Genuine Parts Company (GPC) Q2 2015 Earnings Report, Transcript and Summary

Good morning. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Genuine Parts Company Second Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Sid Jones, Vice President of Investor Relations. Please go ahead, sir.

Good morning and thank you for joining us today for the Genuine Parts' second quarter 2015 conference call to discuss our earnings results and outlook for the full year. Before we begin this morning, please be advised this call may involve forward-looking statements regarding the company and its businesses. The company’s actual results could differ materially from any forward-looking statements due to several important factors described in the company’s latest SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. We’ll begin this morning with comments from Tom Gallagher, our Chairman and CEO. Tom?

Thank you, Sid. And I would like to add my welcome to each of you on the call today and to say that we appreciate you taking the time to be with us this morning. Paul Donahue, our President; and Carol Yancey, our Executive Vice President and Chief Financial Officer are both on the call as well, and each of us has a few prepared remarks and once completed, we’ll look forward to answering any specific questions that you may have. Now earlier this morning, we released our second quarter 2015 results and hopefully you've had an opportunity to review them. But for those who may not have seen the numbers as yet, a quick recap shows sales for the quarter were $3.940 billion, which was up 1%. Net income was $195.4 million, which was down 1%, and earnings per share were $1.28 this year compared to $1.28 in the second quarter last year, putting us even in EPS for the quarter. So it was a challenging quarter for us both on the revenue and earnings side, largely attributable to the impact of currency exchange on our international business, as well a continued slowdown in specific segments of the economy which impacted several of our businesses. Paul and I will comment more on these factors as we review the individual business results in a bit more detail. I'll cover the non-automotive businesses first and the Paul will follow on the automotive segment. Starting with Office Products, this team turned in another strong quarter with sales up 14%. The biggest contributor to our overall growth rate continued to come from the mega accounts as has been the case for the past four quarters, and we're enjoying strong results with this customer segment. On the independent reseller side, we saw some moderation in the overall results in the quarter. After four consecutive quarters of steady growth, the independent channel was flat in the second quarter. We were pleased to see a respectable month in June, however, from this important customer segment, and hopefully this will carry on in the months ahead as well. On the product side, we were pleased to see solid growth across all four of our major product categories with facility and breakroom and furniture continuing to post the strongest increases, but we had solid results from technology products and core office suppliers as well. Now as a point of information, in the third quarter, we will anniversary the acquisition of Impact Products which was acquired on July 1st of last year. Additionally, we will anniversary the increased volume from the Office Depot/OfficeMax combination. So as a result of these two factors, our overall office products growth rates will moderate some of over the second half of the year. However, we continue to feel good about the progress that is being made by the office products team and they will turn in a solid performance for us in the second half and for the full year. Moving on to our two businesses that are tied to the manufacturing segment of the overall economy, EIS and Motion Industries. We'll start with EIS, our electrical company. After being up 1% in the first quarter, this team posted a 3.5% increase in the second quarter which was good to see, but candidly acquisition volume drove the improved results with the underlying business actually ending the quarter down 2%. All of this decrease in the underlying business is attributable to the ongoing slowdown in the electrical side of the business, and this is largely due to the continued challenges faced by a number of our original equipment manufacturer customers, challenges faced by our oil and gas customers, as well as a sizeable reduction in copper pricing year-over-year. Conversely, our wire and cable and fabrication and coating segments continued to perform well for us. These two businesses now account for just over 55% of our total EIS revenue, and we are pleased with the progress that they are making. Looking out over the remainder of the year, our expectation is that we will continue to face challenges in the electrical side of the business, but we do expect a solid second half from the wire and cable and fabrication and coating teams. Before turning it over to Paul, a few comments on Motion Industries, our large industrial distribution company. These folks had a challenging second quarter ending with sales down 2%. Unfavorable currency exchange was a factor in the quarter, but in addition to that we saw further weakening in certain segments of the customer base in the quarter as well. From a product category perspective, across our top 13 categories, we had six categories that had increases, one category was flat, and six categories had decreases in the quarter. These 13 categories in total account for over 90% of our industrial business and you can see the inconsistency and the choppiness in the results. If we look at our top 20 customers, the pattern is somewhat similar. Among these 20 customers, 11 were up, 2 were even with the prior year, and 7 were down. Again, inconsistent and choppy results. Our strongest performing customer segments, both for the quarter and year-to-date, are in the automotive, aggregate and cement, and lumber and wood products categories, and these results would mirror the strength of the performance of each of these segments in the overall economy. On the other side of the ledger, our weakest results will be with customers in the oil and gas, iron and steel, pulp and paper, and original equipment and machinery segments. And here again, we think that this is reflective of overall economic trends and the uneven recovery among the North American manufacturing base with some segments fairing better than others. Of our four business segments, industrial is the one that is most challenged currently, largely attributable to the tepid and inconsistent end market environment and conditions right now, and this is not a situation that we see changing materially in the near term. So under these circumstances, our industrial team is focused on market share, and share of wallet initiatives, and actively looking for strategic bolt-on acquisitions as they work to improve their revenue picture over the second half of the year. At this point, we'll ask Paul to update you on the automotive results for the quarter. Paul?

