Sid Jones – Senior Vice President, Investor Relations Paul Donahue – President and Chief Executive Officer Carol Yancey – Executive Vice President and Chief Financial Officer.

Christopher Horvers – JPMorgan Chris Bottiglieri – Wolfe Research Elizabeth Suzuki – Bank of America Merrill Lynch Seth Basham – Wedbush Securities Brian Sponheimer – Gabelli Matthew Fassler – Goldman Sachs David Kelly – Jefferies Scot Ciccarelli – RBC Capital Markets.

Good day and welcome to the Genuine Parts Company Second Quarter 2017 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.

[Operator Instructions] At this time, I would like to turn the conference over to Sid Jones, Senior Vice President, Investor Relations. Please go ahead Sir..

Good morning and thank you for joining us today for the Genuine Parts Company second quarter 2017 conference call to discuss our earnings results and current 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 the call. We'll begin this morning with comments from our President and CEO, Paul Donahue.

Paul?.

Thank you, Sid, and welcome to our second quarter 2017 conference call. We appreciate you taking the time to be with us this morning. Earlier today, we released our second quarter 2017 results. I will 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 current outlook for 2017. After that, we'll open up the call to your questions.

So to recap our second quarter performance, total sales were up 5% to a record setting $4.1 billion with net income coming in at $190 million and earnings per share increasing 1% to $1.29 compared to $1.28 in the second quarter last year.

These results represent the total sales and earnings across our global Automotive, Industrial, Office and Electrical operations, which we will discuss in more detail throughout this call. As a diversified global distributor, we continue to benefit from the balance of serving a broad range of markets.

The diversity in our operations combined with an ongoing strategy to drive both organic and acquisitive growth produced a second consecutive quarter of 5% total sales growth. Each of our four distribution businesses produced improved total sales with our strongest performances in the Industrial and Electrical segments.

Our teams are committed to generating sustainable sales growth, while also streamlining our cost structure to improve profitability. Thus far in 2017, we have acquired businesses with approximately $180 million in annual revenues and made a minority investment in a market leading industrial distributor in Australia.

We anticipate that each of these new businesses will positively contribute to our future results. Turning to organic growth, total comp sales were up 2% in the second quarter and improved result relative to the last several quarters. And we stand at plus 1% for the first six months of 2017.

And while improved from the first quarter, the low single digit comp sales growth continues to pressure our net margins. Looking ahead, we are confident that our sales and cost initiatives will drive stronger growth and improve margins over the long term.

Turning to our Automotive operations, Automotive remains our largest business segment representing 53% of our total revenues in the second quarter of 2017. For the quarter global Automotive sales were up 3.6% from last year and improved from the 3.4% increase in the first quarter.

Comp sales on a global basis were up approximately 1.5%, which has improved from a 0.5% in the first quarter. In our U.S. operations, which continued to represent just over 70% of our Automotive revenues, total sales were up 4% in the second quarter including a 1% increase in comp sales which has improved from the first quarter.

Across our customer segment sales to retail DIY customer outperformed our sales to commercial DIFM accounts although both groups improved sequentially. On the commercial side of the U.S. business, sales to our NAPA AutoCare Centers were up 1%, while sales to major accounts and fleet customers remained under pressure and were down low-single digits.

Byproduct group batteries, rotating electrical, brakes, chassis, filtration and heavy-duty sales outperformed while categories such as Ride Control, exhaust and heating and cooling remained soft. These sales trends co-relate to the warmer than average winter weather and cooler summer temps in May and June.

By geography our Northern divisions outperformed our Southern divisions although both showed positive sales growth. In the Northern division the Mountain, which experienced the harshest winter conditions in the country continued to outperform while the Northeast and the Midwest divisions also had solid results in the second quarter.

Our Western division, which experienced warmer than normal summer temps in the quarter outperformed the solid growth as well. On the retail ride of the U.S. business we continue to expand our NAPA Rewards Program, which has now grown to nearly five million members.

This loyalty program is available in-store and online and is an important initiative for us in the broader scope of our continued retail growth. We continue to experience higher retail tickets and more frequent visits from our NAPA Rewards members and we’ll continue to enhance this program into 2018.

We are also making progress with our retail impact initiative, which includes installing all new interior layouts and in-store graphics, extended store hours and increase training for our store associates. The 275 stores updated for this initiative through June continue to produce very high single-digit retail sales growth.

This program continues to exceed our expectations and we have a plans to have more than 500 of these retail impact stores completed by the end of 2017. This is an increase from our previous plan for 450 stores by year-end.

The retail-end customer has more choices today than ever before, so it's encouraging to see our initiatives driving growth in our retail segment. Our ongoing acquisitions will also positively contribute to our commercial and retail segments as we move forward.

Thus far in 2017 we have acquired three automotive store groups adding 25 new stores to our U.S. network. On June, first we announced the acquisition of Stone Truck Parts a significant regional distributor with four locations distributing heavy-duty truck parts and accessories in North Carolina.

Combined we expect these new businesses to further strengthen our Automotive and heavy-duty network and contribute approximately $100 million in annual revenues. Moving on to the trends we are seeing across the U.S. automotive aftermarket, the long-term fundamental drivers for our business remain sound.

The size of the vehicle fleet continues to grow, the average age of the fleet is up to a 11.7 years. Lower fuel prices remain favorable for the consumer and miles driven continue to post steady gains.

