Genuine Parts Company (GPC) — Q1 2019 Earnings Call Transcript

Good morning, and thank you for joining us today for the Genuine Parts Company first quarter 2019 conference call to discuss our earnings results and outlook for 2019. I'm here with Paul Donahue, our President and Chief Executive Officer; and Carol Yancey, our EVP and Chief Financial Officer. Before we begin this morning, please be advised that this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results as reported under Generally Accepted Accounting Principles. A reconciliation of these measures is provided in the earnings press release issued this morning, which is also posted in the Investors section of our website. Today's call also 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, including this morning's press release. The company assumes no obligation to update any forward-looking statements made during this call. Now, I will turn the call over to Paul for his remarks.

Thank you, Sid. Good morning, and thank you for joining us for our 2019 first quarter conference call. Earlier today, we released our first quarter 2019 results. I will make a few remarks on our overall performance and then cover the highlights across our businesses. Carol Yancey, our Executive Vice President and Chief Financial Officer will provide an update on our financial results and our current outlook for 2019. After that, we'll open the call to your questions. To recap our first quarter performance across our global platform, total sales were $4.7 billion, up 3.3% from Q1 of 2018, driven by a 3.3% comp sales increase and a 2% benefit from strategic acquisitions, net of a 2% headwind from foreign currency translation. Net income in the first quarter was $160 million, and earnings per share were $1.09. Excluding the impact of currency losses and transaction and other costs related to the sale of Auto Todo, one of our two automotive parts businesses in Mexico, adjusted net income was $187 million, or $1.28 per share, up 1% from adjusted EPS in Q1 of 2018. Overall, our sales and earnings were in line with our plan for the first quarter, which assumed a stronger currency headwind than we were expecting for the full year, as well as one less selling day relative to Q1 last year. In addition, as discussed in our year-end call, our plans accounted for the sale of the Auto Todo business. We can report we've successfully closed the sale of this business in the month of March. We are pleased to report another quarter of positive sales comps across each of our business segments while also benefiting from the favorable impact of ongoing strategic acquisitions. Our sales performance was indicative of the continued improvement in our U.S. automotive business. And the steady growth we continue to generate in our Australasian and Canadian operations. Our strength in these areas offset the pressure on our core automotive results in Europe related to mild winter weather and broad economic and political considerations. In addition, our industrial business remained strong and we made further progress in stabilizing the business products group. Turning to a review of our business segment, total sales in our Global Automotive Group were up 2.3%. This includes a 3.1% comp sales increase and a 2.9% benefit from acquisitions. This was partially offset by an unfavorable foreign currency translation of 3.4% along with the impact from the sale of Auto Todo. Breaking it down further, sales for our U.S. automotive division were up 2.5% in the first quarter, with comp sales at 3.5%. This marks our fourth consecutive quarter of improved sales comps and reflects the continued strengthening of the U.S. automotive aftermarket, as well as the effective execution of our ongoing initiatives to drive both DIFM and DIY sales growth. To sum it up, we believe the aftermarket has benefited from a second consecutive normalized winter and ongoing sound fundamentals. These positive factors led to improved sales growth with both our commercial and retail customers. Sales to the DIFM segment, which represents 75% to 80% of our total U.S. automotive sales were driven by improved results across our primary commercial programs, both NAPA AutoCare Centers and major accounts. NAPA AutoCare is an industry-leading commercial program for our independent repair customers and a key sales driver for us. We entered 2019 with over 18,000 members and sales to NAPA AutoCare Center customers were up 5% in the first quarter following approximately 3.5% growth in 2018, and the strongest growth for this program since the first quarter of 2016. In addition, sales to our major account partners were up 2.2% in the quarter. This improvement follows basically flat year-over-year sales in 2018, and represents the strongest quarterly sales performance for this group in three years. Major accounts, which include fleet and government customers, national tire centers, and OE dealers among others, are a large and important customer segment for us. And the positive sales trend with these accounts is significant. We want to recognize our NAPA AutoCare and our major account teams for their hard work in driving growth with these key customers. We're also pleased with the positive sales results in our retail business as the initiatives such as the NAPA rewards program, which has now reached 10 million members strong and still growing, expanded store hours across our network, and our retail impact store project continue to make a difference and drive steady growth. With the rollout of the retail impact initiative completed in our company-owned stores, these stores are outperforming and driving stronger retail sales growth than in our independent stores. So as we look ahead to the multi-year implementation of this initiative in our independent NAPA stores, which we began in 2018, we see opportunities to drive additional retail sales through our NAPA network in the period ahead. Turning to NAPA Canada, we took advantage of mid-single digit comp sales and the added benefit of accretive tuck-in acquisitions to produce another quarter of solid results. We were especially encouraged by the step up in comp sales relative to last year, and importantly this converted to improved operating profit. So our Canadian operations are performing well, and we expect to build on this trend in the quarters ahead. As I mentioned earlier, we closed the sale of Auto Todo, our legacy automotive business in Mexico. This business generated $100 million in annual revenues, and was not a significant contributor to our overall profitability. Going forward, our focus will be on expanding our presence in Mexico under the NAPA banner. In Europe, the first quarter presented a challenging sales environment due to the combined impact of a mild winter across most of the regions in which we operate. The continued disruption of business associated with Brexit concerns in the UK, social unrest in France and the overall softening economic environment. While these factors pressured our core automotive growth in Europe, AAG’s acquisition activity more than offset the decrease in comp sales. 