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Edited Transcript of GPC earnings conference call or presentation 19-Feb-20 4:00pm GMT

Q4 2019 Genuine Parts Co Earnings Call

ATLANTA Mar 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Genuine Parts Co earnings conference call or presentation Wednesday, February 19, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carol B. Yancey

Genuine Parts Company - Executive VP, CFO & CAO

* Paul D. Donahue

Genuine Parts Company - Chairman & CEO

* Sidney G. Jones

Genuine Parts Company - SVP of IR

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Conference Call Participants

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* Bret David Jordan

Jefferies LLC, Research Division - MD & Equity Analyst

* Christopher James Bottiglieri

Wolfe Research, LLC - Research Analyst

* Christopher Michael Horvers

JP Morgan Chase & Co, Research Division - Senior Analyst

* Daniel Robert Imbro

Stephens Inc., Research Division - Research Analyst

* Elizabeth Lane Suzuki

BofA Merrill Lynch, Research Division - VP

* Matthew J. McClintock

Raymond James & Associates, Inc., Research Division - Research Analyst

* Scot Ciccarelli

RBC Capital Markets, Research Division - MD & Consumer Discretionary Sector Analyst

* Seth Mckain Basham

Wedbush Securities Inc., Research Division - MD Of Equity Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Fourth Quarter and Full Year 2019 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded.

I would like to turn the conference over to Sid Jones, Senior Vice President, Investor Relations. Please go ahead, sir.

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Sidney G. Jones, Genuine Parts Company - SVP of IR [2]

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Good morning, and thank you for joining us today for the Genuine Parts Company fourth quarter and full year 2019 conference call to discuss our earnings results and outlook for 2020. I'm here with Paul Donahue, our Chairman and Chief Executive Officer; and Carol Yancey, our Executive Vice President and Chief Financial Officer.

Before we begin this morning, please be advised this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results as reported under generally accepted accounting principles. A reconciliation of these measures is provided in the earnings press release issued this morning, which is also posted in the Investors section of our website.

Today's call may involve forward-looking statements regarding the company and its businesses. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings, including this morning's press release.

The company assumes no obligation to update any forward-looking statements made during this call.

Now I'll turn the call over to Paul for his remarks.

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Paul D. Donahue, Genuine Parts Company - Chairman & CEO [3]

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Thank you, Sid, and welcome to our fourth quarter 2019 conference call. We thank you for taking the time to be with us this morning.

Earlier today, we released our fourth quarter and full year 2019 results. I'll make a few remarks on our overall performance and then cover the highlights across our business units. Carol will provide an update on our financial results and our outlook for 2020. After that, we will open the call up to your questions.

Our financial results in 2019 reflect the positive impact of our strategic growth initiatives and continued focus on improving our operating performance, maintaining a strong balance sheet,

driving meaningful cash flows and effective capital allocation. Our strategic growth initiatives drove the third consecutive year of record sales for Genuine Parts Company, with positive comp sales and the benefit of several key acquisitions across our automotive and industrial platforms.

Additionally, to further optimize our portfolio, we streamlined our operations with the sale of several noncore businesses, including Auto Todo in Mexico, EIS and the GCN and Canadian operations of our Business Products Group. In 2019, we also accelerated our initiatives to improve our operating performance. Our team executed well, and we were successful in increasing our gross margin rate for the fourth consecutive year.

Additionally, in accordance with our cost savings initiatives announced last October, we took action to streamline field management layers, restructure field support operations and consolidate facilities across the organization. We also continue to assess all areas of the business to identify and act on additional opportunities that increase efficiency and productivity as well as reducing cost.

As announced on November '18, Will Stengel joined the company as EVP and Chief Transformation Officer.

In its first 90 days, Will has attracted talent and created a disciplined approach to help drive improved performance in partnership with the global operating teams. Our efforts, thus far, primarily reflect the savings associated with the company's voluntary retirement program, which we will begin to realize this quarter.

As a result of these initiatives, there were a number of onetime items recorded in the fourth quarter, which Carol will touch on shortly. We fully expect these steps to best position the company for improved profitability, and we remain confident in our ability to achieve our targeted $100 million cost savings run rate by the end of 2020.

Now turning to the results. Fourth quarter sales of $4.7 billion were up 2.2% or nearly 7%, excluding the impact of our divestitures, highlighted by approximately 3% comp sales growth in our automotive segment. The strongest growth in automotive came from our U.S. and Australasian businesses, and these 2 groups also posted solid operating results. In addition, we produced further gross margin improvement for the quarter, and the Industrial segment reported continued operating margin expansion.

In review of our business segment highlights, global automotive sales, which represented 59% of our total fourth quarter revenues, were up 8.7% from last year and improved from 5.3% growth in Q3. Comp sales were up 2.9%, which was a sequential acceleration from the plus 1.8% in Q3, and acquisitions net of the Auto Todo divestiture and other adjustments added another 7.2% to sales.

In our North American operations, U.S. automotive sales were up 5.2% in the fourth quarter, with comp sales up 3.3% and solid growth in operating profit. This has improved from our 2.5% comp sales increase in the third quarter and is on top of the 3.3% growth in the fourth quarter of 2018.

In Canada, our automotive sales were up low single digits with flat comp sales. Canada remains a large and strategic market for us, and we expect to deliver positive sales growth and market share expansion in 2020, driven by key commercial programs such as NAPA AUTOPRO and NAPA AutoCare.

We are also confident in the ongoing strength of the North American automotive aftermarket. We expect improving car park dynamics such as the increase in the number of vehicles in the aftermarket sweet spot, an aging fleet and reasonable gas prices to further support continued industry growth. In the U.S., we produced another quarter of positive sales growth with both our commercial and retail customers. Likewise, sales to the commercial segment, which is nearly 80% of our total automotive sales, both in the U.S. and globally, outpaced our retail sales growth in the fourth quarter as well as for the full year.

Sales to our NAPA AutoCare center and Major Account Customer segments continued to drive our commercial sales growth. NAPA AutoCare is an industry-leading commercial program, representing approximately 18,000 independent repair shops in the U.S. as well as another 2,000 in Canada.