Total miles driven increased 1.2% in April, marking 38 consecutive months of increases in miles driven, and they are up 1.5% year-to-date with steady fuel prices continuing to drive this key metric. The national average price of gasoline was $2.46 in June, which was down slightly from last year.

As a result, we expect to see further increases in miles driven and, ultimately, driving additional parts purchases. Overall our U.S. Automotive sales benefited from the combination of acquisitions and positive comp sales growth for the first time since Q1 of 2016.

We believe this is an indication that our retail and commercial initiatives are gaining traction. And we plan to build on this momentum in the second half of the year. So now let's turn to our International Automotive businesses in Australasia, Canada and Mexico.

These operations account for nearly 30% of our global Automotive revenues and as a group delivered a 4% total sales increase including a 3% comp sales increase in local currency. In Australia and New Zealand, second quarter sales were up low to mid-single digits, driven by low-single digits comp sales growth and the ongoing benefit of acquisitions.

The Asia Pac business operated with 29 additional stores in the second quarter of 2017 relative to the same period last year. And that now brings our total store footprint in Australia and New Zealand to 555 locations with further store expansion opportunities in the future.

In addition, the underlying fundamentals for the Australasian aftermarket remains solid with a growing car part driven by record car sales, relatively low gas prices and upward trends in miles driven. At NAPA Canada, both total sales and comp sales improved in the mid-single digit range, which is consistent with the first quarter results.

Our Canadian team is performing at a high level and they've laid out an effective strategy to expand sales across Canada. In addition the industry is benefiting from a more favorable sales climate driven by an improving overall economy and positive industry fundamentals.

These factors bode well for the future of the Canadian automotive aftermarket and we are optimistic for continued outsized growth at NAPA Canada over the second half of the year. And finally, in Mexico, our sales grew by low double digits for the third consecutive quarter as we continue to expand our NAPA Mexico footprint.

Today we have 36 total stores with plans to accelerate additional store openings in the quarters ahead. So that wraps up our Automotive overview. We're pleased to report a 4% increase in our U.S. business despite continued industry wide headwinds.

Going forward we'll continue to focus on accelerating our comp sales growth while continuing to search for opportunistic bolt-on acquisitions. Our international automotive business continues to post strong results as we expand our comp sales and add new locations across all of our markets. So let's turn to our industrial business.

Motion Industries representing 30% of our second quarter total revenues and this group was up 7.3% in the quarter. This has an improved result from the 6.9% increase in the first quarter and includes a 5% comp sales increase up from a 3% comp increase last quarter.

We are encouraged by the continued strength in our industrial sales thus far in 2017, which reflects both improving organic growth as well as the benefit of acquisitions.

In addition the industry is benefiting from favorable market conditions as broad based industrial indicators such as industrial production and the purchasing managers index as well as rig count and the level of exported goods all continue to trend positively.

These factors drive greater customer demand across the diverse markets we serve and we expect to see this continue over the balance of the year. A review of our Motion business by industry sector, product category and top customers supports the broad nature of our second quarter growth as well.

Of our Top 12 industries nine sectors showed solid sales gains with the others down just slightly. Among the top performers would be sectors such as iron and steel, lumber and wood, equipment rental and leasing, big improvements in oil and gas and equipment and machinery.

Along our primary product categories each generated positive sales growth for the second consecutive quarter and likewise our Top 20 customers outperformed with their second consecutive quarter of high-single digit growth.

So from a market product and customer perspective, Industrial’s solid second quarter and six month performance was very broad based. Finally acquisitions also remain an important element of our growth strategy.

You may recall back in April we purchased 35% of the Inenco group one of Australasia’s leading industrial distributors of bearings, power transmission, fasteners and seals. And Inenco is currently outperforming our expectation of generating annual revenues of more than $450 million in Australian dollars.

Inenco was an attractive long-term investment for us, as it offers us the opportunity to build on our presence in Australasia as well as the potential for synergies with their existing industrial business in North America as well as our Australasian automotive operations.

And in the same vein as our Asia Pac acquisition a few years back, we expect to eventually acquire the remaining stake in Inenco, which we believe will add significant value to our overall industrial operations. We remain excited about our investment in Inenco and we congratulate the team for their record sales performance in the month of June.

On August 01, we'll further expand our industrial automation footprint with the acquisition of Numatic Engineering. Numatic brings over 60 years of experience in Numatic and electrical automation and will add approximately $20 million in annual revenues.

This new business in addition to the Braas acquisition announced last September strengthens our distribution capabilities in the fast growing robotics, motion control and industrial network segment of the industry. We are pleased to welcome the Numatic team to the GPC family of companies.

In summary we are encouraged by the first half performance in our Industrial business and remain optimistic for continued growth in the quarters ahead. Turning now to EIS, our electrical distribution segment; we took 5% of the Company's total second quarter revenues.

Sales for this group, which were up 11% in the second quarter due primarily to the Empire Wire and Supply acquisition on April 01. Empire further expands the EIS’s wire and cable business and in particular it strengthens our overall capabilities to serve the industrial, robotic and automation markets.

This new business performed well in the quarter as did the overall wire and cable segment. EIS’s core electrical business is also producing steady increases and overall we expect to see solid total sales growth at EIS over the balance of the year.

So we'll wrap up with a few comments on our Office Products business which was 12% of the Company's second quarter revenue. The Office Products group reported a 5% increase in sales, driven by an 8% sales contribution from acquisitions in their facilities breakroom and safety supplies category.

Excluding the acquisitions comp sales were down approximately 3% in the second quarter with the continued decline in demand for traditional Office Supplies pressuring sales across all of our channels.

