Earnings Call Transcript
GENUINE PARTS CO (GPC)
Earnings Call Transcript - GPC Q4 2022
Operator, Operator
Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Please note, today’s call is being recorded. At this time, I would like to turn the conference over to Sid Jones, Senior Vice President, Investor Relations. Please go ahead.
Sid Jones, SVP, Investor Relations
Good morning and thank you for joining us today for the Genuine Parts Company fourth quarter and full year 2022 earnings conference call. With me today are Paul Donahue, our Chairman and Chief Executive Officer; Will Stengel, our President and Chief Operating Officer; and Bert Nappier, Executive Vice President and Chief Financial Officer. As a reminder, today’s conference call and webcast includes slide presentation that can be found on the Investors page of the Genuine Parts Company website. Please be advised this call may include certain non-GAAP financial measures, which 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 on the Investor page of our website. Today’s call may also involve forward-looking statements regarding the company and its businesses. The company’s actual results could differ materially from any forward-looking statements due to several important factors described in the company’s latest SEC filings, including this morning’s press release. The company assumes no obligation to update any forward-looking statements made during the call. Now I will turn it over to Paul for his remarks.
Paul Donahue, CEO
Thank you, Sid. And good morning. Welcome to our fourth quarter 2022 earnings conference call. We are pleased to report the GPC team capped off a record-setting year with a strong fourth quarter highlighted by double-digit sales and earnings growth coupled with continued margin expansion. We're incredibly proud of the progress in our operations and thankful to our teammates across the globe for their ongoing commitment to excellence. With the support of strong industry fundamentals and resilience of our automotive and industrial businesses, our teams were focused on executing key initiatives to drive sales growth faster than the market, improved gross margin and enhance operational efficiencies. As a result, we delivered in several key areas in the fourth quarter and full year. A few highlights in the fourth quarter would include total sales of $5.5 billion up 15%. And our seventh consecutive quarter of double-digit sales growth. Segment margin of 9.5%, up 80 basis points from the prior year and adjusted earnings per share of $2.05 up 15% from 2021 and our 10th consecutive quarter of double-digit earnings growth. For the full year, our strong quarterly performance drove record total sales of $22.1 billion up 17% which follows a 14% increase in 2021. Segment margin of 9.4% up 60 basis points from 2021. Adjusted earnings per share of $8.34 up 21% from the prior year, and a new GPC record. And strong cash flow with cash from operations up 17% and free cash flow up 14% from 2021 levels. Reflecting on the record year which followed an outstanding 2021, we are confident that our transformation efforts, including the streamlining of our businesses to an automotive and industrial-centric business, along with our ongoing strategic initiatives has been highly successful. Throughout 2022, our teams have navigated the dynamics of the macro economy and have continued to deliver market share gains while maintaining positive momentum across our core businesses. We continue to make significant investments in talent and technology to maximize the impact of our key initiatives. As examples, we made solid progress to advance our pricing strategies and optimize our supply chain and network footprint. Our execution in the field has proven effective in driving improvement in gross margin and SG&A as well as parts availability, all of which provide additional opportunities for us in the future. As we build on the competitive advantages of our size and scale, we continue to look for strategic M&A opportunities to further boost our product and service offerings and expand our automotive and industrial footprint. As you will hear from Will, last year's acquisition of Kaman Distribution Group has been transformational for our industrial segment. KDG had a significant impact on our industrial performance in 2022. And as elevated our capabilities as a premier industrial solutions provider. Our global automotive teams were also active with acquisitions, including geographic expansion in Europe, with the addition of operations in both Spain and Portugal. For the year, we added 138 net new stores across our global footprint, with the U.S. and Europe leading the way. Looking ahead, we have a healthy pipeline of acquisition targets, and M&A remains an important element of our global growth strategy. As we turn our attention to 2023, while the macro environment remains uncertain, we are confident in our strategic plans to drive ongoing market share gains, with sustained sales and earnings growth, continued margin expansion and strong cash flow. Looking at the operating environment more broadly, our automotive business is benefiting from several tailwinds, including the geographic diversity of our markets. The increase in vehicle miles driven, an aging vehicle fleet and limited new car inventory. These tailwinds are driving steady levels of demand in the aftermarket, with particular strength in the DIFM segment. In industrial, we continue to see solid demand trends with new and existing customer activity and reshoring trends, each presenting growth opportunities. We believe this strong performance in our industrial business reflects the diversity of our product and service offerings, as well as our end markets, which all performed well in the fourth quarter. In addition, as you'll hear from Will, our growing capabilities and industrial solutions, including automation, fluid power and convenience, are proving to be differentiators for our business. Collectively, we believe these strong fundamentals, combined with a rock-solid balance sheet, position GPC with the financial strength and flexibility to continue to pursue strategic growth opportunities through both organic and acquisitive investment, while also returning capital to shareholders. So before I close, I'd like to remind our investor community that we will be hosting an Analyst and Investor day on Thursday, March 23, here at our headquarters in Atlanta. We will be sharing more about our strategic initiatives and provide an update to our long-term financial targets. We look forward to hosting this event next month and hope to see you all here in Atlanta. We have had an exceptional 2022, which included celebrating our 95th year of operations. Our accomplishments as one GPC team are evident in this milestone year. And we are proud to lead a company with such a long and rich history that differentiates GPC across all of our marketplaces. But now I'll turn the call over to Will.