The Major Accounts Group consists of national and regional customers, including fleet and government accounts, national tire centers, regional tire and repair chains and OE dealers. Through our joint business planning with these Major Accounts as well as expansive inventories, advanced technological offerings and best-in-class service capabilities, NAPA is well positioned to serve these large and growing customer groups.

And this holds true across all of our automotive operations. Similar to our strategy in North America, we serve the European and Australasian commercial markets with effective banner programs

For the independent and installer base and comprehensive products and services required by Major Account customers. Globally, our capabilities in selling to these customer segments, distinguish our automotive businesses from our competition and provide us with additional growth opportunities in the years ahead.

In our retail segment, we continue to benefit from initiatives such as NAPA Rewards program, now $12 million strong and growing every month and our retail impact store project, which we are rolling out across our independently owned store base.

Today, our company-owned stores and approximately 200 of our independent stores have been updated for this initiative, and we have plans for another 300-plus remodeled stores in 2020. In addition, our retail sales reflect the favorable impact of our promotional activity in the quarter, which offset some of the early headwinds we began to see in December related to the mild winter weather.

In Europe, we were pleased to experience improving market trends and report our second consecutive quarter of sequential progress in our comp sales performance. Overall, our sales comps were flat in the fourth quarter, which has significantly improved from the mid- to high single-digit declines in Q2 and Q3.

While economic growth in the U.K. was relatively unchanged with the previous quarter, we were encouraged by stabilizing industry activity associated with higher confidence in a Brexit agreement. As a result, comp sales were much improved from the third quarter. In addition, our battery sales in the U.K. outperformed in the fourth quarter, and we continued to gain traction with the rollout of the NAPA brand in categories such as batteries, rotating electrical, shocks and timing belts. We anticipate the continued growth of private label in this region will enhance our brand positioning and sales penetration with all of our customers.

In France, comp sales growth was basically flat with the prior year and in line with the previous quarter, which had shown considerable improvement from the second quarter. The acquisition of the Todd Group, effective 10/1/2019, also positively contributed to our total growth in the fourth quarter. As a reminder, Todd is expected to add $85 million in annual revenues and positions AAG as the market leader in the heavy-duty segment across the French market.

Rounding out our European operations, we reported positive sales comps in Germany and our June acquisition of parts points in the Netherlands performed to plan. We enter 2020 excited for additional growth opportunities in both Germany and the Benelux region of Europe. Looking forward, we expect improving conditions for top line growth in Europe to positively impact our comp sales as well as leveraging our expense base.

And as discussed throughout 2019, our team continues to execute on a variety of initiatives to generate additional expense savings. With these things in mind, we expect to improve Europe's profitability and operating margin in 2020 and beyond.

In Australia and New Zealand, we posted another quarter of mid-single-digit comp growth with solid operating profits, and we'd point out that our performance in this region was fairly consistent throughout 2019. Our finish to the year was especially encouraging, given the trend of more challenging economic conditions over the last half of 2019. In addition, the people of Australia have experienced one of the most devastating and widespread bush fires on record across the region.

We are proud of our team for their continued focus on safety and excellent customer service despite these incredibly difficult circumstances. In response to this crisis, the company was pleased to contribute to the Australian Red Cross, which has been instrumental in serving and protecting the many individuals and families in the communities we serve.

So that's a recap of the global automotive group and our fourth quarter performance. With these results and the many growth prospects we see for this segment across our operations, we are well positioned to produce additional sales growth and operating improvement in 2020.

Turning now to our Global Industrial Parts Group, which represented 31% of our total revenues, fourth quarter sales were $1.5 billion. Excluding EIS, sales were up approximately 7%, with the benefit of Inenco in Australasia and other industrial acquisitions, partially offset by a 1.2% comp sales decrease at Motion. Inenco, which we acquired in July, operated well and in line with our expectations for the quarter as well as the first 6 months.

The growing pressure on our North American sales reflects the slowing trend in the industrial economy that persisted throughout the quarter and the second half of the year. For perspective, 3 of our 14 product categories posted positive year-over-year sales in the fourth quarter. This was down from 8 of 14 in the third quarter, while sales by industry sector held steady with Q3, with 7 of 12 industries showing improvement. These results align with our downward trend for indicators such as manufacturing and industrial production and the purchasing manager's index, although the January PMI improved over 50 for the first time in 5 months.

We remain optimistic that the industrial economy will further strengthen over the course of 2020, primarily in the second half of the year.

In summary, the Industrial Group produced a solid quarter and performed well all year, with operating margin improvement in each quarter despite slower sales comps in the second half of the year. We enter 2020 with strategic plans to capitalize on our market presence in both North America and Australasia and improve our operating results.

Now a few comments to update you on our Business Products Group, which accounted for 9% of total revenues. For the fourth quarter, this segment reported sales of $428 million, down 6.3%, with the decrease primarily due to the continued softening demand for traditional office supplies and technology categories, competitive dynamics and lower volume with our National Accounts group. On a positive note, we delivered another quarter of increased sales for facilities and safety supplies,

And this category has grown to represent 35% of total sales for this business segment.

While the growth in FBS is encouraging and represents an important element of our growth strategies for the Business Products Group, we will continue to evaluate our future plans for this business as we move forward in 2020. With that in mind, we recently streamlined this business segment with the sale of GCN, a small noncore operation in late 2019 and the sale of our business products operations in Canada on January 1 of this year. So that's a recap of our consolidated and business segment results for the fourth quarter of 2019.

Before turning it over to Carol, I'd like to make a few comments on the potential impact of the coronavirus outbreak in China. While this situation is very fluid, we thought it would be helpful to provide a few more details on the level of exposure to the -- to the impacted region.