2018 acquisitions such as TMS and Platinum in the UK, and the Hennig Group acquired in Q1 which expands our presence in Germany have been accretive to our sales and earnings, and we're excited to have these businesses as a part of our AAG operations. In March, we also announced the acquisition of PartsPoint Group in the Netherlands, which we expect to close in June of this year. PartsPoint is a leading supplier of automotive parts and accessories in the Benelux marketplace, with a network of one national distribution center, six regional warehouses, and 147 branches. This new business is an excellent strategic fit for AAG and we're excited for the opportunities we see in the Netherlands and Belgium. We expect PartsPoint to generate estimated annual revenues of $330 million and we look forward to welcoming CEO and Managing Director, Cor Baltus and the entire PartsPoint team to the AAG and GPC family. So, despite the current challenges we face in Europe, our team is fully prepared to push through these near-term issues via the continued execution of their growth plans and cost savings initiatives. We remain confident in the growth potential we see for our European operations over the longer term. In Australia and New Zealand, we produced another quarter of steady growth, with low to mid-single digit sales increases for both total and comp sales. We're also pleased that the Asia-Pac team further improved on their operating results. This business unit continues to operate very well. And with the backdrop of economic stability and sound aftermarket fundamentals, we expect to see additional growth in our Australasian automotive business in the quarters ahead. In summary, our Global Automotive Group posted solid overall results in the first quarter, despite the slowing we experienced in our core automotive business in Europe. Our team in Europe has initiated plans to address these concerns, and we move forward with expectations for additional sales growth and operating improvement over the balance of the year. Turning to our Industrial Parts Group, this business continued its long run of consistent sales increases, with first quarter sales of $1.6 billion, up 5.7% including 4.2% comp sales growth, plus a 1.8% benefit of acquisitions, which was partially offset by a slight currency headwind. As a reminder, our recent acquisitions include the October 2018 addition of a hydraulic supply company, a fluid power distributor, and the March addition of Axis Automation, a leading automation and robotics business that further expands our capabilities in the area of industrial plant floor automation. Overall, our Q1 results were driven by the effective execution of our growth initiatives and the generally favorable economic and industry-specific factors, which continue to benefit the industrial marketplace. As we move forward, we remain focused on our key growth initiatives and those factors we control to drive additional sales and earnings growth. Looking at our product and industry sector sales performance, 13 and 14 major product groups posted sales gains, with especially strong results in the material handling and hose and pumps category. Additionally, 9 of the top 12 industries where we compete had sales increases consistent with last quarter, highlighted by strong growth in the iron and steel, automotive, aggregate and cement, and fabricated metal product sectors for the second consecutive quarter. Offsetting these positive results were softer sales in the electrical specialties group. And our team is working hard to improve the sales performance for this group going forward. As we look to the balance of the year, we remain confident in the growth outlook for our North American industrial business. In addition, we are excited for the opportunity to expand our industrial footprint into Australasia later this year, as we expect to acquire the balance of Inenco. This Australian-based industrial distribution company has operations in New Zealand, as well as a growing presence in Indonesia and Singapore. In 2017, GPC made a 35% investment in Inenco and they have performed extremely well while growing both top and bottom-line for the past two years. Inenco's current annual sales are approximately $400 million and the business is a solid strategic fit with motion industries, aligning well with our global supplier base, and providing for a market-leading presence in Australasia, Indonesia, and Singapore. We will wrap up our business unit updates with S.P Richards, our Business Products Group. We have been pleased to stabilize this business over the last two quarters. In Q1, sales were up 1% for both total sales and comp sales. This marks the third consecutive quarter of positive comp sales, driven by improved sales in three of our four product categories, including positive results in core office supplies, technology, and facilities and safety supplies category. Most encouraging is our sales to our independent reseller, national account, and internet reseller customers, which were all positive. We believe that our growth in these product categories and customer channels reflects the opportunities we have to further grow the business, as the only independent national business products wholesaler in the U.S. We will continue to invest in these growth opportunities where and when appropriate. So that is a recap of our consolidated and business segment results for the first quarter of 2019. As stated earlier, we are pleased to report results that were in line with our plans for the quarter. And we are confident that the progress we made in Q1 will set us up for a successful 2019 and an even brighter future for GPC over the longer term. With that, I'll hand it over to Carol for her remarks.

