Sidney G. Jones - Genuine Parts Co. Paul D. Donahue - Genuine Parts Co. Carol B. Yancey - Genuine Parts Co..

Christopher Michael Horvers - JPMorgan Securities LLC Matthew J. Fassler - Goldman Sachs & Co. Greg Melich - Evercore ISI Bret Jordan - Jefferies LLC Chris Bottiglieri - Wolfe Research LLC Brian C. Sponheimer - G.research LLC.

Good day everyone and welcome to the Genuine Parts Company Fourth 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 would 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 and full year 2016 conference call to discuss our earnings results and outlook for 2017. 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 today with comments from our President and CEO, Paul Donahue.

Paul?.

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. Earlier today, we released our fourth quarter and year end 2016 results. I'll make a few remarks on our overall performance, and then cover the highlights by business.

Carol Yancey, our Executive Vice President and Chief Financial Officer, will provide an update on our financial results and our guidance for 2017. After that, we'll open the call to your questions.

For some perspective on our performance, total sales in the fourth quarter were up 2.7% to $3.78 billion, while net income was $152.5 million and earnings per share was $1.02 compared to $1.07 in the fourth quarter of 2015.

For the year, total sales were $15.34 billion, which is up slightly, with net income at $687 million and earnings per share at $4.59 compared to $4.63 in 2015. These results represent the total sales and earnings across our Automotive, Industrial, Office and Electrical operations, which we'll discuss in more detail throughout this call.

We executed on many of our initiatives in 2016, and we believe we entered the new year as a stronger, more diversified global distributor. And while there is no question the U.S. sales environment was challenging throughout the year, our international operations in Canada, Mexico and Australasia, outperformed the stronger, more positive results.

In addition, we continue to build on the revenue and cost benefits derived from the growing scale associated with our portfolio of distribution operations, and we remain committed to further optimizing our enhanced buying power for indirect and direct spend.

Together with the shared talent, best practices, transportation, technology, systems and common distribution processes, we expect to derive improved efficiencies, productivity and lower overall cost structure, which would ultimately drive profitability and add value to our end customers.

During the past year, we utilized our strong balance sheet to further strengthen the company and generate cash flow. Although we cannot control the weather or the ongoing downturn in the energy sector, we remain focused on our long-term growth targets.

This included ongoing investment in our core business and targeted complementary acquisitions that contributed to our performance in 2016 and will continue to enhance our results as we move forward. We have a proven track record as a disciplined and successful acquirer, and acquisitions remain an important element of our growth strategy.

In 2016, we invested more than $400 million of capital for 19 new businesses, with estimated annual revenues of more than $600 million. Turning now to more details on our performance by six business segments. We'll begin with our Automotive operations, which were 53% of our total revenues in 2016.

For the fourth quarter ending December 31, our global Automotive sales were up 2.4%, improved from the 1.5% increase in the third quarter and our strongest quarterly performance of the year. Comparable sales were up approximately 1%, which has improved from the prior two quarters. For the full year, global Automotive sales were up 1.2%.

In the U.S., which represents over 70% of our total Automotive revenues, sales were up slightly in the fourth quarter and improved from the low single-digit declines we experienced in the second and third quarters. This includes essentially flat comparable sales, which we believe is the most meaningful metric in measuring our core U.S.

Automotive sales performance. This metric covers 100% of our revenue stream, and over time it will replace any reference to just our U.S. company-owned stores, which represent only one-third of our total U.S. Automotive sales and just over one-quarter of global Automotive sales.

With that said, as we make this transition, we also want to be consistent in our quarterly reporting for 2016. So for your reference, U.S. company-owned same-store sales increased 0.5%, and for the full year we're slightly positive. Now turning back to our total U.S.

result, the slight increase in fourth quarter sales was driven by a stronger December, and equally positive contributions from our commercial and retail platforms. Our commercial growth in the fourth quarter was driven by sales to our NAPA AutoCare Center customers, which grew to 17,200 members in 2016, an increase of nearly 500 members from 2015.

This growth area was offset by slight sales declines to our major accounts and fleet customers, which experienced weaker demand patterns throughout most of 2016.

We believe our DIY or retail sales growth in the fourth quarter was at least partially due to December's turn in the weather, which drove increased demand for cold weather parts, like batteries, starters, and heating and cooling products.

Our nationwide NAPA Rewards program has now grown to more than 3 million members, and we believe we are seeing the benefit of that as well. Lastly, as part of our retail impact initiative, we rolled out 166 updated retail concept stores in 2016, exceeding our goal of 150.

