Tom McFall - Chief Financial Officer Greg Henslee - Chief Executive Officer Jeff Shaw - Executive Vice President of Store Operations and Sales.

Matt Fassler - Goldman Sachs Carolina Jolly - Gabelli Mike Baker - Deutsche Bank Dan Wewer - Raymond James Alan Rifkin - Barclays Seth Basham - Wedbush Simeon Gutman - Morgan Stanley Bret Jordan - Jefferies.

Welcome to the O'Reilly Automotive Incorporated Fourth Quarter and Full Year 2016 Earnings Call. My name is Richard, and I'll be your operator for today's call. At this time, all participants are in a listen-only-mode. Later, we will conduct a 30-minute question-and-answer Session. Please note that this conference is being recorded.

I'm now like to turn the call over to Mr. Tom McFall. Mr. McFall, you may begin..

Thank you, Richard. Good morning, everyone and thank you for joining us. During today's conference call, we'll discuss our fourth quarter 2016 results and our outlook for the first quarter and full year of 2017. After our prepared comments, we'll host a question-and-answer period.

Before we begin this morning, I'd like to remind everyone that our comments today contain certain forward-looking statements and we intently covered by and we claim that protection under 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, belief, 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 31, 2015 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' fourth quarter conference call.

Before we begin our discussion of our fourth quarter results and our plans for 2017, I'd like to take a few minutes to discuss the announcement we made in our press release yesterday of the promotion of Greg Johnson and Jeff Shaw to co-Presidents of O'Reilly.

As we've discussed many times in the past, our company is promoting within philosophy and our deliberate commitment to succession planning are highly critical components of our strategy to build the very best team in our industry.

In conjunction with that strategy, we are extremely pleased to have Greg and Jeff assume the elevated leadership roles of co-Presidents of the company.

Greg and Jeff have both proven time and again their exceptional leadership qualities and their contributions over the last three decades are a reason why O'Reilly consistently provides excellent service to our customers and generates the best results in our industry. Greg and Jeff truly are our long-term success stories.

Greg began his career with Mid-State Automotive Distributors as a part-time distribution center team member 34 years ago, and officially joined Team O'Reilly with our acquisition of Mid-State in 2001.

Over the years, Greg has held key positions in information technology and throughout our distribution operations group where his leadership has been instrumental in the development of our industry leading network of 27 distribution centers before taking on as current broader role as executive Vice President of supply chain.

As co-President Greg is now responsible for the company's merchandising, inventory management, advertising as well as the added responsibilities for information technology, legal, loss prevention, risk management, human resources and finance.

Jeff's career with O'Reilly began 27 years ago, when he joined the company as a part specialist at one of our stores in our hometown in Springfield, Missouri.

During his tenure with the company, Jeff has served in every leadership role in our store operations group from store manager to his current role as Executive Vice President of store operations and sales.

And he been instrumental in several acquisitions during his tenure beginning with the key role he played in first major acquisition of Hi-Lo Auto Supply in 1998. Now as co-President, Jeff is responsible for the company's store and distribution, operations teams as well as expansion, acquisitions and real estate.

Again, I could not be more proud of the many years of service Greg and Jeff have provided our company. And I am excited about the leadership they will provide to team O'Reilly in their new roles as co-Presidents.

Greg and Jeff are on the call with me this morning along with Tom McFall, our Chief Financial Officer and David O'Reilly, our executive chairman is also on the call. I'm once again pleased to be in our call today by congratulating Team O'Reilly on another strong year in 2016.

We finished the year off with a comparable store sales increase of 4.8% in the fourth quarter, which matched our increase for the full year of 2016. The solid 4.8% comp store sales growth for 2016 was at the high end of our guidance of 3% to 5% and came on top of 7.5% and 6% in 2015 and 2014% respectively.

Our ability continues to grow our business and capture market share year in and year out is a testament to our team's commitment to providing excellent customer service and I want to thank each of our team members for their dedication to our company's long-term success.

For the fourth quarter, we grew total sales by 7.7% and for the full year, we generated 7.9% total sales growth. Our ongoing focus on growing sales profitably and controlling expenses translated our solid top-line performance into a record fourth quarter operating profit of 19.4%.

For the full year, we generated a record operating profit of 19.8%, which was a 77-basis point improvement over 2015. During the quarter, we generated earnings per share of $2.59, which represents an increase of 18% over the prior year.

This quarter represents our 32nd consecutive quarter of EPS growth of 15% or greater, excluding the atypical tax benefit in the third quarter of 2015. For the year, we generated EPS of $10.73 which was an increase of 17% over the prior year. This year represents our eighth straight year, we have generated annual EPS growth of 17% or greater.

And this remarkable track record of strong, consistent earnings growth is the reflection of the effectiveness of Team O'Reilly's customer service oriented culture, our dual market strategy and our focus on profitable sustainable growth. When we look at our sales performance for the quarter, we saw solid demand to start the quarter in October.