Thank you, Paul. We will begin with a review of our key financial information and then we will provide our updated outlook for 2019. Our total sales of $4.7 billion in the first quarter were up 3.3%, driven by improved sales in each of our business segments. Our gross margin for the quarter was 31.8% compared to 31.3% in 2018, with the improvement in margin relating to several factors. Primarily the increase reflects higher margins in our automotive and industrial businesses due to their ongoing margin initiatives, including global supplier negotiations, more flexible and sophisticated pricing strategies, and favorable product mix. In addition, the increase in supplier incentives due to improved volumes for these segments also had a positive impact on gross margins. In the Business Products Group, our gross margin was pressured due to unfavorable shifts in product and customer mix. Moving forward, we continue to expect our 2019 gross margin rate to remain relatively in line with our current run rate, assuming reasonable inflation of 1% to 2% and consistent levels of volume incentives. The pricing environment remained inflationary across our businesses in the first quarter with tariff price increases for raw materials, commodities, and supplier freight each having an impact on our total costs. We continue to pass along our price increases to customers to protect our gross profit dollars and to maintain our gross margin wherever the market conditions will allow. And we would say that the current levels of inflation have been a net positive to our results. We expect this to continue through the balance of 2019. Our supplier price increases thus far in 2019 have impacted our purchases by one half of 1% in automotive, 1.2% in industrial, and 2% in office. Turning to our SG&A, these expenses were $1.2 billion in the first quarter and represent 25.3% of sales. These operating costs were up from last year as a result of several factors including the effect of rising costs in areas such as payroll, freight and delivery, IT and cybersecurity, as well as the loss of leverage on our expenses in Europe related to the slowdown in their core sales. To offset these and other increases, we continue to work towards a lower cost, but highly effective infrastructure in the quarters ahead. Our plans include steps to effectively integrate our acquisitions to drive facility consolidations, productivity solutions, and other initiatives that will drive efficiencies across all our operations. We expect to benefit from these initiatives and other cost control measures across our operations in the quarters ahead. Moving down the income statement, we would point you to the other non-operating expenses line. The change in this line primarily reflects the $27 million realized currency loss related to the divestiture of Auto Todo as noted earlier. Now let's discuss the results by segment. Our automotive revenue for the first quarter was $2.6 billion, up 2.3% from the prior year, and our operating profit of $179 million was down 3%, with an operating margin of 6.8% compared to a 7.2% margin in the first quarter of 2018. So while we're seeing improvement on our gross margin line, we continue to be impacted by the rising costs. And we were also impacted by the deleveraging of expenses in Europe. With that said, several of our automotive operations produced improved operating results in the quarter, and we expect to see more improvement in the periods ahead. Our industrial sales were $1.6 billion in the quarter, a solid 6% increase from Q1 of 2018. Our operating profit of $121 million is up 8%, and our operating margin improved to 7.4% from 7.2% last year, with the 20 basis point increase due to gross margin expansion and the ability to leverage their expenses. The industrial business has been operating well for nine consecutive quarters and remains strong as we head into the second quarter. Our business products revenues were $479 million, up 1% from the prior year, and their operating profit of $21 million is 4.4% of sales, which is down slightly from 2018. We've been pleased to stabilize this business over the last few quarters, and we're working hard to improve their operating results. Our total company operating profit in the first quarter was up 1% on a 3% sales increase, and our operating profit margin was 6.8% compared to 6.9% last year. This follows two consecutive quarters of margin expansion and we are planning for improved margins again in the quarters ahead. We had net interest expense of $23 million in the first quarter, which was flat from the first quarter of the prior year. Looking ahead, we continue to expect net interest expense to hold steady and to be in the $91 million to $93 million range for the full year. Our total amortization expense was $23 million for the first quarter, and for 2019, we expect full year amortization of approximately $92 million. Depreciation expense was $39 million in the first quarter, and we continue to expect depreciation of $170 million to $180 million for the year. On a combined basis, we expect depreciation and amortization to be in the range of $260 million to $270 million for 2019. Continuing with the segment information presented in our press release, the other line which primarily represents our corporate expense was $64 million in the first quarter, which includes $34 million in transaction and other costs related to the sale of Auto Todo. Excluding these costs, our corporate expense was $30 million, which is a slight improvement from 2018 when we adjust for the $13 million in transaction and other costs that was