As a reminder, this initiative includes things like installing all-new interior layouts and graphics, extending store hours, and increasing training for our store associates. Although small on the overall scheme of total sales today, these updated stores continue to produce low double-digit retail sales growth.

This steady uptick in sales gives us confidence in the long-term positive benefits of this initiative and we are on plan to accelerate the project with an additional 300 stores in 2017. Now moving on to the trends we are seeing across the U.S. Automotive aftermarket. The fundamental drivers for our business remain sound.

The size of the vehicle fleet continues to grow. The average age of the fleet remains in excess of 11.5 years. Lower fuel prices remained favorable for the consumer, and miles driven continues to post substantial gains. Miles driven increased 4.3% in November, the most recent data available, and is up 3% for the 11 months.

November marked 33 consecutive months of increases in miles driven, with lower fuel prices continuing to drive this key metric. The national average price of gasoline was $2.34 in the fourth quarter and just $2.25 for the full year; positive indicators for further increases in miles driven, and ultimately driving additional parts purchases in 2017.

So now let's turn to our international Automotive businesses in Australasia, Canada and Mexico. Combined, these operations account for nearly 30% of our global Automotive revenues and, as we mentioned earlier, these operations outperformed with an 8% local currency increase in the fourth quarter and for the year.

In Australia and New Zealand, fourth quarter sales improved by low double digit, driven by solid comparable sales growth, as well as the benefit of acquisitions. In total, the Asia-Pac business expanded their footprint with 52 new stores in 2016, and we see opportunities for further expansion in the future.

We are also encouraged by the generally favorable economic conditions in this region, as well as solid fundamentals, such as a growing car park driven by record car sales, relatively low gas prices, and upward trends in miles driven. At NAPA Canada, sales held steady with low single-digit sales growth in the fourth quarter.

This team performed fairly well, given the tough conditions in 2016, and we anticipate a more favorable overall sales environment in 2017. Similar to the U.S. and Australasia, the total vehicle fleet is growing due to the record new vehicle sales and gas prices remaining at historically low levels.

These fundamentals bode well for NAPA Canada's continued growth prospects in 2017. Finally, in Mexico, our sales grew low double digits as well, as we expanded our NAPA Mexico footprint to 33 total stores during 2016.

We have plans to add additional stores in the periods ahead and are encouraged by the long-term growth prospects we see for NAPA in Mexico. We were pleased to close the year with improved Automotive sales results in the fourth quarter.

While we made progress in the U.S., we intend to build on these results and we are encouraged as we move ahead in 2017. Furthermore, we expect continued strong results in our international Automotive operations, which have performed well for us.

For 2017, we remain focused on expanding our business with our key commercial platforms, NAPA AutoCare and major accounts, executing on our retail strategy, and continuing to drive global expansion via new store openings, as well as targeted strategic acquisitions.

So now let's turn to our Industrial business, Motion Industries, which represents 30% of our total revenues in 2016. Industrial was up 4% in the fourth quarter, which has significantly improved from the 1% decrease in the third quarter and also our strongest quarterly performance since the fourth quarter of 2014.

In addition, comparable sales were up slightly, which has much improved from the decrease in comparable sales in each of the prior six quarters. For the full year, Motion sales are essentially unchanged from 2015.

We are encouraged by the early signs of strengthening market conditions for our Industrial business, as evidenced by the year-end uptick in indices, such as the Industrial Production and the PMI numbers.

In addition, the energy sector is making progress in its recovery, with the increase in rig counts translating into much improved sales to this sector.

Lastly, the level of exported goods continued to improve from the 6% to 8% declines we experienced in 2015 and the first half of 2016, an especially positive sign for our equipment and machinery customers in the OE sector. Each of these trends bodes well for the overall industrial marketplace.

Today the question is more of the sustainability, as these indicators have been quite choppy over the last several periods. That said, we entered 2017 encouraged by the prospects for stronger industrial sales. A review of our Motion business by industry segment, product category, and top customers further supports our fourth quarter improvement.

We saw an increase in the number of sectors generating positive sales gains, with food processing, aggregate and cement, pulp and paper, and oil and gas, all out performing.

It's worth pointing out that oil and gas improved from a double-digit decline in the third quarter to a double-digit increase in the sales in the fourth quarter, so solid improvement for this sector in just one quarter.

And we had more of our product categories and top 20 customers generating sales increases in the fourth quarter, so positive trends across the business, which we expect to build upon in the quarters ahead, both organically and via strategic acquisitions. Moving on now to EIS, our electrical distribution segment.

