Genuine Parts Company (GPC) — Q2 2016 Earnings Call Transcript

Good morning, and thank you for joining us today for the Genuine Parts Company second quarter 2016 conference call to discuss our earnings results and outlook for the full year. Before we begin this morning, please be advised that this call may involve forward-looking statements regarding the company and its businesses. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. We'll begin this morning with comments from our Chairman, Tom Gallagher. Tom?

Thank you, Sid, and let me add my welcome to all of you on the call this morning. We appreciate you taking the time to be with us. I would start by saying that I've anticipated this call with somewhat mixed emotions. On the one hand, I've been on every one of our calls since we started doing them in February of 2001, so today is my 63rd call, but it's also my last. As you know, Paul Donahue was named Chief Executive Officer on May 1, and Paul is only the fifth Chief Executive in our 88-year history, which is certainly indicative of the management's stability within our organization. I will continue to serve as Chairman of the Board, and as such, I will remain active with GPC. But going forward, Paul and Carol will handle all of the work on these quarterly calls. I couldn't feel any better or more positive about the future of our company with Paul as our President and CEO; and Carol as Executive Vice President and Chief Financial Officer leading the way. They are two very talented and capable executives, and they are highly regarded both inside our organization and externally as well. I want to thank each of you on the call for your past and ongoing support of Genuine Parts Company, and I'll turn the call over to Paul.

