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Genuine Parts (GPC) Earnings Report: Q1 2016 Conference Call Transcript

Company first-quarter 2016 conference call to discuss our earnings results and the outlook for the full year. Before we begin, 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 Tom Gallagher, our Chairman and CEO. Tom? Tom Gallagher (Chairman & CEO): Thank you, Sid. And I would like to add my welcome to each of you on the call today, and to say that we appreciate you taking the time to be with us this morning. Paul Donahue, our President, and Carol Yancey, our Executive Vice President and Chief Financial Officer, are both on the call as well. And each of us has a few prepared comments, and once completed, we will look forward to answering any specific questions that you may have. Earlier this morning, we released our first quarter 2016 results, and hopefully you've had an opportunity to review them. But for those who may not have seen the numbers as yet, a quick recap shows sales for the quarter were $3.718 billion, which was down one half of 1%. Net income was $158 million, which was down 1.9%, and earnings per share were $1.05 this year, which is even with the $1.05 reported in the first quarter of last year. Once again, this quarter currency exchange was a headwind to our overall results. The impact of the strength of the US dollar versus the Canadian, Australian, New Zealand and Mexican currencies was 1.6% on the revenue line and $0.01 per share in earnings per share. Stated another way, in constant currency, sales were up 1.1% and EPS was up 1%. While a bit better than the reported results, we still find ourselves revenue challenged primarily in our non-automotive businesses. And this is clearly pointed out if we look at the results by segment without currency impact. In constant currency, our Automotive business was up 4.4%, Industrial was down 1.7%, Office Products was down 2.5% and Electrical was down 3.4%. So the difference between our Automotive operations and the remaining three segments is quite pronounced, and Paul will cover the Automotive segment in a few minutes. But first, I will make a few comments on the non-automotive business starting with Industrial. Motion Industries ended the quarter down 2.5% on a reported basis, and down 1.7% in constant currency. And although we continue to run decreases in this segment, we are just a bit encouraged by these results for two reasons. First, the first quarter of 2015 was our strongest quarter of the year at plus 3%. And secondly, our Q1 2016 decrease was the smallest decrease that we've seen in several quarters. Additionally our mid-month April results are modestly positive, and hopefully this is something that we can maintain as we move forward in the month and in the quarters ahead. However, it is important to point out that if we look at our performance by industry segment, by top customers and by top product categories it shows just how uneven and choppy our business continues to be. If we look at our top 12 industry segments first, we have six that are up and six that are down.


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On the positive side in no order, are lumber and wood products, food products, ag and cement, chemicals and automotive. On the downside, we have oil and gas, equipment and machinery, iron and steel, and equipment rental and leasing.

Our top 20 customers are actually up low single digit, with 15 of these customers running positive results thus far, but five are down. In our top 12 product categories, six are up and six are down. So as you can see, it's a real mixture. With solid results in a number of areas being offset by weaker results in other areas. And all of this, in this our opinion, is reflective of the tepid state of the economy, both domestically and globally. But this is the environment that we'll face for a bit longer, and we'll try to offset this with a combination of specific market share initiatives and acquisitions. Moving on to EIS, our Electrical distribution segment. This group ended the quarter down 3%, and some of the same factors that impacted our Industrial business were headwinds for the Electrical segment as well. Things like the ongoing challenges for customers in the oil and gas segment, lower defense spending. Lower copper pricing again in the quarter which cost us just over 1% in sales growth, the impact of the stronger dollar on our export oriented customers, and the overall sluggish economic climate. And these factors, we think, will persist for a bit longer, but it's interesting to look at the individual performances of the three segments that comprise EIS. You may recall that the Electrical segment is our largest, representing about 40% of the total Company revenue. Fabrication and wire and cable each represent about 30%. And it's interesting that fabrication and wire and cable both had positive results in the quarter, but Electrical was down mid-teens. So our challenges are primarily concentrated in the Electrical portion of the business. And our folks are working hard to turn this segment around, while at the same time working to maintain the positive results in the fabrication and wire and cable segments. And finally, a few comments on Office Products. As reported earlier, this segment was down 3% in the quarter with mid single-digit growth in the mega channel being offset by high single-digit decline with our independent resalers. On the product side, the facility breakroom supply category turned in the strongest results, ending the quarter with a high single-digit increase. And we continue to be pleased with our growth in this segment. The furniture category was even, followed by a slight decline in Office Products and a low double-digit decrease in technology products. Putting it all together, while making good progress in areas like facility and breakroom, overall end market conditions remain challenging for our Office Products team. And they're working hard on share of wallet and market share initiatives across their product categories and their customer base. Additionally, they continue to work on diversifying their business through new product additions and the opening of new sales channels. And we hope to report in the next call that we were able to close on a strategic acquisition later this quarter that will further bolster their diversification efforts. So that's a quick overview of our non-automotive businesses. And at this point, we'll ask Paul to cover the Automotive operations. Paul? Paul Donahue (President): Thank you, Tom. Good morning. Welcome to our first quarter conference call. I'm pleased to be with you today, and to have the opportunity to provide you an update on the first-quarter performance of our Automotive business. For the quarter ending March 31, our global Automotive sales were up 2% year over year. This performance consists of approximately 4.5% in total Automotive growth, which includes an approximate 1% benefit from acquisitions. However, this was offset by a currency headwind of approximately 2.5% in the first quarter. Our US team posted a 4% sales increase in the first quarter. An improved performance from the 2% growth we reported in the fourth quarter, and the 3% growth we experienced for the full year of 2015. Turning to our international business which includes Canada, Mexico, Australia and New Zealand, this group once again reported another quarter of mid single-digit growth in their local currencies. Despite challenging local economies, especially in Australia and Canada, we remain encouraged by the consistent mid single-digit growth we are experiencing across all of these international markets. In the US, our results varied widely by geographical region and product category. Geographically, our business in the Florida, Atlantic, and western regions of the country all outperformed in the quarter. On the other hand, the central, the eastern, midwestern regions of the country all underperformed.


