Genuine Parts Company (GPC) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Genuine Parts Company Third Quarter 2015 Earnings 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.

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

Thank you, Sid. And I would like to add my welcome to each of you on the call today and to say that we appreciate you taking the time to be with us this morning. Paul Donahue, 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 will look forward to answering any specific questions that you may have. Earlier this morning, we released our third 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 $3.922 billion, which was down 2%. Net income was $188.1 which was down 1%, and earnings per share were $1.24 this year compared to $1.24 in the third quarter last year, putting us even in EPS for the quarter. As has been in the case for year along, currency exchange has been a significant headwind for us both on the revenue and earnings results and the impact accelerated in the third quarter. Importantly, the local currency results for our international businesses remain solid but when converted to U.S. dollars we lost 4% on the revenue line and 5% per share in EPS in the quarter. Or stated in another way without currency impact our sales were up 2% and EPS was up 4%. In addition to the currency headwind, we continue to experience a slowdown in specific segments of the economy which impacted several of our businesses but most significantly in industrial and electrical. We will comment on this factor a bit more as we review the individual businesses and as we customarily do I will cover the non-automotive operations and then Paul will report on the automotive segment. Starting with Office Products, this Group saw this deceleration on the revenue side in the quarter. After being up double digit since sales growth in each of the first two quarters, the Office Products team ended the quarter up 3%. The deceleration is primarily attributable to anniversary in both increased volume from the Office Depot/OfficeMax merger last year, as well as the impact products acquisition that was completed in July of 2014. Each of these was a significant contributor to the double digit growth rates generated over the past four quarters and we anticipated the moderation in Q3. However, we would have to say that we saw a bit more deceleration than expected and more so as the quarter progressed. Our sense is that the underlying Office Products demand has softened over the past 90 days. From a channel perspective, the softening was more pronounced on the independent reseller side and we ended the quarter down mid single digits. Our mega channel remains strong posting another big double digit increase. On the product side, facility and breakroom supplies and furniture each had strong quarters and core office supplies were positive as well. Our technology products were down mid single digits. So putting it all together, our Office Product segment was up 3% for the quarter which in the current environment is probably a solid performance. However, we were expecting just a bit more in the quarter and we're watching the recent slowdown closely. Before closing on Office Products we do want to mention the acquisition that was completed on October 1. Malt industry is a $20 million distributor at safety products and this acquisition will help to further diversify both the product and customer portfolios for impact products and for S. P. Richards and we’re pleased to now have miles industries as part of our organization. They will contribute nicely to our Office Products results in the quarters ahead. Moving over to the industrial segment, Motion industry has experienced another challenging quarter ending the quarter with a 4% decrease. And demand patterns across our customer base were similar to what we have seen pretty much all year long. Customers and segments like lumber and wood products, food processing, cement and aggregate and automotive were generating solid positive results for us and we continue to make good progress with these accounts. Conversely, however, customers in the mining and resource oil and gas, iron and steel, pulp and paper and original equipment manufacturing are all running sizable decreases for the third quarter and year-to-date and notably the rate of decline actually accelerated as the quarter progressed. So despite the fact that there are number of positives within our industrial results, they are being more than offset by some of the specific headwinds and circumstances that we’re encountering and we don’t see this changing in the near term. In the meantime, our industrial team remains focused on key elements of their growth strategy. They were able to complete one acquisition in the quarter, Lake Erie Tool & Abrasive was acquired on September 1. This is a pre location distributor of tools and abrasives with annual revenues of approximately $30 million and Lake Erie will be a nice addition to the Motion organization. Additionally, the Motion team continues to make progress in the areas of securing new corporate account agreements, penetrating new markets and expanding share of wallet initiatives, each of which will contribute incremental revenue in the months ahead and will help to offset some of the declines that we are experiencing in the key customer categories mentioned earlier. But as with office products, we saw deceleration in our industrial results over the quarter which we feel is reflective of the ongoing challenges being faced by many segments of the manufacturing sector in the economy and this is a situation that will take a bit more time to work us way through. And I will wrap up the non-automotive operations with a few comments on EIS, our Electrical Segment Entity. This Group ended the quarter up 2% but in looking at the results more closely it shows that they are down 2%, netted acquisitions and copper pricing and similar to Motion many of their manufacturing base customers are experiencing end market headwinds. However it's interesting to note that EIS is made up of three different business segments. Electrical is the largest at 40%, fabrication is 30% and wire and cable is 30% and it's in the electrical segment where we are experiencing the most challenges. This business is running behind year-to-date while our fabrication and wire and cable segments are both generating solid increases, validating the diversification strategy that was embarked upon several years ago and this is something that they will continue to drive in the quarters ahead. End markets will remain challenging for the EIS team at least for the near term especially on the electrical side but they do have a number of potentially positive initiatives underway primarily in the fabrication and wire and cable sides of the business, and we are pleased with the progress they have made in each of these segments. So that will conclude the comments on the non-automotive businesses. And Paul will now review the automotive operations with you. Paul?