Thank you, Tom. I appreciate the kind remarks and the ongoing support. I'm both honored and humbled to follow you as CEO of this great company. You've had an admirable 46-year career at GPC, and the performance of the Company under your leadership for the last 12 years has been impressive. That said, working closely with you for the last nine years has been invaluable. I feel well prepared for this new role, and importantly, the compensation of our management team remains in place to build upon our performance. Thank you, and I look forward to working with you in your role as Chairman. GPC has a long and rich 88-year history of steady, consistent growth and sound financial management, and has been an effective steward of capital. Under my leadership, we will build on these achievements over the many years to come. In my first 75 days as CEO, I've taken considerable time to visit with our operations, both globally and across our business segments. I'm more encouraged than ever about the good work being done and the growth opportunities available in each of our businesses. As this quarter would indicate, we have challenges to overcome, but I also believe we can reinvigorate our sales growth in the coming quarters. This is our most critical near-term objective, and I'm committed to making this happen. We will provide more details later on the call regarding this point. Turning to our second quarter, I'll make a few remarks on our overall results, and then cover our performance by business. Carol Yancey, our Executive Vice President and Chief Financial Officer, will provide an update on our financial results and our guidance for the full year. After that, we'll open the call to your questions. A quick recap of our second quarter results shows sales for the quarter were $3.9 billion, down 1%. Net income was $191.4 million, down 2%, and earnings per share were $1.28, in line with the second quarter of last year. Total sales in the quarter included a 2% benefit from acquisitions spread across our Automotive, Industrial, and Office businesses, and you'll hear more on our acquisition activity as we review our business results. Currency exchange remains a headwind to our overall results with the strength of the U.S. dollar compared to the Canadian, Australian, New Zealand, and Mexican currencies impacting our results by approximately 1% on the revenue line and $0.01 per share in EPS. Shifting to our Automotive operations, our global Automotive sales were down 0.7%, which included an approximate 2% benefit from acquisitions, offset by a currency headwind of approximately 1.5%. Our U.S. results were down 2% in the quarter, which compares to a 4% increase in the first quarter, primarily due to the softness in demand associated with the mild winter and early spring. Although we are not pleased with this deceleration, we recall that our second quarter sales in 2012, the last year we had similar mild winter patterns, were also down 600 basis points from the first quarter. Hence, we have seen this pattern before and would expect to see a more normalized growth within the next few quarters as the impact of weather plays out and we execute our growth initiatives. Our U.S. results vary widely by geographical region, with our better-performing markets in the Western, Southern, and mountain regions. The Central, Eastern, and Southwest regions underperformed. Again, we would attribute the soft results in the Central and Eastern regions to the mild winter temperatures, which impacted the failed selling of weather-related goods such as batteries, heating and cooling products, and ride control products, which were weak during most of the second quarter. We're pleased to report, however, that our batteries and air conditioning sales recovered significantly with the hot June temperatures, both up double-digits. In the Southwest, we remain challenged by the ongoing negative impact of the oil and gas sector on fleet and general installer business. Same-store sales for our U.S. company-owned store group were flat in the second quarter, compared to a 3.6% increase in the first quarter. The cadence of the quarter saw our team post a low single-digit increase in April, likely bolstered by the shift in the timing of Easter, followed by a low to mid-single-digit decline in May, and flat results in June. So we have a mixed cadence with the month of May being our most challenging month. Looking deeper into our same-store sales for the quarter, our commercial wholesale side of the business slightly outperformed the retail Do-It-Yourself business, driving the overall flat same-store sales results. Despite the ongoing DIY initiatives across our company-owned store group, weak market conditions resulted in a slight sales decrease for our company-owned retail sales. However, we believe that the current market conditions will be short-lived, and we remain confident in the long-term positive outcomes of our retail initiatives. These broad initiatives include installing new interior layouts and graphics, extended store hours, increased training for our store associates, and the nationwide launch of our NAPA Rewards program, to name just a few. Furthermore, we continue to expand on our retail impact initiative, which was initially piloted at 20 stores in 2015, with plans to implement this concept in 150 company-owned stores in 2016. We are encouraged by the positive impact of these initiatives at our updated stores, with early results exceeding our expectations on both the retail and commercial sides of the business. For the second quarter, our retail transaction counts were down low single-digits while our average basket size was up low single-digits. Moving along to our core commercial wholesale business, this segment of our Automotive business was basically flat in the second quarter, compared to a 4% increase in the first quarter. The core drivers for our commercial wholesale business continue to revolve around our major accounts business and our NAPA AutoCare Centers; the results for these key customer groups are good measures of the weak market conditions we encountered this quarter. On the major accounts front, sales were down low single-digits, which we believe reflects the challenging sales environment these customers are experiencing. Sales to our AutoCare Centers were up low-single digits, driven by the ongoing increase in memberships, now totaling over 16,400 members strong. Additionally, our fleet business was slightly down for the quarter. Our average wholesale ticket value was down slightly with no benefit from inflation and we are flat in the average number of tickets. Turning to our import parts business in the U.S., we remain encouraged by the strong underlying growth for this business, along with the added benefit of Olympus Import Parts, a $25 million business acquired this past February. We have positive momentum in this category as we enter the second half of the year. We have made solid progress with the integration of the Olympus business and we are excited about the growth prospects for our import parts business overall. Given the positive attributes of this product offering, we closed on another import parts acquisition in Canada on July 1, which we'll cover later in the call. On the acquisition front, we are pleased to report that we closed on an Atlanta-based heavy-duty truck parts business on May 1. Global Parts operates six branches in three states, with expected annual revenues of approximately $20 million, and serves as a nice complement to our growing business in the heavy-duty segment of the U.S. automotive aftermarket. Moving on to the trends we are seeing across the U.S. automotive aftermarket, the fundamental drivers of our business continue to be positive. The average age of the fleet remains in excess of 11 years. The size of the fleet continues to grow, lower fuel prices are favorable for the consumer, and miles driven continue to show substantial gains. After strong growth of 3.5% in 2015, miles driven increased 2.6% in April, the most recent data available, and are up 3.7% year-to-date. April marks the 26th consecutive month of increases in miles driven, with lower fuel prices continuing to drive this key metric. The national average price of gasoline was $2.35 in the second quarter, well below last year, and a positive indicator for further increases in miles driven, ultimately driving additional parts purchases. Before closing out our