Genuine Parts Company (GPC) — Q1 2017 Earnings Call Transcript

Good morning and thank you for joining us today for the Genuine Parts Company first quarter 2017 conference call to discuss our earnings results and current 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 President and CEO, Paul Donahue. Paul?

Thank you, Sid, and welcome to our first quarter conference call for 2017. We appreciate your time this morning. Earlier today, we shared our first quarter results for 2017. I will provide some comments on our overall performance before detailing the highlights by business. Carol Yancey, our Executive Vice President and Chief Financial Officer, will give an update on our financial results and outlook for 2017. Afterward, we will open the floor to your questions. To summarize our first quarter performance, total sales rose 5% to $3.91 billion. Net income increased 1% to $158.9 million, and earnings per share grew 3% to $1.08, compared to $1.05 in the first quarter of last year. These results reflect total sales and earnings across our global Automotive, Industrial, Office, and Electrical operations, which we will discuss in detail throughout the call. We started 2017 as a stronger and more diversified global distributor, and our diversification continues to yield complementary benefits. We can share and implement best practices on the operational side while leveraging our infrastructure, and our diversity helps us insulate against various challenges across a broad platform. This supports our ability to drive sustained growth and generate strong cash flow, even when facing challenges in certain businesses. A recent example is the progress we have made in our industrial distribution and international auto businesses over the last few quarters. This quarter, we achieved strong sales growth in these sectors while addressing the challenges in our U.S. auto business. As part of our comprehensive strategy, we remain committed to four key growth initiatives: executing fundamental initiatives to increase our share of wallet with existing customers; pursuing an aggressive and disciplined acquisition strategy focused on geographical and product line expansion; enhancing our digital capabilities across all four businesses; and further expanding our U.S. and international store footprint. Our advancements in these areas led to sales increases across all four business segments, making our 5% total sales growth the strongest quarterly increase since the fourth quarter of 2014. While we are pleased with the progress made, we are even more optimistic about the potential for further improvement in our sales performance for the remainder of the year, both organically and through ongoing complementary acquisitions. So far in 2017, we have acquired businesses with nearly $140 million in annual revenues that will contribute positively to our results for the remainder of the year. We will elaborate on this initiative as we discuss each segment. Let's start with our automotive operations, which comprised 51% of our total revenues in the first quarter of 2017. For the quarter, global automotive sales increased 3.4% from last year, up from the 2.4% rise in the fourth quarter of 2016. Comparable global sales grew by approximately 1.5%, including a 4% growth from our international operations. Total sales from our U.S. operations, which account for over 70% of our total automotive revenues, rose 1% in the first quarter, although comparable sales decreased by 1%. Both commercial and retail platforms saw slight declines, impacted by another mild winter and a generally challenging sales environment during the first three months of the year. On the commercial side, sales to our NAPA AutoCare Centers increased by 2%, driven by new member growth, whereas sales to major accounts and fleet customers faced pressure. Sales were particularly tough in the heating and cooling and undercar categories, correlating with warmer-than-average winter weather across much of the country. This was especially notable in January and February, except for some regions in the northern Rockies and Northwest that experienced more typical winter temperatures. We are energized by the opportunities to strengthen our retail business, including our NAPA Rewards Program, which now has 4 million members, the rollout of our retail impact initiative, extended store hours, and enhanced training for our associates. We plan to upgrade over 450 stores by the end of 2017, and although these stores represent a small portion of total sales, the updated locations are generating low double-digit retail sales growth. Regarding trends in the U.S. Automotive aftermarket, the key drivers for our business remain solid. The size of the vehicle fleet continues to grow, and the average age exceeds 11.6 years. Lower fuel prices are favorable for consumers, and the number of miles driven is increasing. In February, miles driven rose 1.9%, marking 36 consecutive months of gains, and is up 2% year-to-date, driven by lower fuel prices. The national average price for gasoline was $2.48 in March, which, although higher than last year, is still relatively low compared to prices from 2010 to 2014. As a result, we anticipate further increases in miles driven and, consequently, more parts purchases in 2017. The first quarter typically presents our most challenging comparisons in the U.S., but we expect improving sales trends as we progress through the year, particularly in the second half. This aligns with our expectations entering 2017, and so far, it appears to be unfolding accordingly. We remain focused on expanding our key commercial programs, NAPA AutoCare and major accounts, executing on our retail strategy, and expanding our footprint through new store openings and strategic acquisitions. We are actively pursuing accretive additions to our business, and this morning, we announced the acquisition of Merle's Automotive, a 15-location Automotive Group in Tucson, Arizona, with approximately $45 million in annual revenues. Merle's is a key player in this market and will enhance our store footprint and competitiveness in Arizona. We are excited to welcome the Merle's team to NAPA and look forward to their positive contributions to our growth. Now, turning to our International Automotive businesses in Australasia, Canada, and Mexico, which account for nearly 30% of our global automotive revenues, these operations reported combined total sales growth of 8%, including a 4% increase in comparable sales in local currency, consistent with the fourth quarter of 2016. In Australia and New Zealand, first quarter sales rose by high-single digits, supported by solid comparable sales growth and the benefits of our 2016 acquisitions in the region. The Asia Pac business operated with 56 more stores in the first quarter of 2017 compared to the same period last year, and we see opportunities for further expansion. Additionally, the underlying fundamentals for the aftermarket remain