopher Horvers:

That’s great. Thanks Bert.

Paul Donahue:

Chris, you are coming back for another one? I think we just had, Chris.

Paul Donahue:

I will talk to you later Chris.

Kate McShane:

Hi. Thanks for taking our questions. You had mentioned, I think in your automotive comments that you saw growth in all categories, and we just wanted to confirm that if it includes discretionary categories and what you are seeing relative to the more defensive categories? And then just with regards to transaction versus ticket if you saw any meaningful change this quarter versus last quarter in automotive?

Paul Donahue:

And Kate, I would just add to Will’s comments that a driver of that business is certainly fuel prices. We are seeing fuel prices coming down a bit, which is always a good thing for our auto business. We certainly expect to see miles driven ticking back. People are taking to the roads. And they are a little – still a little bit reticent to get on mass transit and airplanes. So, all those factors, I believe will continue to bode well for our auto business going into next year.

Bert Nappier:

Hi Kate, it’s Bert. I will take that one. Look, I mean I will kind of point this out, and I will reiterate it. Our expectation, let’s talk about the fourth quarter because that’s a bit of a setup for 2023. Our expectation at this point for inflation for Q4 is that it stays consistent with the Q3 level. And I think in our view that means it’s stabilizing on some level to moderating. However, as many of you know, the inflow of moderating or stabilizing levels of inflation takes some time to flow through supply chain. I think that will lag into 2023. Obviously, we have a tremendous amount of monetary policy action afoot, and that will take some time to have an effect into 2023, but we would anticipate that it would. As we turn the corner into the next year, I think we will see continued pressure on labor costs and on product costs at this point. Again, I mean we are looking several months ahead here. So, that’s a little bit of our initial view. When we think about it from our perspective, it’s a tough and dynamic environment, and our teams are really focused on this and it requires intense focus. Our strategy remains unchanged in that regard as we look ahead. We are going to continue to pass along inflation impacts to protect our gross margin rate. I think we have done a nice job of managing that in a very dynamic environment, and we are going to continue to focus on those category management and pricing actions. So hopefully, that gives you a little color. We are talking about something several months away, but that’s our initial view on that front.

Bert Nappier:

Thanks Kate.

Bret Jordan:

Hey. Good morning guys.

Bret Jordan:

On the European automotive, could you talk a bit more about the private label strategy there? What you are seeing as far as consumer acceptance of the NAPA brand and maybe what percentage is in the mix now and how the margin delta sets up versus the legacy product that you were selling?

Bret Jordan:

You just answered my second question, but just – to go back to the first half of the first – on the October trend in Europe. But how does the margin shake up in Europe on the private label mix, obviously, a different supply chain?

Bret Jordan:

If it’s margin neutral is the long-term goal to get a better cost of goods there to get margin out of it. I mean what’s the point of the initiative, if it’s not more profitable?

Bret Jordan:

Great. Thank you.

Operator:

Our next question comes from Elizabeth Suzuki with Bank of America. Please go ahead.

Paul Donahue:

Yes. I appreciate you pointing that out, Liz. We are seeing used car prices coming down a bit. I honestly don’t see that being a huge impact on our business overall. We look at – look, the key drivers for our business have always been and will continue to be, I believe the average age of the vehicle on the road, which is at a new record again in this year over 12 years. Miles driven is always going to be a key element for us. And we are seeing an uptick in miles driven as fuel prices moderate just a bit. And I think you are going to see that as folks do begin to return to the workplace and are again, a bit hesitant to get on mass transit. I think we will continue to see that drive forward. So, look, in terms of new car sales, Liz, it’s a little bit of a double-edged sword. We need those new car sales because 5 years from now, those are going to be our customers as they come to the aftermarket. So, if new car sales tick up a bit, that’s not going to have a big impact on our business in the short-term. In the long-term, it’s a good thing for us. And if we go back to the 17 million vehicle new car vehicles produced each year sold each year, that’s not a bad thing for us at all because that’s our future customers. So, I think any way you slice it, the – our business – our U.S. automotive business and our global automotive business is in a good place and the fundamentals are very sound.

Will Stengel:

Look, I am looking down our list, but I am not sure I can call out one where we are not pleased. I mean we are seeing really broad-based strength across all the product categories. So, I can’t call out one where we are disappointed. Obviously, if there are some inventory opportunities, those would be – that will be the commentary where we would want to do better, but I am not sure that’s a function of the demand drivers or kind of our strategy. So, sorry for not being more helpful, but I think that’s the honest truth.