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We would attribute the warmer than average temperatures experienced across the northern states in February and March as having a negative impact on our business in that region of the country. And as we look at our winter related goods, we saw a similar trend in sales.

After experiencing double-digit growth in January, our battery business was flat in both February and March. Again, we believe warmer than normal weather patterns impacted this segment of our business. So now let's turn to our same-store sales for the first quarter. Our US Company-owned store group grew same-store sales in the first quarter by 3.6%. The cadence of the quarter saw our team post solid results in January, with sales moderating somewhat in February and March. Again we would attribute a good bit of this slowdown to the weather, as well as the impact from Easter week moving from April in 2015 to March in 2016. This quarter's 3.6% same-store sales increase compared to a plus 2% in the fourth quarter, and was driven by a combination of increases on both our commercial wholesale side of the business as well as our retail business. So let's start with our retail results. As mentioned in previous calls, we continue to expand our DIY initiatives across our Company-owned store group. As a reminder, these initiatives include installing new interior layouts and graphics, extending our store hours, increased training for our store associates and the nationwide launch of our NAPA rewards program to name just a few. We are still early in the process, but we can report the results we have seen thus far are outpacing our expectations. As previously announced, we are expanding our initial 20-store pilot which we tested in 2015 to include an additional 150 company-owned stores in 2016. These initiatives are having a positive impact on our results, and for the first quarter, we can report a total increase of 3% in our retail business. When we couple this 3% increase with the 6% increase we posted in the first quarter of 2015, it gives us two-year stack of plus 9%. Our retail initiatives are driving increased transaction accounts, and in quarter one, we again saw a significant jump in the number of retail tickets. We can also report a low single-digit increase in our average basket size for the quarter. Moving along to our core commercial wholesale business. This segment of our Automotive business posted a 4% increase in the first quarter, an improvement over the 2% increase we generated in the fourth quarter of 2015. The core drivers for our commercial wholesale business continue to center around our major account business, as well as our NAPA AutoCare Centers. We had a strong quarter with our 16,000 plus auto care customers, as this business trended up mid to high single digits. On the major account front, our team drove sales increases in line with our overall Automotive growth for the quarter. We were also encouraged by the slight improvement in our fleet business, which was up 2% for the quarter, and an improvement over the 1% increase we posted in Q4 of 2015. And while it's early, we are working really hard to gain some positive momentum with this important customer group. Our average wholesale ticket value was up low single digits with no benefits from inflation. We were flat in the average number of tickets, although our first-quarter performance was improved over a downward trend we had seen in recent quarters. So earlier in my comments I mentioned our battery business. So now let's take a look at a few of our other product categories, and review the trends we experienced in the first quarter. Our brakes business was a highlight again in the first quarter. This category grew low double digits in the quarter, and we can also report solid growth in both our tool and equipment business as well as our filtration business. We are especially pleased to see the growth in our big filter business. This key product category came under pressure last year as our industrial, energy, and our fleet business softened. We hope to continue this trend as the year progresses. We continue to be encouraged with the strong growth we are experiencing from our NAPA import parts business. Our underlying import parts business was up high single digits in the quarter, before the added benefit of Olympus Import Parts, a $25 million business we acquired this past February. We can report good progress with the integration of the Olympus business, and we will continue to search for additional acquisitions in this growing segment of the aftermarket.


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We would also like to update you on the closing of our Cubs Parts acquisition on March 1. As you may recall, we announced in February that we received approval to acquire 21 of their 25 branches.

This allows our Asia Pac business to further expand its market presence and scale western Australia. This is an important strategic acquisition for the Asia Pac team, and we expect Cubs to generate additional annual revenues of approximately $70 million in US dollars. On the acquisition front, we are encouraged by the ever increasing level of activity in all geographical regions and in all segments of our Automotive business. We are pleased to report today we will be closing on May 1 on an Atlanta, Georgia based heavy-duty truck parts business. We would like to welcome the team from Global Parts Incorporated. Global operates six branches in three states, and generates sales of approximately $20 million plus on an annualized basis. This business will serve as a nice compliment to our growing business in this segment of the Automotive aftermarket. And as we look ahead, strategic acquisitions will continue to be a growth lever for Automotive businesses, both in the US and abroad. Now turning to the trends we are seeing across the US 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 remain favorable for the consumer, and miles driven continues to post substantial gains. Miles driven increased 2% in January, following a strong 3.5% increase in 2015. January marks 23 consecutive months of increases in miles driven, with lower fuel prices continuing to drive this key metric. The national average price of gas is $2 in the first quarter, which is down from $2.40 per gallon in 2015. The second cheapest annual average in the past 10 years. And although gas prices appear to be moving upward in recent weeks in most parts of the US, the current cost of gasoline remains well below last year. And these low gas prices should bode well for future increases in miles driven, and ultimately driving additional parts purchases. In closing, we were pleased to show positive sales growth in the first quarter, and look forward to building on our growth plans over the balance of the year. Our plans call for expanding our business with our key commercial platforms, NAPA AutoCare and major accounts. Executing on our retail strategy and driving global expansion via new store openings, as well as targeted strategic acquisitions. We want to thank our teams both in North America as well as Australasia for their efforts, and appreciate all they do for the GPC business. So that completes our overview of the GPC Automotive business. At this time, I'll hand it over to Carol to get us started with a review of our financial results. Carol Yancey (EVP & CFO): Thank you, Paul, and good morning. We appreciate you being on the call with us this morning, and we'll get started with looking at our first-quarter income statement and segment information and then we'll review a few key balance sheet and other financial items. Our total revenues of $3.7 billion for the first quarter were down 0.5%, or up 1% excluding the impact of FX. Our gross profit for the first quarter was 29.7% compared to 29.8% last year. The slight change in gross profit margin primarily reflects the continued pressure of lower supplier incentives earned in our Industrial business. Excluding this factor, we're pleased with the positive impact of our gross margin initiatives across all of our businesses. On SG&A, the impact of SG&A in the quarter was flat and we had some impact from our cost saving initiatives and just the loss of leverage. So our efforts to enhance gross margin are especially important in our low inflationary environment. I want to mention what our cumulative supplier price changes are for 2015. We're down 6/10 of 1% in Automotive. We're up 2/10 of 1% in Industrial. We're up one-tenth of 1% in Office, and we're down 1.25% in Electrical. So talking about SG&A, again, I'm sorry about that. Our SG&A was $850 million or 23.07% of sales, which is in line with first quarter last year. So our cost control measures continue to positively impact our results, and they're driving our progress towards greater operational efficiencies. For the first quarter, however, the benefits of our overall cost savings were somewhat offset by the deleveraging of our expenses in our non-automotive businesses.