Our facilities and breakroom category however continues to produce strong sales increases across all channels and we expect to see further growth in the quarters ahead. On the product side sales in the traditional office supplies furniture and tech products categories each posted sales decline while the FBS category posted solid sales results.

These results are consistent with recent sales trends and highlight the significant of our efforts to expand SPR’s product and services offering in the large and growing facilities and breakroom market. This is a key element of our growth strategy and today FBS sales represent 36% of total sales for the Office segment, which is up from 25% last year.

Looking ahead we have plans for the continued expansion of the FBS business as well as key initiatives to grow our overall share of wallet and market share across our other product categories and sales channels.

So that recaps our consolidated and business segment sales results and the initiatives underway to generate sustainable sales growth over the long-term. Overall we produced our second consecutive quarter of 5% sales growth driven by the combination of both organic and acquisitive growth and total sales increases in each of our four business segments.

We will look to build on these results over the second half of the year. So with that I'll hand it over to Carol who will provide a financial update and our updated outlook for the year. Carol..

Thank you, Paul, and we'll begin with a review of our key financial information and then we'll provide more information on our updated outlook for 2017. Total sales in the second quarter set a new record our us of $4.1 billion, up 5% including a 2% increase in comparable revenues.

Our gross margin for the quarter was 30.2% compared to 29.9% in the second quarter last year. The 30 basis point improvement is the result of our ongoing initiatives, to enhance gross margins across our businesses as well as higher supplier incentives.

In addition, we continue to benefit from those acquisitions with higher gross margin and higher expense models as some of those have not anniversaried in this quarter. We're encouraged by our progress in improving our gross margin, and we look to produce an approximate 30% gross margin over the balance of the year.

We saw somewhat of an inflationary pricing environment across our businesses in the second quarter with each of our business segments showing at least slight inflation through the first six months of the year.

Our cumulative supplier price changes through June stand at one tenth of 1% for automotive positive, up 1.6% for Industrial, up 0.6% for Office and up 1.6% for Electrical. Turning to our at SG&A our total expenses for the second quarter were $943 million up 9% from last year and at 23% of sales.

Rising labor, freight and delivery costs and addition to our ongoing spending for planned technology and digital investments, which are very critical to our long-term growth strategies are driving the increase in our operating expenses. And as mentioned before we've yet to anniversary certain higher gross margin and higher expense acquisitions.

Finally we also continue to experience the deleveraging of expenses associated with the slow organic sales growth environment in several of our businesses. To offset these expense headwinds we remain focused on initiatives to streamline our cost structure while achieving a lower cost, highly effective distribution infrastructure for our businesses.

As we look ahead to the balance of the year, we expect to recognize some of these savings and improve on our year-over-year expense growth rate. Now, let's discuss the results by segment.

Our Automotive revenue for the second quarter was $2.2 billion up 4% for the prior year and operating profit at $207 million is up 2% with an operating margin of 9.6%, which is just shy of the 9.7% margin in the second quarter last year.

We attribute this slight decline in margin to the deleveraging of expenses associated with our 1.5% comparable sales growth. Our Industrial sales of $1.3 billion in the quarter, were up 7% from the prior year and their operating profit of $96 million is up a solid 9%.

And their operating margin improved to 7.7% compared to 7.6% last year as this segment continues to benefit from stronger overall sales growth, favorable product mix shift and the positive impact of cost savings.

Our Office Products revenues were $504 million up 5% from last year, operating profit of $30 million is down 8% and their operating margin held steady with the first quarter at 6.0%. The margin for Office remains under pressure, due to the decrease in organic sales and the related deleveraging of expenses.

Our teams are addressing these concerns with several pricing and cost initiatives to drive more sales and significant savings in this business in the quarters ahead. The electrical electronic group sales were $205 million in the quarter up 11% from the prior year. Operating profit at $15.5 million is down 3% and the margin for this group is 7.6%.

We're encouraged by the overall sales growth again this quarter, although organic sales remained challenged. We continue to be pressured by customer and product mix shift, which are offsetting the positive impact of the cost saving initiatives in this business.

So our total operating profit in the second quarter, increased by 3% and our operating margin was 8.5% compared to 8.7% last year. This has slightly improved from the first quarter on a year-over-year basis and our team enters the second half of the year focused on building on our positive momentum and improving the margins across our businesses.

We had a net interest expense of $6.9 million in the quarter, which is up $2.2 million from last year due to the increase in debt levels primarily associated with acquisition and certain variable interest rates. With these factors in mind, we’re updating our net interest expense to be in the range of $25 million to $26 million for the year.

Total amortization expense of $11.4 million for the second quarter was up from $9.2 million last year due to acquisition. We continue to expect our full year amortization to be approximately $45 million. Depreciation expense was $27.8 million for the quarter up slightly from last year.

And for the full year we expect total depreciation to be in the range of $110 million to $120 million. On a combined basis, we would expect depreciation and amortization to be approximately $155 million to $165 million.

The other line, which primarily reflects our corporate expense was $33.8 million for the quarter up from $26.5 million last year due mainly to higher overall costs in areas such as personnel, legal and professional, our digital initiatives as well as IT. For 2017, we expect corporate expense to be in the range of $105 million to $115 million.

Our tax rate for the second quarter was 36.1% compared to 36.2% last year. This slight reduction in the quarterly rate as well as our lower year-to-date tax rate is primarily due to a higher mix of foreign earnings, which are taxed at a lower rates.

