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

Matthew J. Fassler - Goldman Sachs & Co. Seth M. Basham - Wedbush Securities, Inc. Greg Melich - Evercore ISI Chris Bottiglieri - Wolfe Research LLC Elizabeth Lane Suzuki - Bank of America Merrill Lynch Christopher Michael Horvers - JPMorgan Securities LLC Anthony F.

Cristello - BB&T Capital Markets Scot Ciccarelli - RBC Capital Markets LLC Bret Jordan - Jefferies LLC Brian C. Sponheimer - Gabelli & Company, Inc..

Good day, and welcome to the Genuine Parts Company Second Quarter 2016 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. At this time, I'd like to turn the conference over to Mr.

Sid Jones, Vice President, Investor Relations. Please go ahead, sir..

Good morning, and thank you for joining us today for the Genuine Parts Company second quarter 2016 conference call to discuss our earnings results and outlook for the full year. 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'll begin this morning with comments from our Chairman, Tom Gallagher.

Tom?.

Thank you, Sid, and let me add my welcome to all of you on the call this morning. We appreciate you taking the time to be with us. I would start by saying that I've anticipated this call with somewhat mixed emotions.

On the one hand, I've been on every one of our calls since we started doing them in February of 2001, so today is my 63rd call, but it's also my last.

As you know, Paul Donahue, he was named Chief Executive Officer on May 1, and Paul is only the fifth Chief Executive in our 88-year history, certainly indicative of the management's stability within our organization. I will continue to serve as Chairman of the Board, and as such, I will remain active around GPC.

But going forward, Paul and Carol will be doing all of the work on these quarterly calls. And I just couldn't feel any better or more positive about the future of our company with Paul as our President, Chief Executive Officer; and Carol as Executive Vice President and Chief Financial Officer leading the way.

These are two very talented and capable executives, and they are highly regarded both inside our organization and externally as well. And they will do a fine job in leading our company and creating shareholder value in the years ahead.

With that said, I want to thank each of you on the call for your past and ongoing support of Genuine Parts Company, and I'll turn the call over to Paul..

the execution of fundamental initiatives to drive a greater share of wallet with our existing customer base; an aggressive and disciplined acquisition strategy focused both on geographical as well as product line expansion; the building out of our digital capabilities across all four of our businesses; and the further expansion of our U.S.

and international store footprint. We are confident that our intense focus in these four key areas will positively impact our sales and support the steady and consistent growth we strive to achieve at Genuine Parts Company. Now, I'll hand it over to Carol who will provide a financial update and a full year guidance.

Carol?.

Thank you, Paul, and congratulations on your promotion to CEO. It is certainly well deserved and we look forward to the execution of your key sales strategies. And, Tom, I would also like to thank you for your tremendous leadership of the company and, on a more personal level, your guidance and counsel over the years.

We will begin this morning with a review of our financials and look at the second quarter income statement and segment information, and then, we'll finish up with a review of a few key balance sheet items. Our total revenues of $3.9 billion for the second quarter were down 1%.

Our gross profit for the second quarter was 29.9%, which was equal to the prior year. Our management teams are focused on the effective execution of our gross margin initiatives, and we remain committed to an enhanced gross margin for the long term.

The pricing environment across our businesses remains relatively steady, with very little supplier inflation, if any. Our cumulative supplier price changes through six months in 2016 were Automotive down 0.7%, Industrial up 0.2%, Office up 0.2% and Electrical down 1.3%.

Turning to our SG&A, our total expenses for the second quarter were $865 million or 22.2% of sales, which is up slightly from last year, primarily due to this lower sales levels for the quarter.

This was partially offset by our tight cost control measures which continue to positively impact our results and drive our progress towards greater operational efficiencies. Now, if we look at the results by segment, our Automotive revenue for the second quarter of $2.1 billion was down 1% from the prior year and 53% of total sales.

Our operating profit of $204 million is down 2% and the operating margin for this group is 9.7% compared to 9.9% in the second quarter last year. Our Industrial sales of $1.2 billion in the quarter were a decrease of 1.7% and 30% of our total revenues.

Our operating profit of $88 million is down 0.7% and our operating margin is up 10 basis points to 7.6% which is driven by a nice gross margin improvement (23:07). Office Products revenues were $482 million in the second quarter, up 1% and 12% of our total revenues.

Our operating profit of $33 million is down 5% and our operating margin is 6.8% compared to 7.2% last year. For the Electrical Group, our sales were $185 million in the quarter, down 5% in the prior year and also 5% of our total revenue.