Sales for this group were basically flat in the fourth quarter and much improved relative to our results in the first three quarters of 2016. Total EIS sales were down 5% for the year and were 4% of the company's total revenue.

The market served by EIS closely follow those at Motion, so our fourth quarter included a sequential improvement in comparable sales, as well as the accretive benefit of the CPS acquisition in October. Looking ahead, we remain focused on our initiatives to drive meaningful sales growth at EIS over the long-term.

And finally, a few comments on the Office Products business, which represents 13% of the company's 2016 revenues. The Office group reported a 4% increase in sales for the fourth quarter, driven by a 12% sales contribution from acquisitions in the facilities, breakroom, and safety supply category. Total sales for the year were up 2%.

Excluding acquisitions, comparable sales were down in the fourth quarter due to the decline in sales through our independent reseller and mega account customers. Sales to these customers were partially offset by the increase in sales to e-tailers, as well as our growing FBS distribution channel.

On the product side, sales in the traditional office supplies, furniture and tech products, each posted sales decreases. Offsetting these declines was a substantial growth in our FBS category sales, which we have expanded to diversify our overall products and service offering.

FBS sales were 31% of our total office sales in the fourth quarter of 2016 versus just 20% in 2015.

As we move ahead to 2017, we remain focused on the continued expansion of our FBS business, including strategic acquisitions, as well as key initiatives to grow our overall share of wallet and market share across our product categories and sales channels. So that recaps our consolidated and business segment sales results.

And in summary, we're pleased that the fourth quarter was our strongest quarterly sales performance of the year, with improved comparable sales trends in the Automotive, Industrial and Electrical businesses, relative to the second and third quarters of 2016.

Generally, we believe that we operated in more favorable market conditions as the fourth quarter progressed and our teams were in position to capitalize and post improved results. In 2016, we executed on several of our initiatives to overcome the challenging sales environment and position the company for sustainable long-term growth.

A few of the highlights include, strong growth in our international Automotive operations, 19 strategic acquisitions that enhanced our product and services offering, effective asset management that further strengthen our balance sheet, key capital expenditures and IT investments, including digital, to support future growth and distribution efficiencies, and finally, return of capital to shareholders via the dividend and share repurchases.

So with that, I'll hand it over to Carol, who will provide a financial update and our outlook for 2017.

Carol?.

Thank you, Paul. We'll begin with a financial review of our fourth quarter income statement and the segment information. And then we'll review a few key balance sheet and other financial items, and finally I'll provide our outlook for 2017.

As Paul mentioned, total sales in the fourth quarter of $3.78 billion were up 2.7%, including a 1% decrease in comparable revenues. For the full year, total revenues of $15.34 billion were up slightly and also include a 1% decrease in comparable sales. Gross margin for the fourth quarter was 29.9%, up 17 basis points from the fourth quarter in 2015.

For the year, gross margin is 30%, up 16 basis points from 2015. This improvement was primarily driven by the combination of product mix shifts to higher margin categories and also the benefit of our higher margin acquisitions, which is partially offset by lower supplier incentives.

Overall, we were encouraged by our gross margin expansion in 2016 and, as we look ahead to 2017, we remain focused on further enhancing our gross margin for the long-term.

The pricing environment across our businesses remains relatively unchanged from the prior quarter, with deflation in the Automotive and Electrical segments, and just slight inflation in Industrial and Office.

Our supplier price changes in 2016 were negative 0.7% in Automotive, positive 0.4% in Industrial, positive 0.3% in Office, and negative 1.2% in Electrical. Turning to our SG&A, our total expenses for the fourth quarter were $895 million, up 7% from last year and 23.7% of sales.

For the year, total expenses of $3.5 billion were up 3% from 2015 and 23% of sales. The increase in operating expenses as a percent of sales primarily relates to the deleveraging of expenses across our businesses for most of the year.

We also increased our spending for planned IT investments and experienced cost increases in areas such as insurance, legal and professional. Lastly, we had increased cost in 2016 related to those 19 acquisitions, which we would expect to eliminate as we further integrate these businesses into our existing operations.

As we mentioned earlier, several of these acquisitions also operate with higher gross margin and higher operating cost model, so this impacts our SG&A comparison as well. To offset these increases, we've implemented enhanced cost control measures and we're focused on assessing the optimal cost structure for our businesses.

As we mentioned in our last call, our businesses are rationalizing their facilities to streamline their cost structure, where appropriate, which serves to reduce our distribution costs, as well as our head count and payroll related costs, which are significant expenses for us.

