Greetings, and welcome to the Genuine Parts Company Second Quarter 2019 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. I now like to turn the conference over to your host, Sid Jones, Senior Vice President, Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining us today for the Genuine Parts Company second quarter 2019 conference call to discuss our earnings results and outlook for 2019. I'm here with Paul Donahue, our Chairman and Chief Executive Officer; and Carol Yancey, our Executive Vice President 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 may also involve forward-looking statements regarding the company and its businesses. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings, including this morning's press release. The company assumes no obligation to update any forward-looking statements made during this call. Now, I’ll turn the call over to Paul for his remarks.

Thank you, Sid. And I’ll add my welcome to our second quarter 2019 conference call. We appreciate you taking the time to be with us this morning. Earlier today, we released our second quarter 2019 results. I’ll make a few remarks on our overall performance and then cover the highlights across our businesses. Carol Yancey, will provide an update on our financial results and our current outlook for 2019. After that, we'll open the call up to your questions. To recap our second quarter performance across our global platform, total sales were a record $4.9 billion, up 2.3% from Q2 of 2018, driven by a 1.6% comp sales increase, and a 2.7% benefit from strategic acquisitions, net of a 1.5% headwind from foreign currency translation, and a 1.5% impact from the Auto Todo divestiture. Net income in the second quarter was $224 million and earnings per share were $1.53. Excluding the impact of transaction and other cost related to acquisitions, adjusted net income was $230 million, or $1.57 per share. Our second quarter results were highlighted by positive total sales growth in each of our automotive regions, including the U.S., Canada, Europe, and Australasia and in our industrial segment, while the business products group had a slight decline in sales. Our core automotive performance in Europe was pressured by the ongoing transitory factors of a mild winter season and broad economic and political consideration. Turning to a more detailed review of our business segments, total sales in our Global Automotive Group, which represented 56% of our total revenues were up 1.4%. This includes a 1.3% comp sales increase and a 3.5% benefit from acquisitions. This was partially offset by an unfavorable foreign currency of 2.5%, and the impact from the sale of Auto Todo in Q1. By region, our U.S.…

Thank you, Paul. We will begin with a review of our key financial information and then we will provide our updated outlook for 2019. With our second quarter total sales of $4.9 billion, representing a 2.3% increase and including 1.6 comparable sales growth, our gross margin in the quarter was 32.4%, compared to 31.6% in 2018 with the improvement in margin relating to several factors. Similar to the first quarter, the increase primarily reflects higher margins in our automotive and industrial businesses, due to the ongoing initiatives, including taking advantage of a global supplier presence, more flexible and sophisticated pricing strategies, and favorable product mix. In addition, the increase in supplier incentives across our business segments also had a positive impact on gross margin. Our team has done an excellent job of improving our gross margin and for the balance of the year, we continue to expect our 2019 gross margin rate to remain relatively in line with our current run rate. This assumes continued inflation in the 1% to 2% range and consistent levels of volume incentives. The pricing environment has been relatively inflationary thus far in 2019. In automotive, price increases primarily reflect the impact of tariffs, while industrial and business products have seen increases associated with general inflations in areas such as raw material pricing, commodities, and supplier freight. Thus far, we have been successful in passing on the price increases to our customers to protect our gross margin overall. So, we continue to believe that the current levels of inflation have been a net positive to our results. We expect this to continue through the balance of 2019. Specific to tariffs, their impact in the second quarter as well as the six months relates to the 10% tariff previously implemented. By segment, the impact of tariffs…

Thank you, Carol. With this quarter's challenges and the need to modify our full-year outlook, it’d be easy to overlook our team’s accomplishments, which include the following. We achieved record quarterly sales of $4.9 billion, including positive comp sales growth in our U.S., Canadian and Australian automotive businesses. We improved our gross margin significantly with a 91-basis point gain. Our industrial business continues to perform well with operating margins improved 30 basis points. We further stabilized our Business Products operating margin, which was unchanged from last year; and we expanded our global footprint with two large strategic acquisitions, PartsPoint Group in The Netherlands and Inenco in Australia. That said, we also thought it would be important to remind you of our multi-year efforts to optimize our portfolio and position the company for a sustained long-term growth. We spoke to this journey at our June 4 Investor Day and want to highlight a few key points for you now. First, we expanded our automotive footprint beyond North America and into Australasia six years ago. And this group has performed very well for us and added significant value. More recently, since 2017, we’ve added 45 acquisitions to our portfolio, which have provided $3 billion in incremental revenues and positively contributed to both our automotive and industrial footprints. While the majority of these new businesses have represented strategic bolt-on types of acquisitions, we've all stepped out and taken advantage of more significant opportunities, including our entree into Europe in late 2017 via Alliance Automotive, which we have further expanded with key strategic acquisitions in 2018 and 2019, and effective this month, our industrial expansion into Australasia with the purchase of Inenco. And while our European operations performance has impacted our first half results, we believe the challenges for this business are transitory, and…