solid, including growth in auto parts driven by record car sales, low gas prices, and upward trends in miles driven. At NAPA Canada, total and comparable sales rose in the mid-single digits, slightly better than the fourth quarter of 2016, reflecting a more favorable sales environment across Canada in 2016, partly due to improvements in the energy sector in Western Canada. Solid industry fundamentals, including a growing vehicle fleet and historically low gas prices, bode well for the future of the Canadian aftermarket. Overall, our growth prospects at NAPA Canada remain positive for the rest of 2017. In Mexico, sales grew by low double digits for the second consecutive quarter. We continue to expand our NAPA Mexico footprint, now totaling 33 stores, with plans to add more locations in the coming quarters. Reviewing the quarter, we are pleased with our International Automotive sales performance and expect continued strong results from these operations throughout the year. Now, let’s discuss our industrial business. Motion Industries accounted for 31% of our total revenues in the first quarter and increased by 6.9%, an improvement from the 4% growth in the fourth quarter of 2016 and our strongest quarterly performance since late 2014. Comparable sales also improved, up 3% from last year, also better than the slight increase in the fourth quarter. Our industrial sales strength seems to derive from favorable market conditions. Key industrial indicators, such as industrial production and the purchasing managers index, have continued to improve, and the energy sector is making progress in its recovery. Rig counts have nearly doubled since last March, positively impacting our customers reliant on the oil and gas sector. Similarly, export levels have improved, signaling a positive trend for equipment and machinery customers in the OE sector. A review of our Motion business across industry sectors, product categories, and top customers supports our first quarter growth. Various sectors, including food products, aggregate and cement, iron and steel, and oil and gas have all outperformed. Moreover, every primary product category saw positive sales growth, and our top 20 customers improved their collective sales from mid-single-digit growth in the fourth quarter of 2016 to high single-digit growth this quarter. Overall, from a product, customer, and market perspective, the industrial business had a solid first quarter, and we aim to build on this performance moving forward in the year. I would like to take this opportunity to update you on a recent investment in the Inenco Group, which we announced on March 30. Inenco, based in Sydney, Australia, is one of Australasia's leading industrial distributors of bearings, power transmission, fasteners, and seals. Currently, Inenco has 161 locations across Australia and New Zealand, with an emerging presence in Asia, particularly Indonesia and Singapore. For context, Inenco generates annual revenues exceeding AUD 400 million. Effective April 3, we acquired 35% of the company, similar to our initial investment in Exego, the automotive business we now call GPC Asia Pacific. We expect to ultimately acquire the remaining stake in Inenco. This investment is attractive for numerous reasons. It presents significant growth opportunities within our core industrial segment, as well as potential synergies with our existing industrial business in North America and our Australasian automotive operations. It allows us to build upon our presence in Australasia and serves as an entry point into Southeast Asia, a market of interest for us. Additionally, it broadens our reach beyond North America, aligning us with a leading industrial distributor in the large, fragmented, and growing Australasian market. We are thrilled to collaborate with an experienced and talented management team at Inenco, and we believe this investment will benefit our shareholders in the long term. Now, moving on to EIS, our electrical distribution segment, first quarter sales for this group increased by 5%, a significant improvement from the flat sales recorded in the fourth quarter of 2016. Additionally, comparable sales at EIS grew by 2.5%, our first quarter with positive comparable sales since the fourth quarter of 2014. We are encouraged that the momentum in our industrial business is beginning to positively influence our electrical segment at EIS, which should lead to improved sales in the upcoming periods. Moreover, last October’s CPS acquisition has performed well, bolstering sales within the wire and cable division at EIS. On April 1, we announced the acquisition of Empire Wire and Supply, which will also enhance EIS's wiring cable business. Empire offers custom cable assemblies and distributes network, electrical, automation, and safety products, with three locations in the U.S. and one in Canada. This acquisition, anticipated to add $65 million in annual revenues, will further enhance our capabilities in serving the industrial robotics and automation markets. We are eager to expand this business further as part of the EIS team. Lastly, a brief update on the Office Products business, which constitutes 13% of our first quarter revenues. The Office Products Group reported a 9% increase in sales, spurred by an 11% contribution from acquisitions in the facilities, break room, and safety supplies categories. Excluding acquisitions, comparable sales declined by 2% in the first quarter as the ongoing drop in demand for traditional office supplies continues to affect sales through our independent retailer customer base. Sales to our national accounts, e-tailers, and FBS distribution customers rose during the quarter, and the 2% decrease in comparable sales is an improvement from the declines we faced throughout 2016. Notably, our new FBS business with one of the national accounts has driven much of this improvement, and we anticipate further growth in this channel in the future. In terms of products, sales in traditional office supplies, furniture, and technology categories saw decreases, while the FBS category experienced solid growth. The continued expansion of our SBS products and services is a crucial aspect of our growth strategy at SPR, with FBS sales accounting for 32% of total sales in this segment, up from 25% a year ago. We have plans for further growth in our FBS business, including strategic acquisitions going forward. In summary, we have reviewed our consolidated and business segment sales results and the initiatives underway to generate sustainable growth in both the near and long term. We were pleased to achieve a 5% sales increase in the first quarter of 2017 and build on the 3% growth seen in the fourth quarter of 2016. It is encouraging that our overall growth was fueled by increases in sales across our four businesses, with positive comparable sales in all but one segment. Now, I will hand it over to Carol to provide a financial update and our revised outlook for the year. Carol?