In 2016, we consolidated or closed several DCs and branches, and we expect to see these savings in our future results. We also see more opportunities for further consolidation ahead.

Our investments in technology, which we noted earlier were stepped up in 2016, are allowing us to do more and more of this type of rationalization, while also maintaining our excellent customer service standard.

So you can look for us to continue making progress towards a lower cost and highly effective distribution infrastructure across our businesses in 2017 and beyond. And looking at our results by segment, our Automotive revenue for the fourth quarter was $2 billion, up 2% from the prior year.

Our operating profit of $160 million is down 5%, with the operating margin for this group at 8% compared to 8.7% in the fourth quarter last year. And this is primarily due to the deleveraged expenses due to our U.S. sales results. Our Industrial sales were $1.2 billion in the quarter, a 4% increase from 2015.

Operating profit of $81 million is up a strong 12%, and their operating margin has improved to 7.0% compared to 6.5% last year. This segment benefited from a favorable product mix shift, as well as progress with their ongoing cost reductions and facility rationalization.

Our Office Products revenues were $476 million, up 4%, including the benefit of acquisitions, which contributed nearly 12% to sales.

Operating profit of $20 million is down 40% and their operating margin is 4.2% due to a variety of factors, including the decrease in organic sales, as well as rising costs associated with serving a growing number of sales channels, including e-tailers.

The Office team is working hard to drive significant cost savings in this business, which we realize needs to happen soon. The Electrical/Electronic group sales were $177 million in the quarter, which is flat from the prior year. Our operating profit of $15 million is down 4% and the margin for this group is a solid 8.7% compared to 9.1% last year.

This team has also been working fast to reduce their facilities and related costs, and we believe these savings will begin to flow through their results in 2017, so we're encouraged by that. So our total operating profit for the fourth quarter was 7.3% compared to 7.9% last year, and for the full year is 8% compared to 8.4% in 2015.

Not the margin expansion we look to achieve each year, but we recognize the need for improvement and we're focused on driving cost savings and improved margins across our businesses in the future. We had net interest expense of $4.8 million in the quarter and $19.5 million for the full year.

We currently expect net interest expense to increase slightly in 2017 in the range of $21 million to $22 million. Our total amortization expense of $12.5 million for the fourth quarter was $41 million for the full year. We estimate total amortization expense of approximately $43 million in 2017.

Our depreciation expense of $27 million for the quarter was $107 million for the full year. For 2017, we expect total depreciation to be in the range of $115 million to $125 million. So our total depreciation and amortization combined would be approximately $160 million to $170 million for 2017.

The other line, which primarily reflects our corporate expense, was $23 million for the quarter and $95 million for the full year. In 2017, we expect corporate expense to increase slightly to the $100 million to $110 million range. Our tax rate for the fourth quarter was approximately 35.5% compared to 38.4% last year.

For the full year, our tax rate was 36% compared to 37.2% in 2015. The reduction in the rate for the quarter as well the year is due to a higher mix of foreign earnings, which are taxed at lower rates, and also more favorable non-taxable retirement plan valuation adjustment. In 2017, we expect our income tax rate to be in the range of 36.0% to 36.5%.

Net income for the quarter of $152.5 million and EPS was $1.02 for the quarter, and for the full year our net income was $687 million and earnings per share of $4.59. Now I'll turn and discuss the balance sheet, which we further strengthened in the fourth quarter with effective working capital management and strong cash flows.

Our cash at December 31 was $243 million, a $31 million increase from 2015, even as we increased our spending for capital expenditures and acquisitions. Our cash position remains strong and it continues to support our growth initiatives across each of our distribution businesses.

Accounts receivable of $1.9 billion at December 31 is up 6% from the prior year, and this reflects our stronger sales in the month of December. Our inventory at the end of the quarter was $3.2 billion, which is up 7% from the prior year, primarily due to acquisitions.

Our teams effectively managed our inventory levels, and we'll continue to maintain this key investment at the appropriate levels as we move forward. Accounts payable at December 31 was $3.1 billion, up 9% from 2015, due to the ongoing benefit of improved payment terms and acquisitions, as well as other payables initiatives.

At December 31 of 2016, our AP to inventory ratio was 96% compared to 94% at December 31 of 2015. Our working capital of $1.7 billion at December 31 was a slight increase from the $1.6 billion in the prior year.

Effectively managing our working capital remains a high priority for the company and we expect to show continued improvement in the quarters ahead. Total debt of $875 million at December 31 compares to $625 million in total debt in 2015. The increase is primarily related to the 19 acquisitions we made during 2016.