Thank you, Tom. Good morning and welcome to our third quarter conference call. I’m pleased to be with you here today and have the opportunity to revive you an update on our third quarter performance of our automotive business. For the quarter ending September 30, our global automotive sales were down 2% year-over- year. This performance consists of approximately 4% in core automotive growth, which is consistent with the second quarter and improved from the 3% underlying growth we reported in the first quarter. However, this was offset by a currency headwind of approximately 6% in the third quarter, which is up from a 4% currency impact in the first and second quarters. Previously, our expectation was the currency to hold at/or around 4%. Our U.S. team posted a 4% sales increase in the third quarter which is improved from the 3% growth we reported for the first and second quarters. Our international businesses which include Canada, Mexico, Australia and New Zealand reported another quarter of mid-single digit growth and local currency. We are encouraged by the positive trends we are experiencing in our U.S. results and the steady growth across our international markets. We expect that these trends continue in the periods ahead. In the U.S. we are pleased with the progress and we are seeing in our field operations across the country. While result vary by geographical reason, our teams are executing on our key initiatives and again we are pleased with the progress The Atlantic, North East, Central and Southern Region showed the strongest growth in the quarter. Likewise, our sales in the mid-western region of the country rebounded nicely in the quarter. This pay group reported solid growth following flat sales in the second quarter, which was directly related to the wet weather patterns experienced in this spring and early summer. The number of our stores throughout the South West including Texas and Oklahoma, as well as a number of our stores in the mountain division which includes Montana and the Dakotas continue to feel the effects of the downturn in the oil and gas business. So now let’s take a look at our same store sales for Q3.We are pleased to report our U.S. Company own store group. Group stores sales grew comps store sales in the third quarter by 5%. This is an improvement over 3% comp store increases we reported for both the first and second quarters. This 5% increase is on top of the 6% increase generated in the third quarter of 2014 giving us a two year stack of 11%. Our 5% increase in the third 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 that retail results. As mentioned in previous calls, we continue to expand our revamp DIY initiatives across our company owned store group. We’re pleased to report these initiatives are having a positive impact on the results as evidenced by an 8% increase in our retail business. This increase is being driven by both transaction and basket size increases, and is up from a 7% increase in the second quarter and on top of the 5% increase one year ago. As mentioned earlier, our retail initiatives have had a positive impact on both the size our average ticket and the numbers of tickets moving through our stores. In the third quarter we experienced an increase on our average retail ticket and a significant jump in the number of retail tickets. While we are still on the early dates of our rolling out our retail strategy, we are pleased with the initial returns. We have a great deal of heavy lifting in front of us but our team both in the stores and here at headquarters is truly energized. Moving along to our core commercial wholesale business, this is the dominant segment of our automotive business and in Q3 we turned in a 4% increase. This is a nice improvement from the 2% increase we reported in the second quarter and is on top of the 6% increase in the third quarter of 2014. The centerpiece of our commercial and wholesale business remains our major account alliances, as well as our NAPA AutoCare business. Our NAPA