Thank you, Paul. We'll start with a review of our key financial information and then provide our updated outlook for 2017. As Paul mentioned, total sales in the first quarter were $3.9 billion, reflecting a 5% increase, which included a 1% rise in comparable revenues. Our gross margin for the quarter stood at 29.6%, slightly down from 29.7% in the same quarter last year, mainly due to reduced supplier incentives. We anticipate these incentives to improve throughout the year, and along with our ongoing initiatives to enhance gross margins, we expect better comparisons in upcoming quarters. The pricing environment remains stable compared to the previous quarter, with slight deflation in the Automotive segment balanced by slight inflation in our Industrial, Office, and Electrical businesses. Supplier price changes in the first quarter showed a 0.2% decrease in Automotive, a 0.3% increase in Industrial, and a 0.4% rise in both Office and Electrical. Regarding SG&A, our total expenses for the first quarter reached $912 million, a 6% increase from last year, accounting for 23.3% of sales. While we are not satisfied with the 28 basis points increase year-over-year, we have seen improvement from the fourth quarter of 2016 as a percentage of sales, and we are focused on driving further cost savings. The increase in SG&A is primarily due to the deleveraging of expenses in our U.S. Automotive and Office divisions, along with rising labor and delivery costs and ongoing IT and digital investment spending. As anticipated, our costs related to recent acquisitions rose year-over-year, but we are gradually eliminating these as we integrate the new businesses. Among our cost-saving initiatives, we are monitoring expenses closely and reducing unnecessary costs as we rationalize our facilities to streamline our cost structure. This process aims to lower overall distribution costs across all businesses, and combined with our technology investments, we expect to make significant progress towards reducing costs while increasing efficiency in our distribution infrastructure in the future. Moving on to results by segment, our Automotive revenue for the first quarter was $2 billion, a 3% increase compared to the previous year. Our operating profit of $152 million is down 1%, with an operating margin of 7.6% compared to 8.0% in the same quarter last year, mainly due to deleveraged expenses in our U.S. operations. Our Industrial sales reached $1.2 billion in the quarter, a 7% increase from the past year. Operating profit was $90 million, up 10%, and the operating margin improved to 7.3% from 7.1% last year. This segment benefitted from overall sales growth, favorable product mix shifts, and positive cost savings impacts. Office Products revenues were $519 million, a 9% increase from last year. Their operating profit of $31 million dropped 9%, with an operating margin of 6.0%. While this has improved since the fourth quarter, the Office margin remains under pressure due to a decrease in organic sales and increased costs from serving more sales channels, including e-tailers. To address these challenges, we've launched several cost initiatives aimed at achieving significant savings in this sector in the coming quarters. Sales for the Electrical/Electronic Group were $184 million in the quarter, a 5% increase from 2016. Operating profit of $14 million is down 8%, leading to a margin of 7.4%, compared to 8.4% last year. While we are encouraged by the sales growth this quarter, we faced pressure from customer and product mix shifts, which negated some of the benefits from our cost-saving measures. Our total operating profit in the first quarter increased by 1%, and our operating profit margin was 7.3% compared to 7.7% last year. As we noted in our last call, we anticipated a challenging first quarter from a margin perspective and are fully committed to pursuing cost savings to enhance margins across our businesses for the remainder of the year. Our net interest expense for the quarter was $6.2 million, increasing by $1.4 million from last year due to higher debt levels and certain variable interest rates. We are updating our net interest expense projection to $23 million to $24 million for the full year. Our total amortization expense was $10.8 million for the first quarter, up from $8.8 million last year. Consequently, we are adjusting our estimate for full-year amortization to around $45 million. Depreciation expense for the quarter was $27 million, slightly higher than last year. For the full year, we expect total depreciation to be between $115 million and $125 million. Together, we anticipate total depreciation and amortization to be around $160 million to $170 million. The corporate expense line, which largely reflects our corporate costs, amounted to $26 million for the quarter, up from $24 million last year, primarily due to increased personnel and IT security costs. For 2017, we expect corporate expenses to range between $100 million and $110 million, consistent with our previous guidance. Our tax rate for the first quarter was 34.3%, compared to 35.9% last year, with the reduction attributed to a higher percentage of foreign earnings taxed at lower rates. The newly adopted change in accounting