From a topline perspective, we're not considering any sales weakness related to the outbreak as we do not have any sales exposure in China. We do, however, have exposure to affected areas throughout our supply chain, including direct and indirect sourcing from China, from North American automotive, Australasia and business products, with only minimal impact in industrial and European automotive. And while we are in good standing today and do not foresee any material product shortages based on the current situation, we are very aware of the potential for a worsening scenario, and we remain in constant contact with our suppliers across the globe to plan for any disruption in supply, should the virus continue beyond the near term.

So with that, I'll hand it over to Carol.

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Carol B. Yancey, Genuine Parts Company - Executive VP, CFO & CAO [4]

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Thank you, Paul. We'll begin with a review of our key financial information, and then will provide our full year outlook for 2020. Total GPC sales of $4.7 billion in the fourth quarter were up 2.2% from 2018 or up approximately 7% excluding the impact of divestitures. These results drove the continued improvement in gross margin, up 20 basis points to 33.7% from 33.5% in 2018. For the full year, sales of $19.4 billion increased 3.5%, and our gross margin improved 55 basis points to 32.57 from 31.94 in the prior year. The improvement in gross margin for the fourth quarter and full year reflect a variety of factors, including the benefit of enhanced pricing strategies and favorable product mix as well as the favorable impact from acquisitions and divestitures. With the continued efforts in our gross margin initiatives, we expect our 2020 gross margin rate to remain relatively in line with our full year rate for 2019. This sustains reasonable inflation of now more than 1% to 2% and consistent levels of volume incentives.

In 2019, Automotive and Business Products inflation primarily reflects the impact of tariffs. And while tariffs were not a factor for industrial, this industry experienced approximately 2% price inflation. Throughout 2019, we were successful in passing on the price increases to our customers to protect our gross margin. So we continue to believe the current of levels of inflation have been a net positive to our results.

Specific to tariffs, their impact in the fourth quarter primarily reflects a 25% tariffs on List 1 through 3 items, although Business products was also impacted by the 15% tariff on list 4 items that was effective September 1. As expected, terrorists were approximately 2% of sales for both U.S. Automotive and Business Products in Q4 and in the 1% to 1.5% range for the full year. Looking ahead, tariffs would be less significant in 2020 as their effective dates will anniversary throughout the year.

Turning to our selling, administrative and restrictive and other expenses. These expenses were $1.25 billion in the fourth quarter, which was up 3% from last year and 26.6% of sales. The fourth quarter reflects the lowest percent increase in our SG&A in 2019. For the year, these expenses were $4.9 billion, up 7% from last year and 25.4% of sales. So while we were encouraged by the progress and better aligning our fourth quarter expenses to sales and gross profit growth, our SG&A continues to be impacted by rising cost in several areas including payroll, freight and delivery, legal and professional, IT and cybersecurity.

In addition, we remain challenged to leverage our expenses on low single-digit sales comps. These cost pressures and the lack of leverage let us to develop 2019 cost savings plan, which we announced last quarter and Paul covered earlier. Through these initiatives, which are well underway today, we expect to generate meaningful savings as we move forward in 2020 primarily in the areas of personnel and headcount associated with various organizational changes. In accordance with the savings plan, the company recognized $112 million in restructuring cost in the fourth quarter that are accounted for as a component of operating expenses. These restructuring cost reflect severance and other employee costs including a voluntary retirement program as well as facility and closure costs related to the consolidation of certain operations. The company also recorded $43 million in special termination costs related to the retirement benefits provided to employees that expected this voluntary retirement package. These costs are presented as nonoperating expenses.

The combination of restructuring and special termination costs reflects the onetime expenses that were incurred to generate annualized savings of $100 million by the end of 2020. This is a significant return on our investment, and we look forward to updating you on the positive impact of these initiatives throughout the year.

Separately, in the fourth quarter, the company reported an $82 million noncash goodwill impairment charge related to our Business Products Group. Several factors that developed in the quarter, including greater uncertainty associated with the longer-term industry trend as well as the competitive environment led us to this decision, which effectively eliminates the goodwill for this business segment.

Rounding out our operating offenses, our depreciation and amortization expense was $73 million in the fourth quarter and $270 million for the full year. Depreciation was $48 million and $173 million for the quarter and the year, respectively. And we expect this to increase to $180 million to $190 million in 2020, which is due to the increase in capital expenditures related to our ongoing growth plans for investing in the company.

Intangible amortization was $25 million for the quarter and $97 million for the full year. We expect intangible amortization to increase to approximately $100 million in 2020. So on a combined basis, we expect depreciation and amortization of approximately $280 million to $290 million in 2020.

So now let's discuss our fourth quarter results by segment. Our automotive revenue for the fourth quarter was $2.8 billion, up 8.7% from the prior year and operating profit of $201 million was up 1%, with an operating margin of 7.2% compared to 7.7% margin for the fourth quarter of the prior year. The 50 basis point decline reflects the headwinds in our European business and to a lesser extent, the Q4 results in Canada. Our U.S. and Australasian group have solid operating margins for the got it. As you move forward, we expect a steady sales environment and additional cost savings to support our initiatives for improved operating results in 2020.

Industrial sales were $1.5 billion in the quarter, a 6% decrease from Q4 of 2018 or up approximately 7% excluding EIS. Our operating profit of $127 million was down 3% or up 9% excluding EIS. Operating margin improved to 8.6% from 8.3% last year, with the 30 basis point increase due to margin expansion in the core industrial business as well as the favorable impact of the EIS divestiture.

In Business Products, our revenues were $420 million, down 6.3% from the prior year. Their operating profit was $14 million and the operating margin declined to 3.3%. These results correlate to the decline in core sales for the quarter and further deleveraging of expenses.

Total company operating profit in the fourth quarter was $342 million, and our operating profit margin was 7.3% compared to 7.7% last year. We had net interest expense of $21 million in the fourth quarter and for 2019, net interest was $91 million, which is down slightly from 2018. In 2020, we expect net interest of $86 million to $88 million, reflecting lower interest rate and lower debt levels. The corporate expense line was $36 million in the fourth quarter, down from $41 million in 2018. For the year, this was $138 million, which was flat with the prior year. We expect our corporate expenses to be within the $140 million to $150 million range for 2020.