automotive review, we want to update you on our international businesses, which include Canada, Mexico, Australia, and New Zealand. In Australia and New Zealand, our core Automotive business is performing well, and we have made significant progress with the integration of the Covs acquisition and its 21 branches in Western Australia. Likewise, we are excited by the June 1 acquisition of AMX, a Melbourne-based retailer of aftermarket motorcycle accessories and parts, with four stores and approximate annual revenues of $12 million. Our team in Australia has a multi-year growth plan for this business, which further expands our growing product offering in the motorcycle category. With these acquisitions, our footprint in Australia and New Zealand has now grown to 527 locations, resulting in net new store growth of nearly 100 locations over the past three years. At NAPA Canada, we continue to produce low to mid-single-digit sales growth despite ongoing economic challenges associated with the oil and gas slowdown impacting Western Canada, and the devastating wildfires in Fort McMurray, Alberta back in May. On July 1, we closed on the acquisition of Auto-Camping, a leading distributor of original equipment import parts in Canada. Auto-Camping, with 20 locations across Canada, specializes in original equipment automotive parts for European vehicles, and sells to foreign repair specialists as well as original equipment dealers. This business should generate approximately $50 million in annual revenues, complementing our existing product offering and distribution capabilities for import parts in Canada. Finally, in Mexico, our sales growth continued to gain momentum as we expand our NAPA footprint. We currently operate 21 NAPA stores in Mexico and have plans for additional store growth in the future. We remain encouraged by the long-term growth prospects we see for NAPA in Mexico. In summary, the second quarter proved challenging for our U.S. Automotive business, although this was partially offset by the ongoing strength of our international operations. We believe the weakness in our U.S. sales relates to the impact of mild winter and early spring, and we expect to improve on this quarter's performance as we move ahead. Our plans call for expanding our business with key commercial platforms, NAPA AutoCare and major accounts, executing our retail strategy, and driving global expansion via new store openings as well as targeted strategic acquisitions. Let's now turn to our Industrial business. Motion Industries ended the quarter down approximately 2%, which compares to a 2.5% increase in the first quarter. After adjusting for acquisitions and currency, core Industrial sales were down approximately 3%, which is basically unchanged from their adjusted sales decrease in the first quarter. For the second quarter overall, our Industrial business seems to have stabilized, consistent with the industrial indicators we tend to follow, such as industrial production and capacity utilization. However, a quick review of our business by industry segment, top customers, and product categories shows that the markets remain uneven and choppy. Among our top 12 industry segments, three generated sales increases, seven were down, and two were essentially flat. Looking at our top 20 customers, 15 of them increased sales, while five saw decreases, which aligns with what we observed in the first quarter. Similarly, among our top 12 product categories, we noted six that increased and six that were down, again consistent with the first quarter. The takeaway here is that our results were quite mixed among our customers and product lines, with solid results in several areas offset by weaker results in others. We have been operating in this type of difficult and choppy environment since the first quarter of 2015 and believe we are observing some early signs of a stabilized industrial economy. This would certainly bode well for a stronger cycle ahead. As we shift to the third quarter and the balance of the year, we will be executing on our initiatives to grow market share and further expand our distribution footprint to generate sales growth. We remain active with strategic bolt-on acquisitions for this business and expect to close a few of these over the balance of the year. We can tell you that effective August 1, we will close on ATCO, a regional industrial safety product distributor, with estimated revenues of approximately $20 million. Moving on now to our Electrical business, EIS, Sales for this group were down 5%, remaining challenged by many of the same factors impacting our Industrial business. These include ongoing challenges for customers in the oil and gas segment, lower defense spending, lower copper pricing, which cost us 1% of sales growth, the impact of the stronger dollar on our export-oriented customers, and just the overall sluggish economic climate. We expect to see these factors carry over to some degree for the balance of the year, but it’s interesting to look at the individual performance of the three segments that comprise EIS. The Electrical segment is our largest, representing 40% of this group's revenues, and sales were down low double-digits. Fabrication was down low single-digits, and our wiring and cable business was up low single-digits, each representing another 30% of the EIS business. Certainly, there is room for improvement across the EIS segment, and our greatest sales challenges are primarily concentrated in the electrical portion of the business. Moving ahead, our team is executing on initiatives to drive meaningful sales growth over the long term. Finally, a few comments on the Office Products business, which reported a 1% increase in sales for the second quarter, driven by a 5% contribution from acquisitions. Sales for the Safety Zone, acquired on June 1, represented the majority of our acquisition revenues for the Office business, and we are pleased to report that the integration of this business is progressing very well. By customer group, our mid-single-digit growth in the mega channel was partially offset by a mid-single-digit decline with our independent resellers. On the Products side, the facilities and breakroom supplies category performed very well in the quarter, while the Office Products segment category was down low single-digits. Furniture was down mid-single-digits, and technology products were down low double-digits. We continue to make solid progress on our acquisition strategy and the overall diversification of this business with a heavy emphasis on the growing facilities breakroom supply category. As previously announced, we acquired certain janitorial and sanitation businesses from Rochester Midland Corporation effective July 1. We expect this business to enhance our facilities breakroom supply product offering and contribute approximately $20 million in annual revenues. Our Office team will continue to look for these types of strategic bolt-on acquisitions, as well as execute on our ongoing initiatives to grow market share despite the challenging end-market conditions that persist in this industry. We remain confident in our growth strategy and look forward to showing more progress over the balance of the year. So that is an overview of our performance by business, and we want to thank our teams across all of our businesses for their efforts day in and day out. We appreciate all that they do to make GPC the great company that it is. I want to reiterate that reinvigorating our sales growth is our number one priority. During this call, we talked extensively about our sales environment and the execution of our initiatives to drive growth. I thought it would be helpful to outline a few of the key action steps we are taking to achieve this goal. The four building blocks of our growth strategy are: the execution of fundamental initiatives to drive a greater share of wallet with our existing customer base; an aggressive and disciplined acquisition strategy focused on both geographical as well as product line expansion; building out our digital capabilities across all four of our businesses; and further expanding our U.S. and international store footprint. We are confident that our focus on these four key areas will positively impact our sales and support the steady and consistent growth we strive to achieve at Genuine Parts Company. Now, I'll hand it over to Carol, who will provide a financial update and full-year guidance.

