Sidney G. Jones - Vice President-Investor Relations Thomas C. Gallagher - Chairman and Chief Executive Officer Paul D. Donahue - President Carol B. Yancey - Chief Financial Officer & Executive Vice President.

Elizabeth Lane Suzuki - Bank of America Merrill Lynch Seth M. Basham - Wedbush Securities, Inc. Greg Melich - Evercore ISI Matthew J. Fassler - Goldman Sachs & Co. Mark A. Becks - JPMorgan Securities LLC Bret Jordan - Jefferies LLC Anthony F. Cristello - BB&T Capital Markets Scot Ciccarelli - RBC Capital Markets LLC A. Carolina Jolly - Gabelli & Co..

Good morning, and welcome to the Genuine Parts Company Fourth Quarter and Year-End Earnings Conference Call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

Now, I'd like to turn the conference over to Sid Jones, Vice President, Investor Relations. Please go ahead..

Good morning, and thank you for joining us today for the Genuine Parts Company fourth quarter 2015 conference call to discuss our earnings results and outlook for 2016. Before we begin this morning, please be advised that this call may involve forward-looking statements regarding the company and its businesses.

The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. We will begin this morning with comments from Tom Gallagher, our Chairman and CEO.

Tom?.

Thank you, Sid, and I would like to add my welcome to each of you on the call today and to say that we appreciate you taking the time to be with us this morning. Paul Donahue, GPC's President, along with Carol Yancey, our Executive Vice President and Chief Financial Officer and I will each handle a portion of today's call.

And once we've completed our individual comments, we'll look forward to addressing any specific questions that you may have. Earlier this morning, we released our fourth quarter and year-end results, and hopefully you've all had an opportunity to review them.

But for those who may not have seen the numbers as yet, a quick recap shows sales for the quarter were $3.682 billion, which was down 4% with negative currency impact accounting for 3% of this decrease. Net income was $161.3 million, which was down 3%.

Earnings per share were $1.07 this year, which was even with last year, and currency negatively impacted the EPS by $0.03 per share in the quarter. For the full year, sales were $15.280 billion, which was down four-tenths of 1%, with currency costing us 3 points of revenue growth.

Net income was $706 million, which was down just under 1%, and earnings per share were $4.63 this year, compared to $4.61 in 2014. And for the full year, the currency impact was $0.14.

After several years of solid performances, 2015 proved to be a more challenging year for us, largely attributable to the combination of the significant slowdown experienced in our Industrial and Electrical businesses, and the impact of unfavorable currency exchange, primarily on our Automotive business.

Fortunately, as you'll hear from, Paul, in a few minutes, the underlying fundamentals remain positive for the Automotive segment, and each of our Automotive businesses are turning in solid local currency results.

The Industrial Operations are our second-largest business segment, representing 30% of total company sales in this past year, and at the end of the year down 3%. And as we reported, over the course of the year, we saw a sequential revenue deceleration as the year progressed.

After being up 3% in the first quarter, the Industrial Operations were down 2% in Q2, down 4% in Q3, and down 8% in the fourth quarter, and these results are reflective of the sluggish end-market conditions encountered by many of our Industrial customers.

Customers in the oil and gas, original equipment manufacturing, iron and steel and heavy equipment rental were all down double-digits with us for a year. And as a point of information, the fourth quarter decreases were even more significant than the full-year declines, indicating the ongoing challenges faced by customers in each of these segments.

Conversely, customers in aggregate in cements, food products, Automotive, lumber and wood products all generated positive results for us this past year. And then looking ahead, we would expect positive results from each of these customer categories in 2016 as well.

At the same time, however, our expectation is for continued declines from customers in the oil and gas, original equipment manufacturing, iron and steel, and heavy equipment rental categories for several more quarters, which will certainly be a headwind to our overall sales results.

In an effort to offset this, our Industrial team remains focused on key elements of their sales strategy including share of wallet initiatives with existing customers, expansion of our customer base, product line extensions, and expanding our geographic footprint and product capabilities through acquisitions.

And on this last point, we're pleased to report two acquisitions that are scheduled to close on March 1 with combined revenue of approximately $50 million, and both companies nicely complement Motion's existing business, and they would help our growth rates over the remainder of the year.

Moving on to our Electrical segment, EIS ended the year with sales of $751 million, which was up 2% and represents 5% of total company revenues. As with Motion, EIS had mixed results among their segments.

Customers in the wire and cable and fabrication sides of the business generated nice increases, while customers in the Electrical side had decreases. The Electrical segment represents about 40% of EIS's total revenue, and similar to Motion, we are probably a few quarters away from seeing stabilization in this segment.

In the meantime, they're employing many of the same growth strategies as Motion including acquisitions, and our expectation is to be in a position to announce a $50-million-plus acquisition in the weeks ahead, which will certainly have a nice positive impact on the EIS results in 2016.

And a few comments on our Office Products Group, which represents 13% of total company sales in 2015. They ended the year with sales of just over $1.9 billion, and this was up 7.5%. The Office Products growth was fueled by incremental acquisition revenue and strong double-digit growth from the mega channel.

Our independent reseller business was down low-single digits for the year, with most of this decrease coming in the second half of the year. On the product side, we had double-digit growth for the year in furniture and facility and breakroom supplies, and mid-single-digit growth in our core Office Product supplies.

And we are pleased with the progress made in each of these categories. Technology products were flat for the year. And looking at our Office Products results over the course of the year, it was really a tale of two halves, with first half revenues being up 16% and second half revenues being up just slightly.

The outsized first half increases were driven by the aforementioned incremental acquisition volume and increased revenue from the mega channel that was anniversaried early in Q3. And then we feel our second half results are more reflective of the ongoing underlying sluggish conditions in the Office Products industry.