Our tax rate for the fourth quarter was 26.5%, a slight decrease from the 26.6% rate in the prior year. Excluding onetime restructuring costs, our adjusted rate of 24.2% was improved from the 26.9% in 2018, due primarily to geographical income mix shift. For the year, our effective tax rate was 25.2% or on an unadjusted basis, 24.5%. And we are planning for our full year tax rate of approximately 24% to 26% for 2020.

Our net income in the fourth quarter was $9 million and our EPS was $0.06, while our adjusted net income was $197 million or $1.35 per share. Net income for the full year was $621 million or $4.24 per share, and adjusted net income was $833 million or $5.69 per share.

So now let's turn to the balance sheet, which remains strong excellent and in condition. We continue to closely manage our accounts receivable, our inventory and our accounts payable to improve our working capital position. We remain pleased with the quality of our receivables and the progress our team is making to enhance our supply chain, which has positively impacted our inventory investment and our gross margin trends. At December 31, our AP-to-inventory ratio is 107%, and our total working capital represents just 8% of revenues. Our total debt of $3.4 billion at December 31st is unchanged from September 30, and up from the $3.1 billion in 2018. At December 31, our average interest rate on all our outstanding debt is 2.2%, which has improved from the 2.7% at December 31 last year.

With a debt-to-EBITDA ratio of 2.34x, we remain comfortable with our current debt structure and we have a strong balance sheet and the financial capacity to support our future growth initiatives and our ongoing priorities for effective capital allocation. In 2019, we generated another year of solid cash flows with approximately $900 million in cash from operations. We expect another solid year in 2020, and we're currently projecting $1.0 billion to $1.1 billion in cash from operations, with free cash flow after the dividend in the $300 million to $350 million range.

Strong cash flows continue to support our ongoing priorities for the use of our cash, which we believe serves to maximize shareholder value. Our key priorities for cash remain: reinvestment in these businesses, strategic acquisition, dividend and share repurchases.

We invested $298 million in capital expenditures in 2019, which was up from $232 million in 2018. This increase reflects our growing operations and the incremental spend in areas such as technology and other productivity-enhancing investments in our facilities. For 2020, we have plans for continued investment in our businesses, and we expect total capital expenditures to be in the range of $275 million to $325 million for the year.

Acquisitions remain an important component of our growth strategy. And in 2019, we used approximately $700 million in cash, partially funded by the proceeds from divestitures to acquire new businesses and expand our global footprint. In 2020, we expect to make additional strategic bolt-on acquisition in the automotive and industrial segments, although these future acquisitions have not been considered in our guidance for the year.

Turning to the dividend. Earlier this week, our Board approved a $3.16 per share annual dividend for 2020, which marks our 64th consecutive annual increase in the dividend paid to our shareholders. This represents a 4% increase from the $3.05 per share paid in 2019, and it's approximately 56% of our 2019 adjusted earnings per share, which is in line with our targeted payout ratio.

Finally, as part of our share repurchase program, we purchased approximately 800,000 shares of our common stock in 2019 and today, we have 15.6 million shares authorized for repurchase. We expect to be active in the program again in 2020 and over the long-term, we continue to believe that our stock is an attractive investment and combined with the dividends, serves to maximize the return to our shareholders.

So now let's discuss our outlook for 2020. In arriving at our 2020 full year guidance, we considered our performance in 2019 as well as the recent trends and our current growth plans and strategic initiatives. In addition, we took into account the current market conditions and what we anticipate for the foreseeable future and each of our business segments and the geographies that we operate. With these factors in mind, we expect total sales for 2020 to be in the range to -- of flat to up 1% or plus 3% to plus 4%, excluding the impact of the EIS and SPR divestiture. As mentioned earlier, this guidance excludes the benefit of any unannounced future acquisitions. By business, we are guiding to plus 4% to plus 5% total sales growth for the automotive segment, which includes plus 2% to plus 3% comp sales growth. A sales decrease of minus 6% to minus 7% for the industrial segment or plus 2% to plus 3% excluding the impact of EIS. This reflects a decrease in comp sales of approximately 1.5% to 2%.

For the Business Product segment, down 4% to down 5%, total sales decline or down 1% to down 2% excluding divestitures. On the earnings side, we currently expect earnings per share to be in the range of $5.80 to $5.90. This represents a 2% to 4% increase over our adjusted earnings per share in 2019 or a 5% to 7% increase excluding the earnings related to the divestiture of EIS. With this guidance, we move forward into 2020, confident that our management teams have the strategic plans and initiatives in place to meet or exceed these targeted results. We are excited by the cost savings potentials we've identified and encouraged that our transformation office is also focused on identifying additional opportunities for us.

In addition, we believe that the underlying fundamentals of our broad and growing business platform will continue to provide us with sustained long-term growth opportunities.

So that's our financial report for the fourth quarter and full year of 2019 as well as our outlook for 2020. We were pleased to finish the year with solid results, and we look forward to reporting more progress in the coming quarters.

I'll now turn it back over to Paul.

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Paul D. Donahue, Genuine Parts Company - Chairman & CEO [5]

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Thank you, Carol. We're pleased to perform at the high end of our expectations in the fourth quarter and finish the year with solid results. Allow me to recap the few highlights. We achieved another quarter of positive total sales growth, driven by our 3% plus from sales growth in our U.S. automotive business, which represents our best comp in 5 years. So congratulations go out to our U.S. NAPA team. We further improved our gross margin by 20 basis points in the quarter and by more than 60 basis points for the full year, our fourth consecutive year of improved gross margins. We experienced improving market trends in Europe, and reported significantly improved sales comps relative to the second and third quarters. Our industrial business continued to operate well, generating a 30 basis points improvement in operating margins. We streamlined our operations with the successful divestiture of several non-core businesses. We took action on our initiatives to achieve $100 million in annualized cost savings by the end of 2020. And effective this week, our Board of Directors approved of 64th conservative increase in the dividend, up 4% from 2019. So as you can see, our team has been busy executing on our growth strategy as well as several key initiatives to improve our operating results. Combined, these efforts have served to further optimize our portfolio and we expect to continue our strategic transformation in 2020.