AutoCare business surpassed another milestone in the quarter, as our membership count has now gone over the 16,000 mark in the U.S., this Group generated high single digit sales increases in the quarter. And we can also report our major account partners delivered steady and solid growth in the quarter. Our fleet business bounced back after moderating somewhat in Q2. Sales to our fleet account showed a low mid-single digit sales increase in the third quarter which is in line with the overall growth of our U.S. commercial wholesale business. Our wholesale ticket trend was consistent with what we experienced in the second quarter. Our average wholesale ticket value was up mid-single digit with no benefit from inflation, while we saw a slight decline in the average number of tickets. Let's take a look at a few of our key product categories and review the trends we experienced in the third quarter. Our brakes category was a highlight again in the third quarter and it has been a strong category for us all year. And as mentioned in last quarter's update, we experienced a strong selling season with our heating and cooling categories. The warm summer temperatures we experienced across many parts of the country drove strong air conditioning sales well into September. We also saw a resurgence with our battery sales in the quarter. This category was off its historical growth rates in the first half of the year, but we are pleased to see a rebound in the third quarter. And finally, our NAPA import parts business continues to expand as we registered another quarter of low double-digit growth. So looking ahead to the fourth quarter of the year, we expect the significant foreign currency headwinds impacting our reported results to continue. That aside, we'll be working hard to further improve on our 4% underlying automotive growth achieved thus far in 2015. Turning to the trends we are seeing across the automotive aftermarket, the fundamental drivers of our business continue to be positive. The average age of the fleet remains in excess of 11 years. The size of the fleet continues to grow. Lower fuel prices remain favorable for the consumer and miles driven continues to post substantial gains. US driving topped 1.8 trillion miles over the first 7 months of the year, which is a new record. In addition, the latest month with reported figures is July, which was up 4.2% year-over-year, also a new record. This makes 17 consecutive months of increases in miles driven. As we look ahead, strategic M&A will continue to be a growth lever for our automotive business. We mentioned in our Q2 conference call that we entered into an agreement to acquire Covs Parts, a 25 branch distribution company in Western Australia. Covs will serve as a nice complement to our existing Repco business as they are focused on original equipment and aftermarket automotive parts, truck products and mining and industrial consumable. We had hoped to close this acquisition on October 1, but are currently awaiting regulatory approval and are targeting a close date no later than December 1. The addition of Covs Parts further expands our presence and scale in Western Australia and is expected to generate annual revenues of approximately $90 million in US dollars. Based on - back on August 1, we closed on a smaller store acquisition in Australasia, and although the revenues for this business are less than $10 million annually, these types of bolt-on acquisitions throughout North America and Australasia will continue to be a key focus for our teams. So in closing, we are pleased to show progress in our third quarter automotive results and we're working hard to continue these positive trends. We would like to thank our teams both in North America, as well as Australasia for their efforts and appreciate all that they do for the GPC automotive business. So that completes our overview of the GPC automotive business and at this time, I'll hand the call over to Carol to get us started with a review of our financial results. Carol?