Great, thank you. [Operator Instructions] Our first question here is from Daniel Imbro from Stephens. Please go ahead.

Yes. Hi, good morning, guys. Thanks for taking my questions.

Good morning.

Wanted to start actually with a clarifier, Paul. I may have missed it in the prepared remarks, but could you just share what were European overall comp sales during the second quarter? Did you guys share that in the prepared remarks?

Daniel, the comps out of Europe, if you recall Q1, we were down slightly in Europe and in Q2 that deceleration – really it was amplified and our comps in Europe were down closer to 7% to 8% in the quarter.

Got it. Thank you. That’s helpful. And then, just digging into that a little bit deeper, are there certain geographies that are meaningfully weaker than others? Obviously, you noted that Benelux is more resilient. And then, just within that we didn't get much of a winter, but we did get some recent extremely heat, did that drive any uptick? Or how was the cadence through 2Q across Europe?

Yes. That’s a great question, Daniel, and as you know, our three primary markets are France, the UK, and Germany. We’ve just entered Benelux, we’re also in Poland. We’ve seen Benelux and Poland have largely escaped some of the downturn we've seen in France, UK, and Germany. The biggest challenge for us in Q2 was France followed by the UK. Germany actually bounced back in Q2. They had a soft first quarter, but actually showed a slight increase in Q2. And I would also – you commented on the recent warmer temps, record high temps in Europe, and what we’ve seen out of the blocks in July and its early, Daniel, but we have seen better sales performance in the month of July and we would attribute some of that certainly to the extreme heat that we've seen in our markets.

Great, thanks. That’s really helpful.

Welcome.

And then, last one for me. Just on the U.S. auto side, you know, weather you noted was disruptive given the rain. Could you maybe quantify what kind of headwinds that was to your business here in the U.S.?

Yes. It's hard to say – to pinpoint exactly, Daniel, but look, I think Q2 was just one more reminder for all of us that, you know, the impact that mother nature can have on our business. We were – if you look at the cadence of the quarter, we were – in the U.S. automotive, we were up slightly in April. May was our most difficult month, and certainly when you look at the weather patterns, May was the most challenging weather-related month. It was awfully wet, still cold. And then, we bounced back in June with a much stronger June. So, hard to pinpoint exactly, but we absolutely know it had an impact.

Great. Thanks so much guys, and best of luck.

Thank you.

Thank you.

Our next question is from Kate McShane from Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for taking my question. If I can just follow up on the auto part retail comment in question earlier, I was wondering if you could maybe characterize the competitive environment currently just now that we’re a few months in now with the tariffs, are you seeing your competitors [past prices] as well?

Yes, that’s a great question. We are – and I'm assuming you're referencing our U.S. automotive business.

Yes, U.S.

Yes, and look, the environment is still very same. We have seen our competitors passing along tariff-related increases much like we have. So, we have not seen any serious disruption in the automotive aftermarket here in the U.S. So, you know, we’re continuing to monitor very closely, but at this point, I think everybody has passed along the increases.

Okay, thank you. And then, my second question unrelated, I think on the last quarterly call you hosted you were talking about working capital improvement that was starting this year for Europe because you were putting supply chain programs in place. And I just wondered if you could update us on where you are with that and what it contributed in the quarter?

Yes. So, we did have – we continue to actually perform quite well. The synergy targets we put in place. We bought Europe a year and a half ago. Those include both procurement synergies and working capital synergies that were right on track for that with working capital being delivered. Having said that, [lot of the way] these terms come in and we’ve got these terms. While they are negotiated globally, we could see it benefit in the U.S. as it relates to the European suppliers as well. So, we know we have further benefit coming in the second half and that’s contemplated in our guidance. So, Q2 you did necessarily see much of an impact, but we have implied for improvement both in global automotive, including Europe and North America as well, honestly as our industrial business for the second half and that’s contemplated in our guidance.