GPC enters the new year with strategic plan and initiatives to drive sales and profitability, working capital improvement and significant value for all of our stakeholders. We look forward to updating you on our progress towards these objectives as we move through the year.

So thank you for listening. And with that, we'll turn back to the operator, and Carol and I will take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Christopher Horvers of JP Morgan.

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Christopher Michael Horvers, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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So wanted to start with the comp acceleration in U.S. NAPA, which is impressive in light of what we've seen from your peers with generally seeing deceleration. Can you talk about where saw that? Maybe break it down between DIY and do-it-for-me? You did mention promotional effectiveness in December around the weather, that would seem to me like that's more of a DIY versus commercial benefit. But sure -- just wanted to get your thoughts there? And any comments in terms of was there any incremental inflation benefit that you clipped in the fourth quarter versus the third quarter?

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Paul D. Donahue, Genuine Parts Company - Chairman & CEO [3]

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Well. Okay. Chris, thanks for the question. I'll do my best to cover all this point and maybe have Carol weigh in on a bit of an inflation discussion. You know you mentioned commercial versus retail. Our commercial business was solid. Our 2 big programs, Major Accounts, AutoCare, both were in line with our overall commercial sales in the quarter, which was up significantly over 2018. So we're pleased with the commercial business and our retail business was solid as well.

You mentioned the promotional activities, Chris. So we had set out very to focus on all 3 of our big sales channels; retail, commercial as well as online. And I think that some of the initiatives that we put into play maybe be offset the impact of some of the mild temps that we saw hit the business in December -- October, November, was still -- the weather was still fairly favorable. December and January obviously have done a good bit warmer. They're taking a bit of a toll on some of our seasonal categories. But our hard parts business remains solid, and we're pleased with the performance of our U.S. automotive business in the quarter.

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Carol B. Yancey, Genuine Parts Company - Executive VP, CFO & CAO [4]

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And just to comment on the tariff impact for automotive our business in the quarter. It was, as expected, about 2% related to tariffs. And so the second half being at 2%, first half at 1%, gave us a blended 1.5% for 2019. And then just as a reminder, as we go into 2020, we'll anniversary some of that. So we're looking for maybe a first half of 1% and a blended 0.5 point for the full year. And that excludes any further inflation.

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Christopher Michael Horvers, JP Morgan Chase & Co, Research Division - Senior Analyst [5]

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Got it. And I'm not sure of -- and maybe as you think about the third quarter, you saw acceleration clearly in full sense of the business, really impressive. But did you see more in DIY? Or did you see more in commercial? Any insights there?

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Paul D. Donahue, Genuine Parts Company - Chairman & CEO [6]

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Certainly, I would say our commercial outperformed our retail, Chris, even though both were solid. And we continued to rollout or impact store initiatives to now -- now, we're working closely with our independent owners. But commercial, both AutoCare and Major Accounts have performed well.

You haven't asked about regionality, Chris, but I'll touch on it as I'm sure some will ask the -- we saw really strong growth up in the north, certainly in the central part of the United States, Midwest. Our mountain team had a really solid quarter. Where we saw some of the softness was out west as well as in the Northeast part of the U.S.

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Christopher Michael Horvers, JP Morgan Chase & Co, Research Division - Senior Analyst [7]

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Got it. And then as you think about 2020, you gave guidance for the overall automotive division. How are you thinking about the U.S. NAPA business? And any comments on so the -- how the weather is impacted your business quarter-to-date? And how it could -- how that could sort of weigh on the year overall?

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Paul D. Donahue, Genuine Parts Company - Chairman & CEO [8]

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Yes. Well, Chris, as it relates to the weather, just to make a comment that we've got a fairly diversified business model and really if you start to break our business apart, only about 30% of our total revenues would really be susceptible to U.S. weather patterns. The industrial business, the Business Products Group, Europe, Australia -- look, we track weather around the world. I'm looking at floods in the U.K. and mild winter in Europe, record heat in Australia. So we look at whether around the world. And honestly, I tend not to dwell on it that much anymore since there's not a heck of a lot we can do about it. We're 6 weeks into the new year, Chris. We'll see some ebbs and flows throughout the year. But I would tell you as we sit right now, we're confident in our full year guidance for automotive.

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Carol B. Yancey, Genuine Parts Company - Executive VP, CFO & CAO [9]

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And Chris, we are implying a comp increase for U.S. business in 2020 of around 2% to 3%, which is very consistent with what we saw for 2019. And that's what we've modeled into our guidance.

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Christopher Michael Horvers, JP Morgan Chase & Co, Research Division - Senior Analyst [10]

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Got you. And one last one, I'm not sure if you have this. But Carol, do you -- can you help us out with, so there's a lot going on with acquisitions and divestitures, sizable ones. Can you just help us, as we think about 2020 versus what you just reported for 2019, what's the net impact at the operating profit and operating margin line from the mixture of everything that's going on? I'm not sure if you have it but clearly, you got some rate benefit, but maybe some profit dollar loss? So help us reconcile that.

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Carol B. Yancey, Genuine Parts Company - Executive VP, CFO & CAO [11]

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Yes. That, for 2019, the core business, if you will, without the impact of the acquisitions and divestitures, was something around at $0.20, is what was factored in there.

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Christopher Michael Horvers, JP Morgan Chase & Co, Research Division - Senior Analyst [12]

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$0.20 headwind?

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Carol B. Yancey, Genuine Parts Company - Executive VP, CFO & CAO [13]

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You're talking about 2019 Or 2020?

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Christopher Michael Horvers, JP Morgan Chase & Co, Research Division - Senior Analyst [14]

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2020 versus 2019.

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Carol B. Yancey, Genuine Parts Company - Executive VP, CFO & CAO [15]

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I'm sorry. I was -- for 2020 -- and that's -- I'm sorry for that. But for 2020, we have implied we will have operating margin improvement in our automotive and industrial businesses. And we have implied a 20 basis point improvement in our operating margin that largely relates to the cost reductions that we've talked about and the work that the transformation office is doing. And that would be what would be in our numbers for 2020 and it would obviously be greater than that going into 2021. So that excludes all the impact from acquisitions and divestitures.