Yes. Thank you, Tom. Good morning everyone and welcome to our second quarter conference call. I’m pleased to be with you here today and have the opportunity to provide you an update on our second quarter performance of our automotive business. For the quarter ending June 30th, our global automotive business sales were flat year-over-year. This performance consists of approximately 4% growth in core automotive, which is an increase from the 3% core growth we reported in the first quarter. However, similar to the first quarter, this was offset by approximately 4% of currency adjustments. The currency adjustment was relatively in line with our expectations for the quarter. For the second consecutive quarter, our US team posted a 3% sales increase, while our international businesses, which include Canada, Mexico, Australia, and New Zealand grew mid-single digits in local currency. Overall, we believe this represents fairly steady growth across all of our markets, and we expect to see this continue over the second half of 2015. In the US, we are pleased that nearly every region of the country positively contributed to our revenue growth in the second quarter. This includes the Northeastern region, which was impacted in the first quarter by the strong weather driven comps of a year ago, as well as the Southwest region. This region has been hit hard by the current oil and gas slump, so we are pleased to see even modest growth. Our strongest growth for the quarter occurred in our Atlantic and Central regions of the U.S. We should note the Midwest section of the country which had reported double-digit growth in 2014 and positive growth in the first quarter was flat in the second quarter as the rain and generally dismal weather patterns that had plagued this area in recent month dampened demand. Across Illinois, Indiana, and Ohio, rainfall records were set in the month of June with each day receiving twice its average monthly rain levels. We are encouraged to report that two weeks into July as more normal weather – summer weather has set in, our business is coming back strong. Let's turn to our same-store sales. Our US company owned store group grew comparable same store sales in the quarter by 3%, consistent with the first quarter. This 3% increase was on top of the 7% increases generated in a strong second quarter of 2014, giving us a two year stack of 10%. Our 3% sales increase in the quarter was driven by a combination of increases on both our commercial wholesale side of the business, and by our retail business. Let’s start with our retail results . As mentioned in previous calls, we have put a renewed focus on this important segment of our business. Our retail associates out in our stores, as well as our retail team here at headquarters continued to get the job done driving a 7% increase in the quarter, which is up from the 6% increase in the first quarter and on top of the 7% increase from one year ago. We are encouraged with these continued strong results, and it confirms the initiatives our team is focusing on are the right ones. Our retail initiatives have had a positive impact on both the size or average ticket and the number of tickets moving through our stores. In the second quarter, we experienced an increase in our average retail ticket and a significant lift in the number of retail tickets. Our retail strategy continued to be refined but be assured it remains a priority for us. We realized we've got a great deal of work ahead of us but our results are reassuring and the opportunity for further growth is out there. So now, let’s turn to our commercial wholesale business. This segment turned in a 2% increase in the second quarter. So we experienced slight deceleration from the 3% increase in the first quarter, but with 7% growth last year we can report a 2 year stack of 9%. Our fleet business the key component of our commercial wholesale segment moderated in the second quarter and while still positive contributed to our overall deceleration in this segment of our business. Highlights for the quarter included solid performances by our two major wholesale initiatives, NAPA AutoCare and Major Accounts. Our NAPA AutoCare centers now totaling over 15,800 nationwide and our Major Account business delivered high single digit sales increases. We can also report solid trends at our average wholesale ticket value, which registered positive growth in the quarter with no inflation support. Although we did see a slight decline in the average number of tickets flowing through our stores. However, we did point out after a slow start to the quarter, we saw our ticket count improved throughout the quarter and in the month of June we experienced a solid increase. Let’s take a look at few of our key product categories and review some of the trends we experienced in the second quarter. Consistent with the first quarter, we can report strong growth in both our Bright business, as well as our tool and equipment business. We are especially encouraged by the double-digit growth we saw in the month of June with our heating and cooling product, after a slow start to the quarter warmer than normal temperatures in the west, the mountain in the Southwest generated strong air conditioning related sales. In addition, our NAPA Import Parts business was once again up low double-digits this quarter. Finally in our first quarter call we commented on supply chain interruptions with one of our key under car [ph] lines. We can report that this issue was mitigated in the second quarter as we felt much of our unmet demand with alternative suppliers. So looking ahead to the second of the year, we expect a significant foreign exchange headwind impacting our reported results to continue at its current level. That aside we'll be working hard over the second half of the year to improve on our 3% to 4% underlying automotive growth achieved thus far in 2015. We continued to be encouraged by the automotive aftermarket fundamental. The average age of the fleet remains in excess of 11 years, size of the fleet continues to grow, fuel prices are down on average of $0.89 from a year ago and as you would expect miles driven continues to post substantial gains up 3.9% through April. Each of these fundamentals bodes well for future demand. We also have plans in place to drive stronger growth in the quarters ahead. We announced last Friday the pending acquisition of Covs Parts, a 25 branch distribution company in Western Australia. Covs will be a great addition to our growing Repco business, as this business is focused on original equipment and aftermarket automotive parts, truck product and mining and industrial consumables. The addition of Covs Parts which we expect to close by October 1st, further expands our presence and scale in Western Australia and is expected to generate annual revenues of approximately $90 million in US dollars. This latest acquisition coupled with our continued Greenfield store expansion, puts us over the 500 store mark in the combined markets of Australia and New Zealand. This type of bolt-on acquisition will increasingly be a key focus for our teams throughout North America and Australasia. So in closing, we want to thank our management teams in North America, as well as our team on the ground in Australia for all that they do for the GPC automotive business. So that completes our overview of the GPC automotive businesses and at this time I’ll hand the call over to Carol to get us started with a review of our financial results. Carol?

