Greetings, and welcome to the Genuine Parts Company Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sid Jones, Senior Vice President, Investor Relations. Thank you, Mr. Jones. You may begin.

Good morning, and thank you for joining us today for the Genuine Parts Company fourth quarter 2018 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 let me turn the call over to Paul.

Thank you, Sid, and let me add my welcome to our fourth quarter 2018 conference call. We appreciate you taking the time to be with us this morning. Earlier today, we released our fourth quarter and full-year 2018 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. We were pleased to build on our prior progress in 2018 and report another solid quarter of improved results. For the second consecutive quarter, each of our three business segments grew their revenues with positive core sales comparisons and combined with the added benefit of our accretive acquisitions. We further improved our operating results with a 30 basis point increase in total operating margin. These results let our team to produce record sales and earnings for 2018 as well as improve our working capital position and generate strong cash flows. To recap, total GPC sales in the fourth quarter were $4.6 billion of 9.4% from 2017 driven by a 0.6% comp sales increased and a 6% benefit from strategic acquisitions, net of a 1.2% negative impact from foreign currency translation. The 4.6% increase in comp sales reflects our strongest growth in 2018 up from the 4.3% increase in the third quarter plus 3.4% in the second quarter and the plus 2% in the first quarter. Net income in the fourth quarter was $187 million and earnings per share were $1.27. Excluding the impact of transaction and other costs as we covered in our press released adjusted net income was $198 million or $1.35 per share up 13% from the adjusted…

Thank you, Paul. We'll begin with a review of our key financial information and then we will discuss our full-year outlook for 2019. Our total sales of $4.6 billion in the fourth quarter were at 9.4% driving gross margin of 33.5% compared to 30.5% in 2017. For the full year, our sales of $18.7 billion increase 15% and our gross margin improved to 32% from 30% in the prior year. These comparisons reflects significant improvement in our 2018 gross margin due to several reasons. The Automotive and Industrial businesses have benefited from effective margin initiatives including ongoing negotiations with our global suppliers, more flexible and sophisticated pricing and digital strategies as well as more favorable product mix. In addition, the higher gross margin model at AAG and other acquisitions has positively impacted our gross margin throughout the year. Specific to the fourth quarter, all three of our segments earned additional supplier incentives due to improved volumes and we also had the benefit of year-end inventory gains net of life out, which further improved our gross margin relative to 2017. With the continued emphasis on our margin initiatives, we expect our 2019 gross margin rates to remain relatively in line with our full-year 2018 rate. This the same as reasonable in place and have 1% to 2% and consistent levels of volume incentives. We experienced an inflationary pricing environment across each of our segments in 2018 with more normal inflation in our industrial and business products and more pronounced and more pronounced in place and in the fourth quarter for Automotive. Overall, we attribute much of the fourth quarter and present place into the direct and indirect impact of tariffs, but we also had steady price increases for raw materials, commodities and supplier freight spread throughout the year. While the impact…

Thank you, Carol. Reflecting on 2018, our team was hard at work executing on their sales and cost initiatives to drive stronger pipeline topline growth, improve our operating results and enhance our earnings growth. We were also focused on ensuring a successful year in our European operations and capturing the synergies planned for this acquisitions. Likewise, with the combination of VIS and Motion on January 1 of 2018. We focus this year building on the synergies created by a larger and stronger industrial operation. Finally, we significantly improved our working capital position during the year driving exceptional cash flows utilized for key investments in the company, as well as turn of capital via share repurchases and dividend which we just increased for the 63rd consecutive year as announced earlier today. With these things in mind, we're pleased to achieve record sales and earnings for the year, and encouraged by the operating improvement across our global distribution platform in North America, Europe and Australasia. Our team had many accomplishments and we are proud of their efforts to create long-term value for our shareholders. Turning to calendar; we are excited for the opportunities to build on the positive momentum generated in 2018. GPC is well positioned to capital on it's many global prospects, and further improve our operating results. With that said, we are also very aware of the potential for a slowdown in the global economy as Carol mentioned, and that was a key factor in arriving at our outlook for 2019. Our growth plans, however, our solid, we remain committed to an organic and acquisitive growth strategy to drive long-term and sustain revenues while also focusing on the continued improvement in our gross margins and cost management. We are confident that our unwavering focus in these areas combined with a continued emphasis on a strong balance sheets, excellent cash flows and effective capital allocation will serve to maximize your return to our shareholders. We're excited for the future and as always we look forward to updating you on our progress when we report again. With that, we'll turn it back to the operator and Carol and I will take your questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Bret Jordan with Jefferies.