Thank you, Paul, and congratulations on your promotion to CEO. It is certainly well-deserved, and we look forward to the execution of your key sales strategies. Tom, I would also like to thank you for your tremendous leadership of the company and, on a more personal level, your guidance and counsel over the years. We'll begin this morning with a review of our financials and look at the second quarter income statement and segment information, and then, we'll finish up with a review of a few key balance sheet items. Our total revenues of $3.9 billion for the second quarter were down 1%. Our gross profit for the second quarter was 29.9%, equal to the prior year. Our management teams are focused on executing our gross margin initiatives effectively, and we remain committed to an enhanced gross margin for the long term. The pricing environment across our businesses remains relatively steady, with very little supplier inflation, if any. Our cumulative supplier price changes through six months in 2016 were Automotive down 0.7%, Industrial up 0.2%, Office up 0.2%, and Electrical down 1.3%. Looking at our SG&A, our total expenses for the second quarter were $865 million or 22.2% of sales, slightly up from last year, primarily due to lower sales levels for the quarter. This was partially offset by tight cost control measures, which continue to positively impact our results and drive our progress toward greater operational efficiencies. If we look at the results by segment, our Automotive revenue for the second quarter of $2.1 billion was down 1% from the prior year, accounting for 53% of total sales. Our operating profit of $204 million is down 2%, and the operating margin for this group is 9.7% compared to 9.9% in the same quarter last year. Our Industrial sales of $1.2 billion in the quarter were a decrease of 1.7%, representing 30% of our total revenues. Our operating profit of $88 million is down 0.7%, with our operating margin up by 10 basis points to 7.6%, driven by gross margin improvement. Office Products revenues were $482 million in the second quarter, up 1%, accounting for 12% of total revenues. Our operating profit of $33 million is down 5%, with an operating margin of 6.8% compared to 7.2% last year. For the Electrical Group, our sales were $185 million in the quarter, down 5% compared to the prior year, also constituting 5% of our total revenue. The operating profit of $16 million represents a 14% drop, with the margin for this group at 8.7% compared to 9.5% last year, reflecting a decline of 80 basis points. So for the second quarter, our total operating profit margin was 8.7% compared to 8.9% in the second quarter last year. This reflects the lack of leverage I mentioned earlier. However, we are intensely focused on showing progress in this area in the periods ahead. Our net interest expense for the quarter was $4.7 million, with the expectation of $20 million to $21 million for the full year. Our total amortization expense was $9.2 million for the second quarter, with projections of $36 million to $38 million for the full year. Our depreciation expense was $26.7 million for the quarter, and we expect total depreciation to approximate $110 million to $120 million for the full year. Our combined depreciation and amortization of $36 million for the second quarter is projected to be within the range of $145 million to $160 million for the full year. The other line, which primarily reflects our corporate expense, was $26.5 million for the quarter compared to $24.8 million last year. For the full year, we still expect corporate expenses to be in the $110 million to $120 million range. Our tax rate for the second quarter was approximately 36.2% compared to 37% last year, reflecting a higher mix of foreign earnings as well as a favorable non-taxable retirement plan valuation adjustment compared to last year. We expect this rate to increase slightly in the last half of the year, projecting our full year rate to be 36.3% to 36.8%. Our net income for the quarter was $191.4 million compared to $195.4 million last year, with EPS of $1.28 equal to last year. Turning to the balance sheet, we continue to strengthen our position with effective working capital management and strong cash flows. Our cash at June 30 was $234 million, slightly up from June of last year, continuing to support growth initiatives across all of our businesses. Our accounts receivable of $2 billion at June 30 was up 1% from the prior year, and we continue to manage our receivables closely and are satisfied with our quality at this time. Our inventory at the end of the quarter was $3.1 billion, down 3% when excluding the impact of acquisitions in the last 12 months. Our team effectively manages inventory levels, maintaining appropriate investment moving forward. Our accounts payable at June 30 was $3.1 billion, up 12% from last year due to improved payment terms and other payable initiatives established with our vendors. We're encouraged by the positive impact of accounts payable on our working capital with our days in payables, reaching an AP to inventory ratio of 100% for the first time. Our working capital of $1.5 billion at June 30 continues to show steady improvement from quarter to quarter, down nicely from the prior year. Effectively managing our working capital, particularly items such as accounts receivable, inventory, and accounts payable remains a high priority for our company. Our total debt at June 30 was $775 million compared to $850 million in total debt last year, including two $250 million term notes, as well as another $275 million in borrowings under our revolving line of credit. One of our term notes is due November 30 of this year, and we currently intend to renew it upon the due date. Our total debt to capitalization is approximately 19%, which comfortably supports our capital structure at this time. We believe that it provides the company with the flexibility and financial capacity necessary to take advantage of growth opportunities. In summary, our balance sheet remains a key strength of our company. We continue to generate strong cash flows, and following a record year in 2015, we remain positioned for another solid year in 2016. We continue to expect cash from operations to be in the $900 million to $1 billion range for the full year, with free cash flow projected to be in the range of $400 million to $450 million. We are committed to several ongoing priorities for the use of our cash, which we believe will maximize shareholder value. Our priorities for cash include strategic acquisitions, share repurchases, reinvestment in our businesses, and dividends. Our strategic acquisitions are ongoing and integral to our growth plans. Through July 1 of this year, we've added a number of new businesses across our Automotive, Industrial, and Office operations. These acquisitions are excellent strategic fits for us, expected to generate approximately $450 million in annual revenues. Looking forward, we will continue to seek additional opportunities across all of our distribution businesses for future growth. We will target acquisitions of companies with annual revenues in the $25 million to $150 million range，but remain open to new complementary distribution businesses of all sizes, provided appropriate returns on investments are met. In terms of share repurchases, we purchased 765,000 shares in the second quarter and 1.3 million shares for the six months. To date, we have 4.9 million shares authorized and available for repurchase. While we don't have a set pattern for these repurchases, we expect to remain active in the program and continue to believe that our stock is an attractive investment. Combined with the dividend, this serves as the best return to our shareholders. Our investment in capital expenditures was $38 million for the second quarter and is $50 million through June. For the year, we plan for capital expenditures to be in the range of $120 million to $140 million, expecting CapEx to increase slightly over the balance of the year due to the timing of several large projects. We also expect our 2016 dividend to be $2.63 per share, reflecting a 7% increase over last year’s dividend of $2.46. This year also marks our 60th consecutive annual increase in the dividend. To conclude our financial update for the second quarter 2016, in summary, our non-Automotive businesses continue to operate within a challenging sales environment. In the second quarter, our U.S. Automotive sales were impacted by weak conditions. Fortunately, we see these as temporary issues and look forward to improved conditions ahead. Additionally, we benefit from strong performances in our international automotive operations. For the quarter, we offset some of the market headwinds with key sales initiatives, steady gross margins, and tight expense controls. We further improved our balance sheet and cash flows through effective working capital management. As we execute on our growth plans, progress in these fundamental areas supports ongoing investments in acquisitions and the return of capital to shareholders through dividends and share repurchases. Now, turning to our guidance for the full year. On the revenue side, we are maintaining our guidance for total sales to be plus 1% to plus 2% for the full year. Among our business segments, we are maintaining our Automotive sales guidance at plus 2% to plus 3% for the full year, while increasing our Office guidance for sales to plus 2% to plus 3% from the original estimate of down 1% to up 1%. We are lowering our Industrial sales guidance to flat to up 1% from the previous plus 1% to plus 2%, and reducing the Electrical sales outlook to down 2% to down 3% from the previous up 1% to up 2%. This sales outlook includes all acquisitions that have closed through July 1 as well as the ATCO Industrial acquisition I mentioned earlier. On the earnings side, we are updating our earnings guidance to $4.70 to $4.75 from the previous range of $4.70 to $4.80 for the full year. This concludes our prepared remarks, and we would like to close by thanking all of our GPC associates for their continued hard work and commitment to GPC's success. Paul, I’ll turn it back over to you.