Thank you, Paul and good morning. We'll begin with a review of our income statement and segment information and then we'll review some key balance sheet and other financial items. Our total revenues for the quarter were $3.9 billion, consisting of underlying sales growth of 1.4%, seven tenths of 1% contribution from acquisitions. These items were offset by a strong currency pressures of 3.7%, which was somewhat stronger than we had anticipated. For the nine months through September, our total revenues of $11.6 billion, a 1% increase, consists of 2.4% core growth and 1.2% from acquisitions, offset by a 3% currency headwind. Our gross profit for the third quarter was 29.8%, up slightly from the 29.7% gross margin last year. For the nine months, our gross margin of 29.8% compares to the 29.9% reported last year. The progress we made in the third quarter is encouraging and primarily reflects the improvement in our automotive margins, although the office and electrical businesses also increased. The improvement in these businesses was partially offset by the continued pressure we're experiencing in our industrial business, which is due to the sluggish sales environment and lower inventory purchases, which ultimately negatively impacts supplier incentives earned. Executing on our gross margin initiatives is a key priority for our management team and we're committed to an enhanced gross margin for the long-term. We would also add that our gross margin initiatives are critical in offsetting the low inflationary environment that has persisted across our businesses for several years now, especially in automotive. Cumulative supplier price changes through September are negative three tenths of 1% for automotive, positive seven tenths of 1% for industrial, positive six tenths of 1% for office products, and a negative 1.5% for electrical. Turning to our SG&A, our total expenses were $869 million in the third quarter, which is a 2% improvement from the third quarter in 2014 and at 22.1% of sales compared to 22.2% last year. For the nine months, our total expenses are $2.6 billion, which is a slight increase from 2014, but improved as a percentage of sales to 22.4% compared to 22.5% last year. Our teams remain focused on controlling expenses in this environment and we continue to take actions to further improve our productivity and streamline our operations to enhance performance. Although we would expect to see more progress on this line in the periods ahead, it's also important to note that our SG&A as a percentage of revenue traditionally trends upward in the fourth quarter relative to the first nine months of the year and we are planning for that. Now let's talk about our segment results. Our automotive revenue for the third quarter was $2.1 billion, which is down 1.7% from the prior year and 52% of sales. Our operating profit of $202 million is up 4.5% and their margin improved just strong 60 basis points to 9.8%, which was due to improved gross margins and also expense controls. For the year, automotive sales of $6.1 billion are down seven tenths of 1% and our operating profit of $560 million is up 1.8% and our margin is improved year-to-date by 20 basis points to 9.2. Our industrial sales were $1.2 billion in the third quarter, a 4% decrease in 2014 and 30% of our revenues. Our operating profit of $90 million is down 5.4% and our margin was down slightly 10 basis points to 7.7. For the year, industrial sales of $3.5 billion represent 30% of our total revenues and are down 1% from 2014. Our operating profit of $267 million is down 2.6% and our margin is 7.5%, which is down 20 basis points from last year and this relates to the loss of leverage and lower incentives that have pressured this group for most of the year. Office products revenues were $511 million for the quarter, up 2.9% and representing 13% of our revenues. Our operating profit of $36 million is up 9.3% and their margins showed nice improvement up 40 basis points to 7.1%. This increase was driven by progress on both the gross margin and expense lines and it was partially related to the Office Depot, OfficeMax business, which we anniversaried July 1 of this year. For the year, office product revenues were $1.5 billion, up 10.9% from 2014. Our operating profit of $107 million is up 9% and our margin is down 10 basis points from last year to 7.3%. So we're pleased to see our margin for this business stabilize. The electrical electronic group had sales in the third quarter of $197 million, a 2% increase and 5% of total revenues. Our operating profit of $20 million is up 12.5%, so the margin for this group showed strong growth of 100 basis points to 10.2% which is a new record high. For the year, sales for this group are $574 million, up 2%. Their operating profit of $54 million is up 8.6% and the margin has improved to 9.4 from 8.9 last year. So a very solid 50 basis point improvement. So for the third quarter, our total operating profit was up 3% from last year and our operating margin improved by 40 basis points to 8.9% from 8.5%. For the year, operating profit grew 2% and our margin is 8.5%, which is up 10 basis points from the prior year. Our margin expansion in the third quarter was driven by improvement in gross profit and also solid progress in managing our expenses. We're very pleased with this expansion given our current sales environment. We had net interest expense of just over $5 million in the third quarter, and our year-to-date interest now stands at $16 million. We expect net interest expense of approximately $21 million to $22 million for the full year. Our total amortization expense was $8.5 million for the third quarter and is $26 million through nine months, which is consistent with last year. We currently estimate total amortization expense to be approximately at $35 million for the full year. The other line which reflects our corporate expense was $34.3 million for the quarter, which compares to $26.1 million last year. Through September corporate expense was $84.2 million compared to $74.5 million for the first nine months of last year. Primarily unfavorable retirement plan valuation adjustments of $5 million and $7 million for the quarter and the nine months account for the increases. In addition, we've experienced slight increases in cost such as legal and professional and IT related investment. Looking ahead we will expect that