That’s helpful. Thank you.

Your next question here is from Scot Ciccarelli from RBC Capital Markets. Please go ahead.

Good morning guys, how are you?

Good morning.

So, Paul, I guess, I just want to understand kind of the cadence a little bit better, and this is specifically on the U.S. auto side, if April was up just slightly, I’d probably interrupt that, I don’t know, 1% to 2%. I would also assume May was down a couple of points just given how wet it was and what we know it does to the business to get to a 3% comp for the quarter should we assume June was up at least in the mid-single digit range.

Absolutely Scot, you’re spot on with your assumptions.

Okay, got it. Do you attribute that to anything, the weather cadence or is there something else that may have happened just so we can kind of understand if there is another influence on that factor?

Well, if you go back to my prepared comment Scot, what we saw in the quarter, as we saw in Q1 as well is our DIFM, our commercial business in solid. We continue the good momentum we had in Q1 in our NAPA AutoCare business. We believe we’re grabbing greater share of wallet with our key AutoCare customers. So that business as mentioned in my prepared remarks we’re very pleased with our major account business is positive, which is certainly an improvement over where we were last year. If you think about the impact of the weather Scot, certainly in the month of May that’s probably more, we were more impact on our retail side than our commercial business.

And was the gap between DIY and commercial wider this quarter than it has been in recent quarters?

Yes, it was.

Got it. Okay, thanks guys.

You’re welcome.

Thanks.

Our next question is from Chris Horvers from JP Morgan. Please go ahead.

Thanks, good morning everybody.

Good morning, Chris.

Carol, can you break down the EPS guide change a little bit further? I get the $0.5 for the acquisitions, but you are just thinking about the core emotion business, the core NAPA business, in particularly in the U.S., first is Europe. How did you change the underlying guide in the core businesses ex the acquisitions? Is it effectively lowering for European losses, but at the same time it looks like emotions you know sales outlook is a little lighter for the year considering the acquisition? So, if you could talk us through that that would be really helpful.

Sure, I’m happy to. So, starting with automotive first, implied in our Q1 comp, we did moderate probably a half a point or so in Q2. That is in part based on again the U.S. comp was strong at 3%, they were 3.5% for Q1. Europe as Paul mentioned, they are running down mid-single digits through the first half. So, we lowered a bit for Europe. We lowered small amount for U.S. and quite honestly, we have seen some weakness in Australasia. So, we looked at that business more so on their top line. We had a little bit there. So, implied in that automotive there is a slightly lower comp that went into our guidance and then you’re spot on for industrial as well. What industrial is seeing is that maybe this happened a little sooner. The signals are definitely mixed, but where we had implied comp, you know of maybe 3 to 4 in Q1, we’re looking at more 2 to 3 right now, that is taken into account, the slowing business in our electrical specialties group that we called out in Paul’s comment, a lot of that is due to copper pricing and some of their customer mix, but again we felt it was appropriate to lower just a bit for industrial and then we do see a bit of moderation in some of our operating margins headwinds in the second half, so that was factored in as well. So, that’s kind of walk through on the guidance.

Just a couple of questions follow here. So, for the U.S., the kick down for the sort of implied U.S. comp from here, was that solely because of 2Q or did you change your back half outlook?

Probably more, a little bit of Q2, but honestly it was very transitory as Paul mentioned. I mean this was weather in Q2 and transitory. We still feel good about our commercial business and a lot of the factors, so really more of a Q2. We are not seeing anything else right now that would give us concern in the second half.

Chris, just a tag team on that a little bit. You know, you look at our core for GPC, it’s certainly North American automotive and industrial and we feel good about both of those key business and both add a good first half of the year. We expected everybody has been calling for a significant slow-down on our industrial business in the second of the year and if you follow all the metrics, whether it’s PMI, which has declined significantly from January to June, but then there was a manufacturing number that came out earlier this week, which was very positive. So, you’re getting mixed signals on the industrial side. So, we’re being a bit cautious, but our motion business is hanging in there and when you look across industrial, I mean you’re looking at 34 straight months of growth in that world. So, we’re feeling pretty good about our two key and core businesses.