Operating profit of $16 million is down 14% and the margin for this group is 8.7% compared to 9.5% last year or down 80 basis points. So for the second quarter, our total operating profit margin was 8.7% compared to 8.9% in the second quarter last year. This basically reflects the lack of leverage as mentioned earlier.

With that said, we are intensely focused on showing progress in this area in the periods ahead. We had net interest expense of $4.7 million in the quarter, and for the full year, we currently expect net interest of $20 million to $21 million.

Our total amortization expense of $9.2 million for the second quarter, and we would expect our total amortization expense for the full year to be $36 million to $38 million. Our depreciation expense was $26.7 million for the quarter and for the full year, we project total depreciation to approximate $110 million to $120 million.

So our combined depreciation and amortization was $36 million for the second quarter, and we would expect the combined number to be in the range of $145 million to $160 million for the full year. The other line which primarily reflects our corporate expense was $26.5 million for the quarter compared to $24.8 million last year.

For the full year, we still expect corporate expense to be in the $110 million to $120 million range. Our tax rate for the second quarter was approximately 36.2% compared to 37% in the second quarter last year.

The reduction in the rate is due to a higher mix of foreign earnings as well as a favorable non-taxable retirement plan valuation adjustment compared to last year. We expect this rate to show a slight increase in the last half of the year, but we are projecting our full year rate to be 36.3% to 36.8%.

Our net income for the quarter, as Paul mentioned, was $191.4 million compared to $195.4 million last year, and our EPS of $1.28 was equal to last year. Now, turning to the balance sheet, we continue to further strengthen our balance sheet with effective working capital management and strong cash flows.

Our cash at June 30 was $234 million, up slightly from June of last year. Our cash position continues to support the growth initiatives across all of our businesses. Accounts receivable of $2 billion at June 30 was up 1% from the prior year, and we continue to closely manage our receivables and remain satisfied with our quality at this time.

Our inventory at the end of the quarter was $3.1 billion, which is actually down 3% when you exclude the impact of our acquisitions in the last 12 months. Our team continues to effectively manage our inventory levels and will continue to maintain this key investment at the appropriate levels as we move forward.

Our accounts payable at June 30 was $3.1 billion, up 12% from last year, due to improved payment terms and other payables initiatives established with our vendors.

We're encouraged by the positive impact of accounts payable on our working capital and also our days in payables, and we would add that our AP to inventory ratio at June 30 reached 100% for the first time.

Our working capital of $1.5 billion at June 30 continues to show steady improvement from quarter to quarter and is down nicely from the prior year. Effectively managing our working capital and, in particular, key items such as accounts receivable, inventory and accounts payable remain a high priority for our company.

Our total debt is $775 million at June 30 compares to $850 million in total debt last year, and this includes two $250 million term notes, as well as another $275 million in borrowings, under our revolving line of credit.

We would also add that one of our term notes is due November 30 of this year, and we currently intend to renew it upon the due date. Our total debt to capitalization is approximately 19%, and we're comfortable with our capital structure at this time.

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

We continue to generate strong cash flows, and following a record year in 2015, we remain well-positioned for another solid year in 2016.

We continue to expect cash from operations to be in the $900 million to $1 billion range for the full year, and our free cash flow which deducts capital expenditures and dividends to be in the $400 million to $450 million range.

We remain committed to several ongoing priorities for the use of our cash, which we believe serve to maximize shareholder value. Our priorities for cash includes strategic acquisitions, share repurchases, reinvestment in our businesses, and the dividend.

Our strategic acquisitions remained an ongoing and important use of cash for us, and they're integral to our growth plans. Through July 1 of this year, we've added a number of new businesses across our Automotive, Industrial, and Office operations.

These are excellent strategic fit for us and collectively, we expect these acquisitions to generate approximately $450 million in annual revenues. Looking forward, we will continue to seek additional acquisition opportunities across all of our distribution businesses to further enhance our prospects for future growth.

We'll continue to target those bolt-on acquisitions of companies with annual revenues in the $25 million to $150 million range. But we're also open-minded to new complementary distribution businesses of all sizes, large or small, assuming the appropriate returns on investments.

Turning to share repurchases, we purchased 765,000 shares in the second quarter and 1.3 million shares for the six months. To-date, we have 4.9 million shares authorized and available for repurchase.

While we have no set pattern for these repurchases, we expect to remain active in the program and the periods ahead and we continue to believe that our stock is an attractive investment and, combined with the dividend, provides the best return to our shareholders.