Our total debt to capitalization is approximately 21%, and we're comfortable with our capital structure at this time. We continue to believe that our current structure provides the company with both the flexibility and the financial capacity necessary to take advantage of the growth opportunities that we may choose to pursue in the future.

So in summary, our balance sheet is in excellent condition and remains a key strength of the company. We generated strong cash flows in 2016, with cash from operations at $946 million and free cash flow, which deducts capital expenditures and dividends, at $399 million.

In 2017, we're planning for another strong year of cash flow and we would expect cash from operations to be in the $900 million to $1 billion range, and our free cash flow would be approximately $400 million. We remain committed to several ongoing priorities for the use of our cash, which we believe serve to maximize shareholder value.

These includes strategic acquisitions, which Paul covered earlier, share repurchases, the reinvestment in our businesses, as well as the dividend. We purchased 420,000 shares of stock in the fourth quarter and 2 million shares for the full year.

We've also purchased another 60,000 shares thus far in 2017, and today we have 4.2 million shares authorized and available for repurchase. We expect to remain active in the program in the periods ahead, as we believe our stock still represents an attractive investment and, combined with the dividend, provides the best return to our shareholders.

Capital expenditures were $74 million in the fourth quarter and $161 million for the full year. For 2017, we're planning for capital expenditures in the range of $145 million to $165 million.

Turning to the dividend, yesterday our board of directors approved a $2.70 per share annual dividend for 2017, which marks our 61st consecutive year of increased dividends paid to our shareholders. This is a 3% increase from the $2.63 per share paid in 2016, and it's approximately 57% of our 2016 earnings.

So this concludes our financial update for the fourth quarter and the full year, and in summary, we operated an overall challenging sales environment throughout most of the year. But our teams worked hard to overcome these challenges and we were in a position to take advantage of the improving marketing conditions in the fourth quarter.

Moving forward, in 2017, we're focused on driving greater efficiencies and cost savings, and this is a critical objective for us across our businesses and we look forward to reporting to you on our progress. Now turning to our guidance for 2017.

Based on our current performance and our growth plans for 2017, as well as the market conditions we see for the foreseeable future, we are establishing our full year 2017 guidance as follows.

Total sales would be in the plus 3% to plus 4% range, including the carryover benefit of our 2016 acquisitions, but no future acquisitions, and net of a slight headwind from currency translation. Comparable sales growth is projected to be plus 2% to plus 3%.

By business, we would expect Automotive and Industrial to be up 3% to up 4% in total sales growth, Office to be up 2% to up 3% sales growth, and Electrical to be up 1% to up 2% sales growth.

On the earnings side, we would expect our earnings per share to be in the range of $4.70 to $4.80 for 2017, which represents a low to mid-single-digit increase from the prior year. We would also add that this full year earnings growth will likely be weighted towards the third and fourth quarters of 2017.

So with that, we would just close by thanking all of our GPC associates for their continued hard work and commitment to the future growth of the company. And at this time, I'll turn it back over to Paul..

Thank you, Carol.

As we enter 2017, we remain committed to our global growth initiatives, which include the execution of fundamental initiatives to drive greater share of wallet with our existing customer base, an aggressive and disciplined acquisition strategy focused on both geographical as well as product line expansions, 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 remain confident that our ongoing focus in these four key areas, along with our initiatives to drive significant cost savings, will positively impact our future results and produce the steady and consistent growth we look to achieve each year.

So with that, we'll turn it back to Dana, and Carol and I will take your questions..

Thank you. And we'll go first to Chris Horvers with JPMorgan..

Thanks. Good morning..

Good morning..

Hey. Good morning, Chris..

So why don't you – a couple of questions. So you mentioned the cadence of sales are weighted to the back half.

Thinking about NAPA and Motion in particular, do you think they build up relatively evenly from the fourth quarter of this year into the back half or do you expect some bumps along the road and specifically around NAPA? I mean, obviously, you talked about a good December.

Weather hasn't been as great here in the first quarter, and then you've got the tax refunds that others have talked about. So trying to get some understanding on how to think about those two divisions..

Yeah, so two things, Chris. One is our comments about the back half of the year were more specific to the earnings. So we were more commenting on the plus 2% to plus 5% in earnings, we would expect to see more of that in the back half of the year. Then the second thing is, you spoke to (32:34) sales, Q1 last year was our strongest quarter.

So as you think about that, I would just take that into account, but then knowing that quarters two, three, and four were more similar. And then you specifically called out Industrial, and I would just mention with the Industrial, again, we saw great improvement in their sales in the fourth quarter.

