Good day ladies and gentlemen, welcome to the Genuine Parts Company Fourth Quarter Full Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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..

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 that 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 also involve forward-looking statements regarding the company and its businesses.

The company’s actual results could differ materially from any forward-looking statements due to several important factors described in the company’s latest SEC filings, including this morning’s press release. The company assumes no obligation to update any forward-looking statements made during this call.

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

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 your questions.

Our financial results in 2019 reflect the positive impact of our strategic growth initiative 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 platform.

Additionally, to further optimize our portfolio, we streamlined our operations with the sale of several non-core businesses, including Auto Todo in Mexico, EIS, and GCN and Canadian operations of our Business Product 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, restructured 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 18th, Will Stengel join the company as EVP and Chief Transformation Officer.

In his 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 company's voluntary retirement program, which we will begin to realize this quarter.

As a result of these initiatives, there were a number of one-time 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 result. 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 and our automotive segment. The strongest growth in automotive came from our U.S. and Australasian businesses, and these two groups also posted solid operating results.

In addition, we produced further gross margin improvement for the quarter, and the industrial segment reporting continued operating margin expansion. In review of our business segment highlight, 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 another adjustment, 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 and operating profit.

This has improved from our 2.5% comp sales increase in the third quarter, and it's 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 continue 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 and Canada.

The major accounts group consists of national and retail customers, including fleet and government accounts, national tire centers, regional tire and repair chains, and OE dealers through our joint business planning, but 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 Australasia and commercial markets with effective banner program for the independent installer base and comprehensive products and services required by major account customers.

Globally, our capabilities and 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 based. 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 trend and report our second consecutive quarter of sequential progress and our comp sales performance. Overall, our sales comps were flat in the fourth quarter, which is 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 continue to gain traction with the rollout of the NAPA brand and categories such as batteries, rotating electrical, shocks and timing belt. 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 10-01-2019 also positively contributed to our total growth in the fourth quarter.

As a reminder, Todd is expected at 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 a 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 profit. And we had 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 bushfires 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 and 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 six 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, three of our 14 product categories posted positive year-over-year sales in the fourth quarter.

This was down from 8 of 14 and the third quarter, while sales by industry sector held steady with Q3, with seven of 12 industry showing improvement. These results align with our downward trend for indicators such as manufacture and industrial production and the Purchasing Managers Index.

Although, the January PMI improved over 50 for the first time in five 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 entered 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 Product Group.

We will continue to evaluate our future plans for this business, as we move forward in 2020. With that in mind, we recently streamline this business segment with the sale of GCN, a small non-core operation in late 2019 and the sale of our Business Product Operations in Canada on January 1st of this year.

So, that's a recap of our consolidated and business segment results for the fourth quarter of 2019. Before turning 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 our level of exposure to this -- 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..

Thank you, Paul. We'll begin with a review of our key financial information and then we 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 profit improved 55 basis points to 32.57 from 39.14 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% 2% and consistent levels of volume incentives.

In 2019, Automotive and Business Product inflation primarily reflects the impact of tariffs. And while tariffs were not affected for Industrial, this segment 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 has been a net positive to our results. Specific to tariffs, their impact in the fourth quarter primarily reflects a 25% tariffs on less 133 items although Business Products was also impacted by the 15% tariff on List 4 items that was effective September 1st.

As expected, tariffs 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 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 our 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 costs reflect severance and other employee cost including a voluntary retirement program, as well as facility and closure costs related to the consolidation of certain operation.

The company also recorded $43 million in special termination costs related to that retirement benefits provided to employees that expected this voluntary retirement package. These costs are presented as non-operating expenses.

The combination of restructuring and special termination costs reflects the one-time expenses that were record 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 non-cash 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 expenses, 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 reinvesting 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 quarter. As we 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 $428 million, down 6.3% from the prior year.

Their operating profit was $14 million and the operating margin declined to 3.3%. These results correlates to the decline in core sales for the quarter and further deleveraging of expenses. Total company operating profit in the fourth quarter $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 one-time restructuring cost, 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 adjusted 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 in an excellent 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 in 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 31 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 is improved from the 2.7% at December 31 last year.

With a debt-to-EBITDA ratio of 2.34 times, 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 this 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 full year. Acquisitions remain an important component of our growth strategy.

And in 2019 we used approximately $700 million in cash, commercially 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 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 for 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 take into account the current market conditions than what we anticipate for the foreseeable future in each of our business segment 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 acquisition.

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 the 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 turn it back over to Paul..