Our investment in capital expenditures was $38 million in the second quarter and is $50 million through June. For the year, we're currently planning for capital expenditures to be in the range of $120 million to $140 million, so we expect CapEx to increase slightly over the balance of the year due to the timing of several large projects.

Turning to our dividend, our 2016 dividend is $2.63 per share or a 7% increase in the prior year dividend of $2.46. 2016 also marked our 60th consecutive annual increase in the dividend.

So that concludes our financial update for the second quarter 2016 and, in summary, our non-Automotive businesses continue to operate in a challenging sales environment. And in the second quarter, our U.S. Automotive sales were impacted by rather weak conditions.

Fortunately, we see these as transitory issues and we look forward to improving conditions as we move ahead. Additionally, we continue to benefit from strong performances in our international automotive operations. For the quarter, we offset some of the market headwinds with key sales initiatives, steady gross margins, and tight expense cost controls.

In addition, we further improved the strength of our balance sheet and cash flows with effective working capital management.

As we execute on our growth plans, progress in these fundamental areas supports our ongoing investment in opportunities such as acquisitions as well as the return of capital to our shareholders through the dividend and share repurchases. Now, turning to our guidance for the full year.

On the revenue side, we are maintaining our guidance for total sales to be at plus 1% to plus 2% for the full year.

Among our business segments, we are maintaining our Automotive sales guidance at plus 2% to plus 3% for the full year, and we're increasing our Office guidance for sales to be plus 2% to plus 3% from the original amount of down 1% to up 1%.

We are lowering our Industrial sales to flat to up 1% from the previous plus 1% to plus 2%, and we're reducing the Electrical sales outlook to down 2% to down 3% from the previous up 1% to up 2%. This sales outlook includes all acquisitions that have closed through July 1 as well as the ATCO (32:39) Industrial acquisition that Paul mentioned earlier.

On the earnings side, we are updating our earnings guidance to be $4.70 to $4.75 from the previous range of $4.70 to $4.80 for the full year. So this completes our prepared remarks, and we would just close by saying thank you to all of our GPC associates for their continued hard work and commitment to the success of GPC.

Paul, I'll turn it back over to you..

Thank you, Carol. A good update on the quarter. So without a doubt, we are experiencing a challenging quarter, and frankly, it has been a challenging six months. But as you can tell from our guidance, we are planning for an improved second half to the year, and our teams are energized to execute on the action steps we outlined earlier.

We look forward to updating you on our progress in the quarters ahead. So now, we'll turn it back to the operator, and Carol and I will take your questions..

Thank you. And we'll take our first question from Matthew Fassler with Goldman Sachs..

Thanks a lot. Good morning..

Good morning..

And Tom, all the best to you as you continue to move forward. I have two sets of questions. The first relates to the Automotive business. It was interesting that you talked about June being flat compared to April up slightly even as some of the weather-sensitive businesses really popped with some of the heat that we saw in parts of the country.

So can you talk about what's transpiring with other categories and how weather-related softness away from the areas like batteries might be, just sort of how we got to flat rather than an increase with some of the weather businesses surging late in the quarter?.

And are you referencing specifically the month of June, Matt?.

I believe so. I'm talking about the cadence that you....

Yes..

...spelled out where I think April was up low singles, May down low to mid singles, and June flat. I believe that related to your same-store sales number, though I'm not sure..

Yes. So product-related movement we're seeing is, certainly, batteries were soft in the quarter. Ride control was soft in the quarter. However, we saw a slowing in our brakes business in the quarter, which we attribute some of that, we believe, to some of our brakes business probably moved into the first quarter given the warmer temps.

On the plus side, we're continuing to see nice growth out of our import lines. We're seeing nice growth out of our tool and equipment categories, but unfortunately, they weren't enough to offset some of the softness we saw in the other categories..

And as we're 20 or so days into a new quarter, any sense of how the current run rate compares to what you saw in June?.

Yeah. I would have to tell you July – Matt, even though we're only a couple of weeks in and it's looking a lot like June. It's choppy is the best way I think I could describe it. The hot weather has to be a benefit to us and we believe with the continuing warm temps we're seeing across the country will be a benefit to us.

And related to that, we are seeing those products that are related to the hot temps, products like batteries, products like rotating electrical, and our AC is picking up. So that's why we're cautiously optimistic about the second half of the year..

Got it. And then, my second question relates to Industrial, and specifically to the margin trends within that business. Historically, the gross was within Industrial, I believe were largely volume-driven and tied closely to volume rebates. You had a quarter where I think the volumes were not quite up to your expectations. The margins was quite good.

