Welcome to the O'Reilly Automotive Inc. Third Quarter Earnings Conference Call. My name is Allie and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Tom -- Mr. Tom McFall. Mr. McFall you may begin.

Thank you, Allie. Good morning, everyone, and thanks for joining us. During today's conference call, we'll discuss our third quarter 2017 results and our outlook for the fourth quarter of 2017. After our prepared comments, we will host a question-and-answer period. Before we begin this morning, I'd like to remind everyone that our comments today contain forward-looking statements and we intend to be covered by and we claim the protection under the Safe Harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as estimate, may, could, will, believe, expect, would, consider, should, anticipate, project, plan, intend or similar words. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest Annual Report on Form 10-K for the year ended December 31st, 2016, and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time, I'd like to introduce Greg Henslee.

Thanks Tom. Good morning everyone and welcome to the O'Reilly Auto Parts third quarter conference call. Participating on the call me this morning are our Co-Presidents Greg Johnson and Jeff Shaw as well as Tom McFall, our Chief Financial Officer. David O'Reilly, our Executive Chairman is also present. I'd like to begin our call today by thanking team O'Reilly for their continued dedication to providing consistently excellent service to our customers. This unwavering commitment to going above and beyond to meeting our customers' needs was on full display during the third quarter and our team's response to Hurricane Harvey and Hurricane Irma. Jeff will touch on our team's effort in more detail in a few minutes. But I want to thank each member of Team O'Reilly for their hard work and commitment they showed to provide great service to our customers during the recovery from these storms. We did see some headwind during the quarter as a result of store closures caused by the storms. However, thanks to our team's amazing commitment to getting their stores back open as soon as possible, we estimate we were able to make up most of the lost volume prior to the end of the quarter and more importantly, we were able to generate incredible goodwill with our customers that will benefit us for years to come. Our comparable store sales results for the third quarter were in line with the guidance expectations we established on last quarter's call as we saw a continuation of the business trends we experienced in the first half of the year. Clearly, our results this year have been below our robust long-term track record as a result of challenging market conditions in our industry driven by several factors I discussed in detail on our last conference call. These…

Thanks Greg. Good morning everyone. I'd like to begin my comments today by thanking our team for their continued commitment to outstanding customer service and their hard work in the third quarter which allowed us to generate respectable results in a tough environment. Team O'Reilly has consistently demonstrated that we will respond to market challenges by working even harder to take care of our customers. And that commitment to our customers has us well-positioned to profitably gain market share moving forward. I would now like to provide some additional color on the third quarter comparable store sales result results in the fourth quarter guidance. Our results were within any expectations as we began the quarter on a similar trend line to the results we posted in the second quarter. Greg previously mentioned our month-to-month cadence for the third quarter was impacted by some headwind in the middle of the quarter as a result of store closures caused by the hurricanes. But we estimate we were able to make up for the lost volume in the affected regions as we saw demand increase for recovery-related activities. Excluding the timing impact of the hurricanes, our results for the quarter were relatively steady with September finishing as the strongest month of the quarter. On a category basis, our results in the third quarter were very similar to what we saw in the second quarter. We experienced continued softness in hot weather categories such as cooling, HVAC, and refrigerants, particularly, in the Central and Southern U.S. where mild summer conditions persisted throughout the quarter. In addition to the pressure and hot weather categories, we saw continued headwinds and other weather-related categories such as ride control and driveline which did not experience the typical wear and tear this past winter in the absence of harsh…