Will Stengel, President & COO
Thank you, Paul. Good morning, everyone. I also would like to thank the global GPC team for an exceptional year in 2022, and the hard work to take care of our customers every day. Around the world, our teams are aligned on our strategic initiative pillars that include talent and culture, sales effectiveness, technology, supply chain and emerging tech. Investment and focus in these areas translate into a better customer experience, profitable growth, operational excellence and a differentiated team culture. During 2022, all of our teams made significant initiative progress, and we look forward to sharing more details about our progress and outlook at our upcoming investor day in March. Turning our attention to the fourth quarter performance total sales for the global automotive segment were $3.4 billion, an increase of approximately $243 million or 7.6% versus the same period in 2021. Our sales growth was consistent throughout the quarter with a solid finish in December to close the year. On a comparable basis automotive sales growth for the quarter increased 8.2%. Our global automotive teams delivered mid-single digit to low digit comp growth across each of our operations. As Paul mentioned, the automotive segment continues to be driven by solid industry fundamentals and team execution. For fiscal year 2022, Global Automotive segment sales was $13.7 billion, an increase of 8.9% from 2021. Global automotive segment profit in the fourth quarter was $295 million and segment operating margin was 8.6%, an increase of 30 basis points versus the same period in 2021. For the year, Global Automotive segment profit was $1.2 billion and segment operating margin was 8.7%, an increase of 10 basis points from 2021 and up 110 basis points from 2019. During the fourth quarter, our automotive business experienced mid to high single digit levels of inflation, relatively consistent with the levels we saw in the second and third quarters. We continue to be pleased with the ongoing positive impact of our category management strategic initiatives. Now let's turn to an overview of our automotive business performance by geography. In the U.S. automotive sales grew approximately 10% during the fourth quarter with comparable sales growth of approximately 6%. Sales were strong across each U.S. region and broadly across product categories, with batteries, motor oil, tools and equipment, heavy duty and brakes all posting strong growth in the quarter. The team navigated various extreme weather events in December and kept teammates safe while taking care of customers. Both commercial and retail customers were positive with low double digit commercial growth outpacing retail, which had low single digit growth. Our commercial business saw sales growth across all customer segments, including notable strength with our fleet and government channel and mid-single digit growth in our NAPA AutoCare Network. Over the course of the year, we grew our NAPA AutoCare Network of professional repair centers to record 18,500 customers, an increase of 670 locations, and further expanded our competitive advantage as America's largest network of parts and care. We also continue our investment in the industry as we trained over 34,000 technicians in 2022 and actively support 900 technicians in our apprenticeship program. Other select accomplishments in 2022 include investments in talent and enhancements to our data analytics and technology capabilities. These enhancements have improved our insights and are driving data-driven decisions around strategic pricing and sourcing, which have nicely contributed to margin expansion performance. We've also improved our inventory visibility and are taking action to ensure the right part is in the right place at the right time. We will continue to invest in these capabilities as we move forward. For the full year our U.S. Automotive business grew sales by approximately 11% with comparable sales growth of approximately 8%. We're extremely pleased with the share gains and record results in 2022. In Canada sales grew approximately 14% in local currency during the fourth quarter, with comparable sales growth of approximately 12%. The results in Canada continue to reflect solid industry fundamentals, strong team execution and market share gains. Our field-oriented data analytics to assess and prioritize market customer and network opportunities has delivered returns. In partnership with global teams, the Canadian business also made progress with next drive powered by NAPA, our leading offering that positions repair shops to service hybrid and electric vehicles. In a short period of time, the program has certified over 50 EV technicians, part specialists and service advisors, with plans to have 100 certified service centers and nearly 400 trained part specialists over the next few years. For the year, our Canadian business grew sales approximately 15% in local currency, with comparable sales growth of approximately 13%. In Europe, our automotive team delivered another exceptional quarter, with total sales increasing approximately 22% in local currency and comparable sales growth of approximately 10%. For the year our European team delivered sales growth of 19% with comparable sales growth of approximately 8%. The strong growth in Europe continues to be driven by solid execution and coordinated teamwork across Europe. As examples, during 2022 our European team won business with numerous key customer accounts and continue to gain market share with the rollout of our differentiated NAPA offering across the region. Sales of NAPA product in Europe reached nearly €300 million, an annual increase of over 50% from the prior year and now positively contribute to profitability. The impressive growth is a testament to the global strength of the NAPA brand. The next drive rollout is also strong in Europe with approximately 150 certified workshops across 7 countries. In addition, our European bolt-on acquisition efforts continue to create value and expand and add density to our market footprint. Despite a challenging environment, the performance over the last few years has been strong in Europe and the momentum has continued into 2023. In the Asia Pac automotive business, sales in the fourth quarter increased approximately 10% in local currency from the same period in the prior year with comparable sales growth of approximately 7%. For the year, our Australian team