And, Carol, on the call, you cited gross margins within that business. So any sense of the margin dynamics beneath the surface in Industrial, please..

Yeah. I guess, and you're exactly right, we certainly have headwinds on the volume incentives in that business.

What we've been pleased to see is for the first six months of the year, Industrial's core gross margin has improved, and that's due to a lot of things that they put in place over the last 18 months or so, and it's both on the buy side and the sell side. And those things have been put in place, and it helped (37:19) their gross profit.

We had, for the six months, a slight decrease in their volume incentives, but they were flat in the quarter. And additionally, on the SG&A side, they've adjusted their cost structure to be more in line with the revenues. So it's the combination of those things. So I would say that we're really pleased to see what they did in Q2.

And we are expecting a slightly better second half for the Industrial business on the top-line. So hopefully, we can maintain that slight margin improvement as we finish out the year..

Got it and understood. Thank you so much, guys..

Thank you..

Thanks, Matt..

Thank you. We'll take our next question from Seth Basham with Wedbush Securities..

Thanks a lot and good morning and best of luck, Tom..

Good morning, Seth..

Thank you, Seth..

First question is just on the difference regionally between – well, within the Auto Parts business. If you could provide some color as to how the regions performed through the quarters, the delta between the Central and Eastern, as well as the rest of the business, say from April, May relative to June..

Yeah. It's a bit like we saw in the previous quarter, Seth, the cold weather in the Northern division. So I called out specifically the Central and the Northeast.

The delta between those businesses and some of our Southern businesses, our Southeastern, even down into Florida Atlantic, even out West, was a significant gap, we're talking close to 400 basis points, 500 basis points gap between those that are performing well and those that are continuing to be challenged..

Got it. So that's 400-basis-point to 500-basis-point gap.

Was that for the full quarter? Or do you see that gap narrow as you moved into June with the weather improvement?.

No. That was full quarter..

Got it.

And did the gap narrow in June?.

Not – it's not much. We're pretty consistent throughout the quarter in both the Northern divisions as well as those warmer weather divisions..

Okay. Great. And then, second question is just on major accounts, a slowdown there in major accounts. Can you provide any color on that maybe like you have done for the Industrial large customers, how many up or down or what's driving the slowdown in major accounts, do you lose customers? Just any other color will be helpful there..

Yeah. We stay close to our major customers, as you would imagine, Seth, and have a lot of conversations. Not all of them are down, but I would tell you that we have seen a drop in their business. We discussed with them often how their business is trending. Their tire sales have been challenged and those big tire guys that we do business with.

So again, I don't think boy, I can tell you we haven't lost any of our big major customers, and I don't believe we're losing share in any of our major customers. I would tell you that I think our business is the reflection of their business.

And I would also share, Seth, that as we look at the Automotive aftermarket, in general, we have had many top-to-top meetings with many of our big suppliers here in recent weeks and months. We do have constant dialogue with our major accounts at our NAPA AutoCare Centers.

And again, that sluggishness that we experienced in our numbers, what we hear is all of those parties that we're discussing with it are seeing similar results..

Understood. Best of luck for improvement in the second half..

Thanks, Seth..

Thanks, Seth..

Thank you. We'll take our next question from Greg Melich with Evercore ISI..

Hey. Thanks. I want to follow up a little bit on the Industrial business and then SG&A.

Paul, you mentioned some signs of stability in the Industrial business, although if you think about the number of categories that were up or down being the same as last quarter and Industrial production seems to be a little bit better than your actual sales growth or organic.

What are those specific signs of stability that you're pointing to? Then I wanted to follow up with Carol..

Yeah. So if I look at the numbers, Greg, that we've seen quarter-to-quarter since back in early 2015 where our sales were declining dramatically from one quarter to the next, culminating in an 8% drop in Q4, we rebounded, if you want to call it that, to a low single-digit increase in Q1 and we've seen that again in Q2.

So when I say stabilizing, it has stabilized from really the drop that we were seeing – significant drops that we were seeing in 2015. In talking to our team, our Motion business in Canada has seemed to stabilize and even is showing some slight improvement. We watch very closely our project work.

And our project work – well, the projects are smaller than we would like. They're steady. And the number of projects that we see out there are steady. So we're hopeful and we're starting to see it play out in the numbers a bit at our Industrial business, which also impacts our Electrical that has bottomed out.

And hopefully, we'll see a better second half..