November was a little slower on the DIY side of the business, as we saw headwinds to our business in the time period around the presidential election and due to the lack of cold weather across many of our winter sensitive markets. However, with the onset of colder temperatures in December, we drove a stronger sales trend to finish the year.

As we saw in the third quarter, the composition of our comparable store sales growth in the fourth quarter was very balanced with our professional and DIY side of our business, both contributing equally to our comparable store sales growth.

For the full year, we saw steady increases in both comparable ticket average and transaction account with a slightly larger contribution from our professional ticket count, although our DIY ticket count growth continues to be solid.

The increase in average ticket continues to be driven by the secular industry driver of parts complexity with no health from increases in selling price as inflation [ph] remains muted. On a category basis, we continue to see solid performance in key hard part categories such as brakes and chassis.

With the onset of cold winter weather in December, our weather-related category such as batteries and HVAC performed very well.

The lingering effects of last year's mall winter which caused the gap through most of 2016 between the stores and weather effected regions and the rest of the company have now seized to exist as winter weather returned in December. For 2017, we are establishing comparable stores sales guidance of 3% to 5%.

Over the past three years, the improving health of the economy and increase in employment and the associated increase in commuter miles has been a key driver of the growth in miles driven, which are up 3% year-to-date through November 2016 after seeing an increase of 3% in 2015 and 1.7% in 2014.

In developing our guidance for 2017, we expect for these gains to be sustainable and to see additional positive tailwinds from a modest increase in miles driven, as employment remain stable and the macroeconomic environment gradually improves.

We expect to see continued growth in miles driven specifically in the population of the ad of warranty vehicles as better engineered and manufactured vehicles are capable of being reliably driven at higher mileages if reasonably maintained, which is being proven out in the continued stable low scrappage rates.

Our guidance expectations including assumptions that our customers will see some pressure from increases in gas prices. However, even with an anticipated increase, gas prices are still low in relative terms and we believe consumers will be able to readily adjust.

Finally, our comparable stores sales expectations assume inflation will remain muted, as we have seen for the past several years. To the extent that we begin to see inflation on our industry, our sales will benefit from rising selling prices.

Against the stable industry backdrop, we are extremely confident and our team’s commitment to providing the highest levels of services in our industry and our ability to continue to gain market share.

Our first quarter represents almost difficult comparison for the year on a two and three-year stack basis, as we compare against the 6.1% and 7.2% comparable store sales increases we generated in the first quarter of 2016 and 2015 respectively.

Our first quarter is also typically the most volatile from a weather standpoint as January and February, our lowest volume months can be impacted by the severity of winter weather. December severe winter weather drove strong demand for our products that as we started up 2017 to mile their January temperatures resulted in software demand.

However, we still have at least a month of winter left and the timing of the arrival of the spring has a big impact on first quarter results. As a result of these factors, we feel it is prudent to establish our comparable store sales guidance range at 2% to 4% for the first quarter.

We are establishing our full year 2017 operating profit guidance at a range of 20.1% to 20.5% of sales. The increase over the prior year is driven by gross margin improvements which Tom will discuss more in detail in a moment offset by some SG&A pressure, which Jeff will cover.

For earnings per share, we are establishing our first quarter guidance at $2.78 to $2.88 and for the full year, our guidance is $12.05 to $12.15. Our guidance includes all the shares repurchased through this call that does not include any future share repurchases.

Before I finish up my prepared comments, I would like to again thank our team for another outstanding year in 2016.

2016 marks O'Reilly's 24th year as a public company, and we have grown comparable store sales and set record revenue and operating income in each of those 24 years, because of your consistent dedication to providing industry leading service to all our customers every day, and I am extremely proud of the job all of you do and I am confident 2017 will be another recording setting year for Team O'Reilly.

I’ll now turn the call over to Jeff Shaw.

Jeff?.

Thanks, Greg and good morning, everyone. I’d like to begin my remarks by also congratulating team O'Reilly on another strong year in 2016. Once again, our team’s focus on providing top notch customer service allowed us to generate comparable store sales that led our industry.

I’m especially pleased with our team’s consistent execution of our dual market strategy.

Your commitment to building and strengthening relationships with our professional customers allowed us to continue to win share and move up the call list especially in our newer market areas, by your outstanding service to our DIY customers also drove improve traffic and allowed us to gain more of our fair share on that side of the business.

Now, we'll spend a little time talking about our SG&A expense in 2016 and our outlook for 2017. For fourth quarter, we levered SG&A by 47 basis points driven by our strong sales results and expense control for the quarter.

For the full year, we'll levered SG&A by 31 basis points, excluding a year-over-year benefit of 24 basis points as we calendared an adverse judgment in 2015. With the 2016 improvement also driven by comparable store sales results near the top end of our guidance range.