for stock-based compensation positively influenced the first quarter rate, in addition to a favorable adjustment for a nontaxable retirement plan valuation. We are updating our expected income tax rate for the full year to a range of 35.5% to 36%. Our net income for the quarter was $160.2 million, a 1% increase from last year, and our EPS was $1.08, reflecting a 3% rise. Now turning to our balance sheet, which remains strong and in great condition. Our cash as of March 31 was $178 million, down by $27 million from last year, but our cash position continues to support our growth initiatives across our distribution businesses. Accounts receivable increased to $2.1 billion, up 5% from last year, in line with our first quarter sales growth. Our inventory at the end of the quarter was $3.3 billion, up 7% from March last year. Without acquisitions factored in, our inventory increased by 3%, and we will continue to maintain this key investment at appropriate levels as we move forward. Accounts payable at March 31 stood at $3.2 billion, up 9% from the previous year, due to higher purchasing levels, improved payment terms, and acquisitions. Our accounts payable inventory ratio was 98% at March 31, a 2-point increase from 96% a year prior, as well as equivalent to December 31, 2016. Our working capital was $1.6 billion at March 31, a slight rise from last year. We continue to effectively manage our working capital, which is a top priority for the company. Our total debt at March 31 was $1 billion, compared to $700 million in March of last year, resulting in a total debt-to-capitalization ratio of approximately 24%. We are comfortable with our current capital structure, which provides the flexibility and financial capacity necessary to pursue any growth opportunities we may choose to explore. In summary, our balance sheet remains a significant strength for the company. In the first quarter, we generated $102 million in cash from operations, and we continue to anticipate strong cash flows for the full year. Our initial guidance projects cash from operations to reach approximately $950 million, with free cash flow—excluding capital expenditures and dividends—estimated at around $400 million. We remain committed to several priority areas for cash utilization that we believe will maximize shareholder value, including strategic acquisitions, share repurchases, reinvestments in our businesses, and dividends. We purchased 1 million shares in the first quarter, and currently, we have 3.2 million shares available for repurchase. We do not have a specific pattern for these repurchases, but we plan to remain active in the program moving forward, as we believe our stock is an attractive investment and, along with dividends, provides optimal returns for our shareholders. Our capital expenditures during the first quarter totaled $25 million, an increase from $12 million last year. For the entire year, we now plan for capital expenditures between $145 million and $160 million. Regarding dividends, 2017 marks our 61st consecutive year of increased dividends to our shareholders. Our annual dividend of $2.70 signifies a 3% increase from 2016 and constitutes approximately 57% of our 2016 earnings. This concludes our financial update for the first quarter of 2017. In summary, while our top-line growth is encouraging, there are still many opportunities to enhance our gross margins and better manage expenses in our businesses. These areas remain our top priority, and we are dedicated to driving improved gross margins, greater efficiencies, and cost savings as we progress throughout the year. We look forward to updating you on our progress in these initiatives. Now turning to our guidance for 2017, based on our current performance, growth plans, and market conditions, we are updating our full-year 2017 guidance as follows. We still expect total sales to grow in the range of 3% to 4%, unchanged from our initial guidance. This outlook includes the positive impact of our year-to-date acquisitions, including the Merle's acquisitions, effective May 1, but excludes any future acquisitions. We also anticipate a slight headwind from currency translation for the full year. Our comparable sales growth is still projected to be in the range of 2% to 3%. By business segment, we are maintaining our initial sales outlook of 3% to 4% growth for Automotive and Industrial, and 2% to 3% for Office. In the Electrical segment, we are raising our sales outlook to 7% to 8%, up from our initial projection of 1% to 2%, to incorporate the addition of Empire, effective April 1, 2017. On the earnings front, we are increasing our full-year earnings per share outlook to a range of $4.75 to $4.85, up from our initial guidance of $4.70 to $4.80 for 2017. Our updated EPS range accounts for the acquisitions we discussed today, including the Inenco investment, as well as our expectations for a lower tax rate. This represents an increase in EPS of 3.5% to 6% over 2016, while we expect earnings growth to progressively improve throughout the year. In closing, we want to express our gratitude to all of our GPC Associates for their continued hard work and commitment to the company's future growth. I'll now turn it back over to Paul.