So the guidance that we gave you for them, those sales increases would be pretty even across the quarters in 2017, unless we see something outside of our control in the economy that we're not anticipating..

And, Chris, just staying on Industrial for a minute. If you look at all the macro numbers, as we look at them, whether it be the ISM number, rig counts, we're seeing significant improvement. We've been through these cycles in the downturns in Industrial before.

And it does feel – and we see it in both Motion and our Electrical business, that these two businesses are now poised for much better growth in 2017..

Understood.

And just to clarify that, that 1Q strongest quarter, that was a reference to NAPA, correct?.

Yes..

Okay. So a segue to Motion. So as you've consolidated facilities, you've invested in technology, how should we think about the long-term margin potential of the business? After the crisis, you got back to an 8.1% operating margin. Before the crisis, the prior peak, I believe, was 8.4%.

So how do you think about what's the potential earnings power sort of in a peak state, and then the time to get back to that?.

Yeah. So a couple of things there is, you're right, they've closed over 50 branches and a couple of distribution centers. They've done a terrific job on the cost side. And as we have mentioned before, they had an impact of lower volume incentives as it related to this business.

So as this business picks up, you do see the margins coming back and we've seen some nice improvement in their core gross profit, and then they've got some acquisitions coming in. So I would just mention, we always have a stated goal of improvement each year in operating margins.

As far as the bounce back and the range, I mean, for all of our businesses, we still target the 8.5% to 9% for operating margin. I wouldn't necessarily expect that within 12 months, but I think you're going to see a nice bounce from them..

I guess asked another way, between the acquisitions and the costs that you've taken out of the business, did you create a structural potential that's higher than you've seen in prior peaks?.

I wouldn't say higher than what we've seen in prior peaks. I mean, remember, they're just at 7.3% right now. So, I mean, we've got a ways to go. But 8.5% would be a really nice margin for them..

Yeah, very nice. Understood. Thanks very much..

Thanks, Chris..

Yeah. Thank you..

We'll go next to Matt Fassler with Goldman Sachs..

Thanks a lot and good morning..

Good morning, Matt..

I'd like to get a little more. I know you've probably covered this in kind of a fragmented way as to why you'd expect the earnings to be second half weighted more so than the sales, if sales are fairly even.

Just talk about what it is moving the margins around that will work more to your benefit in the second half of the year?.

Well, really, if you look at from the cost structure, I mean, we've said it takes a bit of time for us to get those costs out, and look, we're not happy with where we ended up the year in fourth quarter. We've got more work to do in SG&A.

I mean, when we look at what we've done in terms of facility rationalization, when we look at our head count, when we look at our cost structure, freight, legal and professional, insurance, I mean, there is wage pressures. So we've just got to work hard at continuing to get those costs out, and that's not a quick thing that happens in just a quarter.

So that's why we're giving a little bit of the earnings to say it will probably be more back half loaded..

Great. And then the second question, obviously, tuck-in acquisitions and some bigger ones have been a pretty consistent part of the story over the past several years.

Can you just clarify, other than the dividend, what kind of free cash flow deployment you have baked into the guide?.

So, our – what we have assumed in our cash flow guidance that we gave was very similar to what we had this year. So we would have an amount set aside, if you will, for of course the dividend, the CapEx number we gave you, share repurchases of a similar amount, and then for acquisition.

So you can count on the 1% to 2%-ish on acquisitions in terms of revenue, so that's modeled into our cash flow guidance..

Matt, we were very active in 2016 with 19 acquisitions and $600 million in annualized revenue, quite a bit more active than we were in prior years. It's difficult to say, this is generally a long process, when we look at businesses and partnering with businesses.

So you just – it's hard to gauge, because you just never know when they're going to come along, when the right one is going to come along. But I will tell you that we will remain active, not only across all four of our businesses, but across all of our geographical regions as well..

Just to be clear, does that $4.70 to $4.80 include any buyback or any acquisition that is new buyback or new acquisition in 2017?.

No, it would just be the normal ranges that we've discussed. So we have not – the acquisitions that have already taken place in our numbers in 2016, and then roll into 2017 is what's contemplated in our guidance. But in the earnings guidance, it would just be a normal buyback. So that's usually around 1%, 1.5% of our shares..

Great. Thank you so much, guys..

Thank you, Matt..

Thank you..

We'll go next to Greg Melich with Evercore ISI..

Thanks. I – two questions. First, I'd start with the business and particularly the inflation/deflation trends and, Carol, you give us a nice update for last year on each of the businesses.