As we look ahead, our teams remain committed to controlling our expenses and enhancing our productivity and streamlining our operations. We expect to show continued progress on these initiatives as we move ahead.

Now let's discuss our results by segment. Our Automotive revenue for the first quarter was $1.9 billion, or up 2% from the prior year and 52% of our total sales. Our operating profit of $154 million is up 2%, and their margin improved 10 basis points to 8.0%. Our Industrial sales were $1.2 billion in the quarter, a 2.5% decrease from the prior year and 31% of our total revenues. Our operating profit of $82 million is down 6.8% and our operating margin was down 30 basis points to 7.1%, primarily driven by lower supplier incentives as well as expense deleverage. Our Office Products revenues were $477 million in the first quarter, down 2.8%, and representing 13% of our total revenues. Our operating profit of $34 million is down 6.4%, and our operating margin of 7.2% is down 20 basis points. The Electrical/Electronic group had sales in the quarter of $176 million, down 3.4% and up 4% of our total revenues. Their operating profit of $15 million is down 4%, and the margin for this group was down 10 basis points to 8.4%. For the first quarter, our total operating profit margin was 7.7% compared to 7.8% in the first quarter last year. This follows a 10 basis point margin improvement in the fourth quarter, and for the full year of 2015, and basically reflects the lack of leverage associated with the sales environment in our non-automotive businesses. We're intensely focused on continued progress in this area, with further margin expansion being a key goal for the Company. We had net interest expense of $4.8 million in the quarter. And for the full year, we continue to look for net interest expense to be $21 million to $22 million. Our amortization expense was $8.8 million for the first quarter, and we continue to expect total amortization expense to be $36 million to $38 million for the full year. Our depreciation expense of $26 million for the quarter, we're now projecting for depreciation to remain at $120 million to $130 million for the full year. So combine depreciation and amortization of $34.7 million for the first quarter, and we would expect this to be tin range of $155 million to $170 million for the full year. The other line, which primarily reflects our Corporate expense, was $24.4 million for the quarter compared to $25.1 million last year. For the full year, we still expect corporate expense to be in the $110 million to $120 million range. Our tax rate for the first quarter was approximately 36%, which is in line with the first quarter last year. We expect this rate to increase over the balance of the year, and continue to project a 37% tax rate for the full year. Our net income for the quarter of $158 million compares to $161 million for last year, and our EPS was $1.05 which is flat with last year. Now let's turn to the discussion of the balance sheet, which we continue to further strengthen with effective working capital management and strong cash flows. Our cash at March 31 was $205 million, which is in line with our cash position at year end and up a bit from the $166 million at March 31 last year. Our cash position continues to support the growth initiatives across all of our distribution businesses. Accounts receivable at $2 billion at March 31 is flat with the prior year, and relatively in line with our sales. We continue to closely manage our receivables, and remain satisfied with their quality at this time. The inventory at the end of the quarter was $3.1 billion, a 2% overall increase, although this is flat excluding the impact of acquisitions in the last 12 months. Our team continues to effectively manage our inventory levels, and will continue to maintain this key investment at the appropriate levels as we move forward. Accounts payable at March 31 was $3 billion, up approximately 14% 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 and days in payables. Our working capital of $1.6 billion at March 31 is improved from the prior year, and down $67 million on a comparable basis which excludes the reclassification of the $250 million in term debt from long term to current. Effectively managing our working capital, and in particular key items such as accounts receivable, inventory, and accounts payable, remains a high priority for our Company.


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Our total debt of $700 million at March 31 is $194 million less than the $894 million in March of last year. Our debt includes two $250 million term notes, as well as another $200 million in borrowings under our multi-currency credit facility. We would also add that one of the term notes is due this November 30, and we currently intend to renew it upon the due date.