On the Allianz [ph] business, I mean you've talked about some weather and the political concerns. Could you sort of stack which was a bigger issue? And it sounds like you still copped up mid-single-digits. Was that local currency?

That was local currency, Bret. And look, our team at AAG, despite some of the challenges that they faced in the quarter, had a darn good quarter. And I give them a whole lot of credit for executing on a number of their key initiatives. We've got a -- as you know, that market, Bret, it's fragmented. Lots of opportunities to continue to roll up bolt on acquisitions as well as some good strategic ones. And again, I give our team a ton of credit because they had some real headwinds, but despite those headwinds posted a solid quarter.

What are you saying over there as you look at payable program both in the European business and maybe Australasia as well? Carol, maybe you could talk about what can be liberated out of working capital maybe?

And our working capital improvement that we had this year was not related to Europe, but having said that, we worked with the teams over there and our teams here to start putting in place a number of our similar programs. So, we do expect to see some working capital improvement starting in 2019. We have similar supply chain programs already in place for Europe and we have some of our global partners, some on and some coming on. So we would expect to see some working capital improvement from them in 2019.

And then I guess one just housekeeping. As you look at the fourth quarter in the U.S. business, the sort of the cadence of the quarter I'd imagine it's similar to what other people are saying October, November, strong and December weak. But maybe you could talk maybe a little about the cadence and regional performance.

Now, that's exactly right, Bret. We're no different than many others who have reported October and in November were definitely the strongest two months and then we saw our sales moderate in December. And think the moderation in December was really related just to kind of how the holidays timed out coupled with the warmer temps and a ton of rain across the U.S. As we look at our regionality of our business, I got to give a call out to our Midwest team. They had a terrific Q4. And you know, when you look at some of the temperature up in the cities like Chicago in Q4 and on end of January and as the polar vortex rolled across, had really spiked our business and it continues to do well. So Midwest was definitely a top performer for us. The Northeast performed well again as they did all of 2018 and the Central Division. So again, you look across the Upper Midwest, Brent really going from the Midwest all the way to the Northeast was solid business for us.

Our next question comes from the line of Elizabeth Suzuki with Bank of America Merrill Lynch.

So, the business products segment made a pretty nice come back here with solid comps through the last two quarters and some nice operating margin expansion. Since the spinoff plan fell through, has there been a reallocation of attention or resources to S.P. Richards? And then what do you view as the longer term outlook for that business?

Well, Liz, great question. And I would say a few things about our office team led by Rick Top and they had a really solid second half of the year. They were focused on the business and won some new business. And in addition to driving some good core results out of our office supply, the core office supply business, I would also tell you that we saw good growth in our facilities and break room business and along that up the line and it kind of goes with the second part of your question about are we make an investment in the S.P. Richards business. We just brought on a key executive -- industry executive, Steve Shells [ph] to run our FPS business. And he is a well-qualified executive. We expect to see continued growth out of that segment. Long-term, Liz with S.P. Richards, we are head down operating the business and I think what you saw with the much better performance in Q3, Q4 when our team is solely focused on running the business and the changes that are happening in the industry we'll see better results. And again, we're really proud of the team and a great job they did in the second half of the year.

And just a question on NAPA, I hear automotive segment has had a split of about 75%. DIFM about 25% DIY for a long time. And if we look at this business in 20 years, do you think the split is still going to be about 75%, 25% or is there a plan to evolve that over time?

Well, you know, Liz, we have embarked on a longer-term plan to upgrade our stores and we've now completed all of our company stores and we saw a nice lift in our retail business. We're now embarking on a similar strategy with our independent owned stores and our goal is to help our independence lifts their retail business as well. But even with those key initiatives, DIFM is going to be the larger segment. It certainly the faster growing segment, the vehicle population today is only growing more and more complex. I don't see that changing anytime soon. So I would expect certainly into the future our mix will stay relatively similar to what it is today.

Our next question comes from the line of Chris Bottiglieri with Wolfe Research.

So, first one I got through the impact of tariffs. So to start with, it looks like your Automotive inflation year to date moved to 140 basis points relative to last quarter. That seems pretty massive. I would like imply something, the order of 500 basis points of inflation to Q4 and actually have something wrong there. Just wanted an aiding comment on that.