Thank you, Carol. A good update on the quarter. We are indeed experiencing a challenging quarter, and frankly, it has been a challenging six months. However, as illustrated in our guidance, we are planning for an improved second half of the year, and our teams are energized to execute the action steps we outlined earlier. We look forward to updating you on our progress in the quarters ahead. Now, we'll turn it back to the operator, and Carol and I will take your questions.

Thanks a lot. Good morning.

Good morning.

And Tom, all the best to you as you continue to move forward. I have two sets of questions. The first relates to the Automotive business. It was interesting that you talked about June being flat compared to April, even as some of the weather-sensitive businesses really popped with the heat we saw in parts of the country. Can you talk about what's transpiring with other categories and how weather-related softness away from the areas like batteries might be? Just sort of how we got to flat rather than an increase with some of the weather businesses surging late in the quarter?

Are you referencing specifically the month of June, Matt?

I believe so. I'm talking about the cadence you spelled out where I think April was up low singles, May down low to mid singles, and June flat. I believe that related to your same-store sales number, though I'm not sure.

Yes. The product-related movement we're seeing is, certainly, batteries were soft in the quarter. Ride control was soft in the quarter. However, we saw a slowdown in our brake business in the quarter, which we attribute to some of our brake business probably moving into the first quarter due to warmer temperatures. On the plus side, we’re continuing to see nice growth from our import lines. We're seeing nice growth in our tool and equipment categories, but unfortunately, they weren't enough to offset some of the softness we observed in the other categories.

And as we are about 20 days into a new quarter, any sense of how the current run rate compares to what you saw in June?

I would have to say that July – Matt, even though we're only a couple of weeks in, is looking a lot like June. It’s choppy is the best way I could describe it. The hot weather is likely beneficial to us, and we believe that the continuing warm temperatures we’re seeing across the country will bring advantages to our business. We are noticing those products that are related to the hot temperatures—products like batteries, rotating electrical, and AC are improving. So that makes us cautiously optimistic about the second half of the year.

Got it. My second question relates to Industrial, and specifically to the margin trends within that business. Historically, the gross margin within Industrial, I believe, was largely volume-driven and closely tied to volume rebates. You had a quarter where I think the volumes were not quite up to your expectations. However, the margins were quite good. Carol, on the call, you cited gross margins within that business. What are the margin dynamics beneath the surface in Industrial?

You're exactly right, we certainly have faced headwinds on the volume incentives in that business. However, we have been pleased to see that Industrial's core gross margin has improved for the first six months of the year, and that owes to many strategies we've implemented over the last 18 months. This improvement has been seen in both buying and selling efforts. For the first six months, we had a slight decrease in volume incentives, but they were flat in the quarter. Furthermore, the SG&A side reflects adjustments we've made to align our cost structure with revenues. This combination of factors has led to the improvements we report today. We expect a slightly better second half for the Industrial business at the top-line, and we aim to maintain that slight margin improvement as we finish out the year.

Got it and understood. Thank you so much, guys.

Thank you.

Thanks, Matt.

Thanks a lot, and good morning, and best of luck, Tom.

Good morning, Seth.

Thank you, Seth.

