Good day and welcome to the Genuine Parts Company First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] At this time, I would like to turn the conference over to Sid Jones, Vice President, Investor Relations. Please go ahead.

Good morning and thank you for joining us today for the Genuine Parts Company first quarter 2017 conference call to discuss our earnings results and current outlook for the full year. Before we begin this morning, please be advised that this call may involve forward-looking statements regarding the company and its businesses. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. We'll begin this morning with comments from our President and CEO, Paul Donahue. Paul?

Thank you, Sid, and welcome to our 2017 first quarter conference call. We appreciate you taking the time to be with us this morning. Earlier today we released our first quarter 2017 results. I will make a few remarks on our overall performance, and then cover the highlights by business. Carol Yancey, our Executive Vice President and Chief Financial Officer, will provide an update on our financial results and our current outlook for 2017. After that, we'll open the call to your questions. So to recap our first quarter performance, total sales were up 5% to $3.91 billion. Net income was up 1% to $158.9 million and earnings per share increased 3% to $1.08 compared to $1.05 in the first quarter last year. These results represent the total sales and earnings across our global Automotive, Industrial, Office and Electrical operations, which we will discuss in more detail throughout this call. We entered 2017 a stronger, more diversified global distributor, and to that point, our diversification continues to provide complementary benefits as we are not only able to share and implement best practices on the operating side and leverage our infrastructure, but our diversity allows us to better insulate across the board -- across a broad platform. This supports our ability to drive sustained growth and generate strong cash flow even when faced with challenges in certain businesses. A recent example is the solid progress we have made the last few quarters in our industrial distribution business and in our international auto business. This quarter, we drove strong sales growth in these operations while working to overcome the headwinds at our U.S. auto business. As part of our comprehensive strategy, we remain committed to four key growth initiatives including the execution of fundamental initiatives to drive greater share of wallet with…

Thank you, Paul, and we'll begin with a review of our key financial information and then we'll provide our updated outlook for 2017. As Paul mentioned, total sales in the first quarter of $3.9 billion, up 5% included a 1% increase in comparable revenues. Our gross margin for the quarter was 29.6% compared to 29.7% in the first quarter last year with the slight decrease primarily related to lower supplier incentives. We expect these incentives to improve over the balance of the year, and combined with our ongoing initiatives to enhance gross margins, we expect better compares in the quarters ahead. The pricing environment across our businesses remains relatively unchanged from the prior quarter with slight deflation in Automotive segment which is offset by a slight inflation in Industrial, Office and Electrical businesses. Our supplier price changes in the first quarter of 2017 were down 0.2% in Automotive, up 0.3% in Industrial and up 0.4% in Office as well as Electrical. Turning to our SG&A; our total expenses for the first quarter were $912 million, up 6% from last year and 23.3% of sales. While we're not pleased with the 28 basis points increase year-over-year, this has improved from the fourth quarter of 2016 as a percent of sales and we're working hard to drive further cost savings. Primarily, our increase in SG&A relates to the deleveraging of expenses in our U.S. Automotive and Office businesses, as well as rising labor and delivery costs and ongoing spending for planned IT and digital investments. As expected, our costs related to our recent acquisitions were also up year-over-year but we're gradually eliminating these as we integrate these new businesses. Among our cost saving initiatives, we're also monitoring our costs and reducing any unnecessary expenses as we further rationalize our facilities to streamline…

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

[Operator Instructions] We'll go first to Chris Horvers from JP Morgan.

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

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

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

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

Got it, thank you.

You are welcome.

We'll go next to Greg Melich with Evercore ISI.

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

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

And on the comps, remind us are there any -- are the selling days the same in the first quarter this year as the year ago. I know we had a leap year last year and an Easter shift. Was it a true comparison this year.

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

Great, and then Carol, I just want to follow up on the guidance to make sure I got it right. The $0.05 change was basically driven by 2 things, the acquisitions you've done since the guidance in the early part of the year and then the lower tax rate. Was that -- those are the two things that changed that?

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

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

So that is one of the reasons for the lower tax rate. We traditionally have a lower rate in the first quarter, but there were 3 things that drove the lower rate. One was the mix of foreign earnings because they were stronger Q1 because of the stronger sales results. Two was that the impact of the stock option change and then three was we had a favorable nontaxable retirement plan adjustment in Q1. So that was about a third, a third, a third, if you will. We have modeled our stock option change into our lower rate guidance for the rest of the year, and that faced that way. But I can tell you, that's an extremely hard to predict number because it depends what stock options are exercised in the future depending what your market price is. So we've modeled a similar number for the rest of the year as Q1 but that's in our guidance.