Thank you, Carol. We're pleased to perform at the high end of our expectations in the fourth quarter and finished the year with solid results. Allow me to recap the few highlights. We achieved another quarter of positive total sales growth, driven by a 3% plus from sales growth in our U.S.

Automotive business, which represents our best comp in five years. So, congratulations go out to our U.S. NAPA team. We further improve the 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 continue to operate well, generating a 30 basis points improvement in operating margins. We streamlined our operations with the successful divestiture of several non-core business segments.

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 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 a new year with strategic plans and initiative to drive sales and profit ability, 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..

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Christopher Horvers of JPMorgan. Please proceed with your question..

Thanks. Good morning everybody..

Good morning..

Good morning, Chris..

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 you saw that? Maybe break that 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 -- wanted to get your thoughts there? And any comment in terms of was there any incremental inflation benefit that you kept in the fourth quarter versus the third quarter?.

Well. Okay, Chris thanks for the question. I 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 two big programs, Major Accounts, AutoCare both were inline with our overall commercial sales in the quarter, which was up significantly over 2018. So we're pleased with our commercial business and our retail business was solid as well.

You mentioned the promotional activities Chris, so we had set out really to focus on all three 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 camps we saw hit the business in December -- October, November 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 more 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..

And just a comment on the tariff impact for automotive 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 half a point for the full year. And that excludes any further inflation..

Got it. I'm not sure of -- again maybe as you think about relative to the third quarter you saw acceleration clearly in both sides of the business really impressive.

But did you see more in DIY? Or did you see more in commercial? Any insights there?.

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

You haven't asked about originality 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..

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 how the weather is impacted your business quarter-to-date and how it could – how that could sort of way on the year overall?.

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 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 six 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..

And Chris, we are implying a comp increase for our 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..

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 that but clearly I think you got some rate benefit but maybe some profit dollar loss. So help us reconcile that.

Thanks so much..

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

$0.20 headwind?.

You're talking about 2019 Or 2020?.

2020 versus 2019?.

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 points improvement in our operating margin that largely relates to the cost reductions that we 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..

Got it. Thanks so much. Best of luck..

Thanks. Thanks, Chris..

Our next question comes from the line of the Liz Suzuki of Bank of America. Please proceed with your question..

Great. Thank you. First, I just wanted to ask about capital allocation priorities in 2020. I know you laid out the four bucket 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?.

Yeah. That's a great question. As you know, we have certainly taken our leverage up and we're definitely comfortable in the 2.5 to 3 times indefinitely for the right acquisition opportunity. That is something that -- when we think about a larger more strategic acquisition opportunity, those are 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 comfortable with that we know we have flexibility as we look ahead.

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 is pretty nice -- on acquisition. So probably more of just the bolt-ons just for 2020..

Great. Thank you. And I'll just take 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's been trending versus the last couple of quarters?.

No, Liz. I did not cover that. But it's a similar trend as we'd 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..

Great. Thank you..

You're welcome..

Our next questions come from the line of Matt McClintock of Raymond James. Please proceed with your questions..

Hi. Yes. Good morning, everyone..

Good morning..

I was wondering, you bought 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 update us on what you saw in those independents in terms of lift, et cetera, in 2019.

And then how quickly can you accelerate that, the adoption of new independents, should you decide that this is where from -- were of continued efforts. Thanks..

Great question, Matt. This has been a multi-year 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 side.

We fully completed and rolled out our company-owned store group and we are seeing some significant increases over our typical run rate when we do the full impact program..

Okay. Thanks for that color. 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 customer supply chains and that could lead to less activity.

Just wondering I know this is a tough question to ask, but you're probably at a better position to give us color or help us to conceptualize how the impact on your customers' supply chains will actually flow through to your own topline? Any color there at all would be helpful from a derivative standpoint or a secondary standpoint. Thanks..

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 only 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 we are staying incredibly close to it and will continue to monitor the situation..

Thanks for that color. I know it's hard, appreciate it..

Yes. All right. Thank you..

The next question comes from the line of Daniel Imbro of Stephens Inc. Please proceed with your questions..

Hey good morning guys. Thanks for taking our questions..

Good morning..

Paul would love to hear your update on the European market. I think you noted a growth return of relatively flat year-over-year. Pretty nice sequential proven.

Can you talk about what the primary drivers of that will maybe industry versus company specific and kind of how you're thinking about that growth as we head into 2020?.

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 as you dive into those numbers, they're different markets. So, Q2, our French team and a challenging quarter; Q3, our U.K team had a challenging quarter.