Our total debt to capitalization is approximately 18%, and we're comfortable with our capital structure at this time. We believe it provides the Company both the flexibility and the financial capacity necessary to take advantage of the growth opportunities we may want to pursue. In summary, our balance sheet is in excellent condition and remains a key strength of the Company. We continue to generate strong cash flows, and following a record year in 2015, we appear well 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. And free cash flow, which deducts capital expenditures and dividends, to be in the $400 million to $450 million range. We remain committed to several ongoing priorities for the use of our cash, which we believe serve to maximize shareholder values. Our priorities for cash include strategic acquisitions, share repurchases, the reinvestment in our businesses and the dividend which we've paid every year since going public in 1948 and have increased for 60 consecutive years. Strategic acquisitions remain an ongoing and important use of cash for us, and they're integral to our growth plans. Thus far in 2016, we've added the Olympus Automotive Imports Parts business as well as three additional acquisitions which closed on March 1. As previously covered by Tom and Paul, our Asia Pac business also acquired Cubs Parts, with expected annual revenues of $70 million, and Motion added Epperson & Company and Missouri Power Transmission with combined annual revenues of $50 million. For the balance of 2016, we'll continue to seek acquisition opportunities across our distribution businesses to further enhance our prospect for future growth. Although many of these opportunities will continue to be bolt-on type companies with annual revenues in the $25 million to $150 million range, we are open minded to new complimentary distribution businesses of all sizes, large or small, assuming the appropriate returns on the investments. Turning to share repurchases, we have purchased 576,000 shares thus far in 2016, and we have 5.7 million shares authorized and available for repurchase. While we have no set pattern for these repurchases, we expect to remain active in the program in the periods ahead. And we continue to believe that our stock is an attractive investment, and combined with the dividend, provides the best return to our shareholders. Our investment in capital expenditures was $12 million in the first quarter, which is down slightly from last year. For the year, however, we continue to plan for capital expenditures to be in the range of $140 million to $160 million. So you will see CapEx picking up over the balance of the year, due primarily to the timing of several large projects. Turning to our dividend, our 2016 dividend of $2.63 per share approved by the Board in February was a 7% increase from the prior year and is approximately 57% of our 2015 earnings. While it's slightly above our stated goal of a 50% to 55% payout ratio, we're very comfortable going beyond this range from time to time due to our strong cash flows. Now that concludes our financial update for the first quarter of 2016. And in summary, we operated relatively in line with our expectations, which assume fairly steady underlying growth for the Automotive business but another quarter of challenging economic conditions across our non-automotive businesses. We managed to offset some of these challenges with key sales initiatives and cost controls, and also further improve the strength of our balance sheet and cash flows with effective working capital management. As we execute on our growth plans, progress in these fundamental areas supports our ongoing investment in opportunities such as acquisitions, as well as the return of capital to our shareholders through the dividend and share repurchases. We look forward to updating you on our future progress in the period ahead. At this point, I'll turn it back over to Tom. Tom Gallagher (Chairman & CEO): Thank you, Carol, and thanks to you and Paul for your comprehensive updates. So that's an overview of the financial and operating performance for the first quarter.


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And in looking back, our feeling is that our teams did a reasonably good job of operating, with the Automotive group turning in the best performance. The lack of revenue growth in the non-automotive businesses did not enable to us gain any operating leverage unfortunately. Turning to the balance sheet, we feel that our folks did a pretty good job overall and we look for another strong year in cash generation and asset management.

The one area that we continue to be challenged in is sales growth. And across all of our businesses, organic growth initiatives and strategic bolt-on type acquisitions are getting a lot of attention. And on the acquisition front, based upon what we see right now, we think that we'll have a bit more to talk about in the second and third quarters. Now as far as the remainder of the year is concerned, we feel that our previously provided guidance remains appropriate at this time. You may recall that we guided for Automotive revenues to be up 2% to 3% for the full year against the current 1.8% increase. We said Industrial would be up 1% to 2% compared to their 2.5% decrease for the first quarter. Office Products down 1% to up 2% compared to a 2.8% decrease in the quarter, and Electrical will be up 1% to 2% compared to their 3.4% decrease in Q1. So for the total Company, we feel that 1% to 2% increase is appropriate compared to the half of 1% decrease through the first quarter. And then on the earnings side, we feel that an expectation of $4.70 to $4.80 per share remains appropriate, and this will be up 2% to 4% over prior year. At this point, we would like to address your questions, and we'll turn the call back to the Operator. QUESTIONS & ANSWERS Operator: (Operator Instructions) Seth Basham with Wedbush Securities. Seth Basham (Analyst - Wedbush Securities): Thanks a lot, and good morning. My first question is just on the guidance, Tom. Could you tell us what your expectations are for FX impact this year, and any additional revenue you're assuming in your guidance now from acquisitions? Tom Gallagher (Chairman & CEO): Well the FX is pretty difficult, quite honestly, Seth, as you know. If we think back to January of this year, currency exchange was an even heavier factor. We were down mid to upper double digits in the exchange rates between the Canadian, Mexican and Australian rates. We did see some moderation, some strengthening of the dollar in February and March. But at this point for the quarter, it was still double-digit impact, and we really don't have as clear a look at what we think is going to happen as we go forward. I think perhaps the best thing to say would be that for the whole Company, we've guided to being up 1% to 2%, and perhaps for the whole Company FX is going to be a headwind of 1.5% to 2% at this point. As far as the acquisitions, the only ones that we have included in our guidance are the ones that have been completed. So Paul covered a couple of them, Carol covered a few more. They're the only ones we've included. Our practice is not to include anything until we actually close on it. And at that point, we'll incorporate into our future guidance. If that answers your question. Seth Basham (Analyst - Wedbush Securities): That's helpful. Just to confirm, relative to your guidance that you provided initially for 2016 in February, you assumed at that point in time 3% to 4% sales growth for the entire Company ex-FX and now you're looking for 1% to 2%? Tom Gallagher (Chairman & CEO): Well no, we're looking at 1% to 2% including FX, and then 1.5 points to 2% headwind from FX. So on a constant currency basis, you would have to add that 1.5% to 2% back in. Seth Basham (Analyst - Wedbush Securities): Got it, okay, helpful. My other question is on the auto business. Looking at the US comps, it seems like they slowed on a two-year stacked basis. Also seams like your major account businesses slowed a little bit. I understand that you think weather is a drag. Any other factors you can point to that might be impacting your business relative to the industry? Paul Donahue (President): Seth, this is Paul. No, it's just -- I touched on many of the factors, Seth, and you hate to play the weather card. Because at the end of the day, we still need to execute on our initiatives which I think our team is doing a pretty good job of.