My first question is just on the difference regionally within the Auto Parts business. Can you provide some color regarding how the regions performed through the quarters, the delta between the Central and Eastern compared to the rest of the business from April to May relative to June?

It's a bit like we saw in the previous quarter, Seth, the cold weather impacted the Northern divisions. I called out specifically the Central and Northeast regions. The delta between those businesses and some of our Southern businesses, in Southeastern areas, even down into Florida Atlantic, even out West, showed a significant gap—a difference of around 400 to 500 basis points between those performing well and those that are continuing to be challenged.

Got it. So that's a 400 to 500 basis-point gap. Was that for the full quarter? Or do you see that gap narrow as you moved into June with the weather improvement?

No, that number reflects the full quarter.

Got it. Did the gap narrow in June?

Not really. It was pretty consistent throughout the quarter for both the Northern and the warmer weather divisions.

Okay. Great. My second question is just regarding major accounts and the noted slowdown there. Can you provide any color on that? Maybe like you have done for the industrial large customers—how many were up or down, or what’s driving the slowdown in major accounts? Have you lost customers? Any other color would be helpful here.

We stay close to our major customers, as you can imagine, and have many conversations. Not all of them are down, but I would say we have seen a drop in their business. We’ve had discussions with them regarding how their business trends. Their tire sales have been particularly challenged, especially with the major tire companies we partner with. I can assure you we haven’t lost any of our big major customers; I don't believe we are losing share with any of our major customers. Essentially, our performance reflects their business. Many of the parties we speak to in automotive aftermarket also share similar experiences.

Understood. Best of luck for improvement in the second half.

Thanks, Seth.

Thanks, Seth.

Hey. Thanks. I want to follow up a little bit on the Industrial business and then SG&A. Paul, you mentioned some signs of stability in the Industrial business. However, the number of categories that were up or down appears the same as last quarter, and Industrial production seems to be a little bit better than your actual sales growth or organic. What are those specific signs of stability that you’re pointing to? Then I wanted to follow up with Carol.

If I look at the numbers, Greg, we have seen stabilization since early 2015 where sales dropped dramatically from one quarter to the next, culminating in an 8% drop in Q4. We rebounded to low single-digit increases in Q1, and we saw that again in Q2. Thus, when I refer to stabilization, it reflects the recovery from the significant drops observed in 2015. Moreover, our Motion business in Canada seems to have stabilized and is even showing slight improvement. We closely monitor project work, and while projects are smaller than desired, we see stability in the number of projects. So we're hopeful, and some early signs indicate our Industrial business is stabilizing, which could positively influence Electrical as well.

Great. And Carol, what has been helping you manage to take down SG&A dollars? I understand you've done this both in the first and second quarters. Can we expect SG&A dollars to be down in the back half as well?

There are many activities underway across all of our businesses. A lot of our investments focus on technology and productivity. As we adopt efficiencies, we improve volume per employee, particularly in our distribution centers. We are also adjusting our cost structure in alignment with revenue levels. On the Industrial side, we've taken a closer look at our facilities and operations, and adjusted where necessary; for example, from three branches to two, where business lacks. Our Automotive teams have also managed SG&A effectively despite a slightly softer Q2. We expect this trend to continue, assuming we have a better second half, which we are forecasting for revenue.

That's great. Good luck.

Thank you.

Thank you, Greg.

Hi. Thank you for taking my question. I had a couple of questions on Industrial. Several of your competitors have referenced furloughs and plant shutdowns. Have you seen anything similar, or any reason why your customer mix might not be experiencing the same headwinds?

We have, Chris. We are indeed encountering some of the same challenges as our competitors in the industrial space. If we specifically examine the large oil and gas producers, they are feeling the pressure, affecting not only our Industrial business but also our Automotive sector as well. It appears that some large oil producers are set to withstand their storm, but many smaller oil producers are going under, and I’m not sure that’s likely to change soon.

Interesting, thanks. So, with a 3% organic decline in growth, it doesn't seem too significant—what do you think is driving that right now? Is it your maintenance mix versus new equipment? Are there current growth drivers that you've added that might allow you to gain share? What are you seeing in that business?

Certainly, Chris, our emphasis on new focus product categories in recent years—products like industrial supply, safety supply, and material handling equipment—is performing well and generating year-over-year increases. However, we are experiencing pressure on traditional industrial products like hydraulics, bearings, and power transmission. Just as in our Office Products business, the strategy to transition into new and growth-oriented categories is certainly helping influence our numbers.

Got you. Lastly, regarding the Office, you've diversified into jan/san and some other growth categories. Can you tell us how the core technology office products are performing right now? At what point do you see this business becoming less of a headwind to your consolidated Office number?

In the quarter, our tech products were down. Our team is actively focusing on regaining momentum, but for now, that tech business remains somewhat of a headwind. Our strategy has been to drive the overall Office Products business more into facilities, breakroom, and safety product categories, which you can see with most of our recent acquisitions, including the Safety Zone and the Rochester Midland division. We believe the tech headwind will become less significant as we progress.

Got it. Thank you for your help.