delivered sales growth of 12% and comparable sales growth of approximately 9%. Both commercial and retail sales continued to perform well with Repco, NAPA and our motorcycle accessories division delivering profitable growth and share gains. The team continued its impressive performance in 2022 with a 3-year sales stack of more than 30%. Repco's 100-year anniversary in 2022 marked an amazing achievement for this team, and it was only fitting that the team delivered another outstanding year. Turning to the Global Industrial segment. During the fourth quarter, total sales at Motion were $2.1 billion, an increase of approximately $478 million or 29.6%. The sales cadence was consistently strong throughout the quarter with average daily sales growth at or above 30% for all three months of the quarter. Comparable sales growth, which excludes the benefit of KDG, increased approximately 17% in the fourth quarter versus last year. This marks our seventh consecutive quarter of double-digit comparable sales growth. As a reminder, we completed the acquisition of KDG in the first quarter of 2022. As a result, going forward, KDG sales growth will be included in comparable sales growth. The strong sales growth at Motion during the quarter was broad-based with double-digit growth across nearly all product categories and major industries served with particular strength coming from industries such as automotive, oil and gas, food products and aggregate and cement. For the year, sales at Motion were $8.4 billion, an increase of $2.1 billion or 33.2%. Industrial segment profit in the fourth quarter was $230 million or 11% of sales, representing a 150 basis point increase from the same period last year. The profit improvement at Motion is a result of strong and disciplined sales growth and operating performance, including the KDG synergy realization. For the year, Global Industrial segment profit was approximately $887 million, and segment operating margin was a record 10.5%, an increase of 110 basis points from 2021 and up 240 basis points from 2019. In 2022, the Industrial segment now represents over 40% of GPC total profit, up 8 percentage points since 2021. For the fourth quarter inflation in the Industrial segment held in the low single-digit range consistent with the levels we've seen throughout the year. The strong financial performance at Motion is a direct result of their customer and sales intensity, focused strategic initiatives and operating rigor. During the year, we enhanced our selling capabilities by further leveraging data and technology and continue to expand our value-added solutions offering for our customers. These solutions include products and services in categories like automation, conveyance, fluid power and repair. These categories now collectively represent approximately $1 billion in annual revenue promotion. In addition, our strategic initiatives around pricing, category management and supply chain are driving increased productivity and profitability, which is reflected in the strong margin expansion delivered in 2022. As we execute on our organic global growth initiatives, we continue to complement them with strategic acquisitions to capture share in our fragmented markets and create shareholder value. During the fourth quarter, we completed several bolt-on acquisitions primarily consisting of small automotive store groups that increased local market density in existing geographies. We also continue to make progress in integrating our strategic acquisition of KDG with Motion. When we announced this acquisition in January of 2022, we communicated a plan for approximately $50 million in annual run rate synergies to be achieved over a 3-year period. We're pleased to report that thanks to the incredible teamwork for many, Motion realized over $30 million in synergies in just the first year with more expected in 2023 and 2024. Our acquisition pipeline is active, and we will remain disciplined to pursue transactions that advance our strategy, deliver profitable growth and create long-term value. In summary, our team delivered an exceptional fourth quarter and record year for Genuine Parts Company. All our business units and geographies exceeded internal expectations, driven by supportive industry fundamentals and the focused execution of our key strategic initiatives. We're excited to build on our momentum, and we look forward to another great year in 2023. With that, I'll turn the call over to Bert.
Bert Nappier, CFO
Thank you, Will, and thanks to everyone for joining us today. We are very proud of our teams and our outstanding performance, and I'm pleased to share the key highlights of our fourth quarter and full year results. My comments this morning will focus primarily on quarterly and full year adjusted results, which exclude nonrecurring items that I'll cover in more detail shortly. Total GPC sales were up 15% or $720 million to $5.5 billion in the fourth quarter of 2022. The increase reflects an 11.1% improvement in comparable sales, including mid-single-digit levels of inflation and an 8% contribution from acquisitions. These items were partially offset by a 4.2% unfavorable impact of foreign currency, which was essentially in line with our assumption for the quarter. Sales for the full year were $22.1 billion, up 17.1% from 2021. As we continue to invest in organic and acquisitive growth initiatives for both of our segments, it was encouraging to see our core business combined with acquisitions, including KDG, which added more than $1 billion in revenues for 2022 drive strong sales throughout the year. Our gross margin expanded approximately 50 basis points in the fourth quarter to 35.7%, primarily driven by ongoing investments in our pricing and sourcing initiatives that Will mentioned. These initiatives, along with others, contributed approximately 160 basis points of core gross margin improvement. These gains were partially offset by a few key factors: first, moderating year-over-year supplier incentives pressured gross margin by approximately 30 basis points; second, a shift in the mix of our sales based on the strength of our industrial business impacted gross margin by approximately 30 basis points; finally, foreign currency and inflation impacted gross margin by approximately 50 basis points. With a strong fourth quarter, gross margin for the full year was 35.1%, slightly above our expectations and essentially in line with the prior year. Our