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But when you look at the delta between our big divisions up in the northern states versus some of our business in the southern states, it certainly had an impact. Our NAPA AutoCare business continues to be solid, very solid. Our major account business is good, it's not growing at the double-digit rate perhaps that we saw a couple of years ago but it's still growing at a good pace overall.

So, no, I think, Seth, there's just a bit of sluggishness out there right now that -- look, we've got some great initiatives. We just need to continue to execute, and I have no doubt that business will bounce back quickly. Tom Gallagher (Chairman & CEO): Seth, I would add to that, if you look at across the spectrum of our larger accounts, the major accounts and the auto care customers, those in the northern tier, as Paul pointed out, are having a more difficult time than those in the southern tier. But also those that are more heavily oriented toward tires are a bit more challenged than those that are more heavily oriented toward the service side. So we'll see all of that reverse at some point, but we just don't know when. Seth Basham (Analyst - Wedbush Securities): Got it. Since you brought up weather as an important point here, as you think about the warmer winter weather and the impact on parts stress, would you expect, heading into the summer season, there to be fewer part failures and more limited part sales as a result of that? Tom Gallagher (Chairman & CEO): I think it depends upon how warm and how hot it gets in the summer. That's going to put the second round of stress, and that's a key determinant. So if we have a hot summer, I think we'll see some of the summer related products, heating and cooling as an example, I think we'll see some pickup there. If we have a modest summer, we won't get that increased demand. Seth Basham (Analyst - Wedbush Securities): Got it. Thanks a lot and good luck. Tom Gallagher (Chairman & CEO): Thank you, Seth. Operator: Chris Bottiglieri with Wolfe Research. Chris Bottiglieri (Analyst - Wolfe Research): Thank you for taking my call. My first question is, can you talk about your plan for enhanced store openings? I know you're trying to take that up for the Company on store group. Is this primarily in the US, or is it going to be focused abroad? Then ultimately, how many stores do you think you could have in the US? Paul Donahue (President): Chris, this is Paul. So our store expansion program includes all of our markets. So Australia and New Zealand are where we'll continue to grow via acquisition as well as organic growth. And we believe we have opportunities to continue to grow in both Australia and New Zealand markets. In Canada same thing, as well as Mexico. In Mexico, Chris, you may recall, we've rolled out our NAPA Mexico initiative which we have 20 plus stores in Mexico today branded under the NAPA brand, both Company owned and independently owned. We believe, and we're not going to put a targeted number out there, Chris, but we believe we've got significant opportunities to continue to grow our store footprint in Mexico. And then in the US, again, same type of initiatives. Both acquisition, bolt-on type acquisitions, as we announced already two this year, but in addition, organic new distribution as well across the US. And we think again there's many open markets across the US that we can continue to expand the NAPA brand. Chris Bottiglieri (Analyst - Wolfe Research): Got you, and I have one quick follow up. As I understand it, historically, you've more so been a facilitator of independents when they look to exit the business you sell from one independent to the other. Has there been any change in philosophy that the Company would acquire some of these independents, or how do you see that playing out? Tom Gallagher (Chairman & CEO): Chris, this is Tom. Our attitude is exactly what it has been. And that is if it's an independently owned store in an outlying market, if there's another independent owner that's ready to step in and make that acquisition, we'll help them do that. If there isn't someone ready to step in but the current owner has a desire to get out, then we'll buy the store and we'll run it for a period of time until we find a good independent owner.


. Matthew Fassler (Analyst - Goldman Sachs): Hello, this is Jondi Neutrone on behalf of Matt Fassler. Tom, I have a quick question on your Industrials business. So just want to understand about the performance in the Industrials segment. It appears that you guys outperformed versus how we saw your peers report in the last week or so. Could you perhaps throw some light in terms of what drove that performance and what was the cadence? Because a lot of your peers talked about a very sharp decline in the second half of March. Just want to understand if you guys also saw a dip in March, and how the quarter trended. Thank you. Tom Gallagher (Chairman & CEO): Well, we -- I'll take the latter part of the question first. We did see March being the weaker of the three months in the quarter, but still better than what we had been running. In terms of what's happening within our Industrial business, I think our teams have been working hard on some of their share of wallet and market share initiatives as well as on the acquisitions. We did have the benefit of the two acquisitions that closed late in the quarter that Carol mentioned. But additionally, our folks are finding additional opportunities with existing customers, and they're also opening up some new customers. So as I mentioned earlier in my comments, we can look at about half the business and see that it's performing pretty well, and then we look at roughly the other half and we see that we're still challenged. So hopefully we're starting to see a little bit of a turn, and maybe the quarters ahead will be a little bit more reflective of what we've seen in Q1 and then also early in the month of April. Matthew Fassler (Analyst - Goldman Sachs): Got it, thanks for the color. And quickly on the Office segment, so you guys had your business decline by about 3%. Just want to understand, how should we think about move forward given that you've maintained your guidance in terms of what gives you confidence to catch up with that guide given that (inaudible), [ODPO] mex businesses having some impact here? Tom Gallagher (Chairman & CEO): In terms of maintaining the guidance, we did say that. We guided to down 1% to up 1% for the full year. Having finished the first quarter down 3%, we would say maybe closer to the mid to lower end of the range for the full year. I did comment in my prepared remarks that we think we have an opportunity to close on a pretty good size acquisition for the Office Products group yet in Q2. It will be late Q 2. That's not in our guidance at this point, but assuming that we are able to complete that, we'll give you an update on that as we make our comments at the end of the second quarter. Matthew Fassler (Analyst - Goldman Sachs): Great. Thank you so much. Tom Gallagher (Chairman & CEO): Thank you. Operator: Tony Cristello with BB&T