You're welcome. Thank you.

Thanks, Chris.

Hi, guys. If we look at organic revenue growth, backing out the FX impact and positive contribution from acquisitions, every business segment was down year-over-year—in Automotive, you attributed that to the weather specifically. Is there any way to quantify what that growth would have been if the weather had been consistent year-over-year? Is mid-single-digit growth for the second half of the year achievable for that business?

I'm sorry, Elizabeth. Are you referring specifically to Automotive or across all four?

To Auto specifically.

Okay. For Auto, in the first half of the year, our core Automotive business was actually up 1%. We expect that in the second half of the year, we're on track to achieve low to mid-single-digit growth in our core Automotive business, which does not include potential assistance from acquisitions.

Great.

And if you were to ask me how we intend to achieve that, I would note that we are still focused on our core initiatives in Automotive. While the quarter fell short of our expectations, we are not in panic mode and will not shift our focus. There are great opportunities to expand our retail sales. We are launching our top store initiative, totaling 150 stores in 2016. We'll revitalize our business in our NAPA AutoCare Center and introduce new distribution as well. Thus, we are confident we can drive the numbers we discussed in the second half.

Do you think without the weather impact, the second quarter might have seen that kind of low single-digit growth in core for Auto?

One can only assume, Elizabeth. If you consider our first quarter, we were indeed there. If you examine our prior number of quarters, we were consistent. Therefore, Q2 appears to be an outlier. Importantly, the key initiatives being implemented will help us get back on track in the second half.

Thanks very much.

Thanks for your questions.

Thanks. Good morning, and congrats, Tom, on all your success as a CEO over the years, and Paul, congrats to you and good fortune as you move forward as CEO as well.

Thank you, Chris.

I have a couple of follow-up questions at this point. You spoke about June being flat and expressed that July is also choppy. With June being flat, what categories remain soft, especially if you’re observing some weather-sensitive businesses improving?

The same core product lines are concerned: ride control, brake business. We were on a strong trajectory with our brake business in the last quarter until it started to tail off. Nothing fundamental has shifted; only seasonal influences appear to be causing the behavior. Conversely, we are seeing growth in tool and equipment, imports, and temperature-related products, but unfortunately, these have not completely covered the softness we experienced in other areas.

Do we have to wait for the winter to see improvements in those categories, or is it possible that as we progress through the year, those impacts might subside?

I believe you're spot on, Chris. I mentioned in my prepared remarks what we saw back in 2012, which leads me to think it may be the case again. Our team is not sitting idly by; they have a strong sense of urgency to work with our customers in the field and support them. The focus is to get our growth curve moving again in Q3 and Q4. We believe the initiatives we've set forth will enable that.

So you mean that as we move away from winter, growth can resume without having to wait for winter weather to help those categories?

That's correct.

As for July, did the regional differences you characterized in June also apply? Will the July acceleration in weather-sensitive categories align more with the Northern tiers?

It may be a little early to ascertain this, Chris; you also had the July 4 holiday impacting us. It might take more time to clarify. The favorable temperatures we experience now—like they say St. Louis might reach over 100 degrees—should positively influence our business and products closely related to those temperatures have historically performed well.

Just to wrap up, when you claim July is mirroring June, you're suggesting that there isn't any negative impact from the calendar adjustments?

Correct.

Thanks very much, guys.

All right. Thank you.

Thanks, Chris.

Thank you, congrats, Tom and Paul. I'm looking forward to collaborating with you as we move forward.

Thank you, Tony.

I wanted to discuss a bit more about the initiatives in place to drive the sales growth. You outlined some of those around auto, but if you examine your four segments, could you categorize them according to acquisition, digital expansion, and footprint expansion, and share where the greatest opportunities lie in those four categories?

Certainly, we’re looking at strategic acquisitions in every one of our businesses. In 2016, we've made impactful acquisitions in three out of four segments. We are active across all four but have closed deals in Industrial, Office, and Automotive. Regarding expanding the footprint, both domestically and internationally, this is primarily targeted towards our Automotive business. We have new distribution initiatives underway in the U.S., Mexico, Canada, Australia, and New Zealand. Our GPC Asia-Pac business has seen great success, and we'll work to continue that growth. Digital capability initiatives apply across all four businesses as we pursue e-commerce strategies. The overarching goal is enhancing share of wallet, which encompasses all four businesses and is fundamental to driving our growth.

Especially regarding distribution, are the SG&A savings attributable to being more effective across your distribution at all locations?

We believe that is the case, Tony. When we analyze recent acquisitions—such as the bolt-ons we've done—the Safety Zone and Rochester Midland's sanitation acquisition, for instance—we find cross-selling opportunities and infrastructure efficiencies prevalent throughout the organization. Additionally, we observe advantages on the cost of goods sold due to these acquisitions, allowing us to leverage across the organization, impacting both gross margin and SG&A.

One thing I might add, Tony, is that we've observed SG&A savings coming from the gross goods sold side as well. In looking at our acquisitions and product categories, we’re able to utilize common buying power across the organization, benefiting our total expenditure.