So, first of all, the tariffs, as we talked about it in our last quarter, the 10% tariff that went into effect that relates to about 18% to 20% of our U.S. cost of goods sold that's coming from China. So as it relates to that cost of goods sold, we worked with our Chinese suppliers, we took into account many factors with our teams, our cross-functional teams, we negotiated with the Chinese suppliers, we looked at the effect of currency and ultimately, we had more of say 4% to 5% increase that we took and that we also passed on to our customers. So what you saw in Q4 was definitely the impact of the tariffs coming through in the quarter that was pretty late in the year. So, we were able to pass that through and obviously you can see that in our growth margins. So as we look ahead, we're expecting about a 1% inflation for U.S. Auto for 2019. That does not contemplate any further changes to tariff.

I guess maybe two follow-ups there. So you would think, I mean, if it was 4% to 5% Q4 take several quarters for you to anniversary that. So why wouldn't the inflation impact, I guess be more '19 and what percent? That's the first part.

So again, I think the 4% to 5%, it's not on all categories. There was only certain categories that this tariff applied to, so there were some key categories that it applied to. So when you blended in to the total automotive business and you look at it across the board, it waters itself down to say a 2% or 1%, and that's a cumulative number as it comes through. So we're not expecting a lot of those changes went in late Q4, so we're expecting some additional inflationary environment going into 2019 is probably the best way to say that. We said in our prepared remarks that inflation would be 1% to 2%, and I would tell you right now our best estimate is about 1% for U.S. Automotive, and about 1.5% to 2% for Business Products and Industrial. And again, more than anything, what's important is that our ability to take those price increases and pass it through to the customer.

And then I wanted to -- kind of given your weaker economic outlook, or just -- I guess preparing for that; I wanted to ask you a question on kind of downside risk. If you look at your automotive business in the U.S. can you tell us how the business performed out of same-store basis back in the economic downturn, the next one could be as bad as the but I just want some context. And then, similarly, I know you're new to the UK and to Germany, but those management teams are still obviously with the company and I'm sure that a lot of them are around with the downturn. Is there a way to contextualize how those business performed in the last economic downturn as well just to understand the cyclicality of those business in Europe? Thank you.

Well, I think the first comment I want to just clarify; so our U.S. business comps, you're coming off -- I mean, obviously, second half is stronger than the first half but we had about 1.6% U.S. comps for 2018. We're implying in our guidance for U.S. comps to be up 3% to up 4%; so we are not implying weakness in our U.S. comps, I think what you're speaking to more specifically is probably related to either Europe or the industrial business but our North American automotive businesses and our Australasia and automotive businesses going into 2019 are improved from 2018.

And Chris, I would just add to that, generally what we see in the automotive aftermarket in a slower economy which generally will result in fewer new cars sold, the automotive aftermarket generally performs pretty well, people hold onto the vehicles longer, they are conducting more repairs on those vehicles during the course of the year. So whether it be in Europe or the U.S., if there is a slowdown, and that's yet to be determined, I think our automotive aftermarket will be just fine and as you mentioned, we've got a very experienced team on the ground in Europe that has worked their way through these economic cycles that I think will be just fine.

Our next question comes from the line of Seth Basham with Wedbush Securities.

My first question on the U.S. auto business, you spoke to favorable weather trends for most of 2018, based on what you've seen in 2019 to-date, how do you think the weather situation is setting up for 2019?

Seth, I think that while we can't go into too many specifics about what we're seeing in Q1, anytime we're seeing that kind of extreme weather pattern, so we're seeing again and we're seeing actually this week across parts of the U.S.; that's going to bode well for the automotive parts business and I think what we're now experiencing is really the back-to-back normalized winters. And as we have said many times in these calls through the years, that's what this business needs and our business like our peer group, generally performs much better when we're in those kinds of normalized weather patterns.

Excellent, that's helpful perspective. Secondly, as we think about the gross margin outlook here; first, in terms of the fourth quarter performance for auto, you talked about a few drivers, maybe you could help us tell [ph] in terms of listing the biggest drivers in terms of degree of magnitude to the gross margin improvement between supplier negotiations and pricing and rebates?

Yes, so happy to answer that. As you may recall, through the nine months our gross margin with AAG was up about 150 basis points and we ended the year up 180 basis points. So the strong fourth quarter was a combination of several things; so as we have said all year, automotive and industrial had improved gross profit all year and that continued into the fourth quarter, as has AAG. So AAG including some of the synergies as we continue to integrate those business, as well as their acquisitions have had a strong gross margin. In addition, as Paul mentioned, our favorable results in office products that grew; if they had a more favorable product mix and that helped with their gross margin conversion, so you see that in their operating margin and a lot of that flow through to the gross margin line. And then lastly, automotive, industrial and office, all of them had better volumes which led to incremental supplier incentives that went into that number. And then we also had with some of this inflationary environment, we had favorable inventory gains and that was net of the LIFO at automotive and industrial. So while we're not going to breakout any one of those, those factors went into the Q4. Having said that we feel like this 32% rate as we look ahead is appropriate as we go forward.