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So when we look at the continued expansion of that segment, we're excited of our core business, the Ultram business, going through our NAPA network, but also with our recent acquisition of Olympus. And what that group brings us, and I think I talked about it a bit at our last call is, we've got a great team at Olympus. They bring us years and years of import experience that is a value to us, and this is a category that we think we can certainly continue to grow at a greater rate than our overall business.

Tony Cristello (Analyst - BB&T Capital Markets): And do you see the same lift or benefits at your Company stores as you will do or see at your independents when you put in new initiatives or focus on being able to sell through on imports or some of these things? I'm just trying to piece together the success across your whole business, versus Company owned, versus independent. Paul Donahue (President): Yes, so, Tony, we've made a commitment in our Company-owned stores that we are going to be stocking import parts. And it's a classic parts business is in general. If you have the parts, you have good people, and you're priced competitively, generally you're going to get the business. And what we're finding as we upgrade our inventories across our NAPA Company-owned store network, business is growing as we upgrade those inventories. On the independent side, Tony, it's been a initiative that we've worked on for a number of years as our independent owners. Some have gotten into the business, do a terrific job, others have been a little slower to adapt to stocking import parts. Certainly some of our independent owners are out in more rural markets where there may not be quite as much demand for import parts. But our initiative in growing that business is both via our Company-owned stores and via our independent owners as well. Tom Gallagher (Chairman & CEO): Tony, I might just add on, you may recall that our general approach to any new initiative is that we will test it, pilot it in the Company store group, we'll prove the concept, and then at that point we'll good to the independent owners. We want to make sure that what we're recommending to them works. So after we've proven the concept, we'll tell them what we did, how we did it, what it costs, what the returns are, and then our good progressive owners will step up and they'll embrace the initiative, and we go on from there. Tony Cristello (Analyst - BB&T Capital Markets): That's great color. I appreciate that. And if I can ask just one more question, I think you mentioned CapEx acceleration in several projects that may be hitting in the second half of the year. Can you provide any more information? Is that an IT type spend, are there any store refreshes or something that we should consider? Carol Yancey (EVP & CFO): Yes, so it's both in the facility refreshes and also in IT projects. So mentioning on facilities, we've got in each of our segments and both here in the US, Canada, and Mexico and Australia folks have DC refreshes. So a lot of it is in the area of productivity improvement. So it could be not necessarily a full relocation, but a refresh within the facility. So those are multi-month projects that we know we have started, and they will be slated for third quarter and fourth quarter. And then IT as well, we've got, again, most of our IT projects are going to be in productivity areas, warehouse management, inventory optimization, and we have several sites planned for the second half of the year. So those are all in the works. So we expect that to pick up over the balance of the year. Tony Cristello (Analyst - BB&T Capital Markets): Okay. Thank you very much for your time. Tom Gallagher (Chairman & CEO): Thanks, Tony. Operator: Mark Becks with JPMorgan


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And then, any impact from the Leap Day? Paul Donahue (President): Oh, for sure. The extra day, again, estimating between a 1% a quarter to a 1.5%. Mark Becks (Analyst - JPMorgan): Okay, great. Tom Gallagher (Chairman & CEO): So between 0.5% and 1% for the quarter, net-net. Mark Becks (Analyst - JPMorgan): Understood. And then, Paul, you alleviated to a widening performance gap in the northern stores versus the southern stores. Historically, some of your peers have spoken to gaps anywhere in the range of 500 to call it 1,000 basis points. Is there any way you can frame up the difference between, say, the northeast market which is more the weather sensitive market versus the south or the west? Paul Donahue (President): I'll put it this way, Mark. When we look at across the northern states, and not just the northeast because we really felt the impact in the Midwest, when we talk about the central, Mark, that's Ohio, Pennsylvania, but all the way into the northeast as well, that group grew -- and those are some of our larger operations. That group grew low single digits. When we compare those to some of our southern divisions, so I mentioned Florida, I would throw the southern group in there as well, the Atlantic which would be the Carolina south, and then even the west, that group grew mid to high single digits across. So, yes, it was more of a significant delta than we've seen in some time. Mark Becks (Analyst - JPMorgan): Okay, that's very helpful. And then last question for me, Tom and Carol, you mentioned you were open to more larger transformational type of acquisitions. And historically seems Exego you've opted for more of the smaller bolt-on type acquisitions. Just trying to get an idea of historically why that has been the route you've gone. Whether it's just there's more opportunities of that nature in the marketplace, or culture, or anything else there. Tom Gallagher (Chairman & CEO): Mark, I'll take a stab at that. You've hit on one key point, and that is that generally speaking, there are many more opportunities in that $25 million to $150 million range. Secondly, our philosophy has been that any acquisition we do needs to be accretive and hit the minimum threshold within three years. And it seems that we can get to some of the back office synergies more quickly and more easily in the $25 million to $150 million range than something well above that. And then the third thing is we've had a general approach that we want to make multiple acquisitions across each of our businesses. And spread -- investment spread the risk, so to speak, but also to leverage the strong management teams that we have across our businesses. Now with all of that said, if we were to find, I think you used the word transformational. If we were to find something larger, we would be more than happy to look at it. But it has to meet the same general level of expectation within three years, and we look for a 15% ROIC no later than the third year. But if we found something large that met that threshold, then we would absolutely have an interest in doing it. The good point is that we have the balance sheet that will enable us to do whatever. And it was at that kind of logic that led us to GPC Asia Pacific, the largest acquisition we've ever done, and one that has turned out to be pretty darn good we think for the shareholders of Genuine Parts