Okay, that is great, thanks.

Thank you, Greg.

Next is Matt Fassler with Goldman Sachs.

Thanks a lot, good morning. I'll come back to the second question to give everyone a break from it, but I want to start off by asking a question that's relevant, primarily to the Industrial business though it can be -- should remain across the board. So we've heard from a couple of your industrial peers about pricing actions and, in essence, the impact of increased price transparency on their pricing models and in some instances on margin. Can you talk about your pricing approach. And are you seeing a dynamic -- a different dynamic in the market as it relates to pricing in the Industrial business, or do you feel that's more idiosyncratic to some of your peers and the world you see is as it's been.

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

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

So back to Automotive for a moment. Obviously, the weather had an impact on the business in the quarter. If we think back to 2016 which was a sluggish year for the industry, one of the factors that was cited within that was the warm winter that we had last year. And I know that this year was not quite as unique, but by some measure, it was rather similar. How does the winter that we've had which is essentially over -- impact your thinking on the revenue line for Automotive in the rest of 2017.

Well we're for the U.S, Matt, and I'm assuming you're referencing in the U.S, we're staying with our guidelines. We expect to see improved sales, as I mentioned in my comments. Certainly, Q1 was our toughest comps that we had that we went up against -- that we'll go up against all year. So we're expecting many of the initiatives that we have in play to kick in. And once we get beyond some of these weather headwinds, we really expect to see improved business the balance of the year on our U.S Automotive business.

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

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

For U.S.

Yes.

I think in the recent quarters as you've given us quarter on the components of the business, you've broken out commercial and DIY in a little more detail. I might have missed that today, but is that color that you can give us on Q1.

Well, the DIY and commercial were both down slightly in the quarter, Matt.

Got it, alright, thank you so much guys.

We'll go next to Chris Bottiglieri with Wolfe Research.

Thank you for taking my question. Quick question for you. How does the margin structure -- I know company-owned store I presume a higher margin, but how does the operating margin structure of Asia Pac compare to the U.S and I guess firstly for auto and then maybe just for Industrial.

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

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

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

So it can be anything from freight to ocean cargo to technology to digital. I mean there's just a vast array -- warehouse management systems. There's just a vast array of indirect programs, if you will, that we put in place immediately on all our acquisitions.

Chris, we will -- in terms of facilities, we don't intend to share facilities in Australia and New Zealand at this point, but we certainly will take advantage of our global sourcing offices that we have on the ground in China for both -- well, for all of our businesses but certainly for both of our businesses in Australia as well.

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

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

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

Chris, I don't have that number in front of me right now. I would -- well, hold on. So as we went across 2016, our U.S comps -- the first quarter was our strongest. Our comps in the first quarter last year as I mentioned was the strongest, we're up 4%. We were then down 2-plus percent in Q2, down 2% in Q3 and basically flat in Q4.

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

Next is Elizabeth Suzuki with Bank of America.

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

Well, let me take a shot at that, Elizabeth. The scrap rate has -- and certainly, the scrap rate is a key metric that we look at to measure the overall Automotive business and the health of our Automotive business, that has remained fairly consistent. And I think I for one, and it would just be one man's opinion, but a drop in used car pricing, I just don't think it's going to have a huge impact. The size of the fleet that we're talking about here in the U.S is massive and it takes really a significant shift to really move the market, and so we don't anticipate any real shift.

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

Yes, so it's remained fairly consistent, Elizabeth. It's been right around 75-25 mark, 75 being DIFM commercial and 25% being DIY. And it remains pretty consistent. We have -- as we mentioned in my prepared remarks, we have a number of initiatives in play right now to continue to drive additional retail business through our stores. We've got 1,000 company-owned stores, 5,000 independent stores. And one of the things that we have taken from our brethren in Australia is they've got a very strong retail business. So one of the initiatives for us is we've been upgrading our stores, extending our store hours and really just improving the overall retail shop-ability of our stores. And as mentioned, we're seeing a nice impact in those stores that we have to our new to that you look. But to size it up, Elizabeth, the industry is growing on the DIFM side and that's where we -- that's where our heritage is, that's where we intend to stay that's where we intend -- we certainly believe the continued growth will come from us on the DIFM side.

Okay, great. And just a quick one on acquisitions. Looks like in the last -- in just the last month, you've made a couple of smaller and then one larger acquisition in the Industrial and auto and Electrical segments. Is there any -- what are the multiples looking like for the various segments versus -- this year versus last year? And have there been any real shifts where you're starting to see some really compelling opportunities in one particular segment or a couple of segments versus the others?