Many of the ongoing issues within the industry are secular in nature, and as a result, our team continues to work on market share and share of wallet initiatives, product line additions and extensions, product and channel diversification, as well as strategic acquisitions.

You will recall that we completed the acquisition of Malt Industries late in 2015. Malt is a distributor of safety supplies and protective apparel with annual sales of about $20 million. We are pleased with their progress to date.

This acquisition helped to further diversify our product and channel portfolios, and we will pursue additional acquisition opportunities to continue the strategy in the quarters ahead. So that's a quick overview of the non-Automotive segments, and Paul will now give you an update on the Automotive results.

Paul?.

Thank you, Tom. Good morning and welcome to our fourth quarter conference call. I'm pleased to be with you here today and to have an opportunity to provide you an update on our fourth quarter performance of our Automotive business. For the quarter ending December 31, our global Automotive sales were down 2% year-over-year.

This performance consists of approximately 2.5% in core Automotive growth and a slight benefit from acquisitions. However, this was offset by a currency headwind of approximately 5% in the fourth quarter, which is consistent with the impact of currency we saw throughout 2015. Our U.S.

team posted a 2% sales increase in the fourth quarter, compared with 3% growth experienced through the first nine months of 2015. Our international businesses, which include Canada, Mexico, Australia and New Zealand, reported another quarter of mid-single-digit growth in local currency.

Despite challenging local economies, we remain encouraged by the steady and consistent growth we are experiencing across all of our international markets. We see no reason for this not to continue in 2016. In the U.S., our results varied by geographical region.

Our business in the Northeast, Florida, Central and Western regions of the country continue to deliver solid results. The Midwest, Mountain and Southwest regions of the country all came in below our expectations.

Given our strong commercial presence with fleets, including many in the battered oil and gas sector, we felt the effects across many of our stores throughout the Mountain and Southwest regions. Particularly hard-hit were stores in Texas, Oklahoma, Montana and the Dakotas. We also are seeing the effects across many of our stores in Western Canada.

We would also add the above-average temperatures experienced in the fourth quarter across the Midwest and Mountain regions, negatively impacted our winter goods sales. So now let's turn to our same-store sales for the fourth quarter. Our U.S. company-owned store grew comp store sales in the fourth quarter by 2%.

This compares to the 3% comp store increase we reported through nine months. Cadence of the quarter saw our team post solid results in both October and December. In fact, we were encouraged as we entered the fourth quarter as October same-stores sales were our second-best results of the year.

The month of November proved to be the outlier, and we believe warmer-than-normal temps in the month caused this downturn. This quarter's 2% increase is on top of the 7% increase generated in the fourth quarter of 2014, giving us a two-year stack of 9%.

This increase was driven by a combination of gains on both our commercial side of our business, as well as by our retail business. So let's start with our retail results. As mentioned in our Q3 call, we continue to expand or revamp DIY initiatives across our company-owned store group.

These initiatives include installing new interior layouts and graphics, extended store hours, increased training for our store associates, and the nationwide launch of our NAPA Rewards Program to name just a few. And while we are in the early days of rolling out these initiatives, we are pleased with the initial results.

Our plans call for us to expand our 20-store impact pilot in 2016 to include an additional 150 company-owned stores. These initiatives are having a positive impact on our results. And for the fourth quarter, we can report a total increase of 5% in our retail business.

Coupling this 5% increase with the 11% increase we posted in Q4 of 2014, gives us a two-year stack of 16%. For the full year, our retail business was up 6%. These gains are being driven by both transaction and basket size increases.

In Q4, we experienced a mid-single-digit increase in our average retail ticket, and a significant jump in the number of retail tickets. Moving along to our core commercial wholesale business. This segment of our Automotive business posted a 2% increase in the fourth quarter and a two-year stack of 8%.

So, for the year, we can report a 3% increase in our commercial business. The core elements of this segment continue to center around our Major Account business and our NAPA AutoCare business. In 2015, we expanded our AutoCare membership count, which now totals 16,300-plus across the U.S.

Both our AutoCare and Major Account businesses generated mid-single-digit growth for the year. We believe the slowdown in the Industrial sector had a material impact on our fleet business in the quarter. This business was up just 1% after delivering 3-plus percent increases in the previous three quarters.

Our Q4 two-year stack on our fleet business now stands at 6%. Our wholesale ticket trend was consistent with what we experienced in the third quarter. Our average wholesale ticket value was up mid-single digits, with little or no benefit from inflation, while we saw a slight decline in the number of tickets moving through our stores.

So, now, let's take a look at a few of our key product categories and review the trends we experienced in the fourth quarter. Our brakes category was a highlight again in the quarter, and it has been a strong category for us all year. The brakes category grew low-double digits for us in the fourth quarter.

And we also saw experienced – we also experienced solid growth in our tool and equipment business. An area of concern would be in our battery business, which was off slightly in the quarter. We believe this is attributable to the warmer winter temperatures.

And we can report this business has now bounced back in the month of January, and our team drove a double-digit increase in the month of January. We continue to be encouraged with the strong growth we are experiencing from our NAPA import parts business.

This business was up high-single digits in the quarter and posted double-digit growth for the year. On February 1, we announced the acquisition of Olympus Imported Parts. Olympus is a 30-year business specializing in professional-grade import auto parts. They currently operate out of six locations in the Northern Virginia and Greater D.C.

area and generate approximately $25 million in annualized revenues. This business will be a nice complement to our growing NAPA import business, as well as our Altrom import parts business. We'd like to extend a warm welcome to Mike Brown and the entire Olympus team to Genuine Parts Company.