Our increase in average SG&A per store for 2016 was 2.1%, which excludes the adverse judgment headwind in 2015. As we discussed last quarter, we manage our store level expense to ensure we provide excellent customer service that developed and maintains long term relationships.

Given additional headwinds we faced this year from healthcare and credit card cost, we're pleased with the improved operating margin our team delivered in 2016.

Looking forward to 2017, we expect per store SG&A to grow at 1.5% to 2% for the year as we expect to see continued pressure from increasing wage rates, higher expected medical cost, additional investments in our internal information system capabilities and cost to convert the acquired bond stores.

As we saw on 2016, this is our current plan, but it could change as we will continue to prudently manage SG&A expenses both up and down based on ongoing sales trends and the opportunities we see in the marketplace. For the quarter, we open 69 net new stores bringing us to our goal of 210 new stores for the year.

During 2016 we opened new stores in 39 different states and we continue to be very pleased with the performance of our new stores in both expansion and backfill markets.

As we discussed on our last call, our plan is to open 190 net new stores in 2017, which is below our typically new store target as we plan to develop significant resources to converting the bond stores we acquired in December. We will again spread our new store openings across our footprint with plan new store openings in 37 states.

Our growth will be concentrated in our newer expansion markets in the Northeast, Florida, in the mid-Atlantic supported by our recent DC additions in Devens, Massachusetts and Lakeland, Florida in our upcoming expansion in 2017 in Greensboro, North Carolina.

In 2017, we will also see continued backfill and existing markets in Texas in the Great Lakes supported by our newer DCs in San Antonio and Chicago as well as several other markets across the country. Our organic growth plans in 2017 reflect the continuation of a consistent strategy we’ve deploy throughout our history.

The key opening great new stores and taking share in new markets is to develop strong store teams which live the O'Reilly culture and provide excellent customer service and to support those teams with the critical tools they need to take care of their customers.

We have a distribution capacity throughout our chain which allows us to spread our store growth across the country, so we can take the time we need to put in the best team in place when we open a new store.

The significant investments we made in our expansive supply chain infrastructure also ensure stores have the parts they need that compete in each of our markets.

From day one, every new store even a store at our brand-new market area for O'Reilly receives access to the broadest parts availability in the industry, including five night a week delivery from a distribution center usually supplemented with multiple daily deliveries from a DC or a hub store.

It is an easy or inexpensive to provide this level service to our stores and it certainly isn’t easy to replicate. But providing the best parts availability to our customers is built into our culture as well as our business model.

Our ability to control expenses and efficiently execute our intensive supply chain strategy while still expanding our distribution network and adding new stores is a significant competitive advantage.

As I’ve said in the past, there is a tremendous amount of work that goes into opening new stores in DCs and I'm proud of the great work our entire team does to support our growth. Finally, I’d like to finish up today by providing an update on our previously announced acquisition of Bond Auto Parts.

We closed on the acquisition in early December and we’re very excited about the great professional Parts people who have joined our team and the outstanding opportunity we have to grow on the solid foundations of success, the Bond family has established in New England.

Over the course of our history, we’ve proven our ability to very effectively acquire existing store chains, implement our dual market strategy and instill the O'Reilly culture in the new store teams. One of the best results of these acquisitions have been the outstanding leaders we’ve added to our teams.

In fact, many of the members of our senior management team have joined O'Reilly as a result of the prior acquisition and we’re confident that we’re building a great team in the Northeast. I’ll close my comments by again congratulating Team of O'Reilly on their strong performance in 2016.

Our team continues to set the standard for our industry and our most difficult competition every year is outperforming the high bar we set for ourselves.

Every day, we must continue to provide unwavering customer service that surpasses expectations and continues to earn our customer’s business and I'm confident we have the team in place that has service our competitors and take market share again in 2017. Now, I’ll turn the call over to Tom..

Thanks Jeff. I’d also like to congratulate all the Team of O'Reilly of another outstanding year. Now, we’ll take a closer look at our fourth quarter results and provide some additional guidance for 2017.

For the quarter, sales increased a $150 million comprised of $91 million increase in comp store sales, a $59 million increase in non-comp store sales, a $1 million increase in non-comp non-store sales and the $1 million decrease from closed stores.

For 2017, we’re establishing our full year total revenue guidance at a range of $9.1 billion to $9.3 billion.

For the quarter, gross margin was 53.1% of sales and improved 35 basis points over the prior year in line with our expectations as we continue to realize the benefit of acquisition cost decreases we secured earlier in the year and the LIFO headwind was minimal in the fourth quarter.

For the year, gross margin was 52.5% of sales an improvement of 22 basis points over the prior year.

this was right in the middle of our beginning year guidance with 52.3% to 52.7% as we’ve benefited from better than expected acquisition improvements and leverage on distribution cost offset impart by fully year LIFO headwinds of $49 million which exceeded the prior year amount by $21 million.