corporate expense line to be in the $100 million for the full year. Our tax rate was 37.45% for the third quarter and 36.85% for the nine months. These rates are up from 2014 due to the changes in our mix of foreign income and the related foreign tax rate, as well as the unfavorable retirement plan valuation adjustment that was recorded in the last two quarters. With these factors in mind, we currently expect our tax rate to be approximately 37% for the full year. Our net income for the quarter of $188 million compared to $190.5 million in the third quarter last year and our EPS at $1.24 was equal to last year. For the nine months, our EPS at $3.56 is up 1% from the same period last year. Now let's turn to our balance sheet, which we were able to further strengthen again in the third quarter. Specifically this speaks to our ability to effectively manage our working capital and drive increased cash flows. Our cash at September 30 was $199 million, an increase from $136 million at September of last year. We continue to use our cash to support the growth initiatives across our distribution businesses. Accounts receivable was $2 billion at September 30 is down 1% from the prior year and relatively in line with our 2% increase in sales for the third quarter. We continue to closely manage our receivables and remain satisfied with the quality of our receivables at this time. Our inventory at the end of the quarter was $3 billion or down 1.5% from September and a decrease of approximately 2.5% from year end. Our team continues to do a very good job of managing our inventory levels and we’ll remain focused on maintaining this key investment at the appropriate levels in the periods ahead. Our accounts payable at September 30 was $2.9 billion, up 12% from last year, which reflects the positive impact of our improved payment terms and other payable initiatives established with our vendors. We're pleased with our continued improvement in this area and we're encouraged by the positive impact it has on our working capital and days and payables. Our working capital was $1.9 billion at September 30, an improvement of 5% from last year. Effectively managing our working capital and in particular our accounts receivable inventory and accounts payable, remains a high priority for our company and we're pleased with our ongoing progress in this area. Our total debt at September 30 was $625 million, which is a decrease from the $835 million last year and a decrease from $850 million at June 30. Our total debt to capitalization is approximately 16.5% and we're comfortable with our capital structure at this time. We believe it provides the company both the financial capacity and 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 for the company. We also continue to generate solid cash flows driven by the significant improvement in our working capital. We’re raising our 2015 cash flow projections for the full year. We're now planning on approximately $950 million in cash from operations. Additionally we currently expect free cash flow, which deducts capital expenditures and dividends to be approximately $450 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've raised for 59 consecutive years. The 2015 annual dividend of $2.46 per share represents a 7% increase from the $2.30 per share paid in 2014 and its well within our goal of 50% to 55% payout ratio. Our other priorities for cash include the ongoing reinvestment in each of our four businesses, strategic acquisitions and share repurchases. Our investment in capital expenditures was $25 million for the third quarter and through the nine months capital spending is $62 million. We expect our expenditures in the fourth quarter for the full year to be in the range of $105 million to $115 million. The vast majority of our investments will continue to be weighted towards productivity enhancing projects primarily in technology. Our depreciation and amortization was $34 million in the third quarter and its $106 million through nine months, which is down slightly from 2014. Looking ahead, we're projecting depreciation and amortization to be approximately $140 million to $150 million for the full year in 2015. Strategic acquisitions continue to be an ongoing and important use of our cash for us and they're integral to our growth plans. For the nine months through September, we've invested approximately $115 million for the acquisition of several new distribution businesses, including the two in the third quarter previously covered by Tom and Paul. Also as previously mentioned, we closed on an acquisition on the office products business, small industries and we expect to acquire Covs, as Paul mentioned, later this quarter. So as you can see, acquisitions are important to our growth plans and we'll continue to seek new acquisition opportunities across our distribution businesses to further enhance our prospects for future growth. Although many of these opportunities will be smaller sized companies with annual revenues in the $25 million $150 million range, we're open minded to new complimentary distribution business of all sizes, large or small, assuming the appropriate returns on investments. Finally, during the quarter we used our cash to repurchase approximately 950,000 shares of our common stock under our share repurchase program. For the nine months, we've repurchased 2.5 million shares and today we have seven million shares authorized and available for repurchase. We have no set pattern for these repurchases, but we've been slightly more aggressive with our repurchases given the value of our price during those for this year. We expect to remain active in the program in the periods ahead and we continue to believe that our stock is an attractive investment and combined with the dividend provides the best return to our shareholders. That concludes our financial update for the third quarter and nine months. So in summary, we've growth plans in place and are intensely focused on showing progress in periods ahead. Despite our recent challenges and the relative uncertainty in the global economy over the near term, we're encouraged by the fundamental opportunities we see across our distribution businesses. In closing, we would like to thank all of our GPC associates for their hard work and commitment to their jobs. Our people truly are our greatest asset. Now I’ll turn it back over to Tom.