We'd also like to provide you with an update on a previously discussed acquisition target. During our third quarter call, we reviewed with you the pending acquisition of Covs Parts, a 25-branch distribution company based in Western Australia.

While we had hoped to close this transaction in the fourth quarter, we encountered regulatory approval delays, moving the expected close of this transaction to no later than April 1 of this year.

With approval for 21 branches, the addition of Covs Parts further expands our market presence and scale in Western Australia, and is expected to generate annual revenues of approximately $70 million. This acquisition will expand our industry-leading presence in Australia and New Zealand and puts us over the 500-store mark.

We are proud of our team in Asia Pacific and look forward to another solid year from this business in 2016. As we look to the immediate future, strategic M&A will continue to be a growth lever for our Automotive businesses both in the U.S. and abroad. Turning to the trends we are seeing across the U.S. Automotive aftermarket.

The fundamental drivers of our business continue to be positive. The average age of the fleet remains in excess of 11 years. The size of the fleet continues to grow, lower fuel prices remain favorable for the consumer, and miles driven continues to post substantial gain.

Miles driven actually increased 3.5% through the first 11 months of the year, which is a new record. In addition, the latest month with reported figures is November, which was up 4.3% year-over-year, also a new record.

This now makes 21 consecutive months of increases in miles driven, and it certainly is driving – these key metrics are driven by lower fuel cost. The natural – the national average price of gas in 2015 was $2.40 per gallon, which was the second lowest annual average in the past 10 years.

Gas prices continue to move downward, and in the most part of the U.S. today, they average less than $2 a gallon. These low gas prices should bode well for future increases in both miles driven and ultimately driving additional parts purchases.

In closing, we are pleased to show positive underlying Automotive growth for both the quarter and the year in a challenging economic environment. And we are encouraged with the start of the New Year, as our sales in January were more in line with our historical run rates.

We remain hopeful we can carry this momentum through to the end of the quarter and the balance of 2016.

As we move into 2016, our plans call for expanding our business with our key commercial platforms, NAPA AutoCare and Major Accounts, executing our retail strategy, and driving global expansion via new store openings, as well as targeted strategic acquisitions.

I want to thank our teams of both in North America as well as Australasia for their efforts, and appreciate all they do for the GPC Automotive business. So that completes our overview of the GPC Automotive business. And at this time, I'll hand the call over to Carol to get us started with a review of our financial results.

Carol?.

Thank you, Paul, and good morning. We will begin with a review of our fourth quarter and full-year income statements and the segment information, and then we'll review some key balance sheet and other financial items.

As Tom mentioned, our total revenues of $3.7 billion for the fourth quarter were down 4%, and consist of a decrease in underlying sales of 2%, a currency headwind of 3%, and acquisitions contributed 1%.

For the year, total revenues of $15.3 billion consisted of core sales growth of 1.5% and a 1% contribution from acquisitions, offset by a 3% currency headwind. Our gross profit for the fourth quarter was 29.75% down from 30.0% gross margin last year. And for the year, gross margin of 29.8%, compared to 29.9% reported last year.

Primarily, our gross margins for the fourth quarter and the full-year benefited from improved margins in our Automotive, Office, and Electrical businesses, but our growth in these segments was offset by the continued pressure of lower supplier incentives earned in our Industrial business.

This directly related to the sluggish sales environment and lower inventory purchases for this group. We recognize the need for additional progress on this line and the importance of executing on our gross margin initiatives. This is a key priority for our management team, and we remain committed to an enhanced gross margin for the long term.

Our gross margin initiatives are critical to offset the low inflationary environment that has persisted across our businesses for several years now, especially in Automotives.

Our cumulative supplier price changes in 2015 were negative two-tenths – 20 basis points, two-tenths of 1% for Automotive, positive 90 basis points for Industrial, positive 60 basis points for Office Products, and negative 1.75% for Electrical.

Turning to SG&A, our total expenses for the fourth quarter were $834 million, or 22.65% of sales, which is a 40-basis-point improvement from the prior year. For the full year, our total expenses of $3.4 billion, at 22.46% of sales, or a 20-basis-point improvement.

The improvement in our SG&A expenses reflects the positive impact of our cost control measures across all of our businesses. Additionally, we had added savings of lower incentive compensation in the fourth quarter relative to 2014.

Overall, our cost reduction initiatives were partially offset by the deleveraging of expenses in our Industrial business, as well as the increases in expenses across the company in areas such as employee benefits and retirement plans and healthcare.

Our teams remain focused on controlling expenses, and we continue to take actions to further improve our productivity and streamline our operations. We expect to show continued progress on this line in the periods ahead.

If we look at our results for the segment, our Automotive revenue for the fourth quarter was $1.9 billion, down 2% from the prior year. Our operating profit of $169 million is up 12.5%, and their margin improved a strong 110 basis points due to the improved gross margins and expense control. For the year, Automotive sales of $8 billion are down 1%.

Our operating profit of $729 million is up 4%, and our margin has improved by 40 basis points to 9.1%, so a solid margin expansion for Automotive in 2015. Our Industrial sales of $1.1 billion in the fourth quarter, a decrease of 8%. Our operating profit of $72 million is down 24.8%, and our operating margin was down 150 basis points to 6.5%.

For the year, Industrial sales of $4.6 billion are down 2.6% from the prior year, and our operating profit of $339 million is down 8.3%, and our margin was 7.3%, which is down 50 basis points from last year.

This is driven by a lower incentives and expense deleverage, which pressured this group throughout the year but at a greater amount in the fourth quarter. Our Office Products revenues were $459 million in the quarter, down 2%. Our operating profit of $33 million is down 5%, and their operating margin of 7.3% is down 20 basis points.