One final thing, I would just say the operating margin decline for Europe is probably more of a stand out than some of the slight modifications in the U.S. comp or the industrial comp.

Just to clarify that, is European auto – could you say it’s operating income loss currently?

No, just to be clear, and we talked about this in Q1, the margin decline in automotive margins, we said in Q1, was primarily as a result of Europe with them comping down 1%. To their credit, they in March took action plans and set out full plan for all their countries, and they’re starting to make a lot of progress on those plants, but what happened in Q2 was such – so much more pronounced that it’s really hard for them to, when you are comping down at a higher, as Paul mentioned 7% or 8%, whatever plans you had in place, it’s difficult to see the improvement. We do see some of that coming in the second half or some moderation, so when you look at automotive margins in Q2, we said more than half, it was probably 50 basis points of the 70 basis point decline and again we would expect to see that moderate with the plans they have in place. The teams have done some good job, looking at some consolidation of facilities, looking at some of their head count and some of their restructuring that they’re doing and they’ve got close attention on all these areas. So, they are definitely positive over prior year, it’s just the leverage issue with the poor sales decline.

Understood and one last one, just on a follow-up on the tariff question earlier. So, going to 25% now presumably those price increases are passing through now, so is the behavior the same they seem to be passed on very quickly by you and your peers back in September, call it of last year, is the 25 – is there any difference to like, is it being passed on more hesitantly and then how do you think about what maybe the inflation outlook will be for the industry given its move from 10% to 25% for the U.S. NAPA business?

Yes, it is a great question. As we kind of look ahead, I think as we, as you spoke to the 25% tariff, we do believe and we know and we’ve already done – have passed those along in many of our businesses and product lines, those went into effect right away, not seeing any issues with passing them along, but having said that our business had been pursuing alternative sourcing as we look to move purchases outside of China, be it Malaysia, India, Vietnam, Mexico, are picking up capacity. In addition, our Chinese sources are also moving some of their capacity from China and that’s going on as well. So, when we look at the full-year, we will have a more pronounced effect for tariffs in the second half that will be passed through. We expect second half to be approximately 2% for automotive and I think we were 1.2 in the first half. So that will get us to probably a point and a half full-year tariff/inflation for automotive. For business products and office products, it’s going to be something less; it will probably be a half a point for the full-year on tariffs, but their inflation, which includes raw materials, commodities, supplier freight, their inflation will be more like 2% on a full-year basis.

That’s super helpful. Best of luck. Thank you.

Alright, thanks Chris.

Thank you.

Our next question is from Seth Basham from Wedbush Securities. Please go ahead.

Thanks a lot, and good morning.

Good morning, Seth.

Good morning, Seth.

My first question is to close the loop on the U.S. auto comp trends. You know it saw a nice strengthening in July, you spoke to material improvement in Europe in – I mean you spoke to material improvement in Europe in July, but do you also see a further acceleration or consistent mid-single digit type comp growth in the U.S. in July today?

It’s early, yes, Seth. But certainly, I would tell you that the hot, hot temps that we are seeing across the U.S. right now is going to be a real boost for our business. If you think about the NAPA business, we do a significant chunk of business up in the Midwest Central, which will get [I’m sure] somewhere someone will ask about regionality and our trends. Despite all the wet weather, the Midwest Central was our strongest performing business in the quarter. We do a lot of business with farmers and agriculture, and you know, many of these farmers are just now getting out in the field. So, this hot weather will help and we expect to see a boost in our topline in U.S. automotive in Q3.

Got it. That’s helpful. Any other callouts from our regional performance standpoint for the quarter?

Yes. So, I mentioned central part of the U.S., Midwest, upper Midwest, but I’m also very pleased to see some strengthening performance in the South, both in the Southwest part of the country, as well as the Southeastern part of the country, both. But we have a – we track [eight] geographical regions except those four would be at the top of the list.

Fair enough. And turning to margins for the auto business in the U.S., you saw a decline there, I guess, implied by your comments, what's driving that decline? What are you doing to control costs in the U.S. to alleviate that pressure?