Yes. Well, our stated objective in terms of our M&A, we -- if you go back to my growth pillars, Elizabeth, I talked about aggressive but disciplined acquisition strategy and we do stay disciplined in our approach. We shoot for between 6 to 8x multiples. But occasionally, for the right strategic acquisition, we may exceed the outer boundaries of that. But historically, and I can tell you that the majority of the times we do stay within our range and that would be our intention going forward as well.

Alright, thank you.

We'll go next to Seth Basham with Wedbush Securities.

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

Yes. So Seth, it's narrowing significantly, and what I would tell you is that a number of our divisions, we've got eight divisions across the country that are all in various geographical regions. Most of them this quarter were pretty tightly bunched together. We had a couple of outliers. And in the outliers, one on the positive side, which posted some pretty good strong single-digit growth was up in the mountain part of the U.S I referenced in my comments that that's the one part of the country that saw a tough winter, a more normal winter. And so if we ever really want to truly get a handle on does weather impact the business, we see it very clearly in the growth. And look, our teams did a good job up there as well, so it's not all weather. But we saw nice growth on the positive side of the mountain. On the flip side to that, we saw a decline, a greater decline than we saw in our normal -- our regular divisions down in the northeastern part of the country. And again, the Northeast in Q1 had the warmest winter, I think, in 25 years with the exception of that northeastern that blew in, in March. So those would be the two outliers, but the balance were pretty tightly bunched together.

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

In the 200 basis point range.

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

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

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

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

Alright, very good, thank you guys.

We'll go next to Bret Jordan with Jefferies.

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

Well, look, I would tell you this, Bret. We've known Steve and the team out there at Merle's for a number of years, and this happens to be -- Tucson is a market that Merle's dominated in, and we have a few stores but I would tell you they're the strongest player out there and it's a perfect fit for our Phoenix team in our Western Division and just fits very nicely. That's not always the case. When we look at some of these groups and these players that are out there, many times, we have a number of conflicts in those markets and it's difficult to go in and bolt one on just because of the number of conflicts that it would present to us. But I would tell you that we're really excited to have Steve and the Merle's team join NAPA, and we feel really good about the nice fit that that's going to have on our -- with our Phoenix group.

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

No, we did not.

Okay. Ballpark?

Ballpark and our ranges that we discussed.

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

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

Okay, great. Thank you, it was great.

We'll go next to Brian Sponheimer with Gabelli.

Hi everyone, good morning.

Hi, Brian.

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

So Brian, it's similar to what we did with Asia Pac is there is a future earnings target that's been set and there's a period of time that we expect that to happen, and again, it would operate -- that remains to be seen when the time period is. But as we saw with Asia Pac, we ended up doing a little bit quicker than what we thought. So it's structured very similar to our previous ones, so an earnings target in a period of time out. So whether it's two years, three years, it remains to be seen.

Brian, I would just add that our hope and what we anticipate is that it will be sooner rather than later much like we saw with our acquisition on the Revco business and it's a good business and one that -- again, we've known the family. It was a family-owned business. We've known them for a number of years. There was always a good relationship between the Inenco team and our Motion team. It's one that I -- honestly, we're pretty excited about.

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

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

Alright, terrific, well, good luck.

Thanks, Brian.

And we have time for one more question from Scot Ciccarelli from RBC Capital Markets.

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

Okay, sure. So we're probably -- and our guidance kind of implies a plus 3.5% to plus 6% in earnings per share, and we would say that, that's probably more of a second half of the year and, specifically, how are we getting there, what are we doing. So we had said kind of originally kind of a flat margin for those -- for the business in the year, but we're getting some improvement obviously out of the tax line. But what we're doing specifically on the EIS side, they have done significant reductions in facilities as well as headcount and then also working on the gross margin side right now. So this was a quarter we had a nice core growth of 2.5%. So it takes that to start flowing through later in the year with continued growth core growth. On the office side, they took some steps last year in Q4 and there were some additional steps taken in Q1 which pertain to headcount reductions, changes in freight, some of our pricing, looking at facilities. And so I would say it would be more in the SG&A line and more second half of the year. But in total, I think for those businesses, we're speaking towards -- when you put Automotive, Industrial with office and Electrical, that's where you may -- it's going to but beach other out depending where the growth is.

Okay, thank you.

I'd like to turn it back to our presenters for closing remarks.

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

That concludes today's conference. We thank you for your participation. You may now disconnect.