Thank you, Carol. So we are pleased to raise our 2017 earnings outlook as we move forward with the goal of building on our current sales momentum. We are focused on further strengthening the core sales across our businesses as well as maximizing the benefit of our recent acquisitions. We are also committed to executing on our plans to enhance our gross margins and secure cost savings leading to stronger earnings growth. So in closing, I'd like to add my sincere thanks to our GPC Associates across the globe for a really solid start to 2017. And with that, we'll turn it back to Kayla, and Carol and I will be happy to take your questions. Kayla.

This is Jerry Sullivan for Chris. Question around tax refunds. Were tax refunds a significant impact in, I guess, late January and February? And did you see, I guess, an uptick in sales in March as the refund flow started to come to consumers?

No. Jerry, look, it may have had a small impact but it's really difficult to quantify. And if you look at our business with the majority of our business being driven by the commercial sector, I'm not sure that we would've been impacted like perhaps one of our peer groups is a bit more reliant on the DIY customers.

So I take it whether was a bigger impact in February and January and then kind of impacted March. Or how should we think about that?

No. You would be correct. January, we got off to a slow start in January, and February got a little better, and March similar to February. And look, we hate to play the weather card, but the fact is weather had a significant impact. We had a very warm January, a warm February across the country with the exception of our business out West, which was basically cold and wet, and then winter returned in March in the Northeast. And for a lot of you folks who live in the Northeast, you know we had a foot of snow up there in some markets in the Northeast that rolled in, and that cost us business. We had stores that were closed and we had DCs that were closed in the month of March. So look, it's a fact of life. We all deal with it, but it absolutely had an impact on our U.S. Automotive business.

Got it, thank you.

Two questions, Paul, I guess to follow up on that one. You hate to go to weather but you were already there. I guess given your history experience, when you do see a late winter come with that late kind of storm, understand that it can hurt sales at those actual days or weeks, are you seeing any signs that, that late part of the winter that came in has actually helped some of the spring demand? Or are we still at that trend that we've been sort of running through the first quarter?

The trend is similar, Greg. And look, so not that we're into April. Of course, we got the Easter holiday hitting us in the middle part of the month. So it's early yet to really make a call as to what the impact was. Look, if there's anything good, the snow and the cold that returned in March in the Northeast probably blew out some winter goods that we have stocked up on and had hoped to sell in both January and February. So if there was any benefit, we probably blew out some of those winter goods in late March.

And on the comps, can you remind us if the selling days in the first quarter this year are the same as last year? I know we had a leap year last year and an Easter shift. Was this year's comparison accurate?

It was, yes, absolutely. The number of days in the quarter were consistent, 2016 to 2017.

Great, and then Carol, I just want to follow up on the guidance to make sure I got it right. The $0.05 change was basically driven by two things, the acquisitions you've made since the guidance in the early part of the year and then the lower tax rate. Were those the two factors that caused the change?