Yes. And I would mention the other basic point decline in automotive margin is in part Canada and Australasia’s automotive margins and I would tell it’s a little bit of the slowing that we talked about in Australasia. Some of it is timing and definitely expect to see some improvement in the second half for both of those businesses. U.S. was slightly down. It was very minor, so we are really almost running flat U.S. automotive margins, and remember, we’re comping at 3.2% for the six months and we’re getting pretty good leverage, flattish operating margins out of that. But having said that, we’re not going to sit and say that we’re satisfied and we certainly want to improve our SG&A performance. So, there's a number of things that that group is looking at. You know specifically, they are looking at it from a North American automotive standpoint. Paul mentioned facilities and as we look for facilities, its consolidation and rationalization and a number of facilities with automation. In the last six months, we’ve got several facilities both in Canada and the U.S. with [goods to person] conveyor mechanism, [vertical less] modules, things like that mechanized orders that we’re using. Additionally, Paul mentioned functional areas, so think about IT technology, we’re really looking at a digital transformation of our IT infrastructure. So, we can best optimize things like the number of data centers we have, leveraging the cloud, new technologies and networking, back office functions, robotics, sales organizations, leadership, so a number of things that we’re working on as a group.

And Seth, I just would tag team on Carol’s comments, you know, you would ask this question of us at our Invest Day as well, and I would tell you that our teams have been really hard at work to reduce our overall cost structure at GPC. We’re – as Carol mentioned, we’re reviewing every aspect of our business. What I would tell you is during our Q3 call and presentation, we’ll be in a much better position to begin to unveil some of those more detailed plans for you.

Wonderful. Thanks a lot. I look forward to it.

You’re welcome.

Your next question if from Bret Jordan from Jefferies. Please go ahead.

Hi, good morning.

Good morning.

Most of them have been asked, but a couple of cleanups, I guess. The other four regions, could you tell us how the East, Northeast, West and Northwest did?

Yes. Happy to, Bret. The – you know, the – most of those guys are in line. Where we looked at our comps, most of our – most of our regions were right in between, you know, on the low side of, you know, 1 to 2 and on the high side up to 4.5% or so. But, you know, the – where we see a bit more challenges are West, and I already mentioned the strength we’re seeing in the Midwest Central Southern parts of the – Southern parts of the country as well. The Northeast despite really bad weather performed just fine and as did the Mid-Atlantic. So, not a huge – you know, sometimes we see really huge disparity amongst the regions, but what I would tell you – that kind of that range narrowed this quarter. The other thing I would mention, Bret, that we did see across all of our divisions is strengthening in our DIFM business and that was consistent amongst all of our – all of our regions, which we are – I mean look, that’s our bread-and-butter and we’re really encouraged to see some of the DIFM initiatives. Our teams have been working so hard on really begin to take hold.

Okay, great. And then I guess as we’re looking at Europe, and you’ve call out weather and the economy, I guess could you sort of weight the impact of weather versus the economy and the softness there? And obviously as we get further from winter, have we sort of – have we regionally skewed the performance where weather is less impactful, but some economies are more impactful?

You know – so, Bret, we talked about that a little bit on the last call and we had the question earlier about the U.S. weather impact. You know, Bret, it’s really hard to pinpoint exactly. We do know it’s a significant factor. If you back to a year ago, certainly in the UK, they had one of their coldest winters on record followed this year by one of the warmest winters on record. So, it had a significant impact. It’s very difficult to pinpoint an exact number, but I would tell you that with the records heat that we've seen over the last number of weeks, we are seeing an uptick in the business and that’s got us feeling better about our back half prospects in the key markets in which we compete.

Okay, great. Thank you.

You’re welcome, Bret.

Your next question is from Elizabeth Suzuki from Bank of America. Please go ahead.

Hi, thank you. Just a longer-term question on Europe because you just made another acquisition there, and there's – you know even though you’ve seen some perhaps temporary weakness. Just curious how much of that weakness you think is going to continue to impact your overall results for more than a couple of quarters? And, you know, what the vehicle fleet dynamics are that make it an attractive market for you to be in long-term?

Yes. Great question, Liz. We’re still very bullish on the European aftermarket and hence the additional acquisitions that you’ve seen and read about over the last number of weeks. You know if we look at those individually, the one that we just announced yesterday, Todd. Todd is a very strong, heavy-duty truck part supplier in France. They have the 30 plus locations. The combination of Todd along with our existing heavy-duty footprint that we have in France will position us as the Number 1 player. And we’ve seen our heavy-duty business hold up well across all of Europe despite, you know, the slowdown that we’re seeing in the light vehicle market. So, we feel good about the acquisition of Todd. We feel good about our acquisition of PartsPoint, which is, you know, based in the Netherlands and in Belgium is their stronghold. And again, they've not been as impacted as the – some of the other markets with the slowdown, and, you know, as we look at the European market and the vehicle [part of it], the vehicle part that is similar in size to the U.S., the age demographics are similar. It is incredibly fragmented aftermarket across Europe and we have not lost our excitement about that marketplace for the long term and we think we will be just fine. The issues we are faced with right now, less we believe are largely transitory and we’ll get past them as we go through the second half of the year.