reported last year. For 2019, we continue to expect our corporate expense to be in the $125 million to $135 million range. Our tax rate for the first quarter was 24.2%, which is an increase from the 23% rate in the prior year, but likely our lowest quarterly rate for the year. For the full year, we continue to expect our 2019 tax rate to be approximately 25%. Now let's turn to the balance sheet which remains in strong and excellent condition. Our accounts receivable of $2.7 billion is up 4% from the prior year, and this compares to our 3.3% sales increase for the first quarter. We remain pleased with the quality of our receivables. Our inventory at March 31 was $3.7 billion, which was down 2% from March of last year. This improvement reflects the positive impact of our current initiatives to improve the inventory levels in our core businesses and we remain focused on maintaining this key investment at the appropriate levels as we move forward. Our accounts payable of $4.1 billion is up 8%, due mainly to the increase in purchasing volume, as well as the benefit of improved payment terms with key global partners. At March 31st, our AP to inventory ratio stands at 110%. Our total debt of $3.4 billion at March 31 is up slightly from the $3.3 billion in 2018. We remain comfortable with our current debt structure, and we have a strong balance sheet and the financial capacity to support our future growth initiatives and our ongoing priorities for effective capital allocation. In the first quarter, we generated $62 million in cash from operations, and for 2019, we continue to expect $1.1 billion to $1.2 billion in cash from operations. And free cash flow, which excludes capital expenditures and the dividend, to be in the range of $400 million to $450 million. These estimates are in line with the solid cash flows generated last year and continue to support our ongoing priorities for the use of cash which we believe serve to maximize shareholder value. Our key priorities for cash remain reinvestment in our businesses, share repurchases, strategic acquisitions, and the dividend. Regarding the dividend, 2019 marks our 63rd consecutive annual increase for the dividend paid to our shareholders. Our dividend of $3.05 represented a 6% increase from 2018 and is approximately 54% of our 2018 adjusted earnings, which is in line with our targeted payout ratio. We invested $46 million in capital expenditures in the first quarter of 2019, which was up from $32 million in 2018. This reflects the planned increase in our investment in areas such as technology and productivity in our facilities. And for the full year, we continue to plan for capital expenditures in the range of $300 million. Regarding our share repurchase program, we currently have 16.4 million shares authorized and available for repurchase. Thus far in 2019, we have not made any purchases under the program as we have been active with other investment opportunities, such as M&A and capital expenditures. Moving forward, we expect to be active in the program as we continue to believe that our stock is an attractive investment and combined with the dividend provides the best return to our shareholders. Now let's discuss our current outlook for 2019. We are reaffirming our full year 2019 sales and earnings guidance established in February. Our outlook is based on several factors, including our performance in the first quarter, our current growth plans and initiative, and the market conditions we see for the foreseeable future across our operations. In addition, we took into account the impact of a strong U.S. dollar and continue to estimate a 1% currency headwind for the full year. Although we do expect this to be greater than 1% again in the second quarter, which is similar to the first quarter. Finally, our outlook accounts for one additional selling day in the third quarter relative to 2018 to make up for the one less selling day in the first quarter this year. With these factors in mind, we reaffirm our outlook for total sales in 2019 of plus 3% to plus 4%, or plus 4% to plus 5% before the 1% headwind from currency translations. As is customary, this guidance excludes the benefit of any future acquisitions. By business, we continue to guide to plus 2.5% to plus 3.5% sales growth for the automotive segment, or plus 4.5% to plus 5.5% before the impact of an approximate 2% currency headwind, plus 5% to plus 6% total sales growth for our Industrial segment, and flat total sales for our Business Products segment. On the earning side, we expect diluted earnings per share to be in the range of $5.56 to $5.71, which accounts for the transaction and other costs incurred in the first quarter. We're also reiterating our outlook for adjusted earnings per share of $5.75 to $5.90, or $5.81 to $5.96, before the impact of the 1% currency headwind. Our adjusted diluted earnings per share excludes any first quarter as well as any future transaction or other costs. We are optimistic that our management teams have the plans and initiatives in place to show additional progress in 2019, and to successfully operate through the near-term challenges in Europe, as well as the potential for a slowing industrial economy. We remain confident in the underlying fundamentals of our broad and growing business platform, which provides us with the same long-term growth opportunities. So that completes our financial update. And we're pleased to report results that were in line with our plans for the quarter. And we made progress in several important areas that better position us for the future. Paul, I'll turn it back over to you.