Looking forward to 2017, we expect gross margin to be in the range of 52.8% to 53.2% of sales. The improvement as a result of anniversarying the significant LIFO headwinds in 2016 with a lower expected LIFO headwind in 2017 while annualizing the acquisition improvements from the last year. We assume price in the industry will remain rationale.

Our effective tax rate for the year was 36.6% of pre-tax income which was in line with our expectation. Looking at 2017, we expect our tax rate to be approximately 37% for the year, with the increase driven by a lower amount of benefit from certain work tax credits.

On a quarterly basis, we expect the rate to be relative consistent with the expectation of the third quarter being slightly less as we adjust our tax reserves for the tooling of open tax periods. These estimates are subject to resolution of open audits and our success in qualifying for existing job tax credit programs.

For the year, free cash flow was $978 million, which was a $111 million increase from the prior year, driven by increase income and a larger decrease in net inventory.

Our guidance for 2017 is $930 million to $980 million which at the midpoint is slightly below our strong 2016 results, as we expected decrease in our net inventory investment on a year-over-year basis will be less, offset impart by our plan increase in net income. Moving to inventory per store.

At the end of the quarter, it was 575,000, which was flat compared to the end of 2015. Our ongoing goals to ensure we grow per store inventory at a lower rate than the comparable store sales growth we generate and we’re pleased with the management of our inventory in 2016.

However, as Greg discussed earlier, we finished the year on a strong sales trend which put us in a favorable inventory position at the end of the year. Accordingly, for 2017, we expect our per store inventory to increase by 1.5% to 2%.

This growth rate is still below our comparable store sales growth estimate and we expect to continue our success as effectively deploying inventory in 2017. Our AP-to-inventory show finishes the fourth quarter at a 106% which was an increase of 7% over the prior year as we benefited from incrementally improved terms and solid sales volumes.

For the year ended 2017, we expect to see a marginal improvement in our AP-to-inventory ratio to approximately a 107% as we incrementally improve our vendor terms but face structural and pediments took further significant increases in our - percentage.

Capital expenditures for the year, ended up at $476 million which is right in the middle of our guidance. For 2017 we are forecasting CapEx of $470 million to $500 million.

The minor increase is driven primarily by the conversion of the acquired bond stores, increased investments and our over the road vehicle fleet and store technology infrastructure upgrades, offset impart by a reduced number of new stores. Moving on to debt.

We finished the fourth quarter with an adjusted debt-to-EBITDA ratio of 1.63 times, still well below our targeted range of 2.25 times. We continue to believe that our stated ranges appropriate for our business and we’ll move into this range when the timing is appropriate.

We continue to execute our share repurchase program and for the calendar year 2016, we repurchased 5.7 million shares for an aggregate investment of $1.5 billion at an average share price of $264.21.

Since the inception of our buyback program through yesterday’s earnings release, we’ve repurchased 57.9 million shares for an aggregate investment of $7.1 billion at an average share price of a $122.91.

We continue to view our buyback program as an effective means of returning available cash for our shareholders after we take advantage opportunities to invest our business at a higher rate of return and we will continue to prudently execute our program within emphasis on maximizing long-term returns for our shareholders.

Finally, I would like to once again, thank the entire Reilly team for their continued dedication of company success. Congratulations on another outstanding year. This concludes our prepared comments and at this time I would like to ask Richard, the operator, to return to the line, and we'll be happy to answer your questions..

Thank you. We'll now begin the question-and-answer session. [Operator Instructions]. Our first question on line comes from Matt Fassler from Goldman Sachs. Please go ahead..

Thank you so much and good morning to you..

Good morning, Matt..

My first question relates to tax refunds and the cadence thereof.

Is this something that you think may have started to impact your business quarter-to-date at this stage? And is this your sense that in achieving in time that you’ve essentially resolved by the end of the March quarter?.

Yeah, I think it is something that, late in the quarter so far has had some impact because the early viler which are doing the most economically incentivized customers to get their money as quick as they can that we would have seen some benefit in that last year towards the end of January, 1st of February.

We have not seen that yet because of the delay. I think most of that trues up for the end of the quarter, but I don’t really know for sure, but I would suspect that most of the trues up by the end of the quarter..

Got it. And then just a quick follow-up, this relates to LIFO. It sounds Tom, LIFO I think you said negligible in Q4. Obviously, it had some impact in understanding the cadence. Of course, margin pretty consistently over the past several years.

As you think about the outlook for '17 based on what you see for pricing, based to raw material costs, should this be close to zero for the year or more like close to what we had seen in prior years, ex that both that you had in early '16..

We still have a few opportunities that we’re working on. And a couple of them are pretty significant that we know about right now. Our expectation is that we’re going to see about half as much LIFO headwind in 2017 as we saw in 2016..