In addition their recently adopted change in accounting for stock based compensation has also positively impacted our 2017 rates. For the full-year we continue to expect our income tax rate to range from 35.5% to 36.0%. Net income for the quarter of a $190 million and EPS was a $1.29 up 1%.

So now let's turn our discussion to the balance sheet, which remains strong and in excellent condition. Accounts receivable of $2.2 billion is up 7% from the prior year and we remain pleased with the quality of our receivables.

Our inventory at quarter-end was $3.3 billion, which is consistent with last quarter's investment and up 9% from June of last year. Before acquisitions our inventory is up 6%, which is just slightly greater than the sales. We’ll continue to maintain this key investment at the appropriate levels as we move forward.

Accounts payable is $3.3 billion at June 30 and is up 7% from the prior year due to the increased level of purchases, the ongoing benefit of improved payment terms with our suppliers, as well as acquisitions. At June 30 our AP to inventory ratio was 99%, which compares to 96% at December 31.

Our working capital of $1.5 billion at June 30 is down from last quarter and year-end but it is up slightly from June of last year. So overall, we continue to maintain a relatively steady level of working capital from quarter-to-quarter.

Our total debt of $1.1 billion at June 30, compares to $1.025 billion at March 31 and $775 million in June of last year. Our total debt to capitalization is approximately 25.5% and we remain comfortable with our capital structure at this time.

Our average cost of debt is a low 2.49% and we continue to believe that our current structure provides the company with both the flexibility and the financial capacity necessary to take advantage of future growth opportunities. In summary, our balance sheet remains the key strength of the Company.

Thus far in 2017, we generated cash from operations of $345 million and we expect to produce stronger cash flows over the balance of the year. We're forecasting cash from operations of approximately $900 million to $950 million with free cash flow which excludes capital expenditure and the dividends to be in the $350 million to $400 million range.

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

For the first six months of the year, we purchased 1.6 million shares of our stock, which includes 600,000 shares purchased in the second quarter.

Today we have 2.6 million shares authorized and available for repurchase while we have no set pattern for these repurchases, we expect to remain active in the program in the periods ahead as 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 $29 million in the second quarter and $54 million for the six months, which is up slightly from last year. For the year, we're now planning for capital expenditures in the range of $140 million to $150 million.

And lastly our 2017 annual dividend of $2.70 per share marks our 61st consecutive year of increased dividend paid to our shareholders. This represents approximately 57% of our prior year earnings and currently reflects an over 3% dividend yield. So this concludes our financial update for the second quarter of 2017.

And in summary our overall top line growth is encouraging and we see further opportunities to enhance our gross margins and to streamline the cost structure across our businesses. These areas continue to have our full attention and we look forward to reporting to you on our progress.

Now turning to our guidance for 2017 based on our current performance, our growth plans and the market conditions we see for the foreseeable future, we're updating our full year 2017 guidance as follows. We continue to expect total sales to be in the plus 3% to plus 4% range, which is unchanged from our initial guidance.

This outlook includes the benefit of our year-to-date acquisitions, as well as the Numatic acquisition promotion that Paul discussed that is effective August 01, but assumes no other future acquisitions. We also continue to expect only a slight headwind from currency translation for the full year.

By business, we're maintaining our sales outlook of plus 3% to plus 4% growth for the automotive segment. Plus 2% to plus 3% growth for the Office segment and plus 7% to plus 8% growth for the Electrical segment. In the Industrial segment, we're raising our sales outlook to plus 4% to plus 5% from our previous guidance of plus 3% to plus 4%.

On the earnings side, we are revising our full year outlook for earnings per share to $4.70 to $4.75 from our previous guidance of $4.75 to $4.85.

We had anticipated being further along with our cost saving initiatives, at this point in the year and with EPS up 1% for the six months, we've updated our EPS outlook to reflect a 4% to 6% improvement in the second half earnings. And a full year increase over 2016 EPS of 2.5% to 3.5%.

So we continue to plan for improved profitability over the balance of the year and this will primarily come from the cost savings we mentioned before. These savings reflect the headcount reductions, and the facility rationalization and a broad range of productivity projects that are underway across our businesses.

With that said we would close by thanking all of our GPC associates for their continued hard work day in and day out. Our people are our greatest asset, and we’re excited about the future growth prospects and the long-term success of the company. Paul I’ll turn it back over to you..

Thank you Carol. We move forward with the goal of building on our six-month performance and remain focused on further strengthening the organic sales in our businesses, as well as maximizing the benefits of our recent acquisitions.

We are also committed to executing on our plans to enhance gross margins and remove unproductive costs from our operations. As Carol mentioned, we have several initiatives in process to reduce expenses and improve our overall cost structure and we expect to recognize some of these savings over the balance of the year.

Additionally, we believe our continued efforts in each of these areas along with a strong balance sheet, solid cash flows, and effective capital allocation will positively contribute to stronger long-term growth for the company and serve to maximize shareholder value.

So with that we'll turn the call back over to Alisia, and Carol and I will be happy to take your questions..

Thank you Sir. [Operator Instructions] We will go first to Christopher Horvers of JPMorgan..

Thanks good morning everybody..

Hey good morning Chris..

Good morning..

Why don’t you focus first on the U.S. NAPA division, on the heels of the O'Reilly pre-announcement, a couple of weeks ago, I think that the plus one in the U.S. probably comes off, certainly a bit better and it looks like you've actually closed the gap to O'Reilly in that regard.