Paul Donahue:

Okay. Thanks. Thanks Liz.

Scot Ciccarelli:

Good morning guys.

Scot Ciccarelli:

How are doing? So, the industrial business is obviously very strong. And we know that historically, it’s followed some of the broader macro factors and index changes typically with about a six-month to nine-month lag or so. And Paul, I think you already pointed out how PMI is still positive, but obviously, it’s moderated quite a bit. So, I guess the question is, how should we kind of net out today’s strong growth versus at least what appears to be a pretty significant moderation in that, let’s call it, broader macro trend?

Scot Ciccarelli:

Okay. Thanks a lot guys.

Operator:

Our next question comes from Carolina Jolly with Gabelli. Please go ahead.

Paul Donahue:

No problem. Good morning.

Bert Nappier:

No, I don’t think it has anything necessarily to do with Europe. When you look at the landscape – this is Bert, by the way, I don’t think it has anything to do with the European landscape. Look, the business has changed fundamentally over the last year. We have a large acquisition of KDG in the Motion business. But when we look at our working capital metrics, we are very pleased with where we are. We have had a six-day reduction in our cash conversion cycle during the course of the year. So, we are pleased with that. Managing payables well. DSO is down, managing inventory very well as well. And so I don’t think there is anything that I would call out as a structural shift. It’s something that we stay very focused on a day-to-day basis, given the unlock of cash as we are smarter about how we do that. Look, as we look ahead, I mean nobody is perfect. We do have opportunities to optimize on the inventory side, and we will continue to do that. And we have got great teams here that are focused on that as well. So, I wouldn’t place any overreliance or over-indexing on any one factor. Bottom line is we have had very strong cash flow through the course of the year. We will have a great result for the rest of the year in terms of free cash flow and for the full year. And that takes us back to our long-standing ability to continue to be very disciplined and thoughtful on capital allocation and reinvest in the business, which we will continue to do because we see great opportunities there. And at the same time, return capital back to shareholders, which as you all know, we have a long-standing history of doing so.

Bert Nappier:

No. I wouldn’t point to a temporary benefit. I think we are very consistently – I know some of this predates me, but consistently showing improvement across cash conversion and our working capital elements.

Will Stengel:

Yes, Carolina, it’s Will. I think you nailed it. We are super proud. We have made a lot of progress on all things, technology and digital for our retail business all around the globe, but in particular, U.S. automotive and in Canada and investments in the catalog, investments in search, investments in kind of product data quality have been making a real difference. So, more work to do, but proud of the progress the teams are making.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Paul Donahue:

Yes. Thanks Dave. Just to all of our folks out there today, we appreciate your questions and everyone joining the call. Look, we are very pleased with another record quarter at Genuine Parts Company. We could not be more proud of the great work done by all of our GPC teammates around the world. We continue to be excited that with the momentum that our business is generating. And I would just conclude by saying the future continues to be very, very bright for Genuine Parts Company. So, you all have a great day, and we look forward to chatting again in February. Thank you.

Operator:

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Second Quarter 2022 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] A question-and-answer session will follow the presentation and instructions will be given at that time. At this time, I would like to turn the conference over to Sid Jones, Senior Vice President, Investor Relations. Please go ahead, sir.

Paul Donahue:

Thank you, Sid, and good morning. Welcome to our second quarter 2022 earnings conference call. As Sid mentioned, I'm here with Will as well as Bert, who was on his first earnings call as CFO. Welcome to the call Bert. We are pleased to report continued strong results from Genuine Parts Company in the second quarter of 2022. The GPC team had another record quarter consisting of double-digit sales and earnings increases and a steady cadence of continued growth throughout April, May and June. Total sales were $5.6 billion, up 17%, and adjusted earnings per share were $2.20, up 26% from last year. We continue to benefit from the resiliency of our automotive and industrial businesses and the strategic mix of our operations. We would like to thank our 53,000 talented GPC teammates for their exceptional work and commitment to excellence. A few highlights in the quarter include another quarterly sales record for GPC and our automotive and industrial segment, segment operating margin expansion in both segments and for GPC overall, record quarterly earnings and double-digit EPS growth for the eighth consecutive quarter and strong cash flow generation and the further strengthening of our balance sheet. We continue to execute our key strategic initiatives to deliver market share gains and drive positive momentum in our top and bottom line results despite ongoing macroeconomic pressures. Our teams are doing an excellent job of navigating supply chain disruptions, enabling our business with the product we need to serve our customers and capture market share. For example, we are investing in our businesses to enhance forecast accuracy for product demand, improve fill rates and optimize our network footprint. Our size and global scale continue to be an advantage as we work to have the right part in the right place at the right time. Likewise, our pricing strategies have proven valuable in substantially offsetting product inflation and rising freight cost. Our M&A strategy has also been effective. As you will hear from Will, the accelerated integration of KDG has been executed with a high degree of precision and has had a meaningful impact on our industrial performance. In addition, our global automotive teams have been active with ongoing strategic bolt-on acquisitions, such as the addition of [indiscernible], which rounds out our national footprint in Germany, the largest economy in Europe. We continue to explore a healthy pipeline of acquisition targets and M&A remains an important part of our global growth strategy. Additionally, we are benefiting from ongoing initiatives, such as accelerating the rollout of the NAPA brand, our international markets, as well as further investing in B2B and B2C omnichannel enhancements to both our catalog data and technology platforms. We also continue to upgrade our pricing and product category management strategies to further extend our leadership positions in the global automotive and industrial markets. As we look at the operating environment more broadly, our automotive and industrial business are benefiting from several tailwinds. The continued increase in miles driven and the average age of vehicles, limited new car inventory and elevated used car prices are supporting demand in the automotive aftermarket and driving continued strength in the DIFM segment. In Industrial, PMI continues to signal manufacture and expansion and industrial production showed gains again in the second quarter, representing the eight consecutive quarter of growth. We are closely monitoring potential consumer headwinds, including the effective, historically high inflation and its impact on gas prices, freight and wages. However, we will stay focused on our strategic initiatives and remain agile in the execution of our business on a day-to-day basis. The enthusiasm and momentum in our business was on full display last week, when for the first time in seven years, we hosted our 2022 NAPA Expo in Las Vegas. This gathering brought together more than 15,000 global attendees, including Napa AutoCare customers, independent Napa store owners, Napa store managers, key suppliers and leaders across our operations. It was an extraordinary event packed with seminars, insights, business, building strategies, and an extensive trade show featuring our global suppliers and key business partners. We took the opportunity to introduce our new Napa brand campaign, Get Up & Go. And you could feel the positive energy and excitement for the future of Napa and the automotive aftermarket overall. The biggest takeaway is that the Napa team in the U.S. and across the globe is well positioned for the future. During the quarter, we also had the opportunity to spend time in the field with our Motion leadership team. We visited our operations and customers across the Midwest and saw firsthand the momentum in our industrial business and the progress of the KDG acquisition. As we mentioned in our last call, we have been active in 2022 building on our commitment to responsible ESG business practices. This has included formalizing our carbon emission reduction strategy, as well as driving continued progress in DE&I. We look forward to providing additional details in our progress in these areas later this year, as we publish our 2022 corporate sustainability report. So again, we thank each of our GPC teammates for taking great care of our customers and delivering another quarter of record results. Now I'll turn the call over to Will.

Bert Nappier:

Thank you, Will, and thanks to everyone for joining us today. As Paul and Will have shared, we had an excellent second quarter and I’m pleased to walk you through the key highlights. Our comments this morning focused primarily on our adjusted quarterly results, which exclude non-recurring items that I will cover in more detail shortly. Total GPC sales were $5.6 billion in the second quarter, up $819 million or 17.1% from last year. Our increase in total sales reflects an 11.5% increase in comparable sales, including mid-single digit inflation and an 8.8% contribution from acquisitions. These items were partially offset by a 3.3% unfavorable impact of foreign currency. Our gross margin was 35%, a 30 basis point decrease compared to the second quarter last year and in line with our expectations. Our gross margin in the second quarter was negatively impacted by headwinds from anticipated moderation and supplier incentives, foreign currency, and the timing of inflation in certain product categories. These headwinds were substantially offset by the ongoing favorable impact of strategic category management initiatives, where we continue to leverage our growing global scale. As an example of our strategic initiatives and category management, our teams are utilizing technology, innovative data analytics and AI to forecast supply chain lead times and changes in market demand to ensure optimal levels. These actions along with our pricing initiatives positively impacted our gross margin in the second quarter. For the full year, we expect our gross margin rate to be consistent with 2021, as we are relentlessly managing the impact of product and supplier price increases in our costs. Our total operating and non-operating expenses, excluding non-recurring items were approximately $1.5 billion up 15% from 2021 and at 27.6% of sales compared to 28.1% of sales in the prior year. We continue to leverage our expenses despite ongoing inflationary pressures across all costs, particularly in freight and shipping charges. Our teams remain focused on further reducing expenses and driving operational efficiencies across the business. With our strong performance, segment profit was $548 million up 24%, and our segment profit margin was 9.8%, a 60 basis point increase from last year and up 160 basis points from 2019. With a very challenging operating environment over the past few years, ranging from the pandemic to current inflationary dynamics, we are very proud of the work our teams have done to improve our segment margin over the last three years. As outlined in our earnings release, our second quarter results include two non-recurring items. The first item relates to the sale of S.P. Richards real estate, which generated $140 million in cash proceeds and resulted in a non-recurring gain of $103 million. The S.P. Richards properties sold this quarter were not divested with that business in 2020. And we are extremely pleased to monetize these assets and reinvest this capital across the GPC portfolio. In addition, during the second quarter, we incurred approximately $25 million of costs related to our KDG acquisition, including a non-cash impairment charge of $17 million for legacy motion brand name that will no longer be used as a result of the acquisition of KDG. Our second quarter adjusted net income, which excludes $59 million or $0.42 per diluted share and the non-recurring items I just discussed was $313 million or $2.20 per diluted share. This compares to adjusted debt income of $253 million or $1.74 per diluted share in the prior year, an increase of 26%. The strong growth is indicative of the crisp execution of our initiatives to deliver accelerated growth and profitability. As we turn to our balance sheet at June 30, our total accounts receivable balances were up 18% with inventory up 17% and both in line with the increase in sales. Likewise, accounts payable increased 14% from 2021, which correlates to the increase in inventory. We continue to generate strong cash flows with $392 million in cash from operations in the second quarter and $791 million for the six months up 12% from last year. For the full year, we continue to expect cash from operations to be in the $1.5 billion to $1.7 billion range with free cash flow of $1.2 billion to $1.4 billion. We close the second quarter with $2 billion in available liquidity and our debt to adjusted EBITDA is 1.8 times. This is slightly below our targeted range of 2 to 2.5 times, and highlights our financial strength and flexibility. The key priorities for capital allocation at GPC remain unchanged. As a reminder, these included reinvestment in our business through capital expenditures and M&A, and the return of capital to our shareholders through dividends and share repurchases. During 2022, we have invested $153 million in capital expenditures, including $75 million in the second quarter and continue to plan for additional strategic investments through the balance of the year. These investments are primarily in technology and projects to further automate and consolidate our distribution networks and drive productivity throughout the business. Beyond CapEx, during 2022 we have also invested $1.6 billion for acquisitions and returned $366 million to shareholders in the form of dividends and share repurchases. This includes $243 million in cash dividends paid to our shareholders and $123 million in cash to repurchase 943,000 shares. As a reminder, we have increased the annual dividend for 66 consecutive years. Turning to our current outlook for 2022. We are updating our full year guidance previously provided in our first quarter earnings release. We are raising adjusted diluted earnings per share to a range of $7.80 to $7.95, which represents an increase of 13% to 15% from 2021 and up from our previous guidance of $7.70 to $7.85. Our revised EPS guidance includes an incremental headwind of approximately $0.08 due to foreign currency relative to the outlook we provided in April. We expect total sales growth for 2022 to be in a range of 12% to 14%, an increase from 10% to 12% previously. By business segment, we are guiding to the following

Will Stengel:

Yes. Chris, good morning. It’s Will here. Let me take a crack and Bert and Paul can jump in if you have anything to add. So as you alluded to generally speaking U.S. automotive combine, do it for me, do it yourself consistent through the quarter on a monthly basis. I would say, on the do it yourself side, we did see some moderation through the quarter as we expected based on year-over-year comparables. I would say that we’re not reading into a softness in the customer based on what we’re seeing in our data. And so I’m not sure that we have the same takeaway that perhaps some of your traditional retailers are reading through in terms of the help of the consumer.

Chris Horvers:

So just to double click on that a little bit, the DIY moderation was really just anniversary in stimulus from April of last year?

Chris Horvers:

And then separately on the Motion business, Motion is doing in incredibly well. One of your peers in the industrial parts distribution business talked about some signs of moderation as they saw other quarter progress and into the current quarter. So curious, if you had any comments on that side as well.