For the year, Office revenues of $1.9 billion are up 7.5% from the prior year. Our operating profit of $141 million is up 5%, and our margin of 7.3% is down 10 basis points from last year. The Electrical Group had sales in the quarter of $177 million, which is basically flat with the prior year.

Our operating profit of $16 million is up 6.7%, so the margin for this group showed strong growth of 60 basis points to 9.1%. For the year, sales for this group of $751 million are up 1.6%, and their operating profit of $70 million is up 9%, and their margin improved to 9.3%, which is a solid 50-basis-point increase from the prior year.

For both the fourth quarter and the full year, our total operating margin improved by 10 basis points. For the quarter, the margin was 7.9% compared to 7.8%; and for the year, 8.4% compared to 8.3%.

This improvement in 2015 follows our 30-basis-point expansion in 2014, and given this current sales environment, we're very pleased with our continued progress in this area. Looking ahead, further margin expansion remains a key goal for the company.

We had net interest expense of $4.3 million in the quarter, and for the 12 months, interest expense was $20.4 million, which compares to $24.2 million in 2014. For 2016, we currently estimate net interest expense to approximate $21 million to $22 million for the full year.

Our total amortization expense of $9 million for the fourth quarter and $35 million for the full year is down slightly from 2014. We currently estimate total amortization expense of $36 million to $38 million for the full year in 2016.

Our depreciation of $27 million for the fourth quarter and $107 million for the full year, and for 2016, we're projecting this to be approximately $120 million to $130 million. So, combined, depreciation and amortization looking ahead would be in the range of $155 million to $170 million.

The other line which primarily reflects our corporate expense was $16.3 million for the quarter, which is up slightly from the prior-year quarter. For the full year, our corporate expense is $100.4 million, which is consistent with our expectations and up from the $90 million in the prior year.

Primarily unfavorable retirement plan valuation adjustments of $7 million and planned IT-related investments accounted for the increase on this line. Turning to 2016, we expect the corporate expense line to be in the $110 million to $120 million range for the full year. Our tax rate was 38.35% for the fourth quarter and 37.2% for the full year.

These rates are up from 2014 due to the changes in mix of our foreign income and the related foreign tax rates, as well as the unfavorable retirement plan valuation adjustments recorded through the first nine months of 2015. We currently expect our tax rates to approximate 37% for the full year in 2016.

Our net income for the quarter of $161.3 million and our EPS of $1.07 was equal to the prior year. And for the year, our EPS of $4.63 was up slightly from the $4.61 for last year. Now let's talk about the balance sheet which we strengthened in the fourth quarter with effective working capital management and strong cash flows.

Our cash at December was $212 million, which is an increase from the $138 million at December 31 last year. Our cash position continues to support our growth initiatives across all of our distribution businesses. Accounts receivable of $1.8 billion at December 31 is down 3% from the prior year on a 4% decrease in sales in the fourth quarter.

We continue to closely manage our receivables and remain satisfied with the quality of our receivables at this time. Our inventory at the end of the quarter was $3 billion, down 1% from the prior year.

Our team continues to do a very good job of managing our inventory levels and we will remain focused on maintaining this key investment at the appropriate levels as we move forward in 2016.

Accounts payable at December 31 was $2.8 billion, up 10%, and this is due to the positive impact of our improved payment terms and other payables initiatives established with our vendors. We're pleased with our continued improvement in this area, and we're encouraged by the positive impact on our working capital and days and payables.

Our working capital of $1.6 billion at December 31 has significantly improved from the prior year in both absolute dollars and as a percent of revenues. Our progress in this area contributed significantly to our record cash flows for the year.

Effectively managing our working capital and in particular, accounts receivable, inventory and accounts payable remains a high priority for our company. Our total debt of $625 million at December 31 is down approximately $140 million from the $765 million in the prior year.

Our debt includes two $250 million term notes as well as another $125 million in borrowings under our multicurrency revolving line of credit. Our debt-to-capitalization is at 16.5%, and we're comfortable with our capital structure at this time.

We believe it provides our company with both the financial capacity and the flexibility, necessary to take advantage of the growth opportunities we may want to pursue. So in summary, our balance sheet is in excellent condition and remains a key strength of the company.

We generated record cash flows in 2015, driven in part by our improvement in working capital. Cash from operations was $1.2 billion and free cash flow, which deducts capital expenditures and dividends, was $682 million. This is a meaningful accomplishment for us. And for 2016, we're currently planning for another strong year of cash flows.

We would expect cash from operations to be in the $900 million to $1 billion range and free cash flow of approximately $400 million to $450 million. We remain committed to several ongoing priorities for the use of our cash, which we believe serves to maximize shareholder value.

Our priorities for cash includes strategic acquisitions, share repurchases, reinvestment in our businesses and the dividend. Strategic acquisitions remain an ongoing and important use of cash for us, and they're integral to the growth plans of our company.

In 2015, we made a number of strategic acquisitions to expand our distribution footprint, and in total, these new businesses are expected to contribute $180 million in annual revenues. Thus far in 2016, we've added the Olympus Imported Parts distribution business, as covered by Paul.

And looking forward in 2016, we will continue to seek new acquisition opportunities across all of our distribution businesses to further enhance our prospects for future growth.

Although many of these opportunities will continue to be bolt-on-type companies with annual revenues in the $25 million to $150 million range, we are still open-minded to new complementary distribution businesses of all sizes, large and small, assuming the appropriate returns on investment.

Turning to our share repurchases in 2015, we used our cash to repurchase 3.3 million shares of our stock under our share repurchase program. Through today, we have also purchased another 570,000 shares of stock, and today we have 5.7 million shares authorized and available for repurchase.

While we have no set pattern for these repurchases, we have been slightly more aggressive with our repurchases given the value of our stock price over the last 12 months to 14 months.