Well, yes, Greg, we considered all the factors. So the acquisitions, which would be the 35% investment in Inenco as well as Empire and Merle's. And then the lower tax rate. But we also considered slight increases in our interest expense and our amortization expense as well. And then look, just the additional headwinds, if you will, in keeping our core sales consistent throughout the year with Automotive and Industrial, so we consider all those factors in $0.05.

Okay, and you mentioned a lower tax rate. Is that the accounting change on some of the stock comp? Is that what drove that. And is that something we should model out in perpetuity? Is that just a this year issue?

So that is one of the reasons for the lower tax rate. We traditionally have a lower rate in the first quarter, but there were three things that drove the lower rate. One was the mix of foreign earnings because they were stronger Q1 because of the stronger sales results. Two was the impact of the stock option change, and then three was we had a favorable nontaxable retirement plan adjustment in Q1. So that was about a third, a third, a third, if you will. We have modeled our stock option change into our lower rate guidance for the rest of the year, and that faced that way. But I can tell you, that's an extremely hard to predict number because it depends on what stock options are exercised in the future depending on what your market price is. So we've modeled a similar number for the rest of the year as Q1 but that's in our guidance.

Okay, that is great, thanks.

Thank you, good morning. I'll return to the second question shortly, but I want to begin with a question primarily related to the Industrial business even though it should be relevant across the board. We've heard from some of your industrial peers about their pricing strategies and the effects of increased price transparency on their pricing models and, in some cases, on margins. Can you discuss your pricing strategy? Are you observing a different dynamic in the market regarding pricing in the Industrial business, or do you believe this is more specific to some of your peers and consistent with the market you've been experiencing?

Yes. Matt, I'll give it a shot, and Carol, you jump in here if you have a comment. But certainly, I'm assuming you're referencing a business that released yesterday, Matt. And the fact is that our business is different. And while we're watching what's going on in their world, it's really not impacting us. And if you look at our business and our model, it's certainly more of a contractual business and the business that you're referencing is a very small portion of our overall.

And Matt, I would just add that Motion, and you can see it in our operating margin, both their gross margin, their core gross profit as well as their G&A were improved in the quarter. So we're not really seeing that impact and we're not really expecting that. I mean I think for Motion, it is unique to the company that was discussed.

So back to Automotive for a moment. Clearly, the weather affected the business in the quarter. If we recall 2016, which was a sluggish year for the industry, one factor mentioned was the warm winter we experienced. Although this year wasn't entirely unique, it was somewhat similar. How does this winter, which is essentially over, influence your expectations for Automotive revenue for the remainder of 2017?

For the U.S, we are sticking to our guidelines. We expect to see improved sales, as I mentioned earlier. Q1 was certainly our toughest comparison that we'll face all year. We anticipate that many of our current initiatives will start to take effect. Once we move past some of these weather challenges, we genuinely expect to see better business for the remainder of the year in our U.S. Automotive sector.

And then finally, on Automotive. Sorry, Carol, go ahead.

Matt, I just want to reiterate on our core growth for Automotive, our guidance remains at plus 3% to plus 4%. So that's offset by acquisitions and FX. But implied in there is probably plus 2% to plus 3% for U.S and slightly stronger for international.

Got it, alright, thank you so much guys.

Thank you for taking my question. I have a quick question for you. How does the margin structure compare between Asia Pacific and the U.S.? I assume that company-owned stores have a higher margin, but I'm interested in the operating margin structure for both the auto sector and then for industrial.

Yes, and so our margin structure for both Australian businesses and Automotive and Industrial would be comparable. Asia Pac, when we bought them at very comparable margins, what we've seen there is really nice improvement in their top line growth. So then that kind of drives more of an upsized margin improvement but similar margins. And then the Inenco business would be similar margin to our Motion business as well.

What excites us, Chris, on our acquisition of Inenco is the synergies that we believe we can drive both with our Motion business, our Industrial business sharing many of the same key suppliers, global suppliers and some of the best practices potentially adding additional new product lines to our Inenco business but also taking advantage of the infrastructure and footprint that we have on the ground now in Australia and New Zealand to drive improved indirect cost as well. So look, it's early and we're still at just a 35% owner but we see a template very similar to the path we went down with the Revco business four years ago and that's certainly what we intend to replicate.

Got you. And just the indirect, I mean what are you sharing, is it a corporate office space? Is it oversight corporate? Like what are some of the indirect synergies between, I guess, Automotive Australia and Inenco.

It can encompass anything from freight to ocean cargo to technology to digital solutions. There is a wide range of warehouse management systems and various indirect programs that we implement immediately for all our acquisitions.