Thanks, Carol. We entered 2019 excited for the opportunity to build on the positive momentum generated last year. And for the first quarter, we were pleased to report accomplishments in a number of areas. Our total sales and earnings were in line with our plan. Our teams produced positive sales comp in each of our business segments; we experienced the continued strengthening of our U.S. automotive business; we reported another quarter of consistent and steady growth in our Canadian and Australasian automotive businesses, our industrial business remains strong and continues to perform well; we further stabilized our results in our Business Products Group; we closed on two accretive acquisitions, Hennig Group for the automotive business and Axis in industrial. We closed on the sale of our legacy Auto Todo business in Mexico. And finally, we announced entry into the Benelux region of Europe with the addition of PartsPoint Group planned for June of 2019. We enter the second quarter of 2019 focused on further strengthening our global platform, driving consistent and sustainable sales growth and improving our operating results. We plan to support these objectives with a strong balance sheet, strong cash flows, and effective capital allocation. We believe our continued focus in these areas will create significant value for our shareholders as we move forward through the year. These are exciting times for Genuine Parts Company, and we're optimistic for the future and the additional growth opportunities we see across all of our businesses. As always, we look forward to updating you on our progress when we report again.

And before we turn to Q&A this morning, we want to mention that we're going to have our inaugural Investor Day at GPC's headquarters in Atlanta on Tuesday, June 4th. We will also have a store tour and reception beginning on the afternoon of June 3rd. This event is for institutional investors and analysts and will be a great opportunity to hear from our business leaders. If you're interested in joining us or have any questions, please email us at investor_day@genpt.com. Operator, please continue. Our first question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question.