Chris Horvers:

And one last quick follow on, obviously a lot of questions about, what’s going on in Europe? How’s that business holding up as sort of the years played out with the war and energy prices over in that region?

Chris Horvers:

Thanks very much. Best of luck.

Operator:

And ladies and gentlemen, our next question comes from Michael Montani with Evercore ISI. Please go ahead.

Bert Nappier:

I’ll take that one, its Bert. Hey Mike. Good morning. Thanks for the question. Look first, I’d just like to thank our teams for the tremendous work so far in the first half. And I’ll try to give you some color on the guidance from there. Certainly exceeded our expectations in the first half. The business continues to be very resilient and balanced, but a number of factors were contemplated into how we raised guidance, obviously the sales numbers that I provided in my prepared comments, the outperformance in the first half, and the momentum we see in the underlying business that Paul and Will have talked about. We needed to balance that against the fact that we just can’t ignore that there’s tightening economic conditions that potentially could impact businesses in the second half. So, we’re trying to balance the strength of the first half and our momentum exiting Q2 while being eyes wide open and prudent about what we see out there. And again, we've already talked about a few of these things with inflation lingering COVID conditions, the geopolitical landscape, ongoing supply chain constraints. So look, on the back half guide for sales our original plan for the year assume some normalization of growth rates in the second half. And our views are really unchanged on that. When you look at a year ago, the outperformance we had in the second half was quite significant and we just can't expect a year-for-year repeat of that level of outperformance. So we moderated that a little bit, look at a normalized growth rate in the second half. As I mentioned in my prepared comments, we do have some FX headwinds that are incremental to our guide in April about $0.08 as we look at that. But look, we're going to stay focused, look for additional growth opportunities in the second half, stay disciplined on costs and look for efficiency gains. But at the end of the day, we're going to improve operating margin and have operating margin expansion for the full year. And we think that's a pretty good outcome.

Bert Nappier:

Yeah, I'll take – I guess I'll take both of those. Look, I think, we're really in a positive spot on our capital structure. We're at 1.8 times levered that's below our range of two to 2.5 times. We have a very strong investment grade rating. And we look at our debt structure, it's nearly 100% fixed with some episodic borrowing against our revolver usually intra-month. But when you look at that, I don't see a lot of volatility there. We've got a weighted average interest rate of 2.3%. The only place we've seen a little bit of pressure is in our AR securitization program, in operating expenses. But it's still very, very attractive capital source for us and really not anything of consequence to call out there. In terms of gross margin, back to your question on that, look we landed at 35% for the quarter that was in line with our own expectations. The underlying execution from our teams, which has been absolutely tremendous in core activities around category management and pricing has driven significant margin improvement as I mentioned in my prepared remarks. Unfortunately, that's a bit hard to see this quarter. We got three big factors masking that some expected moderation in supplier rebates as you mentioned and I'll talk about that here shortly, foreign currency and inflation. When you look at the supplier rebates those moderated from a year ago we had some heightened supply chain challenges in the prior year that you're all intimately aware of, and those impacted the amounts we received from our suppliers. And so that's abated a bit, if you recall, we had a 40 basis point margin expansion from those a year ago and so that's as anticipated moderated. The great part about that, the flip side of that is we have more inventory to get to our customers, and we've got a better level of availability to be able to drive through to the business. I'll just land that point with, we expect gross margin for the full year to be consistent with 2021. And again, we think that's a great outcome in this very dynamic environment.

Paul Donahue:

Thank you, Mike.

Liz Suzuki:

Great, thank you. Just on inflation which is the kind of topic. Sure. What do you think pricing and margins could look like when inflation ultimately moves in the other direction? As in, if we find ourselves in a deflationary environment, can you hold on to price actions you've taken or do you think the competitive environment has changed such that it might get more challenging to keep pricing sticky?

Liz Suzuki:

Great. Thank you. And just how much of the comp growth in each of your segments? Do you think will be attributable to inflation or your SKU for – SKU inflation for the year, and as you look out into next year, do you expect that to moderate?

Liz Suzuki:

Great. Thank you.

Operator:

And ladies and gentlemen, our next question today comes from Scot Ciccarelli with Truist Securities. Please go ahead.

Bert Nappier:

Hey Scot. Thanks for the question. It’s Bert. I’m on a roll here. I’ll keep taking these, yes, I think, the best way to characterize it is how you’ve couched it there. We’d see the environment to flattish in terms of how the U.S. auto business is performing.