performance on gross margin reflects an excellent job by our team executing our strategies given the very dynamic market challenges. Our total operating and non-operating expenses in the fourth quarter, excluding adjustments, were approximately $1.6 billion, up 16.6% from 2021 and a 28.7% of sales compared to 28.3% of sales in the prior year. Our expenses were up in the quarter, primarily due to inflation-driven increases in freight costs and overall investments in IT initiatives across our business units. For the year, total expenses were $6.2 billion, up 16.2% at a 27.9% of sales, a 20 basis point improvement from 2021. Despite ongoing cost pressures in the fourth quarter, we continued to drive leverage on strong core sales growth across our businesses and execute on our initiatives to produce operational efficiencies. Segment profit in the fourth quarter was $526 million, up 25%, and our segment profit margin was 9.5%, an impressive 80 basis point increase from the same period in 2021. For the full year, segment profit was $2.1 billion, up 25% on a 17% sales increase. Our segment profit margin was 9.4%, a 60 basis point improvement from the prior year and up 160 basis points from 2019, which we believe demonstrates our transformation to an even stronger company and our ability to consistently perform through dynamic economic conditions. As outlined in our earnings release, our fourth quarter results include three adjustments. The first item relates to a $29 million adjustment to remeasure our product liability reserve. Secondly, we incurred approximately $13 million of costs related to the acquisition and integration of KDG. The third item relates to an $11 million loss on the divestiture of our remaining minority interest investment in S.P. Richards, which was finalized in the fourth quarter. For the full year, our nonrecurring items include these fourth quarter adjustments as well as the 12-month impact of costs related to KDG and a gain on the sale of certain real estate recorded in the second quarter. Our fourth quarter adjusted net income, which excludes $40 million or $0.28 per diluted share in nonrecurring items I just discussed, was $292 million or $2.05 per diluted share. This compares to adjusted net income of $256 million or $1.79 per diluted share in 2021, an increase of 15%. For the full year, adjusted net income was $1.2 billion or $8.34 per diluted share, an increase of 21% from 2021. Reported net income was $1.2 billion or $8.31 per diluted share. The continued execution of our initiatives allowed us to deliver back-to-back double-digit adjusted EPS growth in 2022 and 2021. With strong earnings growth and improved working capital, we generated $222 million in cash from operations in the fourth quarter and $1.5 billion for the full year, a 17% increase from 2021. Free cash flow was $1.1 billion, up 14% from 2021, and we closed the fourth quarter and year with $2.2 billion in available liquidity. Our debt to adjusted EBITDA is 1.7 times, which compares to our targeted range of 2 to 2.5 times and highlights our financial strength and flexibility. Our strong performance has allowed us to stay focused on four key priorities for capital allocation, including the reinvestment in our business through capital expenditures and M&A and the return of capital to our shareholders through dividends and share repurchases. For the year, we invested $340 million in capital expenditures, including $96 million in the fourth quarter, primarily in technology and other projects to further automate and consolidate our distribution networks and drive productivity. We also invested $3 billion investment in KDG and returned $719 million to shareholders in the form of dividends and share repurchases. This includes $496 million in cash dividends paid to our shareholders and $223 million in cash used to repurchase 1.6 million shares. Our continued strong cash flow generation provides us the ability to manage our capital allocation through all business cycles. Turning to our outlook for 2023. We expect diluted earnings per share to be in the range of $8.80 to $8.95, which represents an increase of 6% to 7% from adjusted diluted earnings per share in 2022. Our outlook for earnings growth is driven by our expectations for continuous sales growth and another year of margin expansion. We expect total sales growth for 2023 to be in the range of 4% to 6%. As we look at the business segments, we are guiding to the following: 4% to 6% total sales growth for the Automotive segment with comparable sales growth also in the 4% to 6% range. For the Industrial segment, we are expecting total sales growth of 4% to 6%, also with a 4% to 6% increase in comparable sales. We would add that our outlook for Industrial assumes a much stronger first half relative to the third and fourth quarters of 2023. Turning to a few other items of interest. We will continue to drive growth through the reinvestment in our business and M&A. We currently expect CapEx to be in the range of $375 million to $400 million in 2023, reflecting incremental opportunities in technology and supply chain, among others. We also continue to have a healthy pipeline of acquisition targets, and we'll continue to seek additional bolt-on acquisitions wherever they create value for us. In 2023, we will continue to return capital to our shareholders through dividends and share repurchases. Earlier this week, our Board approved a $3.80 per share annual dividend for 2023, representing our 67th consecutive annual increase in the dividend. This represents a 6% increase from the $3.58 per share paid in 2022 and is above our 20-year average increase of 5.8%. Our total shareholder return performance of approximately 27% in 2022 placed GPC in the top 10% of the S&P 500. Taken together, we delivered sales growth of 17% and adjusted EPS growth of 21%, so a tremendous year in 2022. Our teams worked hard for these achievements, and we enter 2023 with strong momentum and are well positioned to continue to take share and deliver through an uncertain macro environment. We look forward to updating you on our progress as we move through the year. In closing, as both Paul and Will have mentioned, we look forward to hosting our Investor Day on March 23. We are excited to provide further insights on key growth initiatives, and long-term financial targets and are confident you will find the day informative and productive. We'd love to see you here in Atlanta.