And Liz one other thing about the margin. The team has done a tremendous job and Europe is very impactful from a global procurement synergy. So, when you look at our gross margin results and the overall improvement in margin and where we are tracking to our synergies with Europe, again that volume is impactful for us, it’s really the opportunities they have with some SG&A as they work through this core sales decline. So, longer-term we see that working its way out.

Okay, that’s very helpful. And just one more quick one. What age do vehicles typically enter your addressable market in Europe? Is it similar to the U.S. or is the sweet spot a little bit different?

No, it’s similar Liz. When the vehicles are going out of warranty and those warranties are very similar in Europe as they are in the U.S. The other thing I would mention about, the European market is there is very little to almost no retail business. So, DIFM really rules the aftermarket in European. So, very similar to the U.S., I would mention, now that we’re on the European market, one of the initiatives that will be launched in the second half of the year is to launch our NAPA private brand in Europe and we’ve got plans in place to launch it in the UK in three key product categories, and we think that’s going to give our team a real boost in the second half of the year.

Great. Thanks very much.

You’re welcome.

Your next question is from Michael Montani from Evercore ISI. Please go ahead.

Hi guys, thanks for taking the question. Just wanted to add some extra clarity if I could around the U.S. comp trajectory, I’m sorry if I had missed this, but did you provide with the overall commercial and then DIY comps were in the quarter?

We did not provide that Mike for the quarter. I would tell you that both DIFM and DIY were positive and I would also tell you that DIFM significantly outperformed our DIY business in the quarter.

Okay, and then if I heard correctly, I think you said there was a 3% U.S. comp in auto, but then more like a 2.3% total growth there, was there store closures or other rationalization there that could have caused that?

Yes and that was a good catch, much likely we talked about it in the first quarter and I guess it’s a little unusual to see comps outpacing total, but that was the case in Q2 and you’re right, our total U.S. comp were up 3% and what we’re pleased with Mike that’s our fourth consecutive quarter of 3% plus comp. We did have store closures that were up against, we had I believe about 40 plus that were not in our mix in 2019, but that’s an ongoing part our business, and where we have underperforming stores whether they are company owned or independent owned, we’re going to move and that’s the necessary part of the business. I would tell you that we see that, even though that was a factor in Q1 and Q2, we see that trend really slowing in the second half of the year.

Thanks. And then if I could on traffic and ticket, I heard 1.2% from tariffs, was the ticket basically the same so that traffic was up over 1.5% to drive this through the year?

Well what I would tell you Mike is that, again we saw our average basket and average ticket was up significantly year-over-year, close to 4%, up year-over-year; unfortunately, what we saw this quarter, which was a bit of reversals over the last 2 or 3 quarters is we saw our foot traffic down just a bit, and honestly we attribute that to some of the inclement weather that we saw, you know when you have as much rain as we saw in late April and May even into early June, that’s going to – unfortunately it’s going to impact the foot traffic we see in our stores and so that was an impact in Q2.

The last thing I had was on the U.S. EBIT margin if I heard correctly for automotive was maybe down slightly even with that 3.2 comp, and so I was just trying to reconcile the because with the total company gross is up 85 bips plus and I think automotive was one of the stronger ones, if you can just help us understand and parse that out?

Yes. So, again, we’ve talked about, and you’re right, the U.S. automotive team has done a terrific job on the gross margin and we are really pleased in this inflationary and tariff environment to be able to protect and maintain our gross margin percentage pass those through, and also have this quarter improvement in gross margin. The things we talked about in SG&A and some of it I call out is our increased level of investment, these things that we’re doing with facilities and automation and technology, digital investment, pricing investments you see our elevated CapEx, we’ve talked about IT spend, cyber security, those things are all weighing on their SG&A. We actually, when we look at payroll and freight, where we were a year ago with payroll and freight is, I mean, I think I remember this call a year ago, pay roll was up 6% in year-to-date and year ago freight was up low double digits. They are sitting more like 2% to 3% in payroll and 6% to 7% for freight. So, those things have moderated and that’s helped, but we still have the cost of some of these investments that is in our SG&A. So, they should be second half again if comps continue around 3%, we should see that be similar and hopefully maybe a bit better in the second half.