Great. And Carol, what was the thing helping you to actually take down SG&A dollars? I mean you did it in the first quarter and in the second quarter.

Can we assume that SG&A dollars are down in the back half as well?.

Yeah. I guess there's a lot of activities going on across all of our businesses. We said that each business, a lot of our investments are in technology and productivity. So as we can put in some of these efficiencies, we would be improving our volume per employee, so certainly, looking at efficiencies in distribution centers.

Also, you're just adjusting your cost structure to a different level of revenue. So on the Industrial side, and looking at some of their facilities, and looking at their operations, and making adjustments to, say, where we're not going to have business in certain areas and possibly we need to go from three branches to two branches.

And so, I think it's a number of projects going on. Our Automotive folks have done a very good job on SG&A, and even with a little softer Q2, they still have some SG&A improvement. So we would expect it to continue.

We need to have a little bit better second half, which we're forecasting on the revenue and we would expect these things to stay in place, yes..

That's great. Good luck..

Thank you..

Thank you, Greg. Operator. Thank you. We'll take our next question from Chris Bottiglieri with Wolfe Research..

Hi. Thank you for taking my question. I had a couple of questions on Industrial. A few of your competitors seem to have referenced furloughs and plant shutdown.

Have you seen anything similar or any reason why your customer mix might not be feeling the same headwinds?.

We have, Chris. We're seeing certainly some of the same things I think our competitors and other folks in the industrial world are seeing. If we look at specifically some of the big oil and gas producers which has a big impact on not just our Industrial business, but our Automotive as well.

The thought is that and it appears that some of the large oil producers are set to weather their storm. But many of the small oil producers are going under, and I don't know that that's going to change much going forward..

Got you. And then, taking all the context, I mean a 3% organic decline really isn't that bad.

Do you think relative to your performance to peers, like what do you think is driving that right now? Is it your maintenance mix versus new equipment? Are there any current growth drivers that you've added that are allowing to take share right now? Like, what are you seeing in that business?.

Well, certainly, Chris, some of the new focus product category that we have gotten into in recent years, products like industrial supply, safety supply, material handling equipment, those products and product lines are performing well, and actually, are generating increases year-over-year.

Where we're seeing some of the pressure is on the traditional industrial products, hydraulics, bearings, power transmission. But I think that much like our strategy in our Office Products business, as we segue into new categories, growth categories, that's certainly helping our numbers..

Got you. Then, actually, one last follow-up related to that. In terms of Office, I mean obviously, you've done a nice job of diversifying into jan/san and some other growth categories.

But what are your core, like, technology office products? How are those performing right now? And is there a point in time where you see that business becomes less of a headwind to your consolidated Office number?.

Yeah. Our tech products – our tech categories were down in the quarter, Chris. And our team is, certainly, focused on getting that back in the plus column, but for now, that is a – our tech business is a bit of a headwind.

Our strategy is I think we've articulated in the past is continuing to drive our overall Office Products business more into the facility, breakroom safety product categories. You're seeing that with most of the acquisitions that we've completed of late, certainly, the most recent being the Safety Zone and the division of Rochester Midland.

So we believe that that tech headwind will become less and less of a factor as we move forward..

Got you. Okay, cool. Thank you for the help (48:01)..

You're welcome. Thank you..

Thanks, Chris..

Thank you. We'll take our next question from Elizabeth Suzuki from Bank of America Merrill Lynch..

Hi, guys. If we look at organic revenue growth backing out the FX impact and positive contribution from acquisitions, every business segment was down year-over-year and for Auto, it sounds like you attributed that to weather specifically.

Is there anyway to quantify what that growth would have been if weather had been consistent year-over-year and is mid-single-digit growth for the second half of the year achievable for that business?.

I'm sorry, Elizabeth.

Are you referring specifically to Automotive or across all four?.

To Auto specifically..

Okay. So Auto, in the first half of the year, our core Automotive business was actually up 1% and our expectation is that in the second half of the year that we are going to generate low to mid-single-digit growth in our core Automotive business and that does not include the potential assistance we'll get from acquisitions..

Okay, great..

And Elizabeth, if you were to ask me as a follow-up, so how do you intend to do that, I would tell you that we're still very focused on our core initiatives in Automotive.

While the quarter was certainly not up to our expectations, by no means are we in a panic mode and going to shift our focus, we have terrific opportunities to continue to grow our retail sales. We are rolling out our top store initiative which will, as mentioned in my comments, will total 150 stores in 2016.