Operator, Operator
And the first question will be from Christopher Horvers from JPMorgan. Please go ahead.
Christopher Horvers, Analyst
Thank you. Good morning, everyone. Can you share your thoughts on the timing throughout the year? I understand that the first half is expected to be stronger for industrials from a comparable perspective. I was wondering how adding KDG into the fourth quarter comparison would impact results. How beneficial is it to have KDG in the comparison base for 2023? Also, regarding margins, do you anticipate margin expansion in both segments for 2023?
Bert Nappier, CFO
Thanks, Chris. It's Bert. I'll take that one. I think in terms of the cadence of the year and maybe I'll just pull it up a level and talk about the guidance in general, sure you can appreciate the forecasting environment has its challenges right now, particularly with the mixed macro signals. We're very comfortable with our outlook, 4% to 6% top line, driving EPS up 6% to 7%, and in our range of $8.80 to $8.95. And we do expect margin expansion. That will come from both segments. We see industrial having a little bit more upside on margin expansion in the auto business, but we'll see nice improvement on both. When we looked at our guidance and talking about the cadence, we really try to be as thoughtful as we can in this environment. We've got solid industry fundamentals for both businesses. We have really good momentum in both businesses coming out of 2022, but we've had two exceptional years. And I think we're in an environment where we all expect, not only GPC, but others growth to moderate a bit and normalize. And I think that's still good, and I think what we're doing this year and what we're forecasting for 2023 is a good outcome. There are headwinds, and we're staying very prudent with our eyes wide open on the key factors that are out there to watch. We can't ignore that there's recessionary pressure and inflation in the geopolitical landscape around the world are all things we're watching. As we look at the year, we really kind of broke it into two halves. The automotive grows consistently across the quarters. So I think the cadence will stay pretty nice throughout the year and a few halves are 4 to 6 in both halves. On the industrial, we're a little stronger in the first half, more high single-digit outlook for the first half for industrial and on the second half, more low single digit. And that's really just some of the uncertainty on that side of the business with some decelerating PMI numbers and things like that. So that's what we can see right now, a little stronger view into the first half and a little less clarity on the second half. And we think that lines up nicely for the full year. Again, KDG has been accretive to the business for the full year. I think you saw in our release and our commentary that we had a nice synergy benefit from KDG, and we'll continue to get good synergy benefits as we look into 2023. So we like that acquisition. It's been a tremendous expansion of capability for the Motion business, and our team at Motion has done an absolutely brilliant job of integrating and executing that acquisition. So all that taken together, I think we feel really good about where we are. We're very bullish on GPC, and our size, scale and momentum across both segments position us to be successful. And we're going to watch the landscape and continue to stay ready for what comes at us as the macro environment continues to move.
Christopher Horvers, Analyst
Got it. And my follow-up question is on the Motion side. You have a number of different end markets that you pursue, and I know there's some weakness in some of the consumer areas out there on the durable side and you have some of your peers talking about that weakness. So can you help us understand, one, are you seeing any indications of weakness within Motion? And two, how is your mix sort of split out at a higher level, the capital goods versus sort of consumer discretionary items versus more commodity and ag type businesses?
Will Stengel, President & COO
Yes, Chris, it's Will. Let me provide some additional details on that. As mentioned in our prepared remarks, we continue to observe strong performance across our end markets. To give you an idea, we have about 15 industries that we categorize as our top sectors. The performance range for these industries in the fourth quarter varies from high single digits to over 35%. We also noted that our growth rate remained quite consistent, with a 30% growth month over month. This stability is broad-based. Our business operates largely in the B2B space, primarily industrial rather than consumer-focused. However, there are some categories, such as lumber and construction-related industries, that might be influenced by broader consumer trends. If I had to identify one area of weakness to start the year, it would be those sectors. It's uncertain whether this change stems from shifts in residential or commercial real estate markets. Overall, our business is well-diversified and predominantly industrial, not leaning towards consumer-oriented markets.
Paul Donahue, CEO
Yes. Chris, I would just add that in our more traditional end markets, including food products, iron and steel, aggregates, and automotive, we've seen strong growth in the double digits in the fourth quarter. As both Will and Bert mentioned, we remain very confident about our industrial business. I'm pleased to report that we are experiencing double-digit growth right at the start of the first quarter. We will continue to push forward, and there are many reasons to be optimistic about the future. Manufacturing is returning to the U.S., with significant onshoring and reshoring happening. Additionally, there are many investments in semiconductors, energy, battery storage, and mining, all of which align with our strengths.
Christopher Horvers, Analyst
That’s very helpful. Thanks very much.
Operator, Operator
The next question is from Kate McShane from Goldman Sachs. Please go ahead.
Kate McShane, Analyst
Hi, thanks. Good morning. And thanks for taking our questions. I just had two questions. One with regards to operating expenses and some of your commentary around CapEx. I just wondered with regards to operating expenses in '23, what you're anticipating for freight and investments in IT? And how that will look in '23 versus '22? And if there are some examples of the ongoing tech investment in the CapEx spend that was noted today?