So can you talk about, they talked about a stronger April and then you know it sounded like May and June being disappointing. Can you talk about the monthly cadence in the U.S. NAPA division..

Yeah, we were pretty consistent across the U.S. Chris. We were essentially up for each month, April, May and June. Globally, it was a little shift. Globally, we saw a little bit of a slide in April. But across the U.S., it was consistent across each month. .

And then if you look at the, it was a lot easier comparison. And as you mentioned, it's been a cool summer so far, at least up until very recently. So we've been waiting to get further away from winter.

Does the cooler summer sort of push out the rebound off the two consecutive warm winters? And then related to that, as you look forward, the compares do step up again in the fourth quarter.

So are we sort of running out at two year? Or do you expect the business to continue to rebound into the end of the year?.

Well..

In U.S.

NAPA?.

Yeah, let me take the first part of the question. I may ask you to repeat the second part of that, Chris. But look, if you look across our business, what's encouraging for us is that our Northern divisions, so we're talking about the Northeast, the Midwest, the Mountain divisions, are performing well.

And I think I called out Mountain last quarter as our top performer. They just happen to have the most normalized winter in that part of the country. Where we're a little bit softer than we are in the Northern divisions is in the Southern divisions.

And so Southeast, Southwest, Atlantic are a little bit softer, and there's a gap between the top performers and the others of about 300 basis points. We think that will close as the year progresses. The South has been, I think, impacted a bit by the cooler temps. And certainly, we have had a ton of precipitation down here in the South.

So we think that, that gap will close a bit as we move through the course of the year..

And some have mentioned some pressure around the Hispanic customer. In fact, the Target CEO was quoted just this week talking about that.

Are you seeing areas, Texas and along the border of Mexico, softer trends in those areas? And is that contributing to the softness in the South?.

Well, I'd answer that a couple of ways, Chris. As you heard me say, our DIY business was good in the quarter. And if you think about the consumer that you're referencing, I think that would probably show up a bit in our DIY retail numbers. So we're quite pleased with our retail business.

As a matter of fact, we had a very good June in our retail business. That said, I would tell you that our Southwest is down a bit or softer than our Northern Division. Whether I can attribute that to one specific demographic, it's hard to say. There's a lot of different factors at work. .

Okay and just last question, I promise. So as it relates to the cooler summer, are you concerned that, that pushes out the recovery in the U.S.

NAPA business?.

No, you saw our guidance for Automotive, Chris, and we've taken all those factors into account. And we're expecting 3% to 4% overall. And look, I think the good news for all of us, especially in the Midwest, is it's getting hot, and it's getting hot down here in the South. And we'll see business start to turn almost immediate as the temps go up.

So we're feeling pretty good about the second half of the year, as I think was illustrated in our guidance. .

Thanks very much Paul..

You are welcome, good to talk to you Chris..

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

Hi, and thank you for taking the question. A couple. One, I guess I just need to clarify I mean, so the comp gap did decelerate a little bit, I mean, sort of the tier comp stack. And then you're getting a lot of self-help initiatives and a little bit of inflation. So maybe I'll ask the question a little bit differently.

What do you think the overall market has been doing? Do you think it is, are you nearing at the peers? Or do you think the market itself is a little bit weaker?.

Well I think, Chris, I have to mention it's a good question. I think that our business, and I can't speak for our public company peers. We'll hear their numbers here shortly. But I think it's an accurate assessment that the automotive aftermarket has slowed somewhat over the past number of quarters, and there's a lot of reasons that we all talk about.

And certainly, back-to-back mild winters has been a big factor. You know that. I think one of you guys have referenced it as an air pocket that stepped down in that 7 to 9 year age group of vehicles. So that sweet spot has been a little bit of a headwind, I think, for us and in the demand for repairs.

And then if you look at some of the tailwinds that we've had in the past, and whether that be miles driven, cheaper gasoline, those tailwinds are still there, but they're lessening than what I think we saw perhaps a year or two ago. So those would be the reasons we'd point to for just a bit of slower growth.

But again, we're cautiously optimistic about the second half of the year and as we distance ourselves from these mild winters. .

Gotcha and then as you’re seeing really strong performance in the DIY stores that you're doing a lot of self-help out and you're kind of closing the gap to peers.

But can you maybe talk about the stores that are just you're chugging along with your kind of normal procedure? How are those stores performing on the DIY side?.

Well I’d love to tell you they're performing as well as the stores that we have gone in and gone through our total refurb. But what we've done Chris, is our level of refurbs, if you will, in our stores varies. So it varies from a total overhaul of resetting fixtures to painting the stores to increasing hours to bringing in additional people.

That would be on a major overhaul. And to a lesser degree, we're trying to impact all of our stores by increasing our store hours and adding more retail-focused personnel. I mentioned our strong performance in June in our retail business. And in June, we saw both transaction and basket size go up for the first time in a couple of quarters.

We're investing in business development managers in our retail stores, which I think are having a very positive impact on our business. So overall, we're positive about our retail business. And we're positive despite, I think, a bit of a hysteria out there around what the online players are going to do to DIY..

Got you. Yeah, that's helpful. And then just one final question on Industrial. Yes, extremely strong organic revenue growth. I wonder if you can give us a sense for why you think the incremental margins came a little bit lighter than maybe than I would have expected.

Is it your investments, is that bifurcated between gross margin, SG&A, deleverage, like kind of what you're seeing in that segment and kind of your outlook for your outlook for margins in that segment?.