That’s comparing against '16 as reported with those couple of big numbers..

Correct..

Great. Okay, thank you so much, guys..

Thanks, Matt..

Thank you. Our next question on line comes from Mr. McAllister from UBS. Please go ahead..

Good morning. Thanks a lot for taking my question.

So, your guidance assumes that conference will accelerate as you move out of the first quarter, beside from the weather and slightly easy comparisons to maybe some of the tax issues, is there anything else that you see that should drive the acceleration and if there is going to be snow in the Northeast in the next day or two, but if this is the last blast of winter, how long will that act as an overhang for the industry?.

We had some pretty good winter weather in December. So, I don’t think that the lack of winter if we don’t have much more winter weather, it would be as potentially impacting as it was related to last winter.

So, we expect it to be a little bit more of a normalized spring and summer related to winter weather, that'd be said it will be seven-month winter to go. So, it’s yet to be seen, but there are some pretty mild trends going on.

Our expectation is that the fundamentals of our industry, our confidence and our ability to continue the cadence that we're on from a comp store sales perspective under more normalized conditions, but we were not comparing to these tax delays and stuff like that that we’re in.

So, we’ll get back to kind of the comp store range that would be in that 3% to 5% range and we feel confident at this point for the year that we would end the year in that range..

And my follow-up question is Greg you’ve been around the industry for a long time and there is obviously you see a lot of attention on some of the emerging competition within the place.

What measures are you watching to ensure that the marginal demand for the industry particularly on the DIY side, isn't moving online and becoming more sensitive for price transparency.

If that becomes a risk, how do you expect yet?.

Well - we, and I've been a little surprised by the interest that there has been in the transition to online recently. We've not seen much in our business that led us to be very concerned about it. But we have read a lot of the reports and I saw the thing in the New York Post and stuff like that.

There really has not a lot of change in RM, our best barometer of that is we have a lot of field guys that - me and Jeff, Greg and Tom and everyone in our management team know very well and we encourage them to be outspoken with us about competitive pressures that they feel. And we've just not seen a change in that competitive pressure.

Customers would tell you, or you would hear things from them about their concerns, things like that.

We’re in a business and I don't want to go into a lot of detail about the things that we bring to the table that may be an online retailer wouldn't, but these online retailers have been around for a long time and I realized that Amazon is the strongest and the best run and I obviously have a lot of respect for them and I am a customer for household items and other things.

But one of the things that - or some of the things that are a barrier to entry for these guys are that we're in a very technical business. We - let's talk about the DIY side for a minute. When a customer has a problem with their car, whether it's a - their car won't start - let's say they don't really know what's strong.

They know, it could either be a battery or alternator or a starter motor, thing jump start their car or something that get it to our store, we're going be able to tell them what's wrong, what's a store and tested we'll help install a battery, we will get him lined up with the technician to help solve their problems they can.

Many times, our problems are - what I call drive ability problems, related to sensors or emission system things that cause the check engine light to come on or a variety of things. We have highly experienced trained professionals in our stores, they help them solve these problems.

Many times, customers, when they come in to buy a part, they don’t really know it's part called, they think it's bad, it looks bad, we'll test it for them, we may lead him down another path. I mean it's just, it's a highly technical business.

And then on top of all that, learning and developing the science, to know what inventory you need in different markets, takes time and experience and that's the reason that our company, one of the reasons, we've done so well because we've been so good at that, plus there is almost 36,000 part stores in the U.S.

it's very convenient to get parts and there is a high immediacy of need, when you have a car problem. Not that there aren't accessories and other things that can wait and do on the professional side, which there has been some talk about, what an online retailer could do on the professional side.

And gosh, I can see that so difficult for them to penetrate, when I think about the relationships, that we have with our professional customers and the dependency that they have on us, to provide them training and guidance and access to tools and the equipment to keep their tools running and their equipment running.

And how quickly they need parts and how if they - they're not sure, maybe modeled your change, where a car might take one of two parts will send them both and bring the other one back, we'll match up parts for and just - the list goes on and on and on of the things that we do, plus we're making a distribution center inventory available to them in many markets, six times, eight times a day, which is - I think that the online retailers while though - as they have proven over the years, they will continue to take a little bit of market share here and there.

I don't see them nearly as one of our most prominent competitors..

Thank you very much..

Okay. Thank you..

Thank you. Our next question online comes from Ms. Carolina Jolly from Gabelli. Please go ahead..

Hi. Thanks for taking my call..

Sure..

So, I mean, after that question, I really wanted to ask, if you have any data around, where you are taking shares and since it really seems like you are able to take share and if you can to do - that do-it-for-me versus that do-it-yourself segment?.