We'll reinvigorate our business in our NAPA AutoCare Center, and then, new distribution will be a factor as well. So we're confident we'll drive the kind of numbers that we talked about in the second half..

Okay.

And do you think without the weather impact, the second quarter might have seen that kind of low single-digit growth in core for Auto?.

One can only assume, Elizabeth. If you look at our first quarter, certainly, we were there. If you look at our previous number of quarters, certainly, we were there. So Q2, we believe, is an outlier, and again, I think that the key initiatives that our team is focused on will get our business back on track in the second half of the year..

Okay. Thanks very much..

Thanks for your questions..

Thank you. We'll now move on to Christopher Horvers with JPMorgan..

Thanks. Good morning and congrats, Tom, on all your success as a CEO over the year and Paul, congrats to you and good fortune to you as you move forward as CEO as well..

Thank you, Chris..

A couple of follow-up questions at this point. So you talked about June flat, July choppy, like June flattish.

What's still soft, if you're seeing some of the weather-sensitive business pop, what categories continue to be a drag in performance?.

Yeah. As we saw in the second quarter, Chris, it's still some of those same core lines. It's ride control. It's brake business. Our brake business, we have been on a tremendous run over the last six quarters to eight quarters in our brake business, and we're seeing that tail off just a bit. Again, there is nothing that we have fundamentally changed.

We haven't raised prices. We haven't changed product categories. So those big categories, ride control, brakes, that's where we're seeing some of the softness which we're certainly trying to outrun with the growth that we're seeing in tool and equipment, imports, and in our temp related businesses..

And so as you – I guess, do we have to wait around for – because it sounds like some of that's like, it's corrosion from the winter that didn't happen, it's potholes that didn't happen.

And so do we have to wait around for the winter to see improvements like – forget your initiatives, but maybe just the industry growth rates, do you have to wait around for the winter to see improvements in those categories or is it – does 2012 suggest that, well, the further you get away, that drag mitigates and you can start to see growth, and maybe later in the third quarter in those businesses?.

I think you're spot on, Chris, with that comment. I referenced in my prepared remarks, what we saw back in 2012, and I do believe that will be the case. But I can assure you our team is not sitting on the sideline, they have a tremendous sense of urgency.

No panic, but a tremendous sense of urgency working with our good customers out in the field, certainly working closely with our AutoCare Centers to understanding where they need our support, how we can help them grow their business. So we are intensely focused on getting our growth curve back going in the right direction in Q3, Q4.

And as we have projected on our numbers, we do believe that that will be the case..

Just to clarify, you mean, as the further you get away from the winter, you can start to see growth as you proceed through the year. You don't have to wait for winter weather to reinvigorate those businesses..

That's correct. That's correct..

Okay.

And then on July, someone asked about the regional differences in June, is the July acceleration in some of those weather-sensitive categories more focused in the Northern tier of the country?.

I think it's maybe just a bit early to go there, Chris. You had the July 4 holiday where we lost essentially a week. I think it might be a bit early to go there, but I will tell you that the hot temps that we're seeing, heck, I heard St. Louis is supposed to be 100 degrees-plus. That goes across the Northeast.

That's going to drive business, and it's going to drive certainly those temp-related products. There's just no two ways about it. We've seen it in the past, and I don't think 2016 will be any different..

And then one last clarifying question to your response. When you say, sort of July looks like June, there's no negative calendar impact in there.

You're sourcing on the days adjusted business, (54:55) business looks similar, right?.

Correct. Yes, sir..

Okay. Thanks very much, guys..

All right. Thanks, Chris..

Thanks, Chris..

Thank you. We'll now take our next question from Tony Cristello with BB&T Capital Markets..

Thank you. Congrats, Tom and Paul. Welcome and look forward to working with you as we move forward..

Thank you, Tony..

I wanted to talk a little bit more about the initiatives you have in place to sort of drive the sales growth, and you laid out some of those related to auto.

But if you look across your four segments, and then identify the four sort of buckets that you attempt, whether it's (54:35) or acquisition, or digital, or expansion of footprint, can you sort of maybe give some more color of how you would align each one, and where the most opportunity along those four buckets would be for each one?.

Well, certainly, we're looking at strategic acquisitions, Tony, in every single one of our businesses, and I think that in 2016 we've had impactful acquisitions in three of our four businesses. We have activity going in, in all four, but we have closed on deals in Industrial, Office, and of course Automotive.

As it relates to specifically expanding footprint, both domestically and internationally, that's really targeted at our Automotive businesses. And as you know, we have new distribution initiatives in place both in the U.S., Mexico, Canada, Australia and New Zealand.