Thank you, Paul and good morning. We’ll begin with a review of our second quarter income statement and the segment information and then we’ll review our balance sheet and other financial items. Tom will come back up and then we’ll open the call for your questions. Our total revenues previously stated was $3.94 billion for the second quarter, an increase of 1%, which consisted of underlying sales growth of 2.2% and a 1.3% contribution from acquisitions. These items were offset by a strong currency headwind of 2.7%. For the six months through June, total revenues are $7.7 billion, a 2% increase consisting of 3% core growth, 1.4% from acquisitions offset by a 2.5% foreign currency headwind. Our gross profit for the second quarter was 29.9% of sales and this compares to 30.2% growth margin last year. For the six months, gross margin at 29.85% compares to 30.05% reported last year. Primarily the second quarter and six months declines reflect our ongoing customer and product mix shifts which continue to pressure our gross margins. This is been especially prevalent in the office business over the last few quarters. In addition, we experienced some added pressure in our industrial business gross margin in the second quarter due to the reduction in sales volume and the related impact of lower supplier incentives earned. Executing on our gross margin initiatives is a key priority for our management team and this area has our full attention. We are committed to making progress towards an enhanced gross margin for the long-term. Our gross margin initiatives are also critical and offsetting the low inflationary environment that has persisted across our businesses for several years now, especially in automotive. And our supplier pricing through June would indicate more of the same for 2015. Our cumulative supplier price changes through June were down three tenths of 1% for Automotive, up one half of 1% for Industrial, up six tenths of 1% for Office Products and down 1.2% for Electrical. Turning to our SG&A, total expenses were $868 million in the second quarter, which is flat versus the second quarter of 2014. Our SG&A improved as a percent of sales by 20 basis points to 22.0%. For the six months, our total expenses of $1.7 billion are 22.5% of sales versus 22.7% last year. In light of the 2% and 3% underlying sales growth for the second quarter and six months respectively, we're relatively pleased with our ability to control our cost and encouraged by the positive of impact of these measures in this challenging period. That said, we believe there are opportunities for more improvements in this area and we'll continue to focus on our SG&A line in the periods ahead. Now we’ll discuss the results by segments. Our Automotive revenue for the second quarter of $2.1 billion was flat with the prior year and 53% of our total sales. Our operating profit of $207 million is up four tenths of 1%, and their margin improved 10 basis points to 9.9%. For the year, automotive sales of $4 billion are unchanged from the prior year and our operating profit of $358 million is up four tenths of 1% and our margin is constant with 2014 at 8.9%. Industrial sales of $1.2 billion in the second quarter, a 2% decrease from 2014 and 30% of our revenues. Our operating profit of $89 million is down 7% and our operating margin declined 40 basis point to 7.5%, as the loss of leverage and lower incentive pressured this group in the quarter. For the year, industrial sales of $2.4 billion, represents 31% of our revenues and are up 1%. Their operating profit of $177 million is down 1%, and our margin is 7.5% which is down 10 basis points from last year. For Office products the revenues of $478 million in the quarter, up a solid 14%, and representing 12% of our total revenues. Our operating profit of $35 million is up a 11%, and their operating margin was down 20 basis points to 7.2% – and for the year office revenues of $968 million are up 16% from 2014. Our operating profit is $71 million is up 9%, so our margin is down 50 basis points from last year to 7.3%. As mentioned earlier, the customers mix shift is impacting our net margin for this business, but we remain encouraged by our overall growth. The Electrical/Electronic Group had sales in the second quarter of a $195 million, a 3.5% increase and 5% of total revenue. Their operating profit of $18.6 million is up 13%, so the margin for this group improved to 9.5% which is up 70 basis points and a new record high. For the year, sales for this group are $377 million and up 2%. Operating profit of $34 million is up 6% and the margin is up to 9.0% from 8.7% which is a solid 30 basis point increase. So for the second quarter, our operating profit was flat with last year and our operating margin held constant at 8.9%. For the year, our operating profit is up 1% and our operating margin is 8.3 compared to the 8.4 for the same periods in 2014. Another [ph] type of expansion we would expect to produce over the long-term that relatively steady given the sales volume for the quarter and the year. We had net interest expense of $5.7 million in the second quarter, and year-to-date our interest now stands at $11 million. We would expect net interest expense of approximately $21 million to $22 million for the full year. Our total amortization expense of $8.8 million in the second quarter and $17.4 million through the six months, which is relatively consistent with last year. We currently estimate $36 million to $38 million in total amortization expense for the full year. The other line which reflects our corporate expense was $25 million expense for the quarter, which is consistent with last year. Through June our corporate expenses are $50, which is up slightly from the first six months of last year. This is relatively in line with our expectations and for the year we would expect corporate expense to be in $90 million to $95 million range. Our tax rate was 37% for the second quarter, and 36.5% for the six months through June. These rates are up slightly from 2014 due to changes in the mix of foreign income and the related foreign tax rate, as well as the less favorable retirement plan valuation adjustment in the second quarter. For the full year we expect our tax rates to be in the range of 36.7% to 37%. Net income for the quarter of $195 million compares to $198 million in the second quarter last year and