Thank you, Carol, and thanks to you and Paul for the comprehensive updates. So that will conclude our prepared remarks and clearly it was another challenging quarter for us. However, underneath the headline numbers, there were a number of positives as well. Few examples, the 4% constant currency increase in automotive and 5% company store same-store sales growth shows steady progress as does our mid single digit local currency increases in Australasia, Canada and Mexico. Also in Automotive, the continued strong results coming from the NAPA Auto Care and major account initiatives are two primary and commercial programs and the solid 8% increase in our retail business show good progress on both the commercial and retail sides of the business. The completion of two key acquisitions in the quarter, one in office products and one in industrial and we expect to announce a few others of similar size before yearend and all this will give us a bit of a sales lift going into 2016. Gross margin improved 12 basis points in the quarter and SG&A decreased six basis points enabling us to show operating margin improvement in three of our four businesses and an overall GPC operating margin improvement of 40 basis points. On the balance sheet, good work was done in the areas of accounts receivable, inventory and accounts payable, enabling us to show a nice reduction in working capital as well as a nice increase in cash generation and there are ongoing progress being made by GPC team in a number of key areas as well, which will all serve as well in the quarters ahead. However, the one area that continues to give a significant challenge is revenue growth across all of our businesses. Currency is having an effect on each of the businesses to one degree or another both directly and indirectly, and specific economic issues are impacting us especially in industrial and electrical. Although both of these issues are transitory, we don’t expect them to moderate in the near term. Additionally as mentioned, we saw deceleration in our growth rates in three of our four businesses as the quarter progressed and the early October results are bit softer than planned. At this point, we don’t see any evidence of share loss across the businesses and our sense is that we are seeing further softening and overall in market demand. With all of that said considering current market circumstances and trends, we feel that's appropriate to revise our year-end guidance downward. Prior we gave you guidance on automotive of being up 1% to 2% and currently we would say that automotive will be flat to up just slightly with a 5% headwind from currency exchange. Industrial, our prior guidance was flat to up 1 and now we would say down 2% to down 3% with a 1% currency impact. Office Products will remain the same, prior it was up 7% and 8% and currently we say it will be 7% and 8%. And electrical prior guidance was to be up 3% to 4%, and we would say now up 2% to 3%. So for total GPC prior guidance was up 2% to 2.5% and right now we would say flat to up slightly with little bit more than a 3% impact from currency exchange. And with revenues at these levels, our prior guidance per earnings per share was to be $4.65 to $4.70, but we would say now $4.55 to $4.60 with a $0.15 to $0.16 per share currency exchange impact and on a comparable basis that would put us at $4.70 to $4.76, which will be up 2% to 3%. So that will conclude our prepared comments. And at this time, we will turn the call back to Victoria to take your questions. Victoria?