We expect to remain active in the program in the periods ahead and continue to believe that our stock is an attractive investment and, combined with the dividend, provides the best returns to our shareholders. Our investment and capital expenditures was $48 million for the fourth quarter, which is an increase from the $34 million in the prior year.

For the year, our capital spending was $110 million, up slightly from the prior year. We are currently planning for capital expenditures to increase further in 2016 to approximately $140 million to $160 million with the vast majority of our investments weighted towards productivity enhancing projects, primarily in technology.

Effective yesterday, the board approved a $2.63 per share annual dividend for 2016, marking our 60th consecutive year of increased dividends paid to our shareholders. This represents a 7% increase from the $2.46 per share and is approximately 57% of our prior year earnings.

This was slightly above our stated goal of a payout ratio of 50% to 55%, but we're comfortable going beyond this range from time to time due to our strong cash flows. So this concludes our financial update for the fourth quarter and the full year. And in summary, we operated in 2015 with relatively mixed results.

That said, we improved the strength of our balance sheet with excellent working capital management, and effective cost control measures helped us produce an expanded operating profit margin. Additionally, we generated record cash flows and a record earnings per share for 2015.

These are meaningful accomplishments and our progress in these areas supports our investment and growth opportunities such as acquisitions, as well as the return of capital to our shareholders with the dividend and share repurchases. We look forward to updating you on our future progress in the periods ahead.

And I'd like to thank all of our GPC associates for their hardwork and their commitment to their jobs. I'll turn it now back over to Tom..

Thank you, Carol. So that will conclude our prepared comments on 2015. And in closing, we would say as mentioned earlier, that it was a challenging year in many ways but a gratifying year in other ways.

Our revenue production in local currencies was solid across our Automotive businesses as it was in Office Products, but Industrial and Electrical found it more difficult. We were pleased to see strong operating margin improvements in Automotive and Electrical, but we had operating margin declines in Office Products and Industrial.

We were, however, able to show a 10-basis-point improvement for GPC overall despite the Office Products and Industrial challenges. Gross profit was down 12 basis points for the year, but good work was done on the SG&A side, and SG&A was down 20 basis points.

As a result, pre-tax income was up slightly, but due to the higher tax rate that Carol explained, net income was down slightly. On the balance sheet side, the progress was more consistent, with cash from operations and free cash, both setting new records and working capital was reduced once again in 2015.

And we returned well over $600 million back to shareholders through a combination of dividends and share repurchases. And we reinvested over $225 million back into the business through a combination of capital expenditures and acquisitions, and we expect to invest an additional $125 million in acquisitions over the next few months.

And these CapEx and acquisition investments are intended to drive revenue and profit growth in the quarters ahead. Now, turning to the year ahead, as a general statement, we would say that we remain quite cautious in our outlook. The general economic conditions look a bit fragile and perhaps tenuous both domestically and globally.

And as mentioned earlier, this is already having a significant impact on certain segments of our customer base, primarily in Industrial and Electrical. Conversely, we think that the outlook for our Automotive segment is generally favorable, but the currency impact will once again be a headwind to our Automotive growth in 2015.

With all of that said, at this point, we would expect our 2016 revenues to be up 2% to 3% in Automotive with a currency headwind of 3%; Industrial, up 1% to 2%; Electrical, up 1% to 2%; Office Products, down 1% to up 1%; giving us a total GPC revenue expectation of being up 1% to 2% and up 3% to 4% before the currency impact.

And with revenue growth at these levels, we would suggest an EPS range of $4.70 to $4.80, which will be up 1.5% to 3.5% after currency exchange impact of approximately $0.08 per share, and before the currency exchange impact, would be up 3% to 5% on a constant currency basis.

At this point, we'd like to address your questions, and we'll turn the call back to Chris..

Thank you. And we will take our first question from Elizabeth Suzuki of Bank of America Merrill Lynch..

Good morning.

Just wondering how much of the SG&A leverage in the fourth quarter was the result of lower stock compensation? And what other cost reductions were made in order to generate the impressive operating margins in the quarter?.

Elizabeth, we would talk about that. I guess I would say primarily it's more coming in the areas of productivity improvements, and we've talked a lot about the investments we've made in technology and productivity things, and that would be both on our warehouses and our stores.

Also I would point out additional leverage in our shared services and areas we're doing there. Even in our freight, we look at freight and optimization of our routes, fuel prices, we had improvement there. And then even bringing on some of the acquisitions.

We're able to bring them on and put them on what we call the GPC programs, and we get the benefit of better pricing for those folks. So to a lesser extent, you'd have the impact of lower bonuses and commissions, and then kind of a tightening up that we do, like on travel and some areas such as that..

Okay, great.

So stock comp wasn't really a material benefit?.

It's really a combination of all those things. That was certainly not the primary. It's more in the productivity and some of the things that we're doing in improving our cost overall..

Okay, great. And for the Automotive segment, you noted that there was a weather impact in the fourth quarter since it was relatively warm through December.

Do you think that should reverse in the first quarter, so that the average of 4Q and 1Q would be about the same year-over-year from a weather perspective?.

Yeah. Elizabeth, this is Paul. We'd certainly hope to see it. What we're seeing in the early part of the year is encouraging. And certainly the folks up in the Northeast, Boston, New York are feeling the impact of colder temps returning, and we're seeing a bit of it in the Midwest as well.

So, absolutely, we are encouraged with some of the weather changes we're seeing..

Okay. Thank you..

You're welcome..

Thank you..

We go next to Seth Basham of Wedbush Securities..

Good morning..

Hey, Seth..

Good morning, Seth..

Good morning..