Thanks Greg and good morning everyone. I'd like to begin my comments today by thanking our team for the relentless commitment to excellent customer service and their continued hard work every day to our service and our competition. Team O'Reilly's dedication was especially evident in those regions of our company impacted by Hurricanes Harvey and Irma and I want to provide a little color on the impact of these storms and more importantly, on the tremendous efforts of our team to overcome significant challenges and provide outstanding customer service. In total, we had approximately 450 stores impacted by the storms with the closures concentrated over the three to four-day time period when storm made landfall, though the majority of the impacted stores were closed for less than two full days. In addition our distribution centers in Houston, Texas, and Lakeland, Florida were also impacted for a short period of time during the storms. While we sustained some damage as a result of the storms and we'll continue to evaluate the total cost of the storms, we did not see material headwind from storm-related losses in the third quarter and we don't expect for these costs to be material going forward. As both Greg and Greg previously discussed, the headwind from store closures during the worst of the storms we'd estimate was offset in the quarter by the incremental sales volumes we captured upon reopening the stores in the affected markets. Our ability to recover quickly from disasters such as these hurricanes isn't a new phenomenon for our company and our teams have long prided themselves in being among the first businesses to reopen and be there for our customers after a disaster. Getting an auto parts store up and running after events like the ones we faced in the third…

Thanks Jeff. Now, we'll take a closer look at our quarterly results and updated guidance for the remainder of 2017. For the quarter, sales increase to $119 million prior to the $57 million increase in comp store sales, a $64 million increase in non-comp store sales, a $1 million decrease in non-comp non-store sales, and a $1 million decrease from closed stores. For 2017, we expect our total revenues to be $8.9 billion to $9 billion. For the quarter, gross margin was 52.6% of sales which was a 10 basis point deleverage versus the last year. The reduced gross margin percentage was the result of product mix, the loss of leverage on fixed costs and higher strengthen offset in part by lower LIFO charge. The LIFO impact resulting from continued incremental acquisition cost reductions was a headwind of $3 million in the third quarter of 2017 versus $10 million in that same period of 2016. We're anticipating the headwind from LIFO in the fourth quarter will be similar to the third quarter. For the quarter, our tax rate was 35.5% of pretax income, which was better than the 36.4% we anticipated. One-third of the positive variance was due to better than anticipated results on the tolling of certain tax periods. As a reminder, the third quarter rate is typically lower than the remainder of the year due the tolling of open tax periods. The remaining two-thirds was due to the required accounting change for the tax benefit relating the share based compensation. For the fourth quarter, our tax rate will be approximately 37.3% of pretax income before any benefit we may receive relating to the accounting change for share based compensation. Now, we'll move on to free cash flow and the components that drove our results in the quarter and…

Thank you. We will now begin the 30 minute question-and-answer session. [Operator Instructions] And our first question comes from Michael Lasser from UBS. Please go ahead.

Good morning. Big thanks -- for taking my question Greg. Are you seeing any signs or any evidence that the industry is becoming more promotional or pricing pressure is becoming an issue in light of your gross margin performance for the quarter? I think that's becoming a question mark for the industry at this point.

Okay. Well, thanks Michael. What I would say is that anytime our industry has a year where demand isn't quite as you know great it was the prior year for a prior period or whatever. We have primarily regional independents I call them undercard warehouses that you know do literally everything they can to hang on to and grow their professional business. So we have those kinds of things happening regionally but there's nothing new that that happens. You see it more during times of lower industry sales growth than you do in times of higher industry sales growth. But it's nothing new. But I would add to that that we've seen nothing across the industry that's changed the way that we compete on price. And I would speculate that there really has been no material change among our competitors. There's a method by which they go to market relative to price other than what we've read about one of our competitors who is considering going to a zone pricing strategy which all of us except for them evidently currently deploy. And we'll just have to see what effect that has. But I guess my comment would be is there's nothing new on the pricing front for us.

That's helpful. And then my follow-up question is how do you reconcile your comments about whether influencing the industry sales and the fact that your trends improved in September? And it sounds like that continued into October despite the fact that it's been abnormally warm in areas of the country like the Northeast? And then if we see another abnormally warm and dry winter, is this 1% to 2% growth rate kind of a new norm for the business?