What are you thinking – or seeing this year when you plan your guidance for inflation or deflation by business?.

Well, so we just finished our fifth year of deflation on the automotive business. And I can't say we're planning for anything much different than that. In the other businesses, this was definitely much lighter than normal year. So we're not really planning for much.

But, look, there are so many unknowns out there in the economy right now and certainly with new legislation, some of the trade and tax issues that are being thrown about, we don't know what will come. But right now we're contemplating a similar number in 2017 for inflation, which would not be much..

Okay, great. And then second one is a little more big picture. If you just take your guidance this year, that sort of low to mid-single-digit EPS growth, I think now it's a couple of years where you've been at slower growth than the normal objective, which is high single digits.

And I guess the question is, has something changed in the business or what – do you think this is cyclical or secular or how should we think about that?.

Well, I think in the – one of the things that we've assumed for this year is core growth of 2% to 3%. So, as you know, in distribution business, core growth of 2% to 3% makes it very difficult for us to leverage or to have margin improvement. So that's why we're giving kind of an earnings number of plus 2% to plus 5%.

But certainly know that we're not happy there and we've got a lot of work we're doing. So I don't think it's anything more than just probably a lower level of sales growth, but we would still expect – and again, our long-term objectives are still to have a much higher core growth, and more like a 4% to 6% going forward..

Got it.

So if the top-line was mid-single-digit, you'd still see the earnings at the high single-digit?.

Yes..

Right..

Yes, we would..

Yeah, we haven't – Greg, we haven't come off our long-term objectives on the number side. But based on what we see today, we believe that the guidance that we provided is achievable, but I can also tell you that our team is focused on not only reaching that guidance, but absolutely exceeding it this year..

Great. Good luck. Thanks..

Thank you, Greg..

Thank you, Greg..

We'll go next to Bret Jordan with Jefferies..

Hi. Good morning, guys..

Hey, Bret..

Good morning..

A question on the fourth quarter. I guess, if we look regionally, I mean, obviously, some of those northern markets that were soft got better.

But could you talk maybe sort of southern, western and northern markets and maybe what the dispersion of results was, like what the spread between the strongest and the weakest markets were? And then maybe a little bit on product category strength, anything that was a particular outlier..

Yeah. Let me – I'll take the regional question first, Bret. First and foremost, I'm very pleased to tell you that every one of our regions we saw improved sales results in the fourth quarter and we also saw that gap narrow from what we had seen in Q3, and even a little bit into Q2 we saw that gap narrow by about 100 basis points.

So we're still – our strong regions are still in the South, but I can tell you we see improved results in the Midwest and we saw improved results in the Central part of the country as well. So that December blast of cold definitely helped. This January warm temps are not helping us a whole lot, but that is what it is.

Your second question, Bret, regarding product performance, our best performing categories, and probably not surprising, in Q4 were anything related to engine and electrical systems, so battery, starters, alternators, all performed well in Q4, filtration performed well.

Some of the – where we saw a little bit of downturn within some of our T&E, tool and equipment, especially on some of the large equipment and some of our paint categories were off just a bit..

Okay. Great.

Anything – I mean, I guess, as you think about the larger tool category, is that sort of a real shift in the consumer side there or any thoughts about that?.

No, I don't think so. Bret, I think it's timing. We have a robust tool and equipment business, and I think it's more one of timing. I don't think there is anything that changed dramatically in Q4 that would have impacted those sales. I think we'll see that rebound in Q1 going forward..

Okay. And then one question on your 2017 outlook for Auto growth of 3% to 4%, how does that stack up U.S.

versus international?.

We would be stronger on the international side than the U.S. That assumes core growth of 3% to 4% as well. We've got a little bit of a currency headwind built-in and a little bit of acquisitions.

But I think you're going to see similar, with a little stronger growth internationally, similar to what we had this year, little stronger internationally than the U.S. side..

Yeah, I would just reinforce Carol's comments, Bret. We continue to be very bullish on our international operations, and that's really all of them, Australia, New Zealand. We think we have expansion potential in those markets. Mexico, we will continue to expand our footprint there.

In Canada, despite a challenging environment out West, our team up there had a good year. Where we need to turn it up is here in the U.S. and absolutely our team is focused on getting that done this year..

Okay, great. And then one last question. On Motion, you called out oil and gas as having double-digit improvement in the fourth quarter.

Are we seeing some structural change you think in that space or just the bar got low enough that we had a good quarter? Are we calling a turn in oil and gas?.

I'm sorry?.