our EPS was $1.28 which is basically flat with 2014. Now let's turn to a discussion of the balance sheet. During first quarter and the year we have further strengthened our balance sheet which positions us well for future growth. Specifically this speaks to our ability to effectively manage our working capital and drive increased cash flows. Our cash at June 30 was $224 million, an increase from approximately $153 million at June 30 last year. Our cash position is strong and we continue to use our cash to support the growth initiatives in each of our businesses. Accounts receivable at $2 billion at June 30 is up 5% from the prior year on a 2% core sales increase for the second quarter. We continue to closely manage our receivables and we would add that June had an extra billing day relative to 2014 which accounts for a portion of this increase in the quarter. We also remain very satisfied with the quality of our receivables at this time. Our inventory at quarter end was $3 billion which is up a margin [ph] of 1% from June of 2014 and actually improved by approximately 1% from year end. Our team continues to do a very good job of managing our inventory levels and we’ll continue to remain focused on maintaining this key investment at the appropriate levels in the periods ahead. Accounts payable at June 30 was $2.7 billion, up 10% from 2014, which reflects the positive impact of our improved payment terms and other payable initiatives established with our vendors. We have shown continued improvement in this area for several periods now and we're encouraged by a positive impact on our working capital and days and payables. Our working capital was $1.9 billion at June 30, an improvement of 6% from last year, effectively managing our working capital and in particular our key accounts such as accounts receivable, inventory and accounts payable continues to be a very high priority for our company and we're pleased with our ongoing progress in this area. Our total debt at June 30 was $850 million. This includes two $250 million term notes, as well as another $350 million in borrowings under our multi-currency syndicated credit facility. Our total debt to capitalizations approximately 21% and we're comfortable with our capital structure at this time, as we believe that provides us with both the financial capacity and the flexibility necessary to take advantage of the growth opportunities we may want to pursue. So in summary, our balance sheet is in excellent condition and remains a key strength of the company. We also continue to generate solid cash flows and we’re raising our 2015 projections for cash from operations and free cash flows by $50 million. For the full year we're now planning for cash from operations to be in that $850 million to $900 million range. Additionally, we currently expect free cash flow, which deducts capita expenditures and dividends to be in the $350 million to $400 million. We remain committed to several ongoing priorities for the use of our cash, which we believe serve to maximize shareholder value. Our first priority for cash is the dividend which we have paid every year since going public in 1948, and we've now raised for 59 consecutive years, a record that continues to distinguish Genuine Parts from other companies. The 2015 annual dividend of $2.46 per share represents a 7% increase from the $2.30 paid in 2014 and it’s approximately 53% of our 2014 earnings, which is well within our goal of a payout of 50% to 55%. Our goal is to maintain this level of the payout ratio going forward. Our other priorities for cash include the ongoing reinvestment in each of our core businesses, strategic acquisitions and share repurchases. Our investment in capital expenditures was $21 million for the second quarter, which is consistent with 2014 and through the six months our capital spending was $38 million, down slightly from the $40 million last year. Our expenditures should increase in the second half of the year and we're currently planning for CapEx spending to be in the range of $125 million to $135 million for the full year. As usual, the vast majority of our investments will continue to be weighted towards productivity enhancing projects primarily in technology. Our depreciation and amortization was $36 million in the second quarter and $71.5 million through six months, which is down slightly from 2014. Looking ahead, we are projecting depreciation and amortization to be approximately $145 million to $155 million for the full year in 2015. Strategic acquisitions continue to be an ongoing and an important use of our cash for us and they are integral to our growth plans. In the first six months of 2015, we invested approximately $80 million for the acquisition of several new businesses, including Miller Bearings in the industrial and segment and Connect-Air for the electrical business, as well as a couple other smaller companies. In addition, last Friday we announced the acquisition of Covs Parts for Australasian automotive business which we covered earlier. We will continue to seek new acquisition opportunities across our business segments to further enhance our prospect for future growth. And although we find that many of these opportunities are smaller size companies with annual revenues in the $25 million $150 million range, we're open minded to new business of all sizes, large or small assuming the appropriate returns on investments. Finally, during the quarter we used our cash to repurchase approximately 670,000 shares of our common stock under the company’s share repurchase program. For the six months, we repurchased 1.54 million shares and today we have 8 million shares authorized and available for repurchase. We have no set pattern for these repurchases, but 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. That concludes our financial report for the second quarter and six months of 2015. In summary, we're looking to improve on our first half results over the balance of 2015. We have our growth plans in place and we're intensely focused on showing progress in periods ahead. Despite our recent challenges and the relative uncertainty in the economy over the near term we're encouraged by the fundamental opportunities we see across our core businesses. We look forward to updating on our future progress when we report again in October. Now I’ll turn it back over to Tom.