Chris, we don't plan to share facilities in Australia and New Zealand at this time, but we will definitely utilize our global sourcing offices in China for all our businesses, particularly for both of our operations in Australia.

That's helpful. And then overall, your Automotive revenue is fairly strong, a little bit weak in the U.S. but margins kind of gave in a little bit. So I was just trying to figure out kind of what drove the margin weakness in Q1 in Automotive.

Yes, look, the comparable sales growth for U.S Automotive was down 1%. So it's a loss of leverage on the U.S Automotive side that drove that margin. And so what we're expecting is that second half of the year is a bit better.

That makes a lot of sense. Paul, just one housekeeping. Could you just give us the compares for the U.S from last year? I think you gave us 0% in Q4 that might come to fill out '16 just to get a sense of the cadence.

Chris, I don't have that number in front of me right now. So as we went through 2016, our U.S. comparable sales in the first quarter were our strongest, up 4%. Then we were down over 2% in Q2, down 2% in Q3, and basically flat in Q4.

That's helpful, thank you, thank you so much I will pass the line, thank you.

Good morning. Historically, what impact, if any, has declining markup pricing had on your business? And do you think there's any credence to the idea that used vehicle values declined and scrap rate may actually go up since the value proposition of fixing up a car versus replacing it becomes a little less compelling?

Well, let me address that, Elizabeth. The scrap rate is an important measure for assessing the overall health of our automotive business, and it has been relatively stable. In my view, a decline in used car prices is unlikely to have a significant effect. The size of the fleet in the U.S. is substantial, and it typically requires a significant change to impact the market, so we don't expect any major shift.

Okay, that's helpful. And looking at DIY versus DIFM, what percentage of your auto business is currently DIY? And how has that trended over the last several years?

Yes, it's remained fairly consistent, with approximately 75% of our business coming from DIFM commercial and 25% from DIY. We are currently implementing several initiatives to drive more retail business through our stores. We operate 1,000 company-owned stores and 5,000 independent stores. We have learned from our counterparts in Australia, who have a strong retail presence, and are upgrading our stores, extending hours, and enhancing the overall shopability. We're seeing positive results in the stores that have adopted these new changes. To summarize, the DIFM sector is growing, which aligns with our heritage, and we believe that our continued growth will stem from this area.

Okay, great. I have a quick question about acquisitions. It appears that in the last month, you have made a couple of smaller acquisitions along with one larger acquisition in the Industrial, Auto, and Electrical segments. What are the multiples looking like for the various segments this year compared to last year? Have there been any significant shifts where you're seeing particularly compelling opportunities in one or two segments compared to others?

Yes. Our objective for M&A is to maintain an aggressive but disciplined acquisition strategy. We aim for multiples between 6 to 8 times. However, for the right strategic opportunity, we might occasionally exceed that range. Historically, we tend to remain within our target range, and that will continue to be our intention moving forward.

Alright, thank you.

Thanks a lot, and good morning. The last few quarters, you guys have given us gap between the performance in your auto business in your southern and northern regions. Can you provide that for this quarter?

Yes. The differences are narrowing significantly, and I can tell you that several of our eight divisions across the country are in different geographical regions. Most of them are closely aligned this quarter, with a couple of exceptions. One positive outlier showed strong single-digit growth in the mountain region of the U.S. I mentioned earlier that this region experienced a tough, yet more typical winter. Therefore, if we want to understand the impact of weather on our business, it’s evident in the growth we saw. Our teams performed well there too, so it's not solely due to weather. Conversely, there was a greater decline in the northeastern region compared to our regular divisions, which had the warmest winter in 25 years, except for a brief cold spell in March. So, those are the two outliers, while the rest remained fairly consistent.

Got it. So the range you're talking about for most of 2016, the 400 to 500 basis points gap between the North and South is much more narrow than that, would you say, 100, 200 basis points in that type of range.

In the 200 basis point range.

Got it, thanks for that. And then secondly, regarding the fleet business, you talked about some improvement in the oil economy and the benefits to the Industrial segment. But what about in the auto segment? Why aren't we seeing any improvement in the fleet business that is somewhat oil economy-centric?

Seth, it's a great question and one that we've discussed internally. We really think there's a bit of a lag effect in terms of the growth we're seeing because if you look at our business in the Southwest, whether it's our Industrial business or in our Automotive business, our Southwest business is bouncing back. And we just think there's a bit of a lag effect that is yet to kick in, but we do believe that's coming and one of the reasons why we feel pretty good about the balance of the year.