Just one follow-up on that. Regarding the pricing and digital initiatives that you've undertook in auto; can you give us some perspectives on how material they've been to your improvement in gross margin rate? And how you think those will benefit you going forward?

I guess we've factored that in, I mean you've seen the gross margin improvements all year in auto, and we would say that it's not any one thing but circling [ph] our investments and pricing and data analytics and some of the new strategies that we're doing have gone into that. But also, from a global sourcing and our global supplier partners, I mean it's buy side and sell side strategy that have gone into that. So we've seen that throughout the year, and again, we would expect that to continue on into 2019. And then the great thing is, we had some inflation for the first time in many years, and as we look ahead to 2019, we expect to have a little bit of that as well.

Our next question comes from the line of Chris Horvers with JPMorgan.

I know you said that potential risk in the back half on a global economic slowdown. Is there anything that you're seeing now in the industrial business that's alerting you or causing you any concern or is it more sort of speculative and what others are talking about that -- just putting this in your guidance?

It's a great question, Chris, because what we're seeing on in on the industrial side, certainly with some of the key metrics that we follow very closely like, PMI, and manufacturing output. The PMI number in January was up from the December number; so it actually I think was over 56 in the month of January which we take as a real positive, and then you get a federal reserve number on industrial output and productivity and that was a little bit slower in the month of January. So there is some mixed signals out there, I would tell you that we're not feeling in our business yet, but there is just a lot of noise out there that you kind of worry about avoiding; we worry all the time, right, if you don't know pretty sure. But our full year projection, we still feel good about where our industrial business is going, and the team we have in place running that business.

Understood. And then, as you're following up on the winter question asked before, I mean, [indiscernible] -- Canada I think was in polar vortex from the past 7 weeks or something like that and obviously the Midwest has been hit harder. Do you think the regional performance in the U.S. in 2019 could be different from what you've seen? I think the West was weaker earlier in '18 and really the Northeast and Midwest -- Northeast lead for most of the year and now it seems like the Midwest has picked up. Any sort of -- I'd love to hear your thoughts in terms of how the regional performance might change based on what we've seen so far?

Well, I think that question Chris is -- and it's a bit hard to say at this point. We have a number of initiatives that are going on in all of our geographical regions outside of weather impact that will influence our performance in those particular divisions, but as we sit here today and looking at another potential polar vortex coming across the U.S., it does appear that many of the same regions; the Midwest, the Northeast, the Central will be the benefactors of that extreme weather. I would add one of our geographical regions that we've seen a nice spike in '19 as out in out mountain division, so that includes Seattle and Colorado and Wyoming, etcetera; that business has gotten off to a good start in 2019. So it's good to see those folks stepping it up. So we'll wait and see, but again, we've got many key initiatives in the works that will certainly bolster all of our divisions in 2019.

Understood. And then in terms of the operating margin outlook, is there any difference in terms of how you're thinking about the three divisions? And then related to that; is your comp needed to drive expense leverage coming down in '19 or will it be relatively consistent for 2018?

Chris, I think as we think about our operating margin, and look, we were pretty excited to have a second half operating margin as 7.7% in total. Our Q4 improvement at 30 bips was really great to see after 10 bips in Q3. We're anticipating 2019 probably something like 10 basis points to 15 basis points in total operating margins. I would have to say, just given our growth outlook that that would come from primarily automotive and industrial. But I want to point out and it's -- there are a lot of investments in our business that -- again, we've talked about our tax savings, we've talked about our CapEx, and we have been investing in our facilities and productivity, in people, and -- again, pricing, data analytics, supply chain, a lot of investments for the future, and those investments will help us. And I think those investments as it flows through the SG&A line, also depreciation, we've got that -- that we know will be beneficial long-term but we're still fighting these headwinds as we've talked about with the tight labor market and wages and payroll. And then also freight and delivery, so those categories still grew greater than our sales and I -- while we think some of the freight in field will level up in 2019, this tight labor market we're in and with wages, we're not sure that that necessarily cycles out. So, I don't think it's a lower comp number, we have the margin improvement but again, we've implied some improved comp numbers for all of our businesses going forward. So again, on a long-term basis, we would expect to see operating margin improvement.

There are no further questions in queue. I'd like to hand the call back to management for closing comments.

We'd like to thank you for participating in our fourth quarter and year-end conference call. We appreciate your support and interest in Genuine Parts Company, and we look forward to reporting out on our first quarter results. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.