Advance Auto Parts, Inc. (AAP) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to your Advance Auto Parts, Inc. Annual Meeting. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host to Tammy Finley. Ma'am, the floor is yours.

Good morning. My name is Tammy Finley, and I am Advance's Executive Vice President, General Counsel and Corporate Secretary. Before we begin, be advised that our remarks today may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans and objectives and future business and financial performance as well as statements regarding underlying assumptions related thereto. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information about factors that could cause actual results to differ materially from the forward-looking statements can be found under the caption Forward-Looking Statements and Risk Factors in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission and under similar captions and subsequent filings made with the commission and our quarterly earnings press release.

Good morning, everyone, and welcome to the 2020 Advance Auto Parts Annual Meeting of Stockholders. I'm Tom Greco, President and Chief Executive Officer of Advance Auto Parts and a current board member, and I'm honored to preside over this meeting. As we're holding this meeting virtually, please note that the agenda for today's meeting appears on your screen, that other meeting materials are linked on the right-hand side of your screen and that you may submit questions via the tech panel at the bottom of your screen. Please note that our rules of conduct for the meeting address how we will respond to questions, along with other important information about the procedure of the meeting. It's 8:31 a.m., and in accordance with the notice of annual meeting of stockholders, I call this meeting to order. Before we proceed with our annual meeting agenda, I'd like to ask Jeff Smith, our departing Board Chair, to make a few comments.

Thank you, Tom. Before I introduce you to the 8 independent nominees for the 2020 Board of Directors, I want to take a moment to reflect on my past 4 years with Advance. As you've seen from the proxy statement and our previous announcement, I am not standing for reelection to the Board this year. I want to begin by thanking the entire Advance team and the Board of Directors. We have made considerable progress together, and I'm confident in the team we have built to continue executing on our long-term strategic objectives. When I first joined the Board, Advance was close to 2 years post the acquisition of GPI. Over the past 4 years of my tenure, we have strengthened the Board of Directors, completely rebuilt the leadership team in Advance, developed detailed strategic plans and made significant improvements as we implemented new processes and technology platforms. All of these actions have been and will continue to be key enablers for AAP to drive shareholder value. I am proud of how far the Advance team has come and believe that this is the appropriate time for me to step down and focus on other projects. That being said, I believe that I'm leaving the Board in great hands, including those of Gene Lee as incoming Board Chair. Before I turn the meeting back to Tom, I want to introduce you to the 8 independent nominees, each of whom were named in the proxy statement. Detailed biographies of each director are in the proxy statement provided to each stockholder of record. Each of these Board members are joining us on the phone today. John Bergstrom, Brad Buss, John Ferraro, Jeff Jones, Gene Lee, Sharon McCollam, Doug Pertz and Nigel Travis. Finally, I pass the meeting back to Tom Greco.