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Yes, so, Elizabeth, if I look at our business is down in the southwest part of the country, and that group was under some stress all last year. And if I look at Q1, that group was up low single digits. So certainly on the lower end of our performance amongst our many divisions. Elizabeth Suzuki (Analyst - BofA Merrill Lynch): Okay, great, thank you. Paul Donahue (President): You're welcome. Operator: Thank you. Our next question comes from Scot Ciccarelli with RBC Capital Markets. Scot Ciccarelli (Analyst - RBC Capital Markets): Good morning, guys. Apologizing in advance to stick on this weather theme here, but a couple questions. What other categories outside of batteries would you attribute to weather gyrations, is the first question? And then second, related to that, I guess winter of 2011, 2012 is probably the closest comparable that we have to this year's warm winter weather. So not sure if you have the data handy or not, but can you remind us of your sales cadence in these types of categories in 2012, how they trended from February to March and into the later spring and summer months? Paul Donahue (President): So, Scott, I'll take the first part first, and then I'll let Carol handle the historical data, if she has it. But you asked outside of batteries. Certainly, the entire electrical category, Scott, when we look at starters, alternators and including batteries, that entire category, which is a big, big category for us, only grew low single digits in the quarter. Heating and cooling, certainly heating is another area that was impacted, and we saw slower than our fleet average growth. And then all of our chemicals and commodity type products was another area that we saw slower than our typical growth, or in our overall growth for the first quarter. So all of those categories really can be impacted one way or the other by the weather. Tom Gallagher (Chairman & CEO): It goes even further, Scott. If you think about up in your neck of the woods, when you've got that extreme cold weather, it tends to cause additional potholes up north and through the central and Midwest parts of the country as well. Which in fact, potentially can impact some of your chassis product in the ensuing quarter or two. So it's pretty pervasive in terms of what it can do. And I should say that we're pretty pleased with our chassis business right now. Our chassis team is doing a really good job for us, and we're getting some pretty good growth currently from that organization. Scot Ciccarelli (Analyst - RBC Capital Markets): Got you. Carol Yancey (EVP & CFO): And, Scott, as far as the weather patterns back in 2011 and 2012, I'll have you get with Sid afterwards. But we're not going to comment, nor do we have the product line specific cadence in those winter months on how that reacted. But we're happy to discuss that further. Scot Ciccarelli (Analyst - RBC Capital Markets): I guess the question is just in general. So obviously you're not going to break all that out by category, but you went from February to March. You already talked about some sluggishness in some of these categories. Paul just referenced them. Did they continue to worsen as you got to the later spring and summer months, or did they get to a level and just stay there? I guess that's really what I'm trying to figure out. Tom Gallagher (Chairman & CEO): I would take a stab at that first, Scott. This is Tom. And I would say that we've somewhat stabilized in those categories at this point. But we wish we were stabilized at a slightly higher rate. Scot Ciccarelli (Analyst - RBC Capital Markets): Got it. Okay, thanks a lot, guys. Tom Gallagher (Chairman & CEO): Thank you. Operator: Bret Jordan with Jefferies. Bret Jordan (Analyst - Jefferies): Good morning, guys. On global parts acquisition, could you give us a little color on what you're seeing in heavy duty and maybe how that's comping relative to passenger vehicle parts? And maybe give us a feeling for after this deal, how big that's going to be relative to your parts distribution? Paul Donahue (President): Yes, so, Bret, that's a business we don't talk about a lot. But across North America, so US and Canada, and in Canada we've got a very mature, robust business on the heavy-duty side. In our stand-alone side, it's in excess of $600 million in annual business.


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It's a good business, it's a growing business. There's 8 million, roughly 8 million, heavy-duty trucks on the road here in the US. And it's a category that we think we can continue to grow.