Yes. Well, what I would say, Michael is that we've had two consecutive winters of mild weather and we've had a mild summer. I think as winter has approached in some markets, we -- what we've seen is a good reaction in some of the winter preparation-type of items and that, most likely, there are people that know that they didn't do some things to their cars last winter and maybe even the winter before because they had a mild winter and they're anticipating the need to do it. And so that's -- we feel like that's probably a little bit of a driving factor in the early season prior to weather, hopefully, turning cold and us having a brutal winter this winter in much of the country. We're not as exposed to the Northeast as some of our competitors, but we do realize it's been softer up there. We're growing up there. So the fact that maybe demand hasn't been as good on a macro level up there as what it typically would be this time of the year, we may not see as much because our stores are still on kind of a high growth rate because they're newer stores. Relative to your question on 1% to 2% being the new norm, if whether it's to be -- we have another mild winter or something like that, that's yet to be seen. I -- it would be very surprising if we had three winters as mild as the two we've had in the past. But time will tell and we'll see. Some of the things that are caused to fail by extreme weather are items that are going to fail no matter what. Extreme weather just causes them to fail earlier than they would have otherwise. So, what I would say is that if we have a real cool winter in many markets this year, I would expect demand to be pretty robust. If we don't, some of the things that didn't fail two years ago or last year are bound to fail this year just based on time and miles rather than extreme weather. So, we would expect there to -- this winter to be a better season for us and I wouldn't expect 1% to 2% to be the new norm.

Thanks much. And good luck with the fourth quarter.

Okay. Thank you, Michael.

And our next question comes from Brian Nagel from Oppenheimer. Please go ahead.

Hi good morning. Thanks for taking my question.

Sure.

So, I too just want to begin with a question on gross margins. And Tom, I know you addressed this somewhat in your prepared comments, but can you help us understand better what really changed from, say, Q1 -- I'm sorry, Q2 to Q3, where gross margins went up from being up solidly to down slightly? What was the key factors that changed there? And then recognizing you don't give guidance beyond 2017, but how should we think about gross -- given what's the industry dynamics right now, how should we think about gross margins if we look out into 2018 and beyond?

So, your question is, to make sure I have this right, is the year-over-year difference, second quarter to third quarter?

That's correct.

Okay. So, when we look at the second quarter of 2016, we had a significant LIFO charge and that created a lot of the difference. When we look at our gross margin, we tend to look on a quarter-to-quarter basis not year-over-year. The best indicator is how we did the quarter before. And there is some seasonality within that based on the product mix that we sell during that quarter. So, the comparison of how much we're over in the second quarter versus of the third quarter really has to do with that LIFO number. If we look at the sequential margin from the second to the third quarter, we actually improved and a lot of that is based on seasonality and we'd expect it to continue to improve per our guidance in the fourth quarter based on the products. As far as next year, we see a pretty stable pricing environment out there. We see a non-inflationary environment continuing and we'd anticipate that we'll continue to work hard at improving our gross margins to the extent that we are better able to leverage our fixed cost we'll see an improvement. And our merchants are always working on getting better deals. So, we wouldn't expect to have the pressure maybe that we've seen this year ex-LIFO.

Got it. It's helpful. And then this -- my follow-up question. With respect to hurricanes, so it sounds like your -- you get your stores up and running quite quick through the storms. Should we expect any type of recovery demand in your business as we look over the balance of 2017 or even beyond?

Well, I think there's always some. Cars that were flooded, that weren't totaled or cars that maybe were in really bad shape that people decided to salvage, there's, you know, fluid changes and other things. We've been through this before. And Jeff, I might ask you to, kind of, speak to some of the things that we see in the stores relative to items that people worked on repaired following hurricanes and how long that lasts.

Sure. I mean, obviously, the big ones would be -- the immediate would be the filters and the fluids and things to kind of get the flooded cars that weren't totaled back in service. Following that, I mean, there's going to be damage to rotating electrical. That's -- we should see a bump in that in the affected markets. It's hard to tell. I mean, we've been through several of these over the years and in those affected regions there will be some post-hurricane demand for some period of time. I don't know exactly when that will play out.