Well, I think that do-it-for-me business is growing a little faster than on a macro basis than the DIY business and considering that we're comping about the same on both, I would speculate that we're gaining a little more share on the DIY side right now than we would be on the do-it-for-me side.

Geographically, we performed well in many markets, generally speaking where we are growing the fastest in our expansion markets, like in the Southeast and the Northeast and areas like that, where we - are stores are newer and we have more to gain from competitors who have business already and we're in there - trying to get all business we can.

So, I would say in those markets is that we're gaining most of the market share..

Thanks. And just a follow-up on that, a lot of the data that's also been spoken about is that you have better fill rates.

All right? I don't know if you're able to speak to that but are you also able to gain share to do better fill rates and previously you have spoken about, I guess picking up do-it-for-me talent do you have any comments around that?.

Yeah. I think we have an incredible fill rate. We - our business is built around this high availability model, making sure that we have a lot of SKUs available on a same day basis, multiple times a day.

And I think we're the - I think we're the best in our industry at making a wide array of parts available to our customers and it's one of the reasons that our company has done as well as it has over the years. And this goes way, way back, this is not a new thing.

I think when the O'Reilly family was running the businesses of small company; they quickly recognized that if you have a part in, get it to the customer quickly than everybody else that you’re going to win. When it comes to that via talent or creating, the second part of your question was about that.

I think that we are a desired employer, I think that people that no parks and are good parks people, they like to work for us and we equipped them with the tools that they need to be successful and you know one of the most important tools that we equipped them with, is this availability that we’re talking about and it’s hard to be a great parks person, if you don’t have access to the parks and we put our professional parks people in a position to where they have excellent access to a wider ray of parks to take care of our professional customers and our DIY customers..

Thank you..

Thank you..

Thank you. Our next question online comes from Mr. Mike Baker from Deutsche Bank. Please go ahead..

Hi, thanks guys. I wanted to ask you a couple of questions on pricing.

First you said, you not expecting or don’t have any inflation in your comp estimates, but what about inflation on oil and other sort of liquids and lubricants, shouldn’t we expect some inflation there and if so will that help incrementally to your comp guidance?.

Tom will take that..

We’re not very good at projecting our commodity cost, to the extent that we do see some increase and we would expect to see some increases as oil prices go up that we have some - headwinds from reducing acquisition cost on hard parts that we would expected to net up, but we don’t anticipate seeing a wide enough effect on products to have inflation help drive our comparable store sales this year..

And so, I guess similarly there wouldn’t there much impact on your gross margins from that type of inflation?.

Correct..

Okay. And then on the other side of the - pricing.

I hear you saying about online competitors perhaps not taking a lot of market share but do you still think that with the prices ability that’s increase now from some of these competitors, there is no pricing pressure, I understand that, consumers need to come in to stores for the advice and one up but do you expect to see consumers come in with pricing for them in one and sort of insist you guys to match that price?.

I think that overtime, as price transparency on equivalent product continues to increase, that’s likely to happen and I think it happens some today and we equipped our team members with to how to deal to that, how to deal with that, we don’t let our customers that needs apart leave our store without that partner hand..

All right, so at this point is there any hit from the incorporated in your gross margin outlook or is too small to matter now.

So, how should we think about that ongoing?.

It’s too small to matter now..

Okay, thank you. Appreciate the color..

You bet. Thank you, Mike..

Thank you. Our next question online comes from Mr. Dan Wewer from Raymond James. Please go ahead..

Thanks.

Greg the Greenfield store growth rate slows in 2017, is that a signal that O'Reilly wants to maintain the flexibility and the way the capacity to make it a small acquisition such as bond in the upcoming year?.

Well, really moving to 190 was simply to better accommodate the integration of bond with the teams that we have to put in new stores that as you know Dan, we are opportunistic and somewhat aggressive right now with looking at companies that we feel like would be good fits for us and several the smaller regional players out there that many would fit well in our geography and fit well in our business.

So yeah, we are in a good position to continue to our strategy of acquiring companies that make since force in 2017 and beyond..

I know, during the past couple of years you talked about the difficulty in securing real estate and whether this has that eased out anything for you?.

Well, I mean it’s a challenging real estate market, there is no open retail watches wait for us to come along, so you had to be pretty creative in the way you put a new store.

Then of course, cost is a factor, so you have to be a little more confident sometimes in the amount of volume that you can do in a location if you’re going to take on the - that it sometimes takes a fair bit.

I think we have learned a lot as these Florida, the Northeast and - real estate and I think our position of there is incrementally improving that no question, real estate tough is there, makes a little more advantageous for us to consider some of the acquisitions that we could potentially make up there, as exemplified with what we did with VIP and now with Bond..

And as the follow-up question. The vehicle miles driven data for the last couple of years have shown a lot more strength in the western markets than in the upper Midwest and then the Northeast and that seems to be correlating with industry sales trend as well.