Thank you, Carol, and thanks to you and Paul for your updates. So that’s a quick recap of our second quarter and mid-year results and in summary, we would certainly say that we founded to be a challenging quarter. And as we look back over the quarter from our perspective there were three strong headwinds that were encountered. First, the strength of the US dollar and its impact on the currency exchange. Second, the continued and pervasive impact of the slowdown in the oil and gas sector and third the further slowdown in certain segments of the manufacturing sector of the economy. As pointed out earlier, currency had a 3% negative impact on our combined GPC sales in a quarter and a negative 4% per share in earnings. Our Automotive operations experienced the most significant revenue impact of currency being just over 4% headwind. But it’s important to point out that our core NAPA business continued to perform well as evidenced by their 3% same-store sales increase on top of the 7% same-store sales increase in the second quarter of last year. So we feel continue to make progress on the NAPA side of the business. Additionally, our non-US based automotive operations each generated solid mid single digit local currency increases, indicative of continued progress by our Canadian, Australasian and Mexican teams. Unfortunately these all translated to sizeable decreases when converted to US dollars. And then looking at the cadence of the quarter, we were encouraged to see that our automotive sales improved sequentially as the quarter progressed, despite the impact of currency exchange. Additionally, the early July results are in line with June and hopefully a positive indicator for the months ahead. Our Industrial operations were also impacted by currency exchange which caused them 1% revenue growth in the quarter. But even more impactful was the continued and further slowdown in certain segments of the industrial end markets. As mentioned earlier, we saw mixed results among our top 20 customers segments with 11 showing increases, two being flat and seven posting decreases. While the 11 at the top remained relatively steady from Q1 to Q2, the rate of decline for the seven that are running decreases actually accelerated during the quarter which significantly impacted our results and at this point unfortunately we don’t anticipate a reversal of this trend in the near term. So due to the ongoing challenges of currency exchange and the continued and accelerating rate of decline among certain segments of our industrial customer base, we feel a downward adjustments to our prior full year guidance are appropriate at this time. On the revenue side, our prior segment guidance was for automotive to be 2% to 3% at year end and right now we would say that should be 1% to 2% net of a 4% to the currency exchange headwind. Previously we guided industrial to being up 5% to 6% and now we would say flat to up 1% net of a 1% currency exchange adjustment. Electrical, we were at 5% to 6% and we would see 3% to 4% currently and in office products we previously guided 6% to 7% and we're actually increasing that to 7% to 8% at this time. In total, our prior guidance was for GPC to be up 3% to 4% and now we would say plus 2% to plus 2.5% net of a 3% currency exchange impact. On the earning side, we previously guided to $4.70 to $4.80 and currently we would say that $4.65 to $4.70 is more appropriate and this includes a $0.15 per share currency adjustment. On a percentage basis, we'll be up 1% to 2% on adjusted and up 4% to 5% on a comparative basis. So that would conclude our remarks and we’ll turn the call back to Stephanie to take your questions. Stephanie?