One additional benefit, Brian, is that many the cars that were totaled -- you know, the people that -- whose car was totaled don't buy new cars. Many of -- I would speculate many of our customers that had cars that were totaled and got insurance checks had probably never bought a new car and wouldn't this time. So they're now buying used cars. Matter of fact, the used car market in Houston is robust. There aren't enough used cars down there and there are -- auctions across the U.S. are filling the need for cars in those flooded areas. So as these customers buy these used cars, many times someone with a car that's new to them takes it through a maintenance cycle which is generally good for us. So I think that in 20 -- late 2017, 2018 we stand to have some benefit from those used cars that are new to families that go through a maintenance cycle to become the family car.

Got it. Helpful. Thank you.

Okay. Thanks, Brian.

And our next question comes from Kate McShane from Citi Research. Please go ahead.

Hi, thank you for taking my question. I think you'd mentioned in the prepared comments to some of the better results that you're seeing at your new stores. Can you walk through how close some of these newer stores are to existing stores and what is exactly driving some of these better results and how they can maybe be deleveraged into the rest of the fleet?

Okay. We put in there some fantastic new stores, and I think you may be surprised to know that one of our largest growth markets is Texas where we have a number of stores and operate in virtually every market. So they are backfill stores and they are even in Houston, Dallas, Austin, San Antonio, markets like that. We're constantly evaluating where we might put additional stores. So some of the new stores we open our stores that are reasonably close to existing stores. But we know by the work we do demographically that we're not getting as much business as we could potentially get if we had another store and we justify opening an additional store. On the other hand, many of our new stores are in Florida and the Northeast where we don't have existing stores and those stores where we don't have overlap, we establish our brand and do very well. I was just -- I just attended our new store up in Norwich, Connecticut which was our 5,000th store. I attended that opening. And it's just incredible the number of customers that come in who are thankful we're there, happy we’re there. Enthused about the new store, impressed with the way the store looks. So we do a lot around promotions and putting a great team in the store to get a store off to a good start. And frankly, over the years, we've just got better at it than we were in the past. And today our new store openings outpace what they had a few years ago and we're pleased with the new stores we opened both in backfilled markets and in new store growth markets.

Okay. Thank you.

Thank you.

And our next question comes from Simeon Gutman from Morgan Stanley. Please go ahead.

Hey guys good morning. First question is on sales. I wanted to ask how do you know if some of the strength that you saw in September/October wasn't just this hurricane rebound that you mentioned and that you don't see that that trends won't soften from there. I guess maybe you can talk to some geographic markets or categories or parts?

Yes, that's how we would know, Simeon, it's simply because we know the effect that those regions that were affected what they can -- what effect they can have and did have based on the detail we, obviously, see on the whole company. And we know that that was -- that is not the primary reason of the improvement. Although, we did have -- we have had some rebound in those markets. But there isn't enough scale there to cause us to -- cause effect on the whole company the way that you might be alluding to.

Got it. Okay. And then I want to ask about the sweet spot. We've talked a lot about it and there's a lot of ways to slice it. I mean, clearly, 2017 wasn't the year it happened or at least it was clouded by weather. But it would seem like 2018 should be a year where mathematically the number of cars in that sweet spot do increase. Do you agree with that? And is there any rhyme or reason for it to occur earlier or later or later in next year.

I agree with you that we should begin seeing in 2018. The 2008 to 2011 cars will be on the tail end of the demand curve and their presence in the population and the number of those cars won't be as impacting on the overall demand in the industry.

Got it. Okay. Thanks Greg.

Thanks, Simeon.

And our next question comes from Dan Wewer with Raymond James. Please go ahead.

Thanks. Greg, I want to follow up on that same topic. Back in 2008 the company had an unexpected weakening in same-store sales along with the economy, had a nice rebound of 4.6% in 2009. A little bit of a similar pullback in 2012 results, followed by a recovery to 4.3% comps in 2013. When you think about next year, do you think that we're set up for a snapback in comp sales maybe to at least the midpoint of 3%. Sounds like you're little bit more bullish on the demographics as well for next year.