Great. Thanks so much.

Thanks Michael.

Our next question here is from Chris Bottiglieri from Wolfe Research. Please go ahead.

Hi. Thanks for taking the questions. I just wanted the part you left off on, are you assuming 3% in the back half? Wasn't sure that was a good tongue slip or something?

U.S. comps?

Yes.

That’s fair, yes.

Okay. That’s helpful. And then I wanted to dig in on margins a little bit. In Europe, it’s roughly 20% of your business that’s only 50 basis point decline, and that would imply European margins were down 250 bips. If I recall the accounting and business structure in France is a little bit different from the rest of Europe. So, it sounds like a lot better than 200 basis points decline last quarter given that the weakening macro environment is on Q2. Let’s try to understand if France was a disproportionate impact of that margin decline, if any way you can contextualize that would be helpful?

Yes. I mean, we're not going to get into exact specifics on that, but you heard Paul say, France was one of the toughest markets in Q2, and from a number of factors in the quarter that was a difficult market and it was a difficult comp for them. Again, that team has a number of things in place that they’re looking at and we should hope to see some of those things take effect. We do think, and we’ve modelled for to this, that what we saw in the first half of the year, the impact on margins does moderate in the second half and that’s because of some of the things that are putting in place, but France was a disproportionate number.

That's helpful. And then free cash flow, I think you kind of touched this on the prepared comments, but it looks like you cut the free cash flow guide at $100 million. The EPS cut was I know just backing into [with price or EBITDA] seems a lot less. So, trying to get a sense as CapEx going up relative to the plan, is it all working capital, are there more like cash non-GAAP items driving that, just any way you can contextualize the cut of free cash flow would be helpful?

Yes. So, I think, I mean you’re right. We modified it slightly, maybe around 100 million. I would say it’s more around working capital. The timing of when these terms come. So, let's say we have terms with our supplier that are 180 days and then we negotiate it to be 240 days or we negotiate to 360, we don't see that for another six months. So, the timing of some of the working capital is what went into that. So that was really – and there were some slight changes in some of the other categories, but mostly working capital. CapEx, we looked at $300 million, which is what it's been the whole time.

Got you. Okay. And then final one is like positive question. This industry is historically very dissensitive, a cyclical. I understand like initially, there's economic weakness in Europe and a lot of other factors that are transitory that you're dealing with. But is there any way to look at your data internally and tell you how did the European business perform on a same branch basis, compared to how your U.S. business performed in the last downturn? Just trying to get a sense for like does this get better or soon? Or this because it's defensive and like this cyclicality that we're seeing today maybe goes away even if European growth kind of stays where it is. Any way to contextualize, that would be helpful?

Yes. Chris, I'll take a shot at it. Look, we do believe it's going to get better. The European marketplace, as I mentioned to an earlier question is very similar in nature. The aftermarket is very similar in nature to the U.S. aftermarket. And I think what we saw, which was a bit unprecedented in Q2, as we talk to our senior management team, who you've met, Chris, they've been running that business for 30 years in Europe and what they saw in Q2, they have not seen in all the time they've been running that business. It was a confluence of events. Certainly, the slowdown in the economy. Some of the geopolitical issues with Yellow Vests and disruptions around that coupled with an incredibly mild winter and all of those factors unfortunately hit us at once and led to a really soft quarter for the team. We don't see that as a long-term situation, and certainly, we'll – we're certainly expecting that to improve in the second half of the year and well into 2020.

And I think one final thing. We think we will see improvements from their cost initiatives and as well as the integration of their acquisitions, too, as we look ahead, which will help offset this.

Got you. Makes sense. Alright, thank you for the time.

Thanks, Chris.

This concludes today's question-and-answer session. I'd like to turn the floor back over to management for any closing comments.

We'd like to thank you for your participation in today's call. We appreciate your support and interest in Genuine Parts Company, and we look forward to talking to you at our Q3 call. Thank you, and have a great day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.