[Operator Instructions] Your first question comes from the line of Greg Melich with Evercore ISI.

Hi, thanks. I wanted to follow up on a couple of things. Carol, you talked a lot about gross margin and some of the initiatives that you have in place there. Could you help us understand a little better what drove the decline in the quarter and specifically what initiatives you have? Is there anything on vendor rebates that may have moved things around or how it will flow to some of the segments? And then I had a follow-up on SG&A.

Okay. On the gross margin, I would say really what we saw this quarter, the big impact that we had was in the industrial area. I mean, that was what was different than say last two quarters. We had the continued pressure on gross margin in the office segment that we talked about before, but on the industrial side, the combination of their lower volume and having to do also with their customer and product mix, but also the volume incentives that are related to that. And as we adjusted what our thinking is between now and the end of the year, that’s factoring into what our adjusted guidance is, it’s lowering that for the industrial volume incentive. And then some of the initiatives, actually our core automotive gross profit and we've put some things in place over the last six to 12 months, and we're pleased with how that’s working, but we're up against some of the other pressures that’s in the other segment. So, it’s on the buy side and the sell side. It’s really initiatives that we work on all the time across all of our businesses.

And Greg, if I could also add one point, the fact that office products is up 14% in the quarter, it had an impact on the total gross profit as well.

Is it fair to say, if you – ex industrial and office products, were gross margins up in the auto business?

That’d be a fair assumption.

Yes. We actually had improvement in both electrical and automotive.

Great. And then on SG&A dollars, I noticed they were nicely controlled. Would the impact there on FX be the same as on the top line? In other words, if FX went away, we would expect SG&A dollar growth to be closer to the 3% to 4%, not flattish?

Yes. We would say, if you think about the FX kind of all the way down the income statement if you will, it’s pretty consistent. I mean, there is really not an impact on our net margins. So you can pretty much just take it all the way down the income statement, its pretty consistent.

All right. Thanks a lot.

Thank you, Greg.

Thank you.

Your next question comes from the line of Scot Ciccarelli with RBC Capital Markets.

Good morning, guys.

Morning, Scot.

Morning, Scot.

Hi. How are you? I was hoping to get a little bit more color on specifically what has softened so much on the industrial side. Obviously, it's a pretty big sea change coming out of you guys, Tom, and we haven't seen that in multiple years. And I guess what I'm asking is, is it particular products or product lines and maybe another way of looking at it is, of the seven end markets that we saw the deterioration in, are there certain ones that were much worse than others? Like can you highlight those because it's down 10%, 15%? What's the best way to kind of think about those? Thanks.

Well, I think you've kind of answered your own question in a way Scot, and that the ones that we highlighted in the order oil and gas, iron and steel, pulp and paper, and the original equipment manufacturing segment, they are the ones that had the most significant decreases in the quarter for sure. And as I mentioned in my commentary, what got our attention a bit was the sequential deceleration in the decreases. So these four categories were down in Q1, but they were down even more dramatically in Q2. And maybe to put a little more color on it, if you look at oil and gas, obviously the fact that the number of rigs running is down over 50% year-over-year. Certainly that has an impact directly, but the indirect impacts ripples through other customer segments as well, certainly the steel segment for any steel manufacturer that has been producing piping to go into exploration, they are having the same situation that we're experiencing. So their volumes are down. You can look at some of the pumping manufacturers those that have down hole pumps would be experiencing some of the same contraction that we're experiencing. So it runs, it pretty much runs through a number of other categories in addition to the oil and gas. And part of it too is the fact that some of the businesses, iron and steel and pulp and paper would also be having some issues because of currency exchange, they are not exporting as much, and in fact they are fighting some import pressures, some product coming in from offshore. So it’s a combination of factors.

So when you look at the second half in these particular end markets, is the assumption that they kind of do in 3Q and 4Q what they did in 2Q, or is there an expectation that they actually deteriorate further from here given the additional declines we've seen in some of the commodity complex?

Well, I'd preface my comments by saying, we just don’t know as clearly as we would like. But our expectation is that we've experienced the worst of the deceleration. We may see just a bit more or we may have stabilized some. But it’s going to be another couple of quarters before we see this start to turn back up in our opinion.

Got you. And then just one quick qualification if I might. You talked about some - the cadence that we saw in the auto business. And just to be clear, you were talking about it on an organic basis, is that correct, in terms of the acceleration?

Yes.

Okay.

Yes.

Okay. Great. Thanks a lot, guys.

All right. Thank you.

Your next question comes from Mark Becks with JPMorgan.

Hi. Thanks for taking my question. I guess just to pick up where Scot had left off, on the industrial, can you speak to how your growth looks like for the market and then I guess across your segments? Can you clarify how you look at the growth, whether you have been maintaining share or perhaps gaining or losing share?

Well, I think as best we can tell we're maintaining share at a minimum and maybe gaining just a little bit based upon the data that we have. And you know, its all not, its all not doom and gloom within the segment. Certainly we've got some customer categories that are really challenged right now. But as I pointed out, we do have a 11 of our key 20 customer categories that are showing increases. And additionally, we've got some positive things going within the industrial segment. It’s just unfortunate that the seven that are down are down in such a magnitude that they are overshadowing some of the good things that are going on. But over time we think that they will show themselves and things will start to turn back up. But we're just not ready today to say that we're starting to see some of that up term. We think we got another quarter or two before we'll experience some of that.

Okay. And then can you give a little bit more color on the Australasia landscape? That's now well over a $1 billion business for you and you just did the $90 million Covs Parts. What's the size of that market and how does the margin profile look versus the US business? And then just given your recent investments over there, what does that say about your outlook for the US market?

We would – by our numbers we would say that we would have market share that’s in the mid teens there in the Australasian market place. And the outlook we think is generally favorable in local currency. But I would say that the economies over there are equally challenged and I think the numbers that our team has put up would indicate that we're gaining a little bit of share over there currently. In terms of the outlook and future growth prospects, I think we'll continue to have recently good organic growth from the team over there. I think we'll sprinkle in a couple of acquisitions over time and we continue to feel like we get a good return on our invested capital in that market place. The margin structure is very much similar to what we would experience in our core automotive business. So it’s equal in worst case and perhaps slightly accretive in best case.