Dan, what I would say is that, having -- been little surprised this year with the softness we experienced. We -- you don't know how years going to play when you do your plan. And Tom and his team do an outstanding job budgeting and forecasting and so forth. But what I would say is, we have much easier compares next year and we've had tough compares for several years in a row now. So I would say that on the tail end of what we would use this air bubble in the view of a population and the easier compares, yes we would expect to have a better comp store sales here next year than what we had this year. And while we haven't done the work for our forecast and set our plan and give guidance yet, I'm hopeful that we will arrive at a point at the end of this year, based on our performance in the fourth quarter, that we have confidence in setting a more aggressive comp store sales plan for next year.

Also, you commented on the feedback from your commercial customers and they indicated they think the weakness is impacting them as well. What are they saying about the dealer's service business. You know the public companies have been showing that their service business has been strengthening. Is there is a risk that they're having some impact on that down the street mechanic and that could be having some influence on their softer results.

Well, I think that there is something to that. I think that the shops that do diagnostic work and drivability work that's relatively technical, I think that the dealers are doing a -- have done a better job in the last several years trying to hang on to some of that business, not necessarily because of the revenue profit generated from the repairers, although that's beneficial. But, more so, because they're trying to get the next new car buy. These people that buy new cars and go through a warranty process where they have warranty work done at the dealer, they try to hang on to them thinking that if there is a new car buyer -- you know, someone is going to buy a new car versus a used car, that they have a better chance of getting that next new car sale if they do a good job from a service standpoint. So I think that some of our competitors depending -- I mean some of our customers depending on how technical of a shop it is, does view the dealers as being a significant competitor. And when it comes to the shops that do primarily under car brake work, alignments, tires, chassis and suspension work relative to alignments and tire ware, I don't think they're nearly as exposed to that and they don't have an issue with the dealers, because the dealers I don't think just do -- they don’t do that much as kind of work.

Okay, great. Thank you.

Okay. Thanks.

And our next question comes from Bret Jordan from Jefferies. Please go ahead.

Hey good morning guys.

Good morning.

Could you talk about the comp -- the magnitude of the comp improvement? Some of the suppliers are talking about some, I guess, almost good POS data from their perspective on September and maybe talk about how much we saw improvement as the quarter progressed. And then, maybe regional spread, you talked about the central states being the weakest, but if you could give us some idea of sort of the spread between worst and best?

Yes. Well, yes, we don't want to get into a lot of detail about our comps, specifically by month. But we said that September was the best month of the third quarter and that better trend has continued into the end of the fourth quarter. Although we don't want to sound overly aggressive, because we know we have this tough compare coming in December, we have the headwind from the holiday and the extra Sunday and so forth. But yes, I think that what you're hearing from suppliers would be reasonably accurate about the improvement that's been seen in September and October. And I'm sorry, I forgot the second half of your question.

The regional spread, how much did the central states underperformed in your strong markets?

Yes, the Central and East would be softer than our West. The West Coast and the western half of the country has been our best performing this past quarter.

Okay. And then the follow-up question, on M&A, obviously the GPC guys bought Monroe in Rochester, or buying and you've done the Bond deal a year ago. Are you seeing more of the smaller independents, the undercar warehouses you talk about, that maybe are challenged in a soft environment looking to sell now?

There's always a few out there that are ready to sell. Some overlap with us, causes valuation to be a problem. But yes, I think the softness in the business causes more of them to be interested in selling than they are in times of robust business.

Okay, great. Thank you.

Yes, thank you.

Our next question comes from Alan Rifkin from BTIG. Please go ahead.

Thank you very much. My first question relates to inflation, both with respect to commodity prices as well as wages. Greg, one of your chief competitors talked about that they were seeing some inflation in commodity pricing. I was wondering why at this point you're not really seeing that. And then the second half to that first question, what are you seeing, if any, with respect to wage pressure inside your stores?