Will Stengel, President & COO
Thanks, Kate. I appreciate your question regarding our expectations for operating and capital expenses in '23. We anticipate some deleverage in operating expenses next year as we invest in technology and talent for long-term growth. Concerning freight, we expect some inflationary pressure similar to what we experienced in the fourth quarter, but we believe that will ease in the second half of the year. Our main focuses for next year are investing in technology and talent to remain competitive. We plan to make strategic investments in our workforce, including a mid-single-digit wage increase this year, slightly higher than in 2022, while also absorbing some healthcare costs due to significant healthcare inflation. We believe these decisions are beneficial for our team. Overall, these initiatives will lead to about 30 basis points of deleverage in our selling, general, and administrative expenses. Regarding IT, we are making necessary investments to enhance our capabilities, modernizing our platforms with a focus on data analytics, AI, and switching to cloud-based systems, which cannot be capitalized. We are optimistic about these investments and the efficiencies they will generate. Excluding these investments, we would see leverage in our business. The IT investment will also contribute about 30 basis points, and our guidance incorporates all of this. On the capital front, we expect a modest increase next year, around 10% at the low end of our range. We are excited about automation and modernization opportunities in our distribution centers and IT. Many of these projects will allow us to consolidate and close outdated distribution centers, providing significant benefits. Overall, we believe these strategies are the right moves for next year, and we still expect margin expansion with a revenue growth target of 6% to 7%.
Kate McShane, Analyst
Thank you.
Operator, Operator
And the next question will be from Greg Melich from Evercore ISI. Please go ahead.
Greg Melich, Analyst
Thanks. Just wanted to clarify that last question, and then I had a follow-up on inflation demand. The 30 and the 30 bps or 60 bps of OpEx headwind, presumably that's offset by more than 60 bps of gross margin expansion, and what’s driving that?
Bert Nappier, CFO
Yes. So on the margin side, we're going to carry the momentum that we had in the fourth quarter. Our teams are doing absolutely reliant job of executing our core strategies on pricing and sourcing capabilities. I think in my prepared remarks, I talked about a 160 basis point increase in the fourth quarter just from the execution of category management, pricing and sourcing activities, that's going to continue. We expect that to continue into 2023, and so that success is what we have in our forecast. We're looking for gross margins to be up in the range of 20 to 40 basis points for 2023. We don't really see a lot of headwind there. Anything in terms of what we're looking at from FX or inflation or any of that, it's pretty negligible at this point. So we're bullish on our execution of our gross margin activities and that helps us expand margin overall. The SG&A impact on those two investment side are offset by other efficiencies. So when you look at the full year, we expect deleverage of 30 to 40 basis points in total. I gave you 60 basis points of deleverage, and so you'll see that we're making some ground up in driving leverage outside of those two investment categories where we can be more efficient and smarter in the business.
Greg Melich, Analyst
Got it. My question about the top line is regarding inflation last year. I believe you mentioned it was around 6% or 7% in the auto sector and low singles in industrial. What are your assumptions for this year when you provided your 4% to 6% guidance for each business?
Paul Donahue, CEO
Yes. So inflation, just to kind of talk about it trend-wise, our view is that it moderated in the fourth quarter. It ticked down slightly from Q3, and that monetary policy in the U.S. is working. It's having an effect around the world, but it does take some time all about the flow-through supply chain and through the businesses. So as you said, Q4 and FY '22 inflation levels overall were mid-single digits. High single digits in auto and low single digits in industrial. And as we look to '23, we expect for it to continue to moderate for the full year. We think monetary policy works and will work. We were at a peak of 9.1% in June. We had 7 straight months of easing. And when we look at that, the way we kind of thought about our forecast for the full year is that the full year would be at a low single-digit all up, remaining at low single digits for industrial and low single digit for auto. That obviously ticks down across the course of the year. So we step down Q1, Q2, Q3, Q4 as monetary policy continues to have an impact. Again, it's a little bit of a wildcard, and we have to make an assumption when we give our guide, which is what we've done. So we'll still be watching the effect of monetary policy and other actions, but that's our assumption based. Q1, just to be specific, we'll tick down from where we are to mid-single digit, I think, for auto. Industrial stays at low single digit and all up mid-single digits in Q1.
Greg Melich, Analyst
That's perfect. And then last, just DIY and do-it-for-me. Do-it-for-me still outpacing DIY by about 1,000 basis points. Is that the trend you're expecting this year to continue? Or are we seeing enough recovery in fleet and others that maybe those start to narrow?
Will Stengel, President & COO
I think they start to narrow, and so we would expect the DIY business. We're seeing some good strength in our DIY business, in particular, our accessories, which is a small part of the business, but it continues to grow really nicely even on tougher comps. So we would expect the gap to narrow as we go through 2023.
Scot Ciccarelli, Analyst
Scot Ciccarelli. First question is, you have made a couple of comments on the gross margin benefits you've been able to accrue from pricing. Is that both in auto and industrial? And then if at least some of it is in auto, could some of those price increases create some competitive challenges down the road since some of your other major competitors have made selective price investments over the last 1.5 years to 2 years?