Hey, Mark. This is Paul. I would also add you mentioned the US market. We – it’s our intent to continue to grow our footprint here in the US as well, but I would also say the same about Canada and Mexico.

Okay. That's helpful. And then just last question, can you shed a little light on the dividend and how you might be thinking about that this year? You've raised it for 59 consecutive years now. It looks like earnings growth will be cyclically flat given the updated guidance. And I know you target a 50% to 55% payout ratio. But just curious how you are thinking about the growth, factoring in EPS, which has been a bit of a drag from FX, but then your cash flow position strengthening. Thank you.

It’s a little bit early perhaps because we visited the whole dividend discussion at our February board meeting. But at this point we would suggest to you that you'll see an increase in the dividend in February of 2016 and we'll pay out 50% to 55% of prior year earnings. We just can't comment now on the size of the increase. But you'll see an increase.

Okay. Thank you.

All right. Thank you.

Thanks, Mark.

Your next question comes from Seth Basham with Wedbush Securities.

Good morning.

Morning, Seth.

Morning, Seth.

I'd like to ask a couple of questions on the auto business. Tom, you mentioned that trends for the quarter were improving. But how do they look on a two-year stack basis, as I remember you had some pretty easy comparisons toward the end of Q2 2014?

We're going to get that number for you right now, so.

Okay. And related to that, you mentioned an extra billing day in June. Any quantification of how much of a benefit it was to your sales and auto or across the rest of the enterprise?

No, but the numbers that I cited are on a per day basis, so we saw a sequential per day increases and strengthening as the quarter progressed and the same thing would be true in our month to date results. So I think we're looking at an apples-to-apples comparison.

Yes, just to be clear, that we had the same number of days in the quarter, but the comment on the extra day for June related to more the increase in accounts receivables, because the extra day was in June and we had one last day in May.

Got it. That's helpful, Carol. And then you mentioned, Paul, the number of transactions on the wholesale side were down in the quarter. Any thoughts as to where the weakness was coming from? Was it in fleet or was some other area of the business?

Yes, we saw a little deceleration in the fleet business Seth, which really we attribute really to some of the ongoing prices on the oil and gas side. But it did come back towards the latter part of the quarter. So I don’t think its anything structural. We've been seeing solid increases quarter-after-quarter and our ticket count side, I think was a bit of an aberration that we'll see bounce back tin Q3.

Got it. That's helpful. With that outlook, you ticked down your sales guidance for the segment for the year. Any more color as to your thought process there?

No, its – part of it is due to the fact that we think currency is going to continue to play a factor for sure. I think that might be a primary driver. I want to go back to what I think I understood to the question earlier, Seth, and you asked about the comps, and if we look at our comps in Q2 of this year and last year, and Q2 last year we had 7% comps both for DIY and for DIFM and this year we were seven on the DIY and two on the DIFM. So its not that comps weakened in the quarter, I think we were going up against some pretty good comps. And if we look out over the remaining quarters of this year we were up 6% in Q3 and we were up 7% in Q4 of last year. So I think we're going up against reasonably good comps and I think we'll come through it fine, but I do think the comps don’t soften any for us in the near term.

Got it. And just lastly to clarify, on FX, are you saying that you expect more FX headwinds for the year than you initially did in the auto segment?

Well, I think across all of our businesses that are affected and maybe just to put a little color to that. If we look at year-over-year our FX comps and I look that on the 15th of July, 15 the difference between July 15, 2014 and July 15, 2015 we had 19% deceleration versus the Canadian dollar and the Mexican peso and 21% decline against the aussie dollar. So that’s a little stronger than what we had originally anticipated.

Got it. All right, thanks and good luck.

All right. Thank you very much.

Your next question comes from Elizabeth Suzuki with Bank of America.

Good morning. Given the miles driven in the US really started to accelerate in recent months. I think the expectation may have been that the auto division would have been a little bit stronger in core growth. Do you think auto is going to start reflecting that improvement in driving trends and vehicle usage in the coming quarters, or are there competitive pressures at play that could hold back some of that same-store growth?

Well, what I would say first of all is the underlying growth for automotive was I think reasonably good at 4% and I think historically that’s a pretty good number. I think Paul referenced some of the underlying factors are generally favorable, miles driven as for instance through the last three quarter [ph] we've seen are up 3.9% year-to-date, that’s the best we've seen a while. So our expectation would be that demand should remain pretty good over the remainder of the year. One thing that impacted automotive as Paul referenced in his comments, was the abnormally worst conditions we've experienced up through the Midwest and that affected not just the normal DIFM type of business it certainly affected our agricultural business up through that part of the country as well. But assuming that we don’t hit abnormality, so I think that demand pattern should be reasonably good as we work our way through year end.