I mentioned earlier we've had terrific success in our GPC Asia-Pac business, and that's a business we'll continue to grow. As we look at our digital capability, that goes across all four businesses, and we're driving e-commerce initiatives across every one of our businesses.

And then, of course, a greater share of wallet which really, that underpins all of our efforts. Again, that growth goes across all four businesses (57:13), and really is that what we need to drive our core growth..

And then, especially on the distribution side, are you – as you continue to cross-sell and leverage across each of the segments, some of the SG&A savings, is that perhaps coming from your ability to be more effective across your distribution at all your locations?.

We believe so, Tony. Certainly, as we look at some of the recent acquisitions, the bolt-on acquisitions that we've done, The Safety Zone would fit that category, Rochester Midland, that Jan/San acquisition, we believe we have opportunities to cross-sell and take full advantage of the structure or the infrastructure we have in place.

And I would say the same as it relates to acquisitions that we've done in the automotive space, whether it'd be on our import business or our heavy-duty business. We're leveraging that structure that we've had in place for many, many years across all of our businesses..

And I think one thing I may add – Tony, one thing I may add and you said on just SG&A, we also see opportunities that come on the cost of goods sold side as well. So on these acquisitions – and we look at the product categories, we're able to take that and leverage across the organization, our total spend.

So we'll see that coming from the gross margin side and the SG&A side..

So it's just a 2016 (58:47) this continue for a period of time beyond as a result of integration and efficiency gain?.

Correct..

Okay. And then last one question.

I just want to clarify, what was your revised guidance on the Industrial? Did you say down to flat, is that correct (59:06)?.

Yes. Our Industrial is going to be flat to up 1% for our new guidance..

Flat to up. Okay. Perfect. Thank you..

Flat to up 1%..

All right. Thanks, Tony..

We will now take our next question from Scot Ciccarelli with RBC Capital Markets..

Hey, guys.

How are you?.

Hey, Scot..

Hey, Scot..

Hi. Specifically asking about auto at this point, any change in the competitive environment worth noting? There's obviously been a lot of changes in the industry over the last, let's call it, 12 months or so. I think we also kind of generally get the weather impact given the industry's experience in 2012.

But there was also a period in 2008 and 2009 where your Auto business started to significantly lag the performance of a bunch of your peers. And if I remember right, it was a function of uncompetitive pricing in a couple of categories. In fact, it may have even been ride control, now that I think about it.

So any change overall in the competitive environment? And then also specifically on your pricing relative to the market. Thanks..

Yes. So I would say this, Scot, on the first question as it relates to our competition, we have not seen any major shift in the competitive landscape. I think pricing remains sane across all of our competitors.

Look, everybody is scratching and clawing for market share in a challenging environment, but we've not seen any major shift across our key competitors.

As it relates to our pricing by product or pricing by product category, I recall quite well your reference to 2008 and 2009, and that did occur and we did adjust, and I think we certainly benefited from it. We don't see anywhere, at this point, where we're an outlier in a particular product category. Our guys do price jobs on a very regular basis.

We get input from the field on a daily and weekly basis, both from our stores as well as our independent owners. And there is always the occasional tweak we make here and there based on the competitive landscape, but now I would say, generally we are not seeing any significant change in the competitive landscape..

And Paul, can you remind us how you did wind up in the pricing quandary that you did back in 2008, 2009 because I thought you guys were doing kind of a price scans and competitive pricing general check, if you will, back then as well. I'm just wondering how it wound up gaining (01:01:56) so skewed relative to the market..

Yeah. So I joined the Automotive Parts Group, Scot, in 2009. And if I recall, the shift that occurred, and maybe we were a bit slow on the trigger, was our competitors dropped the prices, and certainly, our retail competitors dropped their prices specifically.

We ultimately regrouped, reacted and the business bounced right back, but when I joined in 2009, we were on our way out of that..

Got you. Okay. Very helpful, guys. Thanks a lot..

All right. Thank you..

Thanks, Scot..

And we'll take our next question from Bret Jordan with Jefferies..

Hey, good morning, guys..

Hey, Bret..

Congratulations to Tom and Paul also..

Thank you Bret..

You called out the energy market as another region that had some softness, and is that specifically Texas and Oklahoma? Does it spread any further around that range? And then maybe could you compare, you said maybe 400 basis points or 500 basis points spread between the north and the central in the Northeastern markets, versus a strong market comp, could you tell us maybe how the energy market comp compared to the average also?.