My first question is on auto, just trying to understand a little bit better your expectations for 2016. You're looking for a growth of 2% to 3% on revenues, with a 3% FX headwind.

So looking for core growth in the mid-single digit range, is that correct?.

That's right..

Okay.

In terms of the drivers of that core growth, weather might normalize a little bit, but are there any other initiatives that you can speak to that could help improve your business in 2016 relative to 2015?.

Well, Paul and I might double team this. But in his comments, he highlighted several things that we think are going to give us some good production in the year ahead. He talked about the top store initiative, and we'll add 150 of those this coming year and that will certainly be a benefit to us.

So we've got other new distribution initiatives that will also help us. Paul mentioned some of the growth we're experiencing with NAPA AutoCare and with Major Accounts; we would expect that to continue in the year ahead. Our import program is performing well and we did add Olympus, the recent acquisition, so that will fuel growth there.

So just a number of different things that we expect to have a positive impact as we go ahead..

Yeah. I would add to that, Tom. We – Seth, we'll continue to be opportunistic and fairly aggressive on the acquisition front, both in the U.S. as well as international as evident by our Covs acquisition. We do hope to close that here very soon in Australia.

And we continue to expand our presence in Mexico as well, and, as you know, we launched our NAPA initiative down there in late 2014. It's early yet, but we remain encouraged by what we see in those markets as well..

Got it.

Just to quantify it, approximately how much do you expect acquisitions to contribute to auto revenues in 2016?.

The only one we've included in our guidance is Olympus. And just as a general statement, we normally will not include anything that we've not got a very, very high degree of confidence. And we've got a letter of intent and we've got a closing date, so we included Olympus.

On the Industrial side, we included the two acquisitions that will close on March 1. But beyond that, we've not included any of the others in the guidance that we've given you..

Got it, thank you. And then my second question, really good performance on cash flow in 2015. As you look forward, it seems like you're expecting much higher at least percentage increase in CapEx and may not see as much payables leverage.

Can you help us understand those two moving pieces to your cash flow expectations?.

Yeah. Talk about CapEx first. I mean, some of the CapEx, and you saw that we were lower than what our guidance was for 2015, some of that is the timing of projects. But I would specifically call out, we have a couple distribution center refreshes, relocations where we're enhancing again the productivity. And so that's built into there.

And then some of our IT investments that we've talked about, and certainly in the warehouse management area. But again, some of it is the timing on projects. But we're certainly comfortable with the range we've given.

And then you mentioned on the improvements for cash flow, I mean, one of our sources of cash from operations was in the decrease in accounts receivable. We had almost a $200 million source from accounts receivable, more related to our decrease in sales.

So that's why we're guiding to a little bit lower number because we think that receivables won't be as much of a help to us in 2016..

Got it. Thank you very much and good luck..

Thanks, Seth..

Thank you..

Our next question comes from Greg Melich of Evercore ISI..

Thanks. I had a quick follow-up for Carol, and then I wanted to ask Paul and Tom a couple, one thing. Carol, on the working capital, the AP-to-inventory ratio also improved a lot.

Was there something there in timing, or do you think that could get to 100% from I guess what's now a little over 90%?.

Yeah. We were pleased to see that be at 94% at the end of the year, and as you mentioned, improvements from the 84% the prior year. We don't have a set target for 2016, but I would tell you that we certainly would expect continued improvement. And there wasn't anything that drove that in particular in the fourth quarter.

We continue to see improvement across all of our businesses. And that was really done despite lower inventory purchases in the Industrial sector, too.

Good.

So that still has room to go, it sounds like?.

It does..

Great. And then I'm not sure, Paul or Tom, who wants it, but if you think about this year and the guidance and some of the history of weather, if I go back to 2012, which I think is the last time we had a winter that was kind of mild to start, your comps decelerate, I think, maybe 400 basis points over a couple of quarters.

Help us understand why this time could be different, or why we expect that auto should hold in there for the next couple of quarters? And I also wanted to make sure, Tom, you said Industrial would be up 1% to 2% this year. What accounts for that inflection from at least the second half of 2015's trend? Thanks a lot..

Okay. We'll take the Automotive first. I think we're basing our guidance more on some of the underlying strategies than we are on any weather impact. And the issues that – or the initiatives that Paul and I detailed just a moment ago, I think, are the primary reasons that we've guided to the levels we've guided at.

So I think we're pretty comfortable at those levels as we work our way through 2016. In terms of the inflection in Industrial, there are two things. Again, the comment I made about we'll be adding $50 million of annualized revenue as of March 1 with the two acquisitions that we're making, that's one thing.

And then the second thing, it's – six weeks does not a trend make by any stretch. But what we saw on a per day basis in January and what we've seen through mid-month February is a little bit better than what we experienced certainly in Q4 of this past year.

And the other thing is not included in the guidance would be an expectation that we might be able to make another acquisition or two over the course of the year in Industrial..

Great.

And that bit better on a per-day basis, was that more in the oil and gas and some of the areas that have been weak? Or is it already there? Has it already been positively improved?.

No, I think it's more across those segments that have held up reasonably well..

Great. Thanks a lot. Good luck..

Right. Thank you..

Thank you..

Thanks, Greg..

Our next question comes from Matthew Fassler of Goldman Sachs..

Thanks a lot and good morning. My first question relates to capital allocation, and you're use of free cash. I think I detected a change at least in the rhetoric and prioritization. Historically you've always cited the dividend first, and today you cited strategic acquisitions and went into some depth in that.

So is that my imagination, or is there some intent? Obviously, you've been raising the dividend for many, many decades, and that I know is not expected to change, but does that speak to an increased focus on strategic deals for you?.