Paul Donahue:

Hey, Scot. This is Paul. I’ll take that. The – look, the environment we see in Europe in our five years now in that market is very consistent with what we see in the U.S. And look, it’s steady as we’ve seen in the U.S., the automotive aftermarket is incredibly resilient. If there is a recession, which many are predicting, but it remains to be seen. We expect our business to continue to move in a positive direction. So we’re very pleased with our team, with our performance, with our footprint which excludes Eastern Europe and with our performance to date, which has been very, very strong. And as you heard in the quarter Scot, we expanded our footprint first quarter into Spain and certainly expanded our footprint in Germany this past quarter. So we’re in a good place with a great team and with a positive outlook for the balance of the year.

Paul Donahue:

You bet.

Bret Jordan:

Hey, good morning guys.

Bert Nappier:

Hey, Bret,

Will Stengel:

Yes. It’s Will here. I’ll take that one. So I would characterize global supply chain as stable to slightly improved over the last 100 days. We’ve seen a moderation in our ocean freight rate. I would say that the ports continue to be more congested than average in particular on the East Coast now relative to what we saw early in the year on the West Coast. But the suppliers aren’t experiencing problems, obtaining vessel space, which is a positive development. Lockdowns are moderating over in Asia, which is a positive development. And I think for us as we’ve thought through and worked through these developments, we’ve improved actually how we execute. So we've rebalanced some of our poor activity. We've rebalanced some of our supplier geographies and we're gaining some nice traction there. So the one thing that I would call out is the transport from port to final destination that is still challenged, whether we're talking rail or freight logistics, but net-net were slightly improved relative to where we were 100 days ago.

Paul Donahue:

We sell nice strengths down the Eastern half of the United States. One could make the case that fuel prices on the west coast impacted that given there's so much more elevated relative to the national average, but the Northeast, the Southeast in our Atlantic region showed nice strength through the quarter.

Bert Nappier:

Hey, Bret, it's Bert. I'll take that one and look we're not just – we're not seeing much evidence of consumers trading down, customers trading down at all. I think the customer's been pretty resilient despite the rising fuel prices and other inflationary pressures. When you look at the auto business, it's non-discretionary to a large degree; you need your car fixed in this environment, particularly with a shortage of new cars and higher use of car prices as well. So customers are focusing on availability and service, which is our sweet spot and we've got product readily available. Same on the industrial side we're not seeing a pull back there. The momentum continues as you saw in our Q2 results. And so we just really continue to focus on as Will talked about supply chain, inventory management and having the right product in the right place.

Bert Nappier:

Thank you.

Daniel Imbro:

Hey, good morning guys, thanks. I wanted to circle back on the pricing backdrop. Obviously it's been topical with some of your big peers investing in price. It sounds like you guys aren't really feeling the impact of that yet. I guess first is it still true, you guys really aren't feeling any discernible impact? And then Will, if not using price, you talk through a number of initiatives in you're prepared remarks on the auto side. Can you talk about which of those you expect to drive the most share gains or kind of what you guys are leaning into as you look out to next year and get back to share gains not just recouping some of the underperformance during COVID?

Daniel Imbro:

Yes, that's helpful. And then Paul, maybe follow-up on the industrial piece; you guys talked about momentum continuing through the second quarter across all of your end markets. It is still true about half that business is contracted. So you guys have good visibility into the back half of this year. And then just within those end markets and quarter-to-date, are you seeing any signs of weakness among different end markets or any particular concerns you see there?

Daniel Imbro:

Got it. I'll leave it there. Best of luck.

Bert Nappier:

Thanks Daniel.

Seth Basham:

Thanks a lot and good morning guys. My first question is just around the outlook for, especially the U.S. NAPA business. Just thinking about the trends and miles driven as gas prices are still very elevated. Do you expect pressure on your business units declining perhaps on a comparable store basis in the U.S. in the back half of the year, as we see some of the moderation and key leading indicators for your business?

Paul Donahue:

I would just add on to that Seth. Bert mentioned gasoline is coming down and it's coming down quickly. It's been its down. I think, I heard this morning, $0.17 in the past week. And what we're seeing is an incredibly resilient consumer. We heard from our friends at AAA 88% of travelers over the July 4th weekend, which gasoline was well over $5 a gallon in that timeframe. 88% of travelers were on the road in their vehicles. So as always the automotive aftermarket is incredibly resilient. I think our consumers are pretty resilient. So we're feeling, good about our NAPA business in the second half.

Bert Nappier:

I don't think we do Seth.