Yes. So when we look at our energy-related market, Bret, certainly, the first place everybody goes is Texas, Oklahoma and I get that. And certainly, that has been impacted, no doubt, and continues to be. And that's not just in Automotive, we see that in Industrial as well. But we also see it in the fracking regions.

So we see it in portions of the Mountain Division. We see it in Montana, Dakotas a bit. We see it in Pennsylvania where fracking was blowing and going here a couple of years ago.

And in addition, we also see it up in the oil sands in Canada, certainly Alberta has been a headwind for both our Automotive business in Canada as well as our Industrial business. So yes, not just Oklahoma and Texas, I wish it was.

And then – I'm sorry, Bret, your second question related to the Northern division gap between their numbers and our warmer weather?.

I was just going to ask you to compare your energy weakness to the rest of the market. You said that the Northern and Northeastern was 400 basis points or 500 basis points spread. I was wondering, if you could sort of give us a feeling for how bad the energy market was relative to average also..

It's actually – if we focus in on your opening comments there, Texas, Oklahoma are very similar. It's that 400-basis point or 500-basis point gap. I mentioned Mountain as one of our better performing divisions.

So we're able to overcome some of the shortfall in the Dakotas with some strong performance in the Denver area, for instance, that have made up for that..

Okay. And then a final question, you talked a couple of times about air conditioning or temperature-related products being up double-digits.

Are in-stock levels fine there, is demand exceeding supply, or is everything okay in the inventory?.

Yes. I will tell you, Bret, on the inventory comment, we are looking at our inventories across our entire business. We have a new predictive modeling engine that we've put into place, and we're looking at our inventories, and especially in some of the categories where we're challenged, and we are pumping up our inventories in some of those categories.

Our AC products, we have not had an issue at least that I'm aware of at this point. I think we're well-positioned as we race head long into the back half of the summer..

Okay. Great. Thank you..

All right. Thanks, Chris..

Thank you. We'll now take our final question from Brian Sponheimer with Gabelli..

Hi, Tom. Hi, Paul. Congratulations to you both..

Thank you, Brian..

Thank you, Brian..

Two real quick ones. Carol, another great job on working capital.

Was any portion of that attributable to changes in currency?.

No. Well, there was – our currency-neutral numbers were smaller this quarter than they have been in the past. But the bulk of that working capital improvement is just coming from accounts payable, and it's broadly all of the segments quite honestly. And then, really, where we saw a nice improvement this quarter was inventory.

We had about $85 million source of cash from our inventories this quarter, and that was – a lot of that came from Automotive. So we were pleased to see additional improvement coming out of inventory, and we feel like we'll have some more in the back half..

Okay. That's great and encouraging. And then just on getting my numbers right for the NAPA comps, company-owned stores were down 2% in the U.S.

Were they down international?.

They were actually up international..

Okay..

We had said they were up. So I think Canada was low single-digits, and Australia, New Zealand was mid single-digits..

And Brian just to clarify one point, you mentioned our company-owned stores, our company-owned stores same-store sales were flat in the quarter. Overall, our Automotive was down 2%, U.S. automotive..

That's why I asked. Okay. Great. Well, thank you very much and good luck in the coming months..

Thanks very much, Brian..

Thanks, Brian..

And we'll now take our follow-up question from Matthew Fassler with Goldman Sachs..

Hi. Sorry to prolong the call, but I just had felt the need to follow up on Brian's last question. If we think about that delta between the flat comp in the U.S.

and the total down 2%, is that lower sell in to the franchise stores or to the network, or some other factor driving that decline?.

No, you've got it. That's exactly it, Matt..

Any sense of their sell-through relative to that decline, or was it that tough to depot back an inventory because that's a bit of a different pace of business from what you're seeing at the company-owned stores?.

It is. Our independent owners are competing just fine in the marketplace. I don't think there's anything specific to our big independent owners. They did do a little bit of an inventory build towards the end of Q1, which may have had an impact.

But no, we don't see, we certainly don't see anything different happening on the independent side from our company-owned stores..

Understood. Thank you so much..

Thank you, Matt..

And that concludes the question-and-answer session. I would now like to turn the call back over to management for additional and closing remarks..

Well, we would like to thank everyone for participating in today's call, and we look forward to reporting out with our third quarter results. And once again, we like to thank Tom Gallagher for all of his leadership over the last 46 years, and wish Paul all the best. So thank you for joining us..

Thank you. That does conclude today's conference. Thank you for your participation..