Okay. Well, on commodity pricing, we've -- I'm sure that we are shopped electronically as we shop our competitors just ongoing, and we have seen a little bit of inflation in commodities over time. So, we do see some benefit from that, although it's not material across of the scope of our whole inventory since the majority of our business is hard parts and batteries and things like that. Although we continue to be very aware of how our competitors price and look for every opportunity to adjust our prices where we see an opportunity to do so. On wages, I think we see the same pressures that our competitors see. It's well known throughout the country that several municipalities have their minimum wage set well above the U.S. minimum wage and it's just we work to make sure that our stores are as productive as they can be and Jeff Shaw and his team just do a great job of managing this. Jeff, you might talk a little bit about the productivity things and some of the things we're doing with our drivers from a routing standpoint, things like that, to help drive productivity in our stores, if you'd like.

Yes. I mean, anytime there's low unemployment, I mean, there's going to be wage pressure and these municipalities don't really help things. But when payroll goes up, you've got to manage productivity team member by team member and we do that with various things and we're using more and more technology all the time to try to leverage our team member productivity to keep our SG&A in line. So, it's just same thing we've always fought. I mean, we'll work through it and manage it quarter-to-quarter and year-to-year.

Hey Alan, this is Greg Johnson. I'd like to just add to the commodity pricing question. I don't think we've seen anything out of the norm this year from a commodity pricing. The commodity -- a lot of the commodity pricing is based on pricing of various metals, fuel-based pricing, things like that. We see fluctuations every year and we've been able to pass along most of those price increases.

Okay. Thank you very much. And just a follow-up, if I may. Greg Henslee, you said one of the factors, although further down on the list, that you thought was responsible for the weakness, not only in your business, but for the industry, was the addressable vehicles over to 2008 to 2011 time period. That's a pretty long period of time, right, both during the recession as well as the year before and the year after. Does that length of time and the fact that you believe that it is influencing your business, does that maybe give you some pause in terms of changing just the near-term strategy since it looks like it's somewhat of a prolonged period of time possibly taking down the new store growth just a little bit till we get to the other end of that?

No, it doesn't, Alan. And just to be -- I'm not sure everyone understands this, but I'm going to say it anyway. What we're talking about is just simply the depressed new car sales during those years and there being fewer of those cars in the ideal sweet spot for selling auto parts, which is if you look across the bell curve of the demand for parts, when that population decreases, it can have an effect. I -- the reason I wouldn't look at it from the perspective you mentioned relative to maybe knowing that's coming and changing our growth is I feel like it's offset pretty significantly by the fact that cars just stay on the road longer. Some of the cars that are older than -- used to be cars that customers just wouldn't invest in because they were nearing their time to go to the scrapyard. That's just not the case as much. So, I think that the effect of this, while it is a factor is somewhat muted by the fact that there are just more cars on the road that are older that are still worthy of significant investment because they're still pretty good cars.

Okay. Thank you, Greg. I appreciate the explanation.

You bet. Thanks Alan.

And our next question comes from Christopher Horvers from J.P. Morgan. Please go ahead.

Thanks. Good morning guys. So, can you remind us how steep was the decline in the business in December? I know you benefited -- everyone benefited from that cold weather, but at the same time, you also had some headwinds that were starting to emerge with the Hispanic customer. Curious if you could also talk about what you're seeing there. Is that customer more stable now? And do you think that was a drag in your business as early as around the election timeframe?

We don't give monthly comp numbers and I tell you, December -- the comp in December was approximately double what it was the two months of the quarter. So, it's a significant step-up. And a lot of the business during December was directly related to real cold weather. It was batteries and other cold winter items that we sold during the period of time that we might replicate this again in December. We'll have to see. If we have a real cold weather, then there should be a lot of batteries out there that are ready to fail and a real cold snap across the country would cause them to fail. So, we'll just have to see. But December was a material step-up last year for us from a comp store sales basis compared to October and November. On the Hispanic customer, we think it's getting better. Jeff, you made some comments earlier that the -- what some of the RMs and DMs have been saying to you. So, we think it's improving. And Jeff, you might have a comment relative to that.