The acquisition of Global, which is Atlanta-based, is, again, much like the Olympus acquisition that we did on the import side, brings us a great team, a knowledgeable team, experienced team in the category. We believe we'll see some nice bite-sized synergies. Again, just bringing another experienced group into our business, and will compliment our heavy-duty business here in the southeast quite nicely. Tom Gallagher (Chairman & CEO): Bret, just to add on to that, by our estimation, we would have 5% to 6% of the total available market for the heavy-duty industry. And if we can grow that to 10%, we're talking upwards of $0.5 billion to $600 million more in revenue, so that's part of the strategy. Bret Jordan (Analyst - Jefferies): How's that business been comping? Is it comping ahead of your Company average in auto? Tom Gallagher (Chairman & CEO): No, it's actually been -- the fleet business has actually been a little bit less than our total automotive business, but the good news it's come back a bit. I think Paul mentioned that we were up 2% in Q1 in our fleet business. So we're pleased with the fact that it has started to revert back to what is a more normal business. Bret Jordan (Analyst - Jefferies): Okay. And then one last question on comp. When you look at the NAPA core comp, how do you feel that rate was relative to the industry in Q1? Do you think you were a share gainer or just performing in line? Paul Donahue (President): Hard to say, Brett, being the first guys out. I'm guessing we're going to be where the market is. We certainly don't believe we're losing any market share across the country, and our teams are executing on the initiatives we put out there for them. So we think we'll be in line. Hard to say, though. We'll have to wait and see. Bret Jordan (Analyst - Jefferies): Great. And the one last question, in Mexico, are you going to convert the AutoTodo stores to NAPA brand or do they stand alone? Paul Donahue (President): Great question, Brett. That's something that we're looking at. I was actually down there with the team last week. We have not made a final decision one way or the other. As you may know, we have eight AutoTodo stores down in the Puebla marketplace, and we're evaluating that right now. But that absolutely could happen in the future. And I would also comment, Brett, because I know you follow it quite closely, our overall business and sales in Mexico continue to grow each quarter. We're building out our team. We're building out our brand. We just added a talented executive to that group down there, and we're still bullish with our opportunities down in that market. Bret Jordan (Analyst - Jefferies): Great. Thank you. Paul Donahue (President): Welcome. Operator: Greg Melich with Evercore ISI. Greg Melich (Analyst - Evercore ISI): Thanks. I just wanted to follow up on the Easter shift question, make sure I got the math right there and then the second one on margins. If we assume it was 50 or 75 bps, should we be thinking that a run rate would simply move that amount of sales into the second quarter from the first? And, Tom, when you describe a stabilizing trend, which number are we stabilizing against? Is it adjusting for the shift or not or for Leap Day? And then I had a follow up on margins. Tom Gallagher (Chairman & CEO): Well, my understanding of the question on the trends was more product oriented. And that's where I think we have stabilized in particular product categories. In terms of the impact of Easter, we should see the benefit of that in April. We should pick up a little bit more in April that we gave back in March. Greg Melich (Analyst - Evercore ISI): So all else equal, would it be fair to assume that it should be a little better in April so far than we saw in the first quarter? Tom Gallagher (Chairman & CEO): Well, we'll see how it all shakes out, and we'll give you an update on it in our second quarter conference call.


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Okay. So I'll switch to margins then. I think it was Carol in the introductory comments you talked about how Industrial was the main pressure on the overall gross margin rate. A lot of the other improvements you had across the business were still there, but Industrial hurt. So I guess my question is, what level of sales do we need to get out of Industrial so that we actually start to at least not deleverage it on the gross margin side? Thanks. Carol Yancey (EVP & CFO): So you're correct, when we look at gross margin, the other three segments are fine. The pressure on gross margin was through Industrial, and so a lot of our initiatives are in place. And I should mention, Industrial has done a really good job. Their core gross profit was up in Q4, and was also up in Q1. So they've done a lot of things on the buy side and sell side to help get that up. So when the volume does come back, and it probably needs to be more in the very low single-digit range for us to get some of that volume incentive back, that's going to really go straight to the margin. So the good thing is, they're SG&A improvements and they're core gross profit, those things are already in place. And when we do get just a little bit of volume back in the top line growth, then we'll see that on their operating margins. Greg Melich (Analyst - Evercore ISI): That's great. Thanks. Good luck. Carol Yancey (EVP & CFO): Thank you. Operator: Brian Sponheimer with Gabelli. Brian Sponheimer (Analyst - Gabelli & Company): Last and least, I get it. Carol Yancey (EVP & CFO): Hello, Brian. Brian Sponheimer (Analyst - Gabelli & Company): Hello, Carol. My compliments on the continued working capital improvements. And I guess if you just take AP and inventory, it's about $280 million year over year. Is that coming exclusively from NAPA, or is this something that's really a holistic entire business approach to working capital? Carol Yancey (EVP & CFO): So all of our businesses have initiatives in the working capital, and specifically focused in the payables area. So while I would say just more of the majority of the dollars are coming from Automotive, we do have improvement coming from the others. And I can tell you their teams, it's baked into our pay plans, it's part of all -- everybody's performance. It's part of what everybody is pushing down, is working capital initiatives. And we are seeing some improvements in the non-automotive as well. So the idea is that we have just continued improvements each quarter. But again, it's more coming from Automotive, but we're getting some of from the others too. Brian Sponheimer (Analyst - Gabelli & Company): Understood. And then, Paul, just one question. You mentioned brakes being up low double digits in the quarter, and some improvement on chassis. How much of that is more miles driven, and is any part of that just some better supply from some of your larger and important suppliers within those product offerings? Paul Donahue (President): Yes, Brian, so I'll answer that two ways. On the brakes business, our brakes business has been solid now for a number of quarters in a row, and that's across all the brakes. So that's rotors and friction and calipers have been all outpacing our overall growth. And I think it's just a great job by our team out in the field grabbing some market share, and we got a great partner on that side. If you will recall, Brian, a year ago on the chassis side, we were having some significant service issues. And pleased to report those are now behind us, and we're seeing that business return back to more normal growth rates. But we were down quite a bit early last year as a result of some of the service problems. So again, that's a business we ought to do quite well throughout the first half of the year. Brian Sponheimer (Analyst - Gabelli & Company): All right, terrific. Thank you very much. Paul Donahue (President): Thank you, Brian. Operator: Thank you. And I would like to turn the conference back over to management for any additional or closing remarks. Carol Yancey (EVP & CFO): We thank you for participating on today's first quarter call, and we appreciate your support of Genuine Parts