So this will extend beyond 2016 and continue as a result of the integration and efficiency gains?

Correct.

I wanted to clarify—what's your revised guidance on Industrial? Did you say down to flat?

Yes. Our guidance for Industrial now stands at flat to up 1%.

Flat to up. Great, thank you.

You're welcome.

All right. Thank you.

Hey, guys. How are you?

Hey, Scot.

Hey, Scot.

Specifically asking about auto at this point, any change in the competitive environment worth noting? There's been a lot of changes in the industry over the last, let's say, 12 months or so. We generally understand the weather impact given the industry's experience in 2012. However, in 2008 and 2009, your Auto business lagged significantly behind your peers. I believe it was a function of uncompetitive pricing in a couple of categories; it might've even been ride control. Are there any noticeable changes in the competitive environment, specifically regarding your pricing relative to the market?

I would mention that we haven't noticed any substantial shifts in the competitive landscape. Pricing remains stable among our competitors. It's evident that everyone is striving for market share within this tough environment, but we have not faced any significant deviations amongst our key competitors. Regarding pricing by product or product category, I remember your reference to 2008 and 2009, which occurred as we adjusted our pricing strategy. We're not seeing any significant outlier pricing today in any specific category. Our teams appropriately price jobs based on daily and weekly inputs from the field, and though there are occasional adjustments, I think generally we’re on par with the competitive landscape.

Can you refresh my memory on how you ended up in the pricing quandary you did back in 2008 and 2009? I thought you guys were also conducting price scans and competitive pricing checks at that time.

I joined the Automotive Parts Group in 2009. If I recall correctly, the shift stemmed from our competitors reducing their pricing, particularly in retail. We eventually regrouped and reacted appropriately, leading to a business recovery. However, when I joined in 2009, we were still transitioning out of that situation.

Got it. Very helpful. Thank you.

You're welcome.

Hey, good morning, guys.

Hey, Bret.

Congratulations to Tom and Paul as well.

Thank you, Bret.

You mentioned energy market softness. Is that specifically in Texas and Oklahoma, or has it spread further? Also, could you compare, as you mentioned a 400 to 500 basis-point spread between the North and the Central or Northeastern markets—how does that compare to energy market comps?

When we look at our energy-related market, certainly, Texas and Oklahoma are the first areas people look to, and that’s been heavily impacted—both regions have seen challenges. However, we also observe impacts in the fracking regions, including portions of the Mountain Division, Montana, Dakotas, and Pennsylvania, where fracking activities were previously strong. Additionally, we see pressure in the oil sands areas in Canada, particularly Alberta. So yes, it's not limited to strictly Oklahoma and Texas. As to your second question, the energy market has exhibited a similar 400 to 500 basis-point gap impacting that region.

Finally, you mentioned air conditioning or temperature-related products being up double-digits. Are your in-stock levels fine there? Is demand exceeding supply, or do we have stability in inventory?

I can confirm that our inventories across the entire business are being assessed. We introduced a new predictive modeling engine for this purpose, and we're increasing inventories in challenged categories. For our AC products, we haven't encountered issues, to my knowledge, at this time. We're appropriately positioned as we head into the latter half of the summer.

Great. Thank you.

You're welcome.

Hi, Tom. Hi, Paul. Congratulations to both of you.

Thank you, Brian.

Thank you, Brian.

Carol, you did a great job on working capital. Was any portion of that attributable to changes in currency?

No. Our currency-neutral numbers were smaller this quarter than in the past. However, the improvements in working capital chiefly result from accounts payable across all segments. We saw a nice improvement in inventory as well—about $85 million cash was sourced from inventories this quarter, notably from Automotive. Thus, we are pleased with additional advancement in inventory management, and we anticipate further improvements in the back half.

Excellent and encouraging. On the NAPA comps, company-owned stores were down 2% in the U.S. Were they down internationally?

They actually showed growth internationally. Canada was low single-digits, while Australia and New Zealand were mid single-digits.

Just to clarify, our company-owned stores had flat same-store sales for the quarter, while overall, U.S. automotive was down 2%.

Thanks for the clarification. Good luck ahead.

Thanks very much, Brian.

Hi. Sorry to prolong the call, but I felt the need to follow up on Brian's last question. If we consider the delta between flat comp in the U.S. and total down 2%, is it due to lower sell-in to the franchise stores or the network? What might be driving that decline?

You got it exactly, Matt.

Any sense of their sell-through relative to that decline, or was it tough to depot back inventory as that represents a distinct pace of business compared to what you observe at company-owned stores?

Our independent owners are performing well in the marketplace; we've not identified any specific issues impacting our major independent owners. They did build inventory a bit toward the end of Q1, potentially affecting results. However, we don’t believe anything unusual is occurring on the independent side compared to our company-owned stores.

Understood. Thank you very much.

Thank you, Matt.

We would like to thank everyone for participating in today's call, and we look forward to reporting our third quarter results. Once again, we want to thank Tom Gallagher for his leadership over the last 46 years and wish Paul the best. Thank you for joining us.