Yes. I mean what we're hearing from some of the heaviest Hispanic markets is the operators feel that it's taking back up. Foot traffic is picking up and some of the professional business is picking back up. So, at this point, it's isolated, but we are hearing some positive comments more than we've heard all year.

Would -- could you venture -- I mean, as you think about that customer, how much perhaps that's been a headwind or was a headwind, whether in the fourth quarter last year or in the first quarter, is it -- is it like 20 or 30 basis points or is it something more material?

It would just be an absolute guess and I'd rather not put a number on it. It's been a factor. There's been enough discussion about it and the information we get from a company called NPD, who you're probably familiar with, outlines just the general retail demand among the Hispanic customer base and where the Hispanic population is most prevalent in driving retail demand across the country has indicated that it's a factor. But it would be very difficult, if not impossible, for us to put a number on the impact.

Understood. And then just as a quick follow-up. Tom, did the shrink headwind continue as you look into the next few quarters? Is that sort of a new rate of accrual? Or was this just more of a one-time adjustment here in the third quarter? Thank you.

We would -- we've spend a lot of time managing shrink. Our field team, DCs teams do an amazing job, our LP team does an amazing job. And I would tell you that this is just an oddity for us that kind of popped and probably had a lot to do with the timing at the end of the quarter and how much inventory we had to move around in different ways based on the events that occurred during the quarter.

Understood. Thanks.

Thanks.

And our next question comes from Chris Bottiglieri from Wolfe Research. Please go ahead.

Thanks for taking the question. First one is clerical, does your SG&A guidance, is that GAAP? Like do you adjust that for the legal reserve and for the M&A? How are you looking at that?

I'm sorry. Our SG&A guidance would be GAAP.

GAAP. Okay. And then so obviously pretty impressive performance year-to-date. Basically running flattish versus 3%. This is ex-dollar. Have you stripped out depreciation rent out of your SG&A versus running 3% the prior years? So, maybe you can help kind of bridge that gap. Like how much is incentive comp coming out of the SG&A base? How much -- is there any way -- any reason to think that some of these expenses could be pushed into 2018? I just kind of wanted to get your thoughts there.th.

I would tell you, it's just tight expense management and as we talked about before, we have variable compensation for every team member here at O'Reilly from driver up through our executives. And the percent changes. Obviously, that number is under pressure this year. So there's some savings there that won't occur. But it's good expense management, good expanse management of payroll, which is our biggest expense at both of the DCs and in the stores. And we have a very -- the expenses that are volume based that go up when we have higher sales and more activity; we're going to get to out-manage it.

Okay. Then just one brief one on LIFO. Those tailwinds have kind of slowed down a little bit or I guess initial headwinds, I call them lag tailwinds. How do you think about kind of your ability to extract better procurement from your vendors? Are you seeing anything change on the discussion points? Is there a certain percentage of your portfolio turnover in the last couple of years that makes those slower? Or how do you think about those?

So, as Greg mentioned earlier, we have seen some commodity price inflation and its car part to where we continue to get better deals, offset in part by inflation on some commodities. So, we continue to work on getting great deals. But to the extent that we see commodity pricing increase that could -- so if we see inflation provide tailwind to the top line and our industry has been pretty effective at pushing price increases for cost increase that we receive.

Okay, cool. Thank you for the help. Appreciate it.

Thank you.

We have reached our allotted time for questions. I will now turn the call back over to Mr. Greg Henslee for closing remarks.

Okay. Thank you, Allie. We just like to conclude our call today by thanking the entire O'Reilly team for our continued dedication to customer service in the third quarter and for the year. We look forward to finishing 2017 on a solid note and getting off to a strong start in 2018. I'd like to thank everyone on the call today for attending our call and we look forward to reporting our fourth quarter 2017 results in February. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.