Thanks. Good morning.

Good morning, Chris.

Can you clarify whether the 3.5% U.S. figure includes a headwind for one less day or if it excludes that headwind?

Yes, that includes, Chris.

So it would have been 4.0 ex that, is that right?

Well, we would say it's about 1.5% to 1.6% for the shorter day in the quarter. So probably more like 5% on an average day basis.

I want to explore the trends in both the U.S. NAPA business and Motion. First, regarding the U.S. NAPA business, was there significant impact from tax refunds or weather in February, and how would you characterize the overall trends in the business? Then, for Motion, you experienced a sharp deceleration in the fourth quarter. How would you describe the trends in that business and your outlook moving forward?

Yes. So we'll start with U.S. automotive Chris, and pleased to report that business got stronger as the quarter progressed. So, January soft out of the gates a little bit with a warmer first half of January, polar vortex kicked in in the second half and we’ve really took off from there. We had a good February and a better March for the automotive parts business. On the industrial side, pretty consistent, and one thing I'd point out Chris, when you mentioned the slowdown. The industrial business, if you break out just the core motion business, that business was up 7% in the quarter which is pretty consistent with where we've been the last really two plus years. The Motion business, as you look at the average daily sales, really good January, softened a bit in February and then rebounded nicely again in March.

Understood. And then typically if you could just maybe share some light on April and refresh on what the U.S. NAPA business looked like last year from a cadence perspective, in 2Q I think that some of the more DIY-oriented auto parts retailers out there talked about, April being pretty tough because of the weather last year. Is that something that you experienced and could you share any comments on how things are trending now?

Well, Chris, we don't have much to share about Q2 at this time. However, one thing I want to highlight is that we often discuss weather during these calls. The blizzard in early April is not ideal for the automotive parts business as we prepare for the spring selling season. Although it's still early, we are particularly encouraged by the turnaround in our U.S. automotive business. We have new leadership in place and have seen steady improvement over the past few quarters. Aside from the early April weather, conditions have normalized. The industry's fundamentals remain strong, and we are seeing positive developments in both our AutoCare and major account business on the DIFM side. There is a lot to feel optimistic about regarding our U.S. automotive business.

Super, have the great rest of the year, guys.

Thanks, Chris.

Thanks, Chris.

Good morning, guys.

Good morning.

Hi. Sounds like there's a lot of moving pieces on the auto side that impacted EBIT margins. Can you provide some more color specifically on what you saw with the U.S. auto margins, please?

Yes, so as it relates to our automotive margins, and we kind of as we talked about in our comments, we have seen continued improvement from our automotive gross margins and that would be across the board and also include U.S. automotive. So gross margins have improved for all of last year. We're running on probably six or seven quarters. When we look at our U.S. SG&A, little bit of headwinds there that we've called out before, but what I would tell you is they were more flattish. And so we had improved margins for Canada, for Australasia, flattish for U.S., and as we mentioned, with kind of a loss of leverage for Europe that's where we really saw the pressure in our automotive margins.

So just to be very specific, so flat U.S. EBIT margins, is that basically what the message is?

Yes.

Got it. Okay. And then can you clarify your comment regarding inflation, when you talk about your costs of goods change that you already highlighted for the different categories, is that all the flow through? Because I thought the expectation was a little bit higher inflation than what you pointed out specifically on the auto side?

Yes, so what I commented on is the price increases we've received thus far in Q1 on our purchases. And when we look forward, what our full year expectations are, we would say for automotive, for example, they were only up half a point in Q1. And some of that is flowing through to the sales line, and obviously, for all of our businesses. But as you know, the timing and the way that that can be passed through, you're probably getting more like half of that benefit that's flowing through on the top line. But our full year inflation expectations for automotive would be more like 1% to 1.25% on a full year basis. And then for industrial and business products, probably more like a 2%.