Well, I don't know that it necessarily signals an increased focus, but there's a heavy emphasis and focus on strategic acquisitions right now, and we've actually got more discussions going than we had at certain points in the past.

So, we're encouraged by the number of conversations that we're engaged in, and we would expect a certain number of those to come to fruition. And quite frankly, I think if we had 2015 to play over, we might have been even more aggressive on the acquisition front, but we just didn't find – we're unable to engage in enough discussions.

But I think we've gotten that sorted out, and we're pleased with the level of activity we see there right now.

So I don't think it at all indicates reduced interest in increasing the dividend, lower reduced interest in appropriate levels of share repurchase or CapEx expenditures across the businesses, but we're bit more optimistic about our opportunities on the acquisition right now than it might have been this time last year..

And Tom, would you expect most of your deals to be of similar size to the kinds of transactions that we have noted over the past several years in terms of general range?.

Yes. I would say that's right. However, as Carol mentioned, if we would have find something larger that made sense for the shareholders then we would certainly like the opportunity to engage in that discussion. And the nice thing about our balance sheet is that we've got the wherewithal to fund acquisitions that are larger..

Got it. And then shifting gears, just digging a little bit deeper into the Automotive P&L, you had quite a move in the profitability of that business in the absence of any kind of sales momentum.

I understand that last year's margin compare in Automotive was somewhat depressed, so that might help the year-on-year compare, but can you just give us a little more color on what helped you generate that Automotive profitability?.

Yeah. I would call out – so in the quarter, I would say that of the 110 basis point improvement, a third of that came from gross margin and two-thirds was from SG&A. So our core gross profit and we've called this out before, we've seen continued quarterly improvement in our core gross profits for Automotive. And that's both in the U.S.

and our international businesses and there has been specific things done in our foreign businesses to really take control of gross profit, especially with the headwinds that they've had on the strong U.S. dollar. And then two-thirds of the improvement came from SG&A, and it's some of the things that we called out earlier.

So, again, Automotive has done a terrific job on the productivity side. And again, calling out some specific things they've done with investments in technology and systems and the warehouses and the stores. And then also, again, the freight, we've talked about route optimizations in some of those areas.

And then, to a lesser extent, you had lower bonuses and incentives that impacted that in the quarter as well..

And were there reversals of any accruals in that business of year-to-date numbers that perhaps went the other way in Q4?.

There weren't anything else that we haven't already called out..

Got it. Thank you very much..

Thank you..

Thanks, Matthew..

From JPMorgan, next we turn to Mark Becks..

Hi. The sales outlook of plus 1% to 2% in earnings, that seems to imply kind of flat to up slightly EBIT margins.

Is that, in fact, accurate? And then, how does that parse out between Automotive and Industrial? Presumably Automotive would be expected to be up a little, and then on the other side Industrial, I guess, would be expected to be down slightly? Is that the way to think about it?.

Mark, I guess, we are probably implying – what we would imply is that we'd have some slight improvement in our operating margins. And I think what you called out is we would expect probably to see that, depending on the top line, more in the other sectors than the Industrial ones.

But we're more implying for a slight improvement on the operating margin. I mean, we've called out we still have our corporate expense numbers a little higher. But again, I think we can be up slightly with what we're targeting..

Okay. And then, I guess, the other side of the ledger with Matt's question, you guys have been steadfastly committed to the dividend. I think you have a targeted payout ratio of 50% to 55%. And with your dividend announcement today it takes you slightly outside.

Given your proven ability with strong cash flows, why is the 50% to 55% the right number? And then would you have any considerations for taking that up?.

I'll try to answer that, Mark. This is Tom. First of all, the 50% to 55% is somewhat of an informal stated objective, and over time, we've come to conclude that a payout at that level is a reward and return back to the shareholder, while at the same time leaving us adequate funding to do the other things that we want to get done.

So, yes, we're slightly above that. I think we're 57% of prior-year earnings with the recent dividend increase. I don't think you'll see us take that up materially from there. I think we'll take that, the capital that we're generating, the cash we're generating and invest it in some of these other areas..

Understood. And then last quick clarification for Carol. You have that $250 million in November due.

Any initial thoughts on that?.

It's still premature, but our thoughts on that, is that we'll probably do some type of a renewal as we get close to the end of the year..

Okay. Great. Thank you..

Thank you..

Thank you..

Up next, we go to Bret Jordan of Jefferies..

Hey, good morning..

Hey..

Good morning..

Good morning, Bret..

A quick question on the top store rollout, you're adding 150.

If that were successful, how many of your stores do you think are applicable here? I mean, how big could that concept get?.

So, Bret, we're planning on 150 this year of our company-owned stores. We could go a bit greater in that number. We're going to see kind of how the first half plays out.

When we've got stores that are in not exactly prime retail locations, so backstreets, more Industrial areas, we will certainly refresh those stores, but we will not go to the full top-store formats. But right now, we feel very good about our ability to roll out the 150, could expand it.

We will also – any new stores and/or any new relocations this year, we will move to the new store format. And then at the appropriate time, we'll also bring in our independent owners who are ready to make that kind of a commitment as well..

Okay. And then a question on Olympus. I mean, it's a $25 million revenue business.

Is that something that you're getting a catalog you can roll out across the rest of the network that it will contribute in that import parts category more quickly? Or is that just something you're going to grow off of a relatively small base more slowly?.

So, Bret, we are already and have had an import business inside of the NAPA network for a number of years that's Altrom. So we've been in that space. Olympus will be a nice bolt-on addition to that business, and we'll certainly bring with it increased expertise. They've got a great management team, an experienced management team.

We've got expansion opportunities up there in that marketplace, but we're excited to bring those guys on board..

Okay, but there was nothing special about their catalog that you acquired that is leverageable?.