Got it, okay. And last thing, in terms of the cadence really our business through the year. In the second quarter you talked about comparisons easing substantially but it also sounds like you're not planning for much of an improvement in comps here in the second quarter, so it's really back half that you're looking for. What is it about the second quarter besides Easter that gives you a bit of pause?

Well, it's still a bit early, Seth. And look, Easter absolutely has an impact and we've seen it in the month. So look, I think that as I mentioned to Chris earlier, the comps get a good bit easier here in Q2 and Q3. And our expectation, Carol walked you through what we still expect in our U.S. comps and that's where we expect to be.

Good morning, guys. On the Merle's deal, and I'm just sort of thinking about that consolidation of the auto distribution in the U.S., and they were, I guess, a parts plus member and back at the end of the year one of your alliance members. Do you see that is there more of a strategy of owning the retail distribution auto. And do you think this is a result of further consolidation of the buying group members?

We've known Steve and the team at Merle's for many years, and Tucson is a market where they have a strong presence. We have a few stores there, but they are the leading player, making it an ideal fit for our Phoenix team in the Western Division. This isn’t always the case, as we often encounter conflicts with other groups in these markets, which complicates our ability to expand. However, we are really excited to welcome Steve and the Merle's team to NAPA, and we believe this will be a great fit for our Phoenix group.

Did you talk about what you paid for on a multiple basis?

No, we did not.

Okay. Ballpark?

Ballpark and our ranges that we discussed.

Okay. And you talked about the margin and I think you talked about lower supplier incentives. Was that lower supplier incentive on the auto side just because the negative comp you weren't getting as much supplier participation? Or is that supplier incentives in other businesses as well?

So actually, it was Automotive, Industrial, and office, a little bit more in Automotive and more driven by the lower comps.

Hi everyone, good morning.

Hi, Brian.

Want to talk about Inenco. And can you just discuss the purchasing mechanics for the remainder of the business, and is there an agreed-upon price right now? Or is that something that is up for negotiation down the road.

So Brian, it's similar to what we did with Asia Pacific; there is a future earnings target that's been established and a timeframe in which we expect it to be achieved. However, the specific timing is still uncertain. But, as we experienced with Asia Pacific, we managed to reach our goals a bit sooner than anticipated. The structure is very similar to our previous initiatives, indicating an earnings target within a certain timeframe. Whether this will be two years or three years is still to be determined.

Brian, I would just add that we hope and expect it will happen sooner rather than later, similar to our acquisition of the Revco business. It's a solid company, and we've had a longstanding relationship with the family, which has owned the business for many years. The connection between the Inenco team and our Motion team has always been strong, and honestly, we're quite excited about this opportunity.

It seems like a great opportunity. Just within Motion, so you talked a little bit about channel inventory and what you're seeing from your own customers and whether some of this is restocking ahead of optimism about the market or just simply meeting demand with purchases.

I think it's more of a meeting demand with purchases. I think and, look, that's why we were kind of we want to give a little bit more time to know that this growth is sustainable. So there's definitely signs there's new business, but I don't think it's as much as you described at the beginning. I think it's just more of the normal sales that's going on right now.

Alright, terrific, well, good luck.

Hi this is Mike for Scott, thanks for taking my question. Maybe talk a little bit about efforts you're making to improve margins in the coming year. And was just wondering if you could provide some context on the cadence of when you expect those improvements to show through, particularly maybe with some more color around the recent pressure in Office Products and Electrical.

Okay, sure. Our guidance suggests an earnings per share increase of approximately 3.5% to 6%, which we anticipate will be more evident in the second half of the year. In terms of how we're achieving this, we initially expected a flat margin for the year, but we’re seeing some improvement from the tax line. Specifically, on the EIS side, we have implemented significant reductions in facilities and headcount, and we are currently focusing on improving gross margins as well. In this quarter, we experienced a solid core growth of 2.5%, which we expect to continue throughout the year. On the office side, we took various measures last year in Q4 and made additional adjustments in Q1, including headcount reductions and changes related to freight and pricing, as well as facility considerations. Most of these improvements will reflect in the SG&A line and appear more prominently in the latter half of the year. Overall, when considering Automotive, Industrial, Office, and Electrical, growth will vary and influence the results accordingly.

Well, we'd like to thank you for participating in today's call and we thank you for your support and interest in Genuine Parts Company and we look forward to talking to you in July with our second-quarter results. Thank you.