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Operator [16]

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Our next question comes from the line of the Liz Suzuki of Bank of America.

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Elizabeth Lane Suzuki, BofA Merrill Lynch, Research Division - VP [17]

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First, I just want to talk about capital allocation priorities in 2020. I know you laid out the 4 buckets there. But it seems like you're kind of taking down the debt levels a little bit despite very low interest rates. So I was curious if a large acquisition opportunity came up that would be in the auto or the industrial business where you might have to lever up a little bit to do it. Do you have a threshold to which you would aim to keep that leverage?

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Carol B. Yancey, Genuine Parts Company - Executive VP, CFO & CAO [18]

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Yes. Liz that's a great question. As you know, we have certainly taking our leverage up, and we're definitely comfortable in the 2.5x to 3x indefinitely for the right acquisition opportunity. That is something that when we think about a larger, more strategic acquisition opportunity, those are the things that you can always control. The timing, there's nothing in the horizon right now. We'll continue with our bolt-ons, which are probably in the 1% to 2% range as we look ahead. So we think, the leverage that we have right now, that we are comfortable with that we know we are flexibility as we look at. And we would again just take into account what we already have coming into our numbers for 2020. We have a carryover impact to this pretty nice on acquisition. So probably more of just the bolt-ons just for 2020.

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Elizabeth Lane Suzuki, BofA Merrill Lynch, Research Division - VP [19]

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Great. And I'll just tack on one more, if you wouldn't mind. Did you guys -- I may have missed this, and did you talk about transaction growth versus average ticket in the U.S. auto business? And how that is trending versus the last couple of quarters?

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Paul D. Donahue, Genuine Parts Company - Chairman & CEO [20]

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No, Liz. We -- I did not cover that. But it's a similar trend as we've seen over the last few quarters, which is nice growth in Q4 in our invoice -- in the size of our invoices. So nice mid-single-digit growth with a slight decrease in the number of invoices per store per day.

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Operator [21]

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Our next questions comes from the line of Matt McClintock of Raymond James.

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Matthew J. McClintock, Raymond James & Associates, Inc., Research Division - Research Analyst [22]

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I was wondering, you brought up the impact project, and you have now done that in 200 independents. I was wondering if you could give us a little bit of color or what you saw in those independents in terms of list, et cetera, in 2019? And then how quickly can you accelerate that, the adoption of new independents, should you decide that this is worth continued efforts.

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Paul D. Donahue, Genuine Parts Company - Chairman & CEO [23]

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Great question, Matt. We -- this has been a multiyear project for us. We're at -- between the last couple of years, we've done over a couple of hundred of our independent stores. And it's a comprehensive upgrade. It's everything from extending store hours, improving the retail storefront, changing out some of the product assortment, probably one of the most important aspects of the program is adding business development managers in the stores as well. So we're expecting to ramp this project up in 2020 and actually looking for 300-plus stores in 2020 on the independent site. We fully completed and rolled our company-owned store group and we are seeing some significant increases over our typical run rate when we do the full impact program.

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Matthew J. McClintock, Raymond James & Associates, Inc., Research Division - Research Analyst [24]

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Okay. And then if I could have one more. Just on coronavirus, understand that for the Industrial business, probably limited impact of new supply chain. But I suspect there's probably potential meaningful impact on your customers' supply chains and that could lead to less activity. Just wondering I know this is a tough question to ask, but you're probably in a better position to give us color or help us conceptualize how the impact on your customers' supply chains could actually flow through to your own top line? Any color there at all would be helpful from a derivative standpoint or a secondary standpoint.

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Paul D. Donahue, Genuine Parts Company - Chairman & CEO [25]

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Yes. Matt, look, it is, as you know, and it is a tough question because it's an incredibly fluid situation. We've been on the phone daily with all of our business unit heads talking about not really our own supply chain, which I covered in my prepared comments but also some of our good customers as well. I would tell you, it's early. We have not felt any downward pressure on our numbers from our customers at this point. But I would tell you that were staying incredibly close to it and we'll continue to monitor the situation.

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Operator [26]

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Your next questions comes from the line of Daniel Imbro of Stephens Inc.

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Daniel Robert Imbro, Stephens Inc., Research Division - Research Analyst [27]

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Paul, I would love to hear your update on the European market. I think you noted that growth returned out relatively flat year-over-year. It's a pretty nice sequential improvement. Can you talk about what the primary drivers of that were, maybe industry versus company specific and kind of how you're thinking about the growth other than 2020?

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Paul D. Donahue, Genuine Parts Company - Chairman & CEO [28]

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Yes. Thanks, Daniel. We're quite pleased with the progress we've made with our European business. We had, no doubt, a tough Q2 and Q3 in Europe. What's interesting is you -- as we dive into those numbers, they're different markets. So Q2, our French team had a challenging quarter; Q3, our U.K team had a challenging got it. Both rebounded nicely in Q4 to get us to flat overall comp. Germany, on the other hand, showed growth in Q4, which certainly we were pleased to see.

I would tell you that from our perspective, our team in 2018 and in the first half of 2019, they were very focused on integrating this business and doing all the things necessary to bring a privately held European business under the umbrella of a U.S. publicly traded company. I would tell you that, that focus now has shifted in the second half of '19. And as we go in to 2020, more on growing this business, taking market share and doing other things that this business has done for the past 30 years. So despite some remaining complicated economic issues in some of those markets, we are certainly more bullish going into 2020, just because our team is focused on all the right things and focused on grabbing market share and growing our business.

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Daniel Robert Imbro, Stephens Inc., Research Division - Research Analyst [29]

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Got it. And as a follow-up on that, it sounds like looking for more growth over there, that should, I would think, lead the margin leverage, given the weaker sales led to deleverage last year. But Carol, I think your answer just said most of the auto expansion should come from cost-cutting. So how do I reconcile maybe those 2 statements? And what kind of impacts should we expected Europe to have on the automotive operating margin in 2020?