Got it. Okay. Very helpful. Thanks, guys.

Thank you.

Hi. Thanks for taking the questions. A couple of clerical ones upfront. What was the difference between the U.S. auto up 2.5% and the comp 3.5%, did you close doors or something else that caused that spread?

Well, it's a combination of things, Chris, your comment of closed stores is accurate from a year ago. But there's also consolidation of stores, as well as stores that we sold off. So if you go back a year ago from Q1, the impact was about 60 stores that would fall in one of those buckets of consolidated, closed, or sold. And that was the explanation for the difference in the comp versus total.

Got you. That's really helpful. Okay. And then Easter. So last year, Easter was like a combined one point headwind for the Northeaster and the Easter shift. So what I understand how much you think you benefit from this quarter from Easter? And then similarly, what do you think the headwind will be for Q2 as we kind of think through the cadence?

Yes, Chris, last year we mentioned that it was approximately a half point. We believe that's what we've experienced in the first quarter of this year. With Easter occurring in April, we anticipate it will have a similar impact.

Okay, I understand. My first question is about Europe. One key thing to quantify is your expected growth, which you haven't addressed yet. Also, if I'm following the call correctly, Europe's contribution is around 20% of your automotive sales, and it seems that this percentage accounts for a 40 basis points margin decline. Is it correct to say that 20% of your business led to a 40 basis points decline?

Well, let me comment on your first question on the overall comp. I think you asked that did you not Chris for Europe.

Yes, for Europe, please. That will be really helpful. The comp in the prior acquisitions.

Yes, so our total sales were up high-single digits in Europe, which was largely driven by acquisitions; if you go back and look pure organic, and that would be between the UK, France, and Germany. Our organic would be down about 1% year-over-year.

And just a comment on the automotive margins, as we've mentioned before, our European business does carry a higher operating margin than what the total number is. So there's a 1% comp decline and knowing that we really can't leverage on that. And look, our teams have got plans in place to address that over the balance of the year. But how quickly that happened in the quarter and then being able to react to it did drive the basis point decline in the quarter. But again, we're working hard to turn that around over the balance of the year. And I would tell you in the balance of the year, we would expect to show margin improvement on a full year basis of more in the magnitude of 10 to 15 basis points for both automotive and in total.

Chris, just an additional comment or two about Europe since you raised the question. We see the issues that we're facing there, which I think a number of companies are facing is largely transitory. And you've coupled some of the economic what we believe are short-term challenges with the fact that in our markets, between the UK, France, and Germany, they literally had no winter weather. And just as we see here, we never talk about the weather in Europe, but just as it impacts our U.S. automotive business, that had a huge impact on our European business. So few short-term challenges, but ones that we believe are largely transitory, and we'll get by.

That makes a lot of sense. Good luck. Thank you.

Thank you.

Thank you.

Great. Thanks, guys. From a foreign exchange standpoint, when do you think the year-over-year impact starts to reverse or improve because you're only expecting about a 1% headwind for the year and it was a 2% headwind this quarter. So, do you think there's a risk to the 2019 outlook if foreign exchange plays out somewhat differently than the way you're modeling?

Yes, so a couple of comments, as we mentioned earlier, we do expect you to be very similar to Q1. So definitely a greater impact in Q2 at a similar rate as it was in Q1. So we would expect to see it a little bit better for Q3 and Q4. We based our guidance and we've modeled that full year 1% based on the rate that we started with at the beginning of the year. As we look ahead, we think that's still appropriate, but obviously, we'll continue to keep an eye on that over the balance of the year.

Okay, great. And how quickly can you adjust pricing or anything else or your contracts to offset factors like both the supply or price increases or foreign exchange and when there are rapid changes, is it a three months impact or six months? Like how long is that usually an impact on your earnings?