[Operator Instructions] Your first question comes from the line of Elizabeth Suzuki with Bank of America Merrill Lynch.

Good morning, guys. Can you parse out the foreign exchange impact between Australia and Canada, et cetera? And do you think the headwinds should start to ease in maybe not the next quarter, but starting 2016?

I'll try to answer that Elizabeth. We can't give you the specifics right now on the impact by country, but I can’t tell you that currency exchange quarter-end-over-quarter-end we were down about 20% in Mexican Pesos, about 18% in both Canadian and Australian Dollars. If that helps, we will be happy to follow up with you.

Okay, thanks. In the industrial segment, are there cost-cutting measures or price cuts that you can execute to try to offset the demand headwinds? Are you noticing any market share shifts among your competitors at all?

We are adjusting our cost structure as we go forward. What normally happens is when we get in the periods like this and we have seen prior periods similar to this. Revenue declines a bit more quickly than we can get to cost structure down, but eventually, we will catch up with it. And then at least based upon prior experiences what we have seen is that, when revenue does start to come back, the earnings come back fairly quickly and at a bit stronger pace because of the good work that the team does on the cost side of the business. As far as share shifts, we don't see anything right now that would indicate to us that we are losing business. I had mentioned in my comments that good work is going on in landing new agreements with specific customers, which might suggest that we are at least holding our own, perhaps picking up a little bit, but as being overshadowed by the declines we are seeing in certain categories right now.

Okay. Thank you.

Thank you.

Your next question comes from the line of Mark Becks with JPMorgan.

Hi, thanks. On the sales guidance, I just wanted to sharpen the pencil on automotive and industrial. So it looks like it's implying kind of 5% to 9% declines in industrial and then in automotive, it seems like 4Q is like 2% to 6%. So I was just hoping you can - obviously, with 4Q being a little bit of a smaller quarter, it gives a wide range, so I'm hoping you can drill that down a little bit.

You're going to have to help me on that. I get a little confused when you referenced second quarter.

Yes, so if we use the guidance for down 2% to 3% in industrial, it seems to imply a down 5% to 9% decline in industrial. So I want to see if that seems appropriate. And then similarly with automotive, if we should be thinking about kind of 2% to 6% sales growth in that category for the fourth quarter.

I think on the industrial, you are probably a ted high. What you saw as Tom mentioned, the later part of the quarter got worse in the industrial segment. So we are guiding for a little bit worse in Q4 so it’s probably more at the lower end of the range that you talked about. And then I think as you look out for what automotive would be Q4, I think you are in line with what we are using. Part of that is the currency. If currency won’t be quite as strong of an impact in Q4, it's going to be more back to where it was like Q2.

All right, that's helpful. And then within industrial more specifically, if I look at your 4% sales decline, it looks like it was a little bit more severe than some of the competitors out there. I was just curious who you see the major competitors being, whether it be an Interline or perhaps maybe a Grainger or Fastenal who looked like their top line was a little bit stronger?

Yes. We would not say that they are direct competitors. The best comparison I think would be with Applied Industrial Technologies with Kaman and with DXP. They would be the ones that we would encounter most frequently and would have the cost with the clearest overlap in product offering. If we look at Interline or if you like at Grainger or Fastenal, we really don’t overlap with them as much on the product categories that we sell.

Understood. And then just last question, you operated a distribution business essentially with four distinct segments. I know some of the facilities are shared warehouses, but I was just hoping you can kind of tease out what benefits you derive from operating the multiple segments and then the potential synergies you gain, whether it be from fleet or transportation or shared services from the various segments? Thank you.

You mentioned three of the areas where we do get some leverage, certainly on transportation both inbound and two to three outbound. We certainly get it in the area of shared services without question. We don't share facilities to a large degree today. Each business runs independent facilities. That’s something that we think potentially we could do as we go forward. We are looking at it now between the couple of the businesses. But we share technology enhancements and capabilities. We generally pilot something new in one of the business, prove the concept and then start to roll it into other businesses. There are several things that we do across all of the businesses once we prove that the concept gives us a kind of returns that we are looking for.