Would you expect the revision to the main where the upper Midwest and the Northeast industry trends would improve relative to the west going forward?.

I don't know it's always tough to determine the drivers of miles driven differences between regions at the country.

That Tom or Jeff I don't know if you guys have an answer to that but I don't know I have a better opinion on that?.

So, what we would tell you is that the accuracy of that data while we think it directionally is a very good parameter for us. It regional exact miles there are lot of estimations going to that calculation. But from a long-term perspective I think it has more to do with where is the population growth in the US.

And that ultimately will drive the miles driven differences in the regions..

That's a good point. Thank you..

Okay. Thanks, Dan..

Thank you. Our next question on the line comes from the Mr. Alan Rifkin from BTIG. Please go ahead..

Thank you very much. Could you may be provide a little bit color with respect to the free cash flow guidance for 2017, why given at the high end that would be flat versus '16. Why would that not continue to grow in '17 and beyond. And I have a follow-up, please..

The key difference there is just the expected year-over-year increase in our AT to inventory ratio that we saw 7% increase in 2016 over 2015. And our expectation is that while we will increase it somewhat we won't see that 7% increase therefore we won't drive as much reduction in working capital..

Okay. And then my second question and then if you can maybe provide Greg an update on what's happening in South Florida, how many stores you have there today, how many you'll forecast of this '17 openings. And then also as a wider picture and now certainly Jeff and Greg's promotions are obviously well deserved and congratulations gentlemen.

But Greg does this signal any intention on your part to doing it in different with your longer-term career at O'Reilly..

Okay, well I'll answer that question first and then talk about Florida. It really is recognition of the leadership roles that these two individuals play in our company.

They do a great job, I'll be 57 years old so I won't be CEO forever, but I have no immediate plans to not be CEO and when that time comes it will be announced and we'll do it the right way. I don't think that long-term I could proceed a time that I wouldn't be involved with the company right now. So, we're talking down the road if any will happen.

So, I wouldn't - like anything that we've done with Greg to Jeff to something like that. In Florida, today, we have 163 stores most of which are supplied out of Orlando. We continue to progress that leave that stores bumping up against for Water dale, Miami. So, our expansion in that area has been significant and very successful.

We continue to have great success with the new stores we've opened down there. We've been very fortunate that we're sometime that to have a great team of auto parts guys down there that are able to recruit good auto parts guys. And we have some strong regional competitors down there that we feel like we've done well against.

So, we continue to grow and have continued expansion plans down there this year. A material part of our new store openings this year will be in Florida..

Okay. Thank you very much..

Okay. Thank you, Alan..

Thank you. Our next question on line comes from Mr. Seth Basham from Wedbush. Please go ahead..

Thanks a lot. Good morning and congratulations to Jeff and to Greg. My question is around omnichannel. You mentioned that you're ramping up some investments in information systems.

Can you speak more broadly where those are and what your omnichannel strategy is going forward?.

Tom, you want to take that?.

Sure, when we look at our investments in IT. It's across a broad spectrum of things. we are going to launch a new website beginning of the second quarter, which is the step in the right direction for us from an omnichannel standpoint. Our real goal is to make sure that we have a seamless transaction.

However, our customers would like to start the transaction often in our business it starts with looking up a part online, finding out what you might need, what the availability is, making sure that we can transition, the start of that transaction and pull it up in the store, make sure we identify the customer, make sure we can maintain visibility of what type of vehicles they work on and really maintain that connection with the customer, as Greg talked about earlier, our customers are permanently coming to our store for advice, so if they start online, we want to be able to continue that transaction in the store..

That’s helpful.

As a percentage of your business where is it now, and what do you think it will be in five years in terms of the transactions that are started online?.

It continues to be a relatively small portion where - right now we are tracking primarily order online pickup in store, our opportunity there is to better tie when our customers are looking at availability and looking up parts and getting information how to repair their vehicles, obviously primarily DIY side, and making sure we maintain that data for when they come in to the store, right now if they don’t actually transact online, we're not capturing that when they walk in the store, but a high percentage of our customers are investigating their fixes online..

And Seth, if I can, this Greg.

If I can add something to that a pretty material part of our B2B business is transacted online, it has been for some time, we were one of the first companies to go to a - online type of ordering platform back pre-internet, we did it using what they call ASCII terminals back in the day at 1200 about modems and in a workforce, and so we've continue to build on that and today a material part of our B2B business is transacted online..

Got it. Thank you, guys..

Okay. Thank you..

Thank you. Our next question online comes from Simeon Gutman from Morgan Stanley. Please go ahead..

Thanks. Good morning and congratulations Greg and Jeff.

My question first for Greg, there has been a lot of noise around the segment lately, we talked about online, I think tax was mentioned, even you mentioned whether, I feel like a lot of the noise is louder outside of the industry, I think your guidance projects calm and steadiness, just wanted to get a sense is there anything sort of - missing, underlying trends seem fine, you talked about miles driven thing, can you just sort of assess, I don’t know current state anything you haven’t said already?.