Yes, look, I would say our teams have done a really good job in the gross margin area, and we're balancing a lot of things that are coming in. So with having more of an inflationary environment has given us an opportunity to drive a little bit of lift in our gross margins. We are balancing any currency impact that comes into there. And then, as we look at what our pricing constraints may be, we also look at pricing opportunities. As we've mentioned before, both our automotive team and industrial teams are doing a lot around pricing, data analytics, their pricing strategy and being more nimble and being able to react quicker. So, we are obviously looking at that as it relates to the market and the competitive environment. But again, if we just look at our gross margin, we feel like we've done a pretty good job of getting those passed through.

Great, thank you.

Thank you.

Good morning, guys.

Good morning.

On the European business I guess, could you sort of bucket what was winter versus the economic issues you referenced maybe as far as impact?

It's hard to say Bret, how it splits out between the two both are certainly impactful. I would say though, if you were to ask me, which was more impactful in the quarter. I would say it was the weather. And, look, the European economy has not been the greatest in the last few quarters. So the outlier is that really, really warm weather they had in Q1 that really impacted the business, especially as it relates to a lot of our winter goods category categories that were impacted greatly in the quarter. So hard to break it down specifically, but if you were to ask me, I'd say weather was more impactful than some of the economic issues.

So how is the cadence, I guess, is the cadence stabilizing or did it improve as the quarter went as you got out of the cold weather selling season or is it just continuing to drag?

It was pretty flat throughout the quarter. I mean, pretty straightforward. You've heard me mention earlier, our total sales in Europe are up high-single digits, our comps were down one which were pretty consistent through the three-month period.

Yes, so great question. And we still continue to believe and are pleased to see some improvement in our synergies, both from margin initiatives and on the payable side. So in working with a lot of our global suppliers, we do have programs that have been put in place, we have additional terms that have been negotiated, those will be falling more in the second half of the year. And that's actually been factored into our working capital guidance that we've given. So those are actually coming along quite well. And there's even an offset that comes to the U.S. where we're getting some improved terms based on European supplier relationships. So it actually works on both sides.

Hi, it’s Brian Sponheimer pinch hitting for Carolina.

Good morning.

A couple of questions on the acquisitions that you've made in Europe and maybe the valuation multiples that you're seeing there relative to the attractiveness of making similar acquisitions in your core markets.

Well, Brian, I have a few comments. We have made a couple of acquisitions, one of which is Hennig, an automotive parts business in Germany that we closed earlier in the first quarter. We also recently announced PartsPoint Group based in the Netherlands and Belgium, which we anticipate closing in early June. From a valuation and multiple standpoint, it is quite similar to what we've observed in the U.S. These businesses have existing relationships, just like our approach here in the U.S., and we are not engaging in bidding wars with private equity. Overall, it's been very consistent; that's all I wanted to share.

Just kind of following on that, for both auto and for motion you chose Australia first for international expansion in Australasia. What are the dynamics as far as Motion either looking into Europe or further in the U.S. as far as acquisitive growth there, given that your suppliers are large multi-national companies and your customers are large multi-national companies.

I'm sorry, Brian, I didn't mean to interrupt you. Our industrial business has been performing well for nearly 10 quarters now. We're excited to expand into Australasia. A couple of years ago, we made a 35% investment in Inenco. We have developed a strong relationship with their team and understand their business and the markets they serve, mainly in Australia, New Zealand, and Southeast Asia. This is a great business that we hope to finalize later in 2019. It will provide us with a strong presence in that region through a $400 million MRO player that is arguably a leader in its market. Currently, we do not have plans to expand our industrial business into Europe, largely because we see significant growth opportunities remaining here in the U.S. Despite our size, we still hold less than 10% market share. Thus, we believe there is plenty of room for continued growth in North America, and we will also consider potential bolt-on opportunities in Australasia.

We like to thank you today for your participation in our first quarter earnings call. We thank you for your support and interest in Genuine Parts Company. And we look forward to reporting out our second quarter results in July. Thank you and have a great day.