Will Stengel, President & COO
Yes, Scot, it's Will. I'll take a cut at this. We're seeing great pricing work happening on both sides of the business, and in particular, in U.S. automotive. I would say, they're one of the most dynamic teams in terms of the things that they're doing around pricing. We've been at this now for 12 to 18 months in a pretty robust way, both in terms of the technology that we're using, the data, working with a third party, et cetera. And we are actively thinking through the right way to execute pricing strategies relative to the market. That's really at the core of the work that we're doing. So we feel good about what we're doing. We study it daily. It's at the SKU level. We go into different markets, and we've got really nice visibility to react accordingly with dashboards and weekly updates as a team to make sure that what we're doing is beneficial for our customers and our business. So it's definitely something that we're hyper-focused on.
Paul Donahue, CEO
And Scot, I would just add to that, despite what you may be hearing in the marketplace, the pricing environment overall in automotive is rational. We're not seeing any significant fluctuations. As you know, having the product on the shelf and available when the customer needs it remains the primary driver, not necessarily price.
Scot Ciccarelli, Analyst
Okay. That's helpful. And then just a follow-up on the industrial side. I mean the comp performance of the industrial piece segment rather has continued to significantly outpace the indexes. It's historically tracked really over the last, call it, 15 to 18 months. And Paul, I think you've mentioned some of it is kind of the changing business mix that you previously highlighted. Are there other factors we should be thinking about to kind of explain the divergence from, let's call it, the historical trend that we've seen?
Paul Donahue, CEO
I don’t believe that’s the case, Scot. We discussed it during our last call. While we are not completely shielded from a decline in PMI or industrial production, I can confidently say that we have a much stronger outlook now due to the diversity in our products and services, especially in end markets like EV manufacturing. The opportunities in onshore and nearshore manufacturing returning to the U.S. also look promising for Motion. Over my time here, we've transformed from primarily being a distributor of bearings and industrial supplies to becoming a top-tier industrial solutions provider that offers automation, robotics, conveyance, hydraulics, and fluid power solutions. We may not be entirely unaffected by the challenges in manufacturing, but I am optimistic about our business, our team, and our future prospects. We have made a strong start in Q1.
Will Stengel, President & COO
Scot, I might just add one other thought, which is the momentum that's behind the KDG and the Motion combination. We get very active and positive feedback from customers on kind of the breadth and depth of the service offering, the value-add services. And I think that's really extended the leadership position of the combined business over the last 12 months.
Operator, Operator
The next question is from Liz Suzuki from Bank of America. Please go ahead.
Liz Suzuki, Analyst
Thank you. I was hoping you could just comment a little bit about your leverage ratio, which is a bit below target. Are you kind of holding on to some dry powder so that if attractive acquisitions or buyback opportunities come up, you could act on that opportunity without taking on high-rate debt? Or is there some hesitancy maybe about the economic outlook that's keeping you more conservative on leverage?
Paul Donahue, CEO
Liz, you're exactly right. We're being a little conservative here. We're holding some dry powder. Look, we are at 1.7 times, well below our stated range of 2 to 2.5 times. And we like that position. We think that it's really smart right now in this environment. We'll look for opportunistic things across the board whether it's CapEx or M&A. And so we really do think that we've been able to work that down post KDG acquisition right after we bought KDG earlier in the year, we were closer to 2. So I think nice performance to work it back down. And look across the landscape or whatever we might see come up. So nothing pressing or imminent, but we just like the financial flexibility that we have with our current cash balance, our total liquidity and being very disciplined across our capital allocation structure.
Operator, Operator
And the next question is from Bret Jordan from Jefferies. Please go ahead.
Bret Jordan, Analyst
Good morning, guys. On the NAPA private label program in Europe, you said, I think, what, €300 million you're doing. Could you talk about sort of what inning you are in and penetrating there? I mean how many segments that you think you're going to run private label versus how many you're doing or what the potential market is?
Will Stengel, President & COO
Yes, Bret, let me take a pass at that. We're in the very early innings. Obviously, the last 12 to 18 months has delivered really strong momentum. We're excited about that. We fully expect to continue to do that. We're in, call it, 10 to 15 categories. We've got opportunities to do more than that. Within the categories that we actually offer that doesn't necessarily mean they're in each one of our local markets. So even if we just stayed in our 10 to 15 primary categories, we'd have a great opportunity to continue to push that product. But we're excited about this and believe that it can be close to 20% of the revenue over the next 2 to 3 years.
Paul Donahue, CEO
Bret, I know we got into this discussion last time we were together. And so I would tell you, I think we're at about the bottom of the third, Bret, in terms of our process here in private label. It's going extremely well. All the countries have jumped on board, and we haven't even rolled it out yet to the new markets we entered last year, Spain and Portugal. So yes, we're excited, and I know the team is excited. And the best part is, our customers and the consumers are buying the product, and they love the product.
Bret Jordan, Analyst
Okay. Great. And then on the U.S. acquisition, you're talking about folding in some store acquisitions. Could you talk about what you're looking at there? Are these NAPA-independents? Are these other independents in other buying groups, and I guess, sort of which regions are these, more urban company-owned store markets you're looking at? Sort of what's the strategy on increasing this company-owned store base?