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Carol B. Yancey, Genuine Parts Company - Executive VP, CFO & CAO [30]

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Yes. So for our automotive business, and as Paul mentioned, their comps were down something around 3% for the full year; and in the fourth quarter, about 40 bps of the 50 bp decline in our automotive margin was Europe, and then the other smaller impact was due to the slowdown in Canada in Q4. When you look at the full year, we would say that all of the decrease in the automotive margin was Europe. So strong growth margin, obviously, in our U.S. business and Australasia business. So when we look ahead and remember that team started on their cost-cutting in Q2, and they have been working very hard. And we actually saw some progress in the second half of the year, and we're certainly seeing further improvement that will come in 2020. We're modeling a comp of up 1% to up 2% for Europe in 2020. And with all the cost reductions that they've done and the further changes we made at the end of the year, that gives them a flattish margin in 2020 and certainly as we look ahead, we would see that to be improved in 2021 and beyond.

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Daniel Robert Imbro, Stephens Inc., Research Division - Research Analyst [31]

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Got it. And then maybe my last follow-up. Carol, just switching to the industrial site. I think you said the outlook calls for 2% or 3% growth, which includes slightly positive comps. One, did I hear that correctly? And then two, what do you think the cadence of that growth should look like, given, you noted the reason infection hiring in PMI and some of the leading indicators?

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Carol B. Yancey, Genuine Parts Company - Executive VP, CFO & CAO [32]

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Yes. So the 2% to 3% for the industrial outlook for 2020, and I would tell you, you have to remember to take into account that excludes the EIS amount. So the 2% to 3% implies something of 1.5% to down 2% comp. And I would tell you that this primarily our Motion North American business, probably more so in the first half, a little weaker, hopefully a little bit better in the second half. Our Australasian business, Inenco. They have comps of around up 2% in 2020. So we've implied something of a 1.5% to down 2% for 2020.

Having said that, again, with the cost reductions and the work that the transmission team is doing and the work that, that business has done all in 2019, they will have some operating margin improvement in 2020, despite having comps down 1.5% to 2%. So the team's done a great job in that area as we look ahead.

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Operator [33]

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Your next question comes from the line of Bret Jordan of Jefferies.

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Bret David Jordan, Jefferies LLC, Research Division - MD & Equity Analyst [34]

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Carol, I might've missed this, but did you talk about how you've done on the payable side on the AAG business?

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Carol B. Yancey, Genuine Parts Company - Executive VP, CFO & CAO [35]

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We have not. And it's a great question, Brett. We -- while you didn't necessarily see the impact directly in our Q4 working capital. I would tell you with the introduction of the private label and some of the work that our global procurement teams have done, they were able to achieve about $50 million in working capital improvements in 2019. And then we look ahead in 2020, we think we'll have another $50 million. And those are even greater than Europe because with getting global savings, global working capital savings as well. And then on the other side, we are definitely on track, and we will have about $25 million of procurement gross margin synergies by the end of 2020. And we were right on track with that as well. And that does not take into account the implied income statement benefit on these payable terms. So we've implied that in our 2020 working capital guidance to see that $100 million-plus coming into 2020.

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Bret David Jordan, Jefferies LLC, Research Division - MD & Equity Analyst [36]

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Okay. Great. And then I guess, when you look at Europe, what is the private label mix over there? And I think Paul called out some real strength in the U.K. battery business in the fourth quarter, and I think they have had a mild winter. Are you guys doing something differently there on the promotional side or market share shifts that you're seeing seem?

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Paul D. Donahue, Genuine Parts Company - Chairman & CEO [37]

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Well, to your first question, Bret, the private label market in Europe is minimal. And AAG, our business there, they had a number of different private labels in different product categories. But it was certainly not an impactful part of their overall product mix. We have launched the NAPA brand now, and in a few categories in the U.K, we're in the process of rolling that into Germany -- I mean, into France and ultimately, into the Netherlands. We're quite pleased with the acceptance we're seeing from our customers and you know, we have a separate battery business in the U.K, Bret, that we acquired 12 to 18 months ago, called Platinum. And it is a strong player in the U.K. in the battery business. So it's a part of AAG, but that would account for some of the strength we're seeing and -- and again, they have gotten behind the NAPA logo and the NAPA brand, and are doing quite well. So we're pleased. And our goal will be to roll that NAPA brand across Europe.

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Bret David Jordan, Jefferies LLC, Research Division - MD & Equity Analyst [38]

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Okay. So the U.K. strength is more your strategy in the U.K, not the category in the U.K?

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Paul D. Donahue, Genuine Parts Company - Chairman & CEO [39]

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Correct. That would be accurate.

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Operator [40]

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Our next quarter comes from the line of Seth Basham with Wedbush Securities.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - MD Of Equity Research [41]

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My question, just reverting to the U.S. NAPA business. Can you give a sense of cadence of comps through the quarter? And how your thinking the cadence of comps through 2020? That would be helpful.

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Paul D. Donahue, Genuine Parts Company - Chairman & CEO [42]

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Yes. The cadence for the quarter, Seth, if I look at GPC in total automotive, we're pretty steady throughout the quarter with actually November and December slightly stronger than October. Automotive trended positive -- U.S. automotive trended positive, really every month with a solid December, probably unlike some of the other reports that we've heard. But we did fine in December, and again, I think part of that goes back to some of the initiatives that our team launched in the quarter -- I mean in the month and in the quarter. As I look across 2020, hard to say, Seth, we, again, I mentioned earlier, we're only 6 weeks into the year. We're going to see ebbs and flows as we go. But one thing we are encouraged is we're seeing some really cold weather hit the Midwest this week and looks like some big snow up in the Northeast. So that will blow out a lot of the inventory that's sitting in our customers' shelves and hopefully, propel us into a better spring.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - MD Of Equity Research [43]

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Got it. And then as a follow-up question. You guys have been up a great job on gross margins with improvements over the past 4 years. You talked to a flattish gross margins in 2020. Can you just help us understand why we're likely to see a slowdown in that progress?