Are we calling a turn in the oil and gas?.

Well, I'm not sure I'm ready to go there. All I know is, where we were a year ago in the depth, Bret, where – we're double the price of a barrel of oil today than we were a year ago.

Rigs are coming back online and we're seeing a lift in that Southwest – we do a big business down in the Southwest and we're seeing a nice lift across that part of the country really in all of our businesses..

Okay, great. Thank you..

All right. Thank you, Bret..

Thanks, Bret..

We'll go next to Chris Bottiglieri with Wolfe Research..

Hi. Thanks for taking my question. Just one – first clerical one and a clarification. Do you have any currency movements and M&A activity for the non-Office segments? I don't think you gave it out this quarter. And then two, just wanted to confirm what your definition of a comp is for your non-Automotive.

Are you measuring it by branch, like maybe just talk high level what your comp number means for your business?.

Well, I'll take comp first, and then let Carol address your first question. So as we're identifying and defining comps, Chris, we're excluding new stores, new branches, or new stores, branches closed over the past 12 months, and we're also excluding acquisitions..

Got you. Okay..

And you specifically asked about FX in the quarter for the non-Automotive?.

Well, I mean, like I say, if you have – I think in the past you've given out the FX impacts and you've given out....

Yeah, there....

...the M&A impacts for each segment..

Yeah, there was virtually no FX impact in the quarter. It was just negligible. And the acquisition impact in the quarter, it was around 2% for Automotive, and it was around 4% for Industrial, and it was around 11% for Office, and then Electrical was 1%, so in total we were about 4%..

Okay, very helpful. And then just quick high-level question. Given the improving – I mean, you were extremely acquisitive in 2016, which was nice to see.

How do you think about the backlog right now that industrial sentiment's improving and probably just global sentiment around the markets right now, are you having a harder time kind of building the acquisition pipeline? Have you seen any changes in your conversations, anything to think that your pace of M&A might slow near term? Thank you..

Yeah. It's a great question, Chris. I will tell you that we have a robust acquisition pipeline in really across all four of our businesses and, as I think I've mentioned earlier, in all of our geographical regions.

I think what we're seeing is that in some parts of our business, when we do an acquisition, and I'd point out one that we did in Industrial with the acquisition of Braas in Q3 of last year, what that brings us is additional players in that space.

When they see that GPC is, one, that we're acquisitive, and two, that we're a good partner, we have more and more some of these folks coming to us as opposed to us tracking them down. So we feel good about our prospects for 2017. I mentioned earlier, we did 19 acquisitions last year.

I don't know that we'll be at that level of activity, but we certainly expect to be active again in 2017..

Okay, great. That's very helpful. Thanks for your time..

You're welcome. Thank you..

Thanks, Chris..

And we'll take our final question from Brian Sponheimer with Gabelli..

Hi, everyone. Thanks for fitting me in here..

You bet, Brian..

Good morning, Brian..

Just a question on NAPA. You're not the only one today who reported some margin degradation there and you're not getting the comp leverage, but I'm just curious about the pricing environment relative from a competitive standpoint and then also any pressure or pushback from the manufacturers themselves..

No, what we're seeing has been fairly typical of recent years, Brian. The pricing across the marketplace is rational and we're not seeing – and our supplier partners are partnering with us as they always have. We're not seeing any significant shifts there either..

Okay. All right. Terrific.

Just conversations with suppliers, if we were to have a situation where there is some sort of border adjustment tax that was really draconian for the industry by nature, any talks with them about potential onshoring or areas that you could speak to?.

Well, I would say it's probably premature. We have – it's early to have discussions with suppliers about what changes they are going to be making, what changes we're going to making. I think we're all taking a bit of wait and see to see what ultimately happens.

I think, as we think about this, what amount is going to be borne by the supplier, what amount is borne by us, what amount passes onto the customer, I think in theory, a lot of this is probably going to end up being passed onto the consumer and in terms of inflation and what we see in the cost of products. But we have not started.

Again, it's early to be having discussion with what changes may happen in the supply chain. But know that we will work with our suppliers and hopefully come up with the best solution that we can..

All right, terrific. Much appreciate it and good luck in 2017.

Thank you, Brian..

Thank you, Brian. I appreciate it..

And that does conclude today's question-and-answer session. I'd now like to turn the conference back over for any additional or closing remarks..

We want to thank you for your participation in the call today. As always, we thank you for your support of Genuine Parts Company and we look forward to reporting to you in Q1. Thank you..

Again, that does conclude today's presentation. We thank you for your participation..