Look we did little bit lighter margin improvement in the quarter, but I would look to what we've done for the six months. And you've got a 20 basis point improvement in margin for the six months, sales being up 7%, profits up 10%. That is indicative of their gross margin initiatives, which they have been working on for two plus years.

Their core gross profit has been up for a number of quarters. We also had higher supplier incentives, which again is tied to the improved growth and the increase in purchases. The cost reductions that they made are actually, we’re seeing improvement in their SG&A. But for us to move the needle, it takes some time.

And again, showing through six months 20 basis point improvement is a nice job by that team. So we're going to expect that to continue as we move forward. But having said that, the guidance is really more of a factor in the lower comparable sales and the leverage issues that are in the other segments, not Industrial. .

Got you. That's helpful.

So it sounds like the margins have held up pretty well in that segment? Is that the takeaway there?.

Yes they have..

Very great, thank you very much for your time I appreciate it. .

Thank you Chris..

Thank you Chris..

We'll go next to Elizabeth Suzuki of Bank of America Merrill Lynch. .

Hi guys..

Hi Elizabeth..

Good morning, can you just remind us what percentage of the Auto business is DIY versus to do-it-for-me? And I know you mentioned that DIY outperformed the commercial business, but just curious how much of the Auto business is currently being sold to DIY customers..

So it’s good question Elizabeth. And it varies by country. But our U.S. NAPA business, our DIFM commercial business, which is our dominant part of our business, is 75 plus percent, which leaves our DIY business at 25% approximately of the overall. It's different in Australasia, where we have a more stronger retail presence. And Canada is very similar.

Mexico is very similar as well. .

Great thanks that is really helpful and within the Auto segment, you mentioned that pricing was up about a 0.10%.

And which product categories within that are showing the most strength? And which are under some pressure? And how would you expect pricing overall to trend going forward for the rest of the year?.

Well look we are coming off of five years of either deflation or no inflation in Automotive. So the fact that we ticked positive even though it was 10 basis points, we're encouraged to see that. As far as what we're estimating for the full year, it could be 0.5 point. I'm not sure it'll be a full point.

But the categories we're probably seeing it in would be commodities. But again, we're not modeling for a significant uptick in that inflation between now and the end of the year. It's pretty modest, but it was encouraging to see a bit of improvement this quarter. .

Yes, definitely.

And just one more quick one on Auto, is that if used vehicle pricing really starts to come under some significant pressure as supply goes up, do you think that, that would impact the auto aftermarket at all? I mean, does it make the consumer any more likely to scrap their older vehicle than fix it up? Or is the average consumer just not even really looking at that?.

Well, Elizabeth I don't think that's going to be a significant factor for us going forward. I think the – everything I read, some of your peers that follow the dealer segment, it appears the used vehicle market is pretty strong right now. That's always a good thing for us. So we don't expect to see any significant shift going forward..

Alright great thank you..

You are welcome..

We'll go next to Seth Basham of Wedbush Securities. .

Thanks a lot and good morning..

Hi, good morning Seth..

Good morning..

My questions would fit in the Auto business.

If you could maybe fare it out for us a little bit the difference in growth trajectory for the wholesale business versus the company-owned stores on the do-it-for-me inside?.

I am sorry Seth can you repeat that..

The wholesale business independents relative to the strength to growth at the company-owned stores, specifically on the do-it-for-me side of the equation, if you can get to that level of granularity..

The total sales that we're reporting, we're talking about for the quarter only. Our comps were up 1% overall, and that's all of our business. So that's independents, that's company stores, that's inclusive of all of our stores.

And as we saw – as I think I mentioned earlier, our trend throughout the quarter was very steady, and we were basically plus 4% across the way. DIY, I mentioned, was a bit stronger. But both, I think the other important takeaway, Seth, is that both DIFM and DIY improved sequentially quarter-over-quarter.

I am not sure I answered your questions, Seth, but….

Yeah, that’s helpful but I was just wondering if the wholesale business grew any more or less than the company-owned stores business?.

We would say that we had similar results in both the company-owned stores and the independent stores. And again, pointing to the sequential improvement from Q1 to Q2. So it would be similar. .

Got it helpful. And then secondly, just in terms of what's happening with fleet and major accounts.

Any more color on what you think the drivers are of that persistent weakness?.

Yeah, I think look think our major account business, Seth, which is a significant part of our overall DIFM business, I think our business continues to track with our customers' business. I don't believe we're losing market share. Matter of fact, I would contend that perhaps we've gained a bit of market share overall.

But I believe our numbers overall reflect their business. The fleet business, again, sequentially improved. And I would tell you also, in our major account business, we saw sequential improvement quarter-over-quarter. We also saw sequential improvement in our fleet business quarter-over-quarter.

The fleet business, Seth, I think that we're going to continue to see that improve. If I look across – I mean, you follow the Motion business and how strong our Industrial business is as a whole. Ultimately, and we've always said this, is that fleet tends to lag a bit behind the market.

So we're still confident that we'll continue to see sequential improvement in the fleet business going forward. .

Thank you very much..

You’re welcome Seth..

Thanks Seth..

We'll go next to Brian Sponheimer of Gabelli..

Hi good morning everyone..

Hi Brian..

Hi Brian..

Want to talk about Motion. You've handled the NAPA business very well. I was a little surprised, given the comp store increase, to see margins expand just to 10 bps.

So can you talk a little bit about if there are any friction costs there that would lead to maybe a little bit less leverage than you would normally expect?.