Okay, great. And with foreign exchange having a larger and larger impact as you grow internationally, are there any plans to put currency hedges in place? It just seems like FX is causing a lot more fluctuation in your earnings than we are used to.

We're looking at it, we haven’t done anything as yet, but we recognized it’s something that we need to spend a little more time on.

Okay. Great…

Part of the FX when you are just translating the dollars into your income statement, you can't really hedge against that, What we're looking at as more on the cash flow and balance sheet side, but we're just translating the sales in from these foreign countries, we do have an impact there, you really just have to translate the lower dollar.

All right. Thanks very much.

Thank you.

Your next question comes from the line of Matthew Fassler with Goldman Sachs.

Thanks a lot. And good morning.

Good morning, Matt.

Good morning, Matt.

A couple of follow-up questions on automotive. Can you give us a sense for the order of magnitude of fleet deceleration? Just trying to understand how much it contributed to the DIFM slowdown because it looks like your DIFM comp slowed from 3 to 2. We had assumed that in the first quarter your fleet was up kind of mid single, a [indiscernible] I mean, year-on-year basis…

No. Matt, this is Paul. Fleet business was actually up a couple of points in the quarter, but it wasn’t at the trend that we've seen in recent quarters which you already hit on was closer to mid single digit. So we saw a – yes, we saw a little bit of deceleration in the quarter and if you break it down its certainly an element of our overall commercial wholesale business and its an important element for sure, but again we don’t think there is anything structural there and that we'll see that bounce back in Q3 in the balance of the year.

And then just a follow-up, Paul. So we have your new automotive revenue guidance for the year and we have the number gross of FX, net of FX. To the extent that you ran a US comp of 3% in both the first quarter and the second quarter, what's the directional expectation for that number within the automotive business in the second half of the year?

This is Tom, we would say probably consistent with what we've seen through the first of the year.

Got it. Okay. Thank you very much, guys.

Thank you.

Thanks, Matt.

Your next question comes from the line of Brian Sponheimer with Gabelli.

Hi, good morning.

Good morning, Brian.

Good morning, Brian.

To try and focus more on the positive within Motion, can you talk about, outside of auto production, maybe some of the sub-pockets of growth that you may not have foreseen heading into the year? Is construction one of them?

Yes, anything related to construction Brian we're showing good results, so if you get into the aggregate and cement category, that’s a nice category for us currently. Lumber and wood products is a nice category for us as well. So its – I think its fair to say if you looked at those segments of the manufacturing sector, that are performing reasonably well they tied pretty closely to those segment of the overall economy that are performing pretty well right now. So…

All right. And then just on the OE side within Motion, would you say that it's driven more on the equipment side by mining, or is this now fully an ag and potentially some broader machinery issue?

I think it’s a combination. And I think it’s a factor of curtail demand here domestically but also its an FX situation as well to the dollar some of these companies that have reasonably strong export businesses are not getting the same type of demand that they might get under more normal FX circumstances. So I think it’s a combination of both elements [indiscernible]

All right. Thank you very much.

Thank you.

Thanks, Brian.

We have time for one question. Your last question comes from Bret Jordan with Jefferies [ph]

Good morning, guys.

Morning, Bret.

Morning, Bret.

Just a quick question on the DIY trends. Obviously, 7% is better than the market. Are you seeing market share gains in any particular regions or do you see yourself picking up share from any particular channels?

Bret, its hard to tell, our retail increases are wide spread and you know, I think as I've said in prior calls, its our team that’s been really just focusing on the basics, better store hours, better training, better planogram execution, better in store stocking. We've gotten, I would tell you we've got creative in some of our recent promotions that have performed well for us, but its hard to say if we're actually picking market share or not but I would think with the kind of increases we've been showing we are most likely taking it from one of the competitor.

Okay. And then as far as temperature control, you mentioned double-digit growth. Was that something you are talking about double-digit growth regionally? I think you called out the West. Or was that double-digit growth as an entire category? And I guess to follow up, how are inventory levels when you're seeing that kind of growth? Are you being able to meet the demand?

Yes. So the double-digit growth was that to cross all of NAPA that was we really, it was driven in the western part of the country we had record heat out west in the month of June Bret in California, Oregon, Washington record temps, so they really drove the increase. But we're seeing significant increases across the country and right now we're into good shape at our inventory level.

Okay. And then one last question. Mexico, the branding under NAPA as opposed to AutoTodo, what are you seeing? Are you picking up share sequentially with NAPA or is it too early to tell?

It’s too early to tell, we're still early in our rollout we have 11 companies stores up and running. We have a certainly goal that continued increase at our – its still early Bret but we're on plan and on target.

All right, great. Thank you.

You're welcome.

Thanks, Bret.

Thank you. This concludes the Q&A portion of today's conference. I'll turn it back over to management for closing remarks.

We thank you for your interest in Genuine Parts Company and your continued support and we look forward to reporting to you on October with our third quarter results. Thank you.

Thank you. This concludes today’s conference call. You may now disconnect.