Will Stengel, President & COO
It's a great question. The short answer is, it's always the above on the store base. So a lot of thought has gone into the markets in which we want to add relative density. And so depending on the best way to do that, we'll consider either working with an independent owner or if it's another competitive store group, we'll consider that. But as you alluded to, it's strategic markets, adding that density, making sure that we've got the ability to cover customers well with the right inventory mix, and it's a very attractive ROIC lever for us as we bring a lot of value to those merged entities after we own.
Bret Jordan, Analyst
Are there any particular regions you're looking at? Or is this sort of national?
Will Stengel, President & COO
It's a national approach. We're doing it. It's the same M&A strategy, quite frankly, globally for our automotive business. We do the same work in Canada, and we did the same work in Europe as we do here in the U.S.
Bret Jordan, Analyst
If you were to roll that forward, if you're sort of thinking out three to five years, is it a meaningful change in company-owned store mix versus independent?
Will Stengel, President & COO
It has the potential to be. It will take some time just given the law of numbers, but that is a lever that we have to change that mix, for sure.
Operator, Operator
And the next question is from Daniel Imbro from Stephens Inc. Please go ahead.
Joe Enderlin, Analyst
This is Joe Enderlin on for Daniel. Looking at the industrial space, I think you noted reshoring as a tailwind in the prepared remarks and previous questions. Could you maybe provide some more thoughts on how you expect this to impact profitability or how you're thinking about the effects of reshoring?
Paul Donahue, CEO
Thanks for the question, Joe. It's true that many CEOs are considering moving manufacturing back to North America, including the U.S. and Mexico, where we have a strong presence in the Motion business. This is a positive development, though it's a long-term process that won't happen immediately. As companies return to North America, automation will play a crucial role due to labor challenges and shortages. Our automation and robotics offerings position us very well to take advantage of this shift.
Joe Enderlin, Analyst
That's helpful. Thank you. As a follow-up, you noted you realized there were $30 million of synergies from the KDG acquisition with more expected in '23 and '24. Just to clarify, were these mainly revenue or cost synergies? And then what are the primary drivers here? And then do you maybe think there might be any upside to the $50 million goal?
Will Stengel, President & COO
Yes. The synergies are in both buckets. So we have net sales synergies as well as cost synergies. So they interplay together. We do think there's some upside as we move forward. The business has really nice momentum. We committed to $50 million when we originally announced the transaction by year three. We're in a position to deliver $50 million by the end of year two. So with $30 million realized through year 1, an incremental $20 million in year 2. And I'm confident that the team will execute well and deliver on that commitment and potentially more.
Operator, Operator
Ladies and gentlemen, we have time for one more question and that question is from Seth Basham from Wedbush. Please go ahead.
Seth Basham, Analyst
Thanks a lot for squeezing me in. Nice quarter. I have a couple of questions about the core U.S. NAPA business. First, regarding the fourth quarter results, you mentioned strength finished the quarter. I presume weather helped. I'm wondering if you can quantify how much weather was a help, and how you're thinking about weather for the first quarter and 2023.
Will Stengel, President & COO
Yes, Seth, it's Will. I would say that the weather may have provided a slight benefit, but it wasn't significant enough to impact the year's end. Looking ahead, it's currently 80 degrees here in Atlanta while some regions are experiencing a couple of feet of snow. It's challenging to make predictions. January seems to have been mild in our North American market, which has affected some of our product categories. However, I am confident that the team will manage this well. While we can't control the weather, we will concentrate on what we can influence and ensure we take care of our customers and teammates safely.
Seth Basham, Analyst
Fair enough. And then as you're thinking about the U.S. NAPA sales growth in comps in 2023, is that within the same 4% to 6% range that you're expecting for the global business?
Bert Nappier, CFO
Yes, Seth, this is Bert. That's right. We're thinking about that total automotive segment out of 4% to 6%. And within that, we would be in the same range for the U.S. business.
Seth Basham, Analyst
Got it. Okay. And then lastly, in terms of the miles driven outlook, how are you thinking about miles driven and obviously, a key driver of U.S. NAPA of sales?
Paul Donahue, CEO
Well, I would tackle that, Seth. We're hoping to see a little bit of a lift, which we did see in the latter part of the year as fuel prices started to abate a bit here in the U.S. So I still think there's a bit of a reluctance for mass transit, not to mention air travel and air fares are at all-time high. So I think that a 1% lift would not be out of the realm of possibility. So we think it will be a tailwind in '23, for sure.
Seth Basham, Analyst
Wonderful. Thank you very much for your answers. And good luck.
Operator, Operator
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Paul Donahue, CEO
Yes. Thanks, Chad. We appreciate it. Appreciate all the questions and everyone joining us this morning. As you've heard, we're incredibly pleased with the reported record year for GPC, and we could not be prouder of the great work done by all of our teammates around the world. We continue to be excited with the momentum this business continues to generate, and I would just conclude by saying, the future is very, very bright for GPC. So I hope you all have a great day wherever you are, and hope to see you at our Investor Day meeting here in March. All the best.
Operator, Operator
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.