I can’t say it is any one thing, Brian. I think what – look with that group, they are being very cautious on when they're adding back expenses and the payroll that we took out, and we think about the facilities that we rationalized. And as businesses come back, they've had to weigh that in, in bringing back in some of those costs.

Some of the gross margin improvements, and you know 50% of that business is with major accounts, national accounts, there continues to be a significant amount of competitive pricing pressures. In some of those contracts, you're under pricing agreements, and so you may not be able to pass through. There may be some kind of lag there.

So I can't say it's anything in particular. I mean, sometimes, you get subtle changes between the quarters. But still, we like what we're seeing with the 20 basis points through six months. I mean, one thing to remember, too, is their core growth – I mean, the core growth is a function, it's lower than what the total number is.

So you got some acquisition costs that are still weighing in there. The other thing I'll just mention, we've kept their inventory down through the six months. And with that, we're not ramping up the level of incentives as quickly as you might expect. So we're trying to work hard on focusing on the balance sheet as well..

Hey Brian, I would just add to Carol's comments. First off, thank you for the question on our Industrial business. It gives us an opportunity to brag a bit on our Motion team. We've been, in past quarters, a little bit cautious to go out and say we think that, that business is now coming back full speed.

But what we're seeing and continue to see is very encouraging. When we look at products like industrial hose and pneumatics that were up double digits in the quarter industrial supplies, hydraulic hose, seals, accessories up high single digits in the quarter, it's very, very encouraging for us.

And then you look across the various metrics, whether it be the PMI number in June, which was 57.8 or capacity utilization, industrial production, all with arrows going up. Rigs count, our rigs count was up 500 over a year ago, and it's our highest in two years.

So a lot of things to be bullish on and optimistic when you look at our Industrial business..

And just, Carol, one on AP-to-inventory. Slight slowdown in the three months versus a year ago.

If you're looking apples-to- apples kind of on a comp store basis, I guess how much of the deceleration would have been from the acquisitions as opposed to just maybe a little bit larger inventory growth than you're expecting?.

The issues on the inventory, the comments on the inventory, I would say, and we mentioned that inventory was up 6% without acquisitions versus the 9%, and what you're speaking to is a little bit of change there. I would say certainly, a portion of it is acquisitions and a fair portion of it.

And then the other increases are probably more coming from – on the Automotive side. And again, looking at – a lot of it is looking at our inventory analytics and some of our predictive modeling and all that.

And so we're working hard to get that inventory down in Automotive, but some of that is coming from just the depth and breadth of inventory that you've got to have in really getting into your supply chain and all the data analytics. But acquisitions, probably half of it, and the other part is just probably coming from the Automotive side. .

Much appreciate, best of luck..

Yeah, thank Brian. .

Okay Brian..

We'll go next to Matthew Fassler of Goldman Sachs..

Thanks a lot, good morning to you..

Good morning Matt..

So a couple of questions. The first is on Automotive, and I guess it's sort of a big-picture backdrop question.

As you think about the aging of the fleet and where the surge is and air pockets are, et cetera, what are the ages that you think, critical ages ranges that are most important for the different pieces of your business, most notably thinking about commercial and then thinking about DIY?.

Yeah, so that number, Matt, kind of has shifted through the years, right. We have historically looked at that 6 to 12 year age group as the sweet spot for our DIFM business. And I don't think that has really moved at all. I still think that's the key age group for our DIFM business.

As we look at our DIY business, I think that number continues to move out, so anywhere from 12 to 17 and 18.

When you look at the average vehicle on the road today at 11.7 years and how well built and constructed cars are today, that number continues to move out, and we're seeing more and more older vehicles, 15-plus-year vehicles, at our stores and shopping in our DIY counter.

So I don't think it's changed dramatically but probably a bit more on the DIY side..

And just thinking about your perspective on when VIO trends may have started to weigh on this space because within that 6 to 12 year range, we obviously had this massive depth, and I would imagine that there's maybe a little more volatility, and the impact, maybe more of a bit of a cliff impact.

Do you feel like this has been a headwind for a while or are we just seeing it now? Was there a headwind that was perhaps masked by cold weather a couple of years ago? What's your best sense as to when this may have churned and when do you think it might start to rebound in your favor again?.

Yes, it's a great question, Matt, and I think it was masked. I think that when you go back a couple of years ago, when we were collectively, as an industry, pounding out strong mid to even high single-digit comps kind of quarter after quarter, I think it got masked.

We had a couple of really harsh winters that probably drove a higher level of increase than what we attributed to weather. So I don't want to say they snuck up on it, but. certainly, I think last year and this year is having an impact.

When we see that trailing off, we'll be really, as we get into back half of 2018 and 2019, we think it will be less of a factor than what it perhaps has been in the last couple of years..

Appreciate it. And then I have very quick follow-ups on the financial front. I'll just ask them together. The first is just directional color on the gross margin assumption embedded in your guidance. It's still roughly flattish year-on-year.

And then the second one, I believe that the operating cash flow and free cash flow guidance came down a little bit more than the implied net income guidance. And that's with, I think, a CapEx number that's slightly lower.

So did you round it down to the nearest $50 million? Or is there some nuance related to working capital or something else that may have changed for the business? Thank you..

Yes, so on the cash flow question, we would say that was more of a working capital change. And we gave you a range, so that was kind of our best thinking at this time, and it would be working capital. And then as far as gross margin, I mean, look, we had a nice improvement through the six months. The quarter looks good.