No. No. No..

Okay. Great. Thank you..

All right. You're welcome..

Our next question comes from Tony Cristello of BB&T Capital Markets..

Thank you. Good morning..

Good morning, Tony..

Morning..

I wanted to ask a follow-up on some of the discussion with M&A. It sounds as if there is certainly an acceleration, and perhaps you had an appetite to maybe even have done more in 2015.

Is that a result of more willing sellers or multiples have come in? Or are there some distressed businesses out there that you feel like you can pick up and gain some market share from right now?.

Tony, I think it's more of the former two than the last point. We're not really bottom-fishing. We're not looking for distressed businesses. We're looking for businesses that give us an opportunity to expand geographically, or give us product diversification, and that fit us strategically for the long haul.

I think, as I mentioned earlier to a prior question, I think we're just seeing right now the opportunity to at least engage in more discussions with certain sellers than perhaps we had seen a year ago.

And certainly we're interested in following not just the discussions we're in now through to completion, but also identifying some additional opportunities that we could add to the organization..

Has the marketplace afforded more reasonable valuations for you as well?.

Well, yeah, and I think you probably know at least we consider ourselves to be a fairly disciplined buyer, and there have been times in the past where we've engaged in discussions and we couldn't chin to the valuations and feel it was appropriate for our shareholders.

But right now, we seem to have a number of folks that fit in the ranges that we would use for valuation purposes..

Okay. And switching gears a little bit, if you look across your competitive landscape and each of your segments, you've done an excellent job of keeping your inventory appropriate.

Do you feel your competitors are also reacting accordingly to what appears to be at least in the non-auto segments a bit more of a sluggish or challenging environment?.

Tony, if we could – something happened where you broke up a little bit there.

Would you mind repeating the question?.

Sure, I'm sorry. Across the categories, I was wondering from a competitive standpoint, you've done a very good job on managing your inventory levels and keeping things somewhat appropriate.

When you look across some of your competitive segments, and more so in the Industrial side, do you believe your peers are also reacting accordingly?.

Well, I don't know that I'd be in a position to address that honestly. The thing that I would say is that having the right amount of inventory and the right mix of inventory is a high priority for us across all of the businesses.

And I think it's played out reasonably well for us and I expect that it'll be a heavy initiative for us going forward as well. I can't address what the competitors are doing..

Okay. Okay. Very good. Thank you for your time..

Thank you, Tony..

Thank you.

Thank you..

Our next question comes from Scot Ciccarelli of RBC Capital Markets..

Good morning, guys..

Good morning, Scot..

Good morning. So I know you don't break out CapEx by division, but even as I look at the entire company, your CapEx is somewhere between a half and a quarter of your biggest Automotive competitors.

And I know your model is, obviously, a bit different with the wholesale component, but I guess the question is do you believe those levels of CapEx are sustainable, number one? And number two, it does appear that some of those competitors are actually accelerating their own capital investments.

So I guess in a nutshell the question is, do you think you're going to need to accelerate your capital investments at some point?.

I would take a first stab at that and Carol may jump in. But in the guidance that Carol provided, she said $140 million to $160 million in 2016, which is up a bit from where we have been historically. And I think for modeling purposes, you could probably use that for the years after 2016. So it is a little bit heavier. We're investing a bit heavier.

And as Carol mentioned, it's for facility refreshments to enable us to be more productive in the throughput. It's for technology investments that enable us to either have better management information or enable us to be more productive in what we do.

And at least as we look out over the next couple of years, it appears that that's an appropriate level for the next several years..

I guess, I think the only other two things I'd add is one is our maintenance level of CapEx, if you will, the amount we need to do each year is probably more in the $100 million range. And the other thing is we have our distribution footprint out there. I mean, we're really in all the areas we need to be.

So, if anything, it's – we have a lighter level of investments on real estate. So more of ours is in the technology, productivity areas with systems. And so if we have investments in real estate, it's more due to a relocation or refresh..

Got you. Okay, that's helpful. And then you guys did talk about there's quite a bit of regional variability in the auto business, obviously weather had an impact. I'm assuming part of that is also the, let's call it, stores in the oil patch or energy patch.

Can you give us some more color around the magnitude of the differences experienced market by market?.

Yes. Scot, this is Paul. What we saw in those markets that performed well, and I think I called out the East, certainly the Northeast, Florida, Central, out West, those businesses in Q4 all grew mid-single digits, good solid growth.

The other end of the spectrum, and I believe I called out the Southwest and the Mountains, certainly impacted by oil and gas and Midwest, which we believe was more weather-related, were down low-single digits..

Perfect. All right. Thanks, guys..

All right. Thanks, Scot..

Thank you..

We'll take our next question from Carolina Jolly of Gabelli..

Thanks, guys, for taking my question..

Good morning..

Good morning.

In regards to the Industrial side of the business or Motion, what is your sense of inventory at your customers? And do you expect, I guess, any destocking going forward into 2016?.

Carolina, I'll try to answer that one. Most of what we sell on the Industrial side is not for customer inventory. It's for something that they need right now. So inventory fluctuations are not that big of a factor for us honestly. So what we do see is we do have some customers that would hold some inventory.

And if they're a multi-location customer, we do see them employing what we might call a buy – or use what we own already. So we do see some inventory transfer among plants under the same ownership, but I don't think inventory fluctuations are going to have a material effect on our demand patterns over the next year..

Great. Thanks..

Thank you..

And with no further questions in the phone queue, I'd like to turn the conference back over to management for any additional or closing remarks..

We thank all of you for participating in today's call, and we appreciate all of your support, and we look forward to reporting out to you with our first quarter results in April. Thank you..

And this does conclude today's presentation. Thank you all for your participation..