Thanks, Jeff. On behalf of the entire Advance team and Board of Directors, I want to express our sincere gratitude for your support and invaluable contributions over the last 4 years, both for AAP and for me personally. You've been here from the very beginning for virtually all of the current management team, and we wish you nothing but the utmost happiness and success in your future endeavors. In regard to our current meeting agenda, we're in an unprecedented time, and I appreciate that we have technology available for us to hold this annual meeting virtually. Thanks to everyone who's joined us on this morning. I'd like to begin by taking this opportunity to recognize all of our team members, including our network of independent partners for their dedication, not only over the past few months but throughout all of 2019. In recent weeks, as COVID-19 has put tremendous pressure on every country and business in the world, the men and women of AAP have been standing tall every single day, ensuring that people can get to and from their work, their local grocery store, their pharmacy and to get health care. We're incredibly proud of the role they have played on keeping our customers on the road each and every day during this difficult time and always. 2019 saw a marked improvement in our financial performance. And we continue to make progress against our long-term strategic objectives. Some of the highlights from 2019 include: we delivered our second consecutive year of net sales growth with a 1.3% increase year-over-year. Our adjusted operating income margin expanded 36 basis points year-over-year, focusing on 4 pillars of margin expansion, which include improving our sales and profit per store, transforming our supply chain, category management and SG&A productivity. Adjusted diluted EPS increased 14.9% to $8.19. We returned approximately $505 million to stockholders through our share repurchase program and dividends. We made significant investments in supply chain, information technology and our team members. And in the fourth quarter, we announced the exciting acquisition of the iconic DieHard brand, which we believe will be a differentiator for Advance. As we look forward to the remainder of 2020, there's no doubt we're in a unique time as the country begins to recover from the outbreak of COVID-19. As an essential business, Advance remains open to serve our customers who are relying on their personal vehicles more than ever to access critical supplies and in some cases, medical assistance. While we remain open, there's nothing more important than the health and safety of our team members and customers. During COVID-19, we've been focused on 3 overarching priorities: first, prioritize the health and safety of our team members and our customers; secondly, preserve cash and protect the P&L during the crisis; and third, prepare to be stronger following the crisis. We look forward to sharing more during our first quarter 2020 earnings call on Tuesday, May 19. I'd like to thank the entire Advance team and members of my senior leadership team to help deliver these accomplishments and are poised to continue delivering against our objectives. I'd also like to introduce Laurie Londergan and Michael Elder from Deloitte & Touche LLP, the company's independent registered public accounting firm. They will be available during our question-and-answer session to respond to questions. I will now turn the meeting over to Jeff Shepherd, Executive Vice President, Chief Financial Officer, to lead us through the business portion of the meeting.

Thank you, Tom. Tammy Finley will serve as the secretary of this meeting. The company's proxy statement and the 2019 annual report were provided to each shareholder of record of the company, and both are available on the company's website. The formal agenda of the meeting consists of the following 4 proposals: one, the election of 9 nominees named in the proxy statement to the Board of Directors to serve until the 2021 annual meeting of stockholders or until their successors have been duly elected and qualified; two, advisory vote to approve the compensation of the company's named executive officers; three, ratification of the appointment by the Audit Committee of Deloitte & Touche LLP as the company's independent registered public accounting firm for 2020; and four, advisory vote on a stockholder proposal on the ability of stockholders to act by written consent if presented at the annual meeting. No other director nominations or proposals were properly brought before this meeting. Therefore, the business of this meeting is limited to these proposals. If you sent in your proxy card or voted by phone or Internet, your shares will be voted accordingly. Please do not vote live at this meeting unless you wish to change your vote. I will now turn the meeting over to Tammy Finley who will address matters regarding the mailing of the notice of annual meeting and proxy statement and the presence of a quorum.

Thank you, Jeff. I have a list of the stockholders of the company who are the holders of the common stock of the company as of the close of business on March 18, 2020, which was the record date for stockholders entitled to notice of and to vote at this meeting. This list of stockholders is available for review by the stockholders of the company. The records of the company show that there were 69,089,472 shares of common stock outstanding on the record date. We have previously received an affidavit that the notice of annual meeting and proxy statement were mailed on or about April 2, 2020, to each holder of record on the close of business on the record date. A copy of the affidavit, including the attached documents, will be included as an exhibit to the record of this meeting. The company has appointed [ Chris Hunberg ] as inspector of elections for this meeting. The certificate and report of the inspector of election also will be attached as an exhibit to the record of this meeting. The inspector informed me that 63,046,494 shares of common stock or 91.25% of the outstanding shares entitled to notice of and to vote at this meeting are present in person or by proxy. The inspector is making an exact count and will submit a formal report on the number of shares present or represented during the course of the meeting.

A quorum is declared present, subject to confirmation by the inspector in her report. Therefore, the meeting is duly convened for the transaction of any business that may properly come before it. The time is 8:41 a.m., Friday, May 15, 2020. And I note that the polls are open for the 4 matters to be voted on at this meeting. The first item of business is the election of the 9 nominees named in the proxy statement to the Board of Directors to serve until the 2021 annual meeting of stockholders and until their successors have been duly elected and qualified. May I have a motion?