I think I’ve said everything.

I’ve been, and we were just chatting amongst ourselves here before the call, wondering if we be asked Amazon, because just something we were with our annual meeting with our store managers this week and we talk about lot of things, we've got a lot of tough competitors, I have yet to invite anyone talk to me about Amazon, as a competitor, online competitors.

And I know that they’re there. It's just not a big factor right now from a competitive standpoint, not that it can be in the future and I obviously have a lot of respect for the great company that they build and again I’m a customer like most people.

I think the things we've talked about just tough year-over-year compares to first quarter, mild weather in January and this delay in tax refunds are the reasons that we have the 2% to 4% comp guidance for the first quarter. And I would refrain from reading more into it and just that..

Okay.

And then I don’t know if this was asked, but if you think about, if you look at your next year, full year guidance and the composition of industry growth versus market share, you mentioned higher gas prices could pinch them at a little, I don’t know if that near to get three to five is still impact, but does anything change in how you expect the industry to grow or as how much share you expecting in 2017?.

No, I think the cadence of industry growth and I think our success in taking market share is in addition to that growth is pretty comparable in 2017 versus 2016.

The challenge for our industry ongoing and this has been a challenge for some time now is that is cars become more complex, we have to work harder to make sure that we're in a great position to keep customers that have cars out of warranty from going back to the dealers in choosing the aftermarket shop grew by parts from us and our competitors.

So, I think that as an industry we better continue to work to keep that business coming our way because as the cars become more complex, it becomes more and more difficult to build these parts and so forth, I think our industry has done great that when I talk to our suppliers tonight that will be one of the things that I talk to them is just the investments, that we all have to make and making sure that we're in the best position we can possibly be to compete against our real competitors in the aftermarket and that is the OE dealers..

Okay. Thanks, Greg..

Thank you, Sammy..

Thank you. Our next question on line comes from Mr. Bret Jordan from Jefferies. Please go ahead..

Hi. Good morning, guys..

Good morning..

Good morning, Bret..

It's my last question your response with the cadence of industry growth in 2017 comparable to 2016.

Will it be more similar to 2012 or we had a very weak - very weak winter and we had a weak year in 2012 and some pick in 2013? Do you think - we don't think we're going to see acceleration in 2017 industry wide?.

I am hopeful we do, Bret. And I agree with you that very probably it would be a little more - more comparable to that.

When we talk about industry growth, I usually rely on what the associations kind of project and so far that the people I have talked with various associations are projecting growth, similar to what we would have seen last year, but Tom you may have some input on that..

Bret, what I would tell you is that, when we look back at 2016, the second quarter and third quarters were - they were solid quarters for us. When we go back to 2012 they were a little bit weaker than that.

So, that's why we think we're going to be more of a consistent basis and that's why we've given three to five guidance versus kind of that gave that comparison to 2012..

Well that sort of leads on other my questions. On '14, you talked a couple of times on the - about the market share gain.

On Q4, how did you see the underlying industry growth versus your comp, I mean it seems like the industry didn't - certainly didn't grow as well as you did last year, but do you have a feeling for what the spread might be market share versus just the rising time?.

Do you have a comment on that?.

We're going to watch and see, how other people in the industry do here later in the month and they would have a better answer for you..

Bret, I don't mean to over simplify this but you always look what the association say about industry growth and kind of various indicators, you can get through industry associations and so forth, my most direct comparison is with our publicly traded competitors and the privately-owned companies, some of which I know the principles finding, how they're doing and comparison to how we did.

And as you can see that comparison is less of the conclusion that we've gained quite a bit of market share over the last few years and under existing circumstances, I see no reason to think that will continue through 2017..

Okay, great.

And then one last question, I think in our prepared remarks, you said that the gap in regional performance had ceased to exist is that the case and I guess, as we look at what we've seen in January ROE sort of just because we've lost some of the winter in the Northeast seeing a little bit of a slight back up here or is there anything meaningfully going on in different regions?.

Well, we always have regional variations for a number of reasons, including the AJ stores that exist in some regions versus others and things like that.

What we were saying is that the difference that we felt like was driven by winter sensitive markets or weather sensitive markets, as compared to those that might not be so weather sensitive that towards the end of the quarter, we saw that gap go away, to the extent that we have mild weather continue through the remainder of the winter..

Okay. Thank you..

Okay. 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, Richard. We'd like to again conclude our call by thanking our entire O'Reilly team for our strong 2016 results. We're pleased with our solid fourth quarter and full year results and we remain extremely confident, in our ability to continue to aggressively and profitably gain market share in 2017.

I would like to thank everyone for joining our call today and we look forward to reporting our 2017 first quarter results in it. Thank you..

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