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Carol B. Yancey, Genuine Parts Company - Executive VP, CFO & CAO [44]

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Yes. I would say that our team has done a great job, especially in this tariff environment and really pleased to see it across the automotive and industrial businesses, lot of our pricing strategies and a lot of our supply chain initiatives were doing. We believe there still is some opportunities for that to increase. We're just sort of modeling a flattish and maybe a bit of improvement. So remember some of the improvement, this year is related to the net improvement from acquisitions and also honestly acquisitions and divestitures. So some of it is coming from that, which we would anniversary that next year.

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Operator [45]

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Our next questions comes from the line of Scot Ciccarelli with RBC Capital Markets.

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Scot Ciccarelli, RBC Capital Markets, Research Division - MD & Consumer Discretionary Sector Analyst [46]

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It's Scot Ciccarelli. So a question on the 2020 guidance. I guess I'm trying to understand your expectations for, let's call it, core margins in auto and industrial versus -- what's the impact from cost-reduction action? So like, if you take a step back, would you expect kind of core auto and industrial had flat core margins? And the 20 basis points lift -- for the full year comes from layering in those cost efforts? Or are you expecting some deterioration because of the low top line growth? But it's more than made up for the cost reduction. I think that will help out everyone understand kind of the cadence for both 2020 and then how these trends may roll through into 2021?.

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Carol B. Yancey, Genuine Parts Company - Executive VP, CFO & CAO [47]

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Yes. So as we mentioned, when you look at our automotive and industrial business, we are implying operating margin improvement there. That is coming from -- the majority of that is coming from the improvements in that cost savings. So you would say, without the cost savings, it would've been nowhere like flat. I would tell you, what we're really pleased to see is especially in the automotive business, for example, with comps of 2% to 3% we're able to leverage and improve operating margins for the first time in a couple of years. So again, this cost reduction and the transformation that we're talking about is giving us something better than a flattish margin, with some of these low comps and remember the industrial business has got a comp of down 1.5% to down 2%. And yet, they will as well have operating margin improvement. What you -- and this just gets back to the gross margin thing, you're going to see that more in the SG&A line. And that's why we kind of implied a flattish gross margin with our improvement coming through SG&A.

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Scot Ciccarelli, RBC Capital Markets, Research Division - MD & Consumer Discretionary Sector Analyst [48]

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Got it. That's real helpful. And so you kind of think about the amount of cost savings that flow through -- that you actually capture in 2020, because it's a run rate by the end of 2020 that gets you to $120 million. You're capturing what about half? Kind of $40 million to $45 million, would be my estimate?

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Paul D. Donahue, Genuine Parts Company - Chairman & CEO [49]

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Yes. That's reasonable. The $100 million in savings is about a 2% decrease in our SG&A. So we're modeling about half of that in our AG&A, about a 1% decrease. And so then again, as you look ahead in 2021, we would have the full benefit of that and the other thing I'd mention, our transformation office and transformation team, they're hard at work identifying other opportunities. So we're not just stopping with this first list, if you will, of the hundred million dollars, they've got a pretty exciting packet with all of our businesses and a team that's working on a lot of new initiatives that we hope to be able to speak about in the quarters ahead.

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Operator [50]

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Our final question comes from the line of Chris Bottiglieri of Wolfe Research.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [51]

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Just want to follow up on Scott's question for a bit. So that $40 million to $45 million that you're anticipating for 2020, what is like the cadence of that? Seems like you've taken a lot of non-GAAP cost in Q4, which I think would mean the costs are taken out at this point. But wanted to get a sense of cadence of how we see the cost takeouts planning throughout the year?

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Carol B. Yancey, Genuine Parts Company - Executive VP, CFO & CAO [52]

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Yes. I mean I guess it would be -- we did, you're right. And remember a majority of these first round of the $100 million, the majority of that is headcount. Because as you know, 60% or 65% of our SG&A is headcount. So with the payroll, we did recognize those costs in Q4, the payroll starts to -- you start to see that into Q1 but you definitely -- some of the other things will come a little bit later in the year. So that's why we have some of the initiatives that come maybe in Q2 through Q4. So it's not exactly divided by 4 quarters. But again, as we've got some facilities, some consolidation amongst branches and operations, those would come later in the year.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [53]

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Go it. And then more of a longer-term question, as you have these discussions about the independents on making the necessary store level investments to position the businesses to the future. Have you been in to kind of rethink your long term store potential? Do you still expect the majority of your stores will be independently owned versus at company-owned? Or do you foresee the opportunity for some of these conversations to precipitate like higher store ownership of the company?

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Paul D. Donahue, Genuine Parts Company - Chairman & CEO [54]

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Yes. Interesting question, Chris. We -- look, we're always evaluating our store models and store mix. Today, of our 6,000 stores, roughly 5,000 are independently owned. We've had that mix for a number of years. We do not see any massive shift here in the quarters or even a year or 2 to come. We've got some great independent owners who are investing in their business, expanding their business. We have new owners coming into our model all the time and so at this rate -- at this point in time, Chris, there is no strategy to shift to a 50-50 mix per se of independent and company stores. We're pleased with the progress. We're pleased with some of the new talent that we're bringing into our independent store group. I would also tell you that it is our intent to expand our company store group and to continue to open new company-owned stores and if you look at our recent history, Chris, we've closed a number of underperforming and nonprofitable stores. We think a good bit of that heavy lifting while there is always some of that to be done, a good bit of that is now behind us and it's our intent to grow our company-owned store base from here going forward.

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Operator [55]

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We have reached the end of the question and answer session. I will turn the call back over to management for any closing marks.

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Carol B. Yancey, Genuine Parts Company - Executive VP, CFO & CAO [56]

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We'd like to thank you for your participation in today's year-end conference call. We appreciate your support and investment in Genuine Parts Company, and we look forward to reporting out on our Q1 results. Thank you, and have a great day.

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Operator [57]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.