I move that the nominees listed in the proxy statement be elected as directors of the company.

I second the nomination.

No other nominations have been duly made. Therefore, the nominees listed in the proxy statement are the only nominees to be considered. The second item on the agenda is the advisory vote to approve the compensation of the company's named executive officers. May I have a motion?

I move to approve the compensation of the company's named executive officers listed in the proxy statement.

I second the motion.

The third item on the agenda is the ratification of the appointment by the Audit Committee of Deloitte & Touche LLP as the company's independent registered public accounting firm for 2020. May I have a motion?

I move that we ratify the appointment by our Audit Committee of Deloitte & Touche LLP our independent auditors for 2020.

I second the motion.

The fourth item on the agenda is the advisory vote on a stockholder proposal, if presented at our annual meeting, regarding the ability of stockholders to act by written consent. At this time, I would like to recognize the proponent of the stock -- of the shareholder proposal on the ability of stockholders to act by written consent to present the proposal. You will be allowed 3 minutes.

Hello. This is John Chevedden. Can you hear me okay?

Yes.

I didn't hear from the meeting leader. Can you hear me?

Yes.

Yes, we can hear you.

Okay. This is proposal 4, adopt a mainstream shareholder right written consent. Shareholders request that our Board of Directors take the steps necessary written consent by shareholders entitled to cast the minimum number of votes that would be necessary to authorize an action at a meeting at which all shareholders entitled to vote thereon were present in voting. Hundreds of major companies enable shareholder action by written consent. Taking action by written consent in place of a meeting is a means shareholders can use to raise important matters outside the normal annual meeting cycle. Shareholders gave 45% support to this proposal topic in both 2014 and 2016 at our company. These 2 votes of 45% would likely translate into majority votes from the shareholders who had access to independent proxy voting advice. Following a 45% vote for written consent shareholder proposal at the Bank of New York Mellon -- the Bank of New York Mellon said it adopted written consent in the following year, 2019. This proposal is additional importance because Advance Auto Parts shareholders also do not have the right to call a special meeting in regard to the removal of a director. The right for shareholders to act by written consent is gaining acceptance as a more important right than the right to call a special meeting. The directors at Intel currently thought they could divert shareholder attention away from written consent by making it less difficult for shareholders to call a special meeting. However, Intel shareholders responded with greater support for written consent in 2019 compared to 2018. This is a proposal that can gain increased shareholder support even if management opposes it. For instance, Flowserve Corporation opposed this proposal topic and support increased from 43% to 51% in 1 year. There is also concern about the long-term decline in the price of our stock from $198 in 2015 to $119 now, even with a stock buyback of up to $600 million. Stock buybacks can be a sign of short-termism for executives, sometimes boosting share price without boosting the underlying value, profitability or ingenuity of the company. Please vote yes, adopt a mainstream shareholder right written consent, proposal 4.

Thank you. With the proposals before the meeting haven't been made, I would now like to invite any questions you may have. Questions or comments must be relevant to the matters to be voted upon at the annual meeting or to the business of the company. Our Senior Vice President, Investor Relations and Communications, Elisabeth Eisleben, will be reading questions. Please refer to our meeting rules of conduct for instructions on how to contact Investor Relations if you have a question of individual concern or that's not otherwise addressed at this meeting.

Tom, our first question is kind of related to impacts of COVID-19 and what the greatest impacts are on the company.

Sure. Well, we have outlined the 3 primary things that we've been focused on throughout COVID-19. And I think it's probably really the first one that I referenced, which is the importance of prioritizing our people and making sure their health and safety is protected during the crisis. So there's really nothing more important than the health and safety of our team member -- team members and customers. I think it's important at this time that our actions are really to be loud, and I think we have -- we've taken care of our team members and we care for our customers throughout this to keep them healthy and safe. We've offered special team member pay and benefits for all of our team members that have been impacted. We've weighed our attendance policy. We provided them with everything they need to be safe, including cleaning supplies, training of social distancing, masks. We've installed Plexiglass shields inside of our stores. In many cases, we were the first, if not just in our industry, but in all of retail to do this. And each of these is supported by our extensive education and training. So very, very high priority in place on that. We've also given back to our communities throughout this to help them through the crisis. So I'm very proud of what's been done in our stores and DCs to keep people safe. Obviously, this impacts just about everyone in the country and our business. It impacts our professional customers. It impacts our suppliers. It impacts our independent partners. So we're also staying very close to them and making sure we're close. So those are the biggest things that we've been focused on and obviously, adapting to changes in customer behavior, which we'll talk about more on Tuesday.