We were just under 30% last year, so we would hope to be right around 30%, which may give us a couple basis point improvement. So we should see it be a little bit better than the prior year..

Great. Thank you so much. .

Thanks Matt..

Thank you..

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

Hey good morning It's David Kelly on for Bret. Thanks for squeezing me in. Just a quick follow-up on your DIY e-tail comments earlier and thinking about your out-performance in the category.

Are you seeing any change in the DIY pricing environment, either a strategy shift from any of the traditional peers out there or anything notable from e-tailers trying to enter the market?.

No, it's been relatively the same, David. We're bullish on our retail business only because I think of the initiatives that we've put into play. And the initiatives, so the bar would settle fairly low for us. And when you look at what we focused on, the retail basics, it's store hours. It's having retail-focused personnel on the floor.

It's having the right products on the counters. So, I mean, really just an attention to the retail basics. And as that store count that we've gone through, what we call our Retail Impact initiative, we'll have 500 stores now at the end of the year. We started that a couple of years back.

It's been a slow ramp-up, but it's now beginning to be a fairly significant chunk of our overall stores. So those stores are impacting our business. And as I've said, we had a good month of June now with both basket and ticket size going up for the first time in a few quarters. So it's good.

But I think largely, it's the initiatives that we've put into play..

Okay, great. Thanks Appreciate the color. And last one, a quick follow-up from me. We've long discussed and weighed in on some price inflation in Autos as well.

Do you think that's skewed, just thinking out over the next 2 to 3 years, would that be skewed more towards commercial? Or could we also see some price inflation in DIY as well?.

Well, I think if we see inflation, David, which we're not opposed to as a distributor, I think you'll see it play out on the DIFM side, but I think you'll also perhaps see a bit on DIY. DIY would most likely be more in the chemicals and oil, which we've seen some increases in.

So I honestly think you will, and if, and that's a big if because we have not seen inflation, as Carol pointed out, in a number of years. But if we get a bit more, I think, primarily on the DIFM side, but I think some of that will leak over into the DIY as well.

Alright great, thanks again..

Yes you’re welcome. Thank you David..

We'll go next to Scot Ciccarelli of RBC Capital Markets..

Hey guys, how are you doing?.

Hey good..

Great. Paul, I wanted to clarify some of your prior comments about the DIY outperforming commercial.

Did that apply to the U.S.? Or was that on, just on a global basis?.

That's U.S., Scot. When we get into specific segments of the business, DIY, DIFM, we are really pulling those numbers from our U.S. business. The comments I was making earlier about our global business is the mix, like the mix in Australia, DIFM to DIY, is significantly different than it is in the U.S.

But when we talk specific DIY increase or DIFM increase, we're referencing U.S..

Okay. I just want to clarify because I think those two statements had blended into one another. So with that being said, obviously DIY performs better than commercial in the U.S. I know you talked about softer growth in fleet and major accounts. Obviously, that would act as a drag on the commercial business.

But what is it that would impact, in your opinion, the commercial segment more than retail? Like if the drag is things like weather, the car park, et cetera, why wouldn't both segments be impacted about the same?.

Yes. So I want to just repeat something I just said a few minutes ago to David. When we see an increase on our DIY business, as we did in the quarter, and saw a nice increase in June, I think that is more indicative of the initiatives that we've put into play, Scot, versus the overall DIY segment of the automotive aftermarket.

I made that comment in a bit tongue in cheek. The bar was set fairly low for us on the retail side. So when we embark on improving the retail basics in our store, we're bound to get a bit of a lift, and that's what we're now seeing.

And part of it is also due to our Retail Impact initiative that we embarked on a couple of years ago to upgrade a number of our stores..

I got it. And yes, I've heard that commentary before.

So you really think the reason DIY outperformed for you is the things you have done, not necessarily a change in the marketplace? Do you have any feel for a change in the marketplace? Do you think both segments performed about the same? Do you have any feel for that?.

Absolutely. Hard to say, I'll be anxious to hear the other public companies when they report, Scot.

But look, I think that on the DIFM side, again, if I go back to some of the comments I made earlier with consecutive mild winters, the step-down in that or as referenced, that air pocket and our sweet spot of vehicles, that's impacting, that’s certainly is impacting the DIFM side.

But again, I think it's transitory, and I think we'll begin to move away from that as we move into 2018 and beyond..

Got you. And just a housekeeping item. Was there anything else to note on the corporate expense? Was there a pension adjustment? I didn't hear that mentioned.

Or is it just the labor and IT investments that were already highlighted?.

Yes. there was no pension or non-recurring adjustments.

What we would really point to is the investments that we're making, be it in our digital initiatives, which are global across all of our businesses, IT investments, which could be in warehouse management, productivity, inventory modeling to IT security, and then payroll and then legal and professional, which is somewhat related to acquisitions.

So, and look, when you look at it, that's the majority of it. We gave you a little bit higher guidance in that area, but that's, we gave you a range. We hope to do better in there, but you certainly sometimes get non-recurring, onetime items in there but hopefully, we've covered that in our range..

Got it. Okay, thanks guys..

Alright Scot. Thank you..

At this time, we have no further questions in the queue. I would like to turn the call back over to management for closing or additional remarks..

We'd like to thank you for your participation in today's conference call. We appreciate your interest and support of Genuine Parts Company, and we look forward to talking to you after our third quarter results. Thank you..

That does conclude our conference for today. We thank you for your participation..