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 the U.S. publicly-traded company.

I would tell you that that focus now has shifted in the second half of 2019 and as you going to 2020 more on growing this business, taking market share, and doing other things that this business has been for the past 30 years.

So, despite some remaining complicated economic issues and 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 driving market share and growing our business..

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 weaken 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 two statements? And what kind of impacts should be expected Europe to have on the automotive operating margin in 2020?.

Yeah. 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 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 stronger 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 on -- in the second half of the year and we're certainly seeing further improvement that will come in 2020. We're modeling the comps of up 1% to up 2% for Europe in 2020.

And with all the cost reductions that they've done and the further changes they 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..

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 two, what do you think the cadence of that growth should look like given -- you noted the recent infection higher in PMI and some of the leading indicators? Thanks..

Yeah. 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 that is 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 and 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..

Got it. Best of luck..

Our next question comes from the line of Bret Jordan of Jefferies. Please proceed with your questions..

Hi, good morning guys..

Good morning, Bret..

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

We have not. And it's a great question Bret. 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 works 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 just Europe because we’re getting some global savings, global working capital savings as well. And then on the other side, we are definitely on track and we will have our $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..

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. 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?.

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 that we’re seeing in and again, they've 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..

Okay. So the U. K. strength is more your strategy in the U.K.

and not the category in the U.K.?.

Correct. That would be accurate..

All right. Thank you..

Our next quarter comes from the line of Seth Basham with Wedbush Securities. Please proceed with your question..

Thanks a lot and good morning..

Good morning, Seth..

Good morning..

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

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 find 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 we only six 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..

Got it. Thank you. And then as a follow-up question. You guys have been doing a great job on gross margins with improvement for the past four years. You talk to a flattish gross margins in 2020.

Can you just help us understand why we're likely to see a slowdown in that progress?.

Yes. I would say that our team has done a great job, especially in the tariff environment and really pleased to see it across the automotive and industrial businesses. A lot of our pricing strategies and a lot of our supply chain initiatives we're doing, we believe there still is some opportunities for that to increase.

We're just sort of modeling flattish and maybe a bit of improvement. Now, 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..

Understood. Thank you very much and good luck..

Thanks, Seth. .

Thanks..

Our next questions come from the line of Scot Ciccarelli of RBC Capital Markets. Please proceed with your questions..

Hey, guys. It's Scot Ciccarelli. So a question on kind of 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 were to kind of take a step back, would you expect kind of core auto and industrial to have flat core margins? And the 20 basis point 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 reductions.

I think that will help everyone understand kind of the cadence for both 2020 and then how these trends may roll through into 2021? Thanks..

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 improvements in their cost savings. So you would say, without the cost savings it would've been more like flat.

I would tell you, what we're really pleased to see is, especially like in the automotive business, for example, with comps of 2% to 3%, we're able to leverage and improve operating margin 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 businesses got a comp of down 1.5% to down 2%. And yet, they will, as well, have operating margin improvement.

What you - and this gets back to the gross margin thing, you're going to see that more in the SG&A line. And that's why we've kind of implied a flattish gross margin with our improvement coming through SG&A..

Got it. That's very helpful. And so, as 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 $100 million.

You're capturing, what, about half, kind of $40 million to $45 million, would be my estimate?.

Yes. That's reasonable. The $100 million in saving is about 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 transmission team, they're hard at identifying other opportunities. So we're not just stopping with this first lift, if you will, of the $100 million.

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..

Yes. All makes sense. Thanks a lot guys..

Thank you, Scot..

Our final question comes from the line of Chris Bottiglieri of Wolfe Research. Please proceed with your questions..

Hi. Thanks for taking the questions. 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 cost of taking out of this point.

But wanted to get a sense of cadence of how we see the cost takeouts planning throughout the year?.

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%, 65% of our SG&A is headcount.

So, with the payroll -- we did recognize those costs in Q4, the payroll start 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 four quarters.

But again as we've got some facilities, some consolidation amongst branches and operations those would come later in the year..

Got you. Okay. And then more of a longer term question, as you have the dependence on making it a necessary store-up on investments to position their businesses to the future.

Have you been to kind of rethink your long-term store potential? Do you still expect the majority of your stores will be independently owned versus company-owned or do you foresee the opportunity for some of these conversations to precipitate like higher store ownership of the company?.

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 two to come.

We've got some great independent owners who are investing in their business, expanding their business. We have 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 will bring 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 non-profitable 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..

Got you. That's really helpful. Thank you for the time..

All right. Thank you..

Thank you..

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

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..

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