Perfect. And just a follow-up to that, what percentage of our employees can work mostly remote or from home?

Well, of course, the vast majority of our employees work in the stores and in our distribution centers, and we're incredibly thankful that they have been working throughout the pandemic to ensure that we're keeping people on the road and making sure that our customers are being served. Obviously, our corporate offices are adhering to the local government guidelines wherever they may be. And largely, they are carrying shelter-in-place orders at this point.

Perfect. And with that, I'll turn it back over to Jeff.

Thank you for your questions. At this time, Tom; incoming Board Chair, Gene Lee; and Jeff Smith like to share a few brief remarks. Following which, we will close the polls and report the tabulated results.

Thank you, Jeff Shepherd, and I'd like to take this opportunity to personally thank Jeff Smith for his direction and leadership on Advance's Board the past few years. We've reached some important milestones in our transformation agenda. And while we're still executing on some of our longer-term strategic plans, I'm very appreciative of the guidance we've received from Jeff. I would like to also introduce and formally congratulate Gene Lee on his new role as our Board Chair. Gene has been a member of our Board since November 2015. He's a proven leader with extensive experience, and I'm confident he will help us enable continued success in the transformation of AAP. I look forward to working with him and the rest of the Board this year.

Thank you, Tom. I'd like to reiterate your comments and express my gratitude to Jeff for his support over the past several years, both personally and professionally. It has been a pleasure working with him, and I wish him luck on his future plans. I look forward to continuing my work on Advance's Board and this new capacity. As Tom mentioned earlier, we are in a very unusual time right now as we navigate our global pandemic. I've been impressed with how Advance has adapted and become more agile as we navigate not only how we -- how to operate in this current environment, protecting the health and safety of our team members and customers, but also how to ensure that we're able to come out of this stronger together.

Thank you, Tom, and Gene. I know that I'm leaving the Board in very capable hands under your leadership. Like both of you, I'm proud of what Advance has accomplished, and I'm confident that the entire Advance team will continue to work diligently to achieve our goals. I'll now turn it back to Jeff Shepherd to conclude the voting period.

Now that anyone choosing to vote live has had the opportunity to do so, I declare the polls closed at 8:51 a.m., Friday, May 15, 2020.

We will now review the results of the voting. Tammy, would you please report the results of the voting?

Tom, the report of the inspector of election confirms that a quorum is and has been an intended at the meeting for all purposes. It also shows that all of the nominees for director have been elected by a majority of the votes cast at this meeting as directors of the company until 2021 -- until the 2021 annual meeting of stockholders or until their successors are duly elected and qualified. The report of the inspector of election also shows that a majority of the shares of the company present and entitled to vote at this meeting had been voted in favor of the advisory vote to approve the compensation of the company's named executive officers and the ratification of the appointment by our Audit Committee of Deloitte & Touche LLP as the company's independent registered public accounting firm for 2020. Additionally, the majority of shares have rejected the proposal to permit written consent by shareholders entitled to cast a minimum number of votes that would be necessary to authorize the action at the meeting at which all shareholders entitled to vote thereon were present and voting.

Thanks, Tammy. The report of the inspector of elections has been accepted and approved and will be attached to the record of the meeting. If there's no further business to come before the meeting, may we have a motion to adjourn?

I move that the meeting be adjourned.

I second the motion.

The motion is carried, and the meeting is adjourned. Thanks for joining us today. We hope to speak to all of you next year.

Thank you, ladies and gentlemen. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.