And Mark I just want to be clear on automotive guidance that we talked about. What we were talking about is probably flat up slightly for Q4 that’s what implies, but the FX would be about 4%. So that is kind of what you are talking about.

Okay. So with kind of the 4% core automotive growth rate, it seems like that's a good number to think about for fourth quarter as well.

Yes, it is. And last year Q4 our automotive comp was at 6%. So that’s a good number.

Okay, great. Best of luck.

Your next question comes from the line of Greg Melich with Evercore ISI.

Hi, thanks. Tom, I think in your final comments, you mentioned that revenue decelerated across the business through the quarter. Could you help, I guess give a little bit more color then into October and specifically in auto what you saw. Does that mean that auto had a really strong beginning of the quarter and now it's just at that lower level that you just inferred or what do you think is going on there?

We saw the quarter was softer. The underlying business as Paul mentioned was pretty good. But we did see deceleration in our U.S. based business, as well as in the international businesses. The delta is not as significant in automotive as it is in industrial - and to a degree in office products. The only business that we did not see deceleration across the quarter was in our electrical business. The other three all declined. If we look at the early results in October, it’s pretty much in line with what we saw in the back half of the quarter is softer than what it had been. We think right now based upon what we can gather from talking with our customer base and with our supplier base is we think end market demands have pulled back a bit from what we had seen earlier in the quarter and certainly through first half.

If I could follow up on the gross margin, what drove the expansion there, again, especially in auto? Was it the stronger dollar helping, price optimization, vendor leverage? What are you seeing there?

Actually Greg, it’s all those things. We were pleased - this has been our second quarter, our gross margin improved with automotive and some of the things that we put in place earlier in the year and certainly you talked about it with our foreign operations. We had to put some things in place on both the buy side and the sell side to combat the currency issues. Those are working quite nicely for us in Q2 and Q3. And then really on the U.S. business too, their gross profit is up as well and that’s really just strong focus on both the buy side and the sell side. It’s just really all across the board. So we’ve been pleased to see their improvements. I'd tell you going into Q4, the only headwind is going to be coming with industrial and just a further softening in their top line. So if we can maintain where we were at be flat or slightly up, through the rest of the year, but we’ve got a little bit of headwind with industrial.

That’s great. Thanks a lot.

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

Thanks a lot and good morning to you. The first question I want to ask is about the cadence of cost control. The Company responded quite well to the revenue slowdown in the quarter, both in SG&A and in working capital. And the deceleration in SG&A growth or I guess the move to a decline was a real step change from where you had been. The guidance that you gave as best I can tell suggests a trend in SG&A much closer to the year-to-date number than what you saw in the third quarter. So can you talk about what enabled you to cut costs so substantially in Q3 and why you don't expect that same pace of expense reduction to persist into Q4?

What we talk about is, look we were extremely pleased with the progress in Q3 and I'd tell you from an SG&A standpoint, again our team suggesting our cost structure to where we saw the topline to be and it’s in a lot of different areas on SG&A and we’ve seen improvement that’s come in automotive really all year with SG&A. It’s really hard with industrial and their lack of top line for them to have. And they are going to have continued pressure on their SG&A line. When you look at the full year, I’d really point you to look at our operating margins through the nine months where each of our businesses except industrial have improvements through the nine months and where we are at 10 basis points operating margins, that’s really probably more of what we expect to be for the full year. We had sequential better sales in Q3, especially in automotive. So we leverage better on the SG&A. Q4, you just have a lower sales volumes, their seasonality. You won't get as much SG&A leverage. And then we are guiding on the corporate expense. You see a change there for the end of the year. We had some favorable onetime items in corporate expense at the end of the year and we called those out last year and there was a swing of almost – there will be a swing of almost $10 million in that retirement plan adjustment. So some of those things are factoring into our full year guidance to get us more to the year-to-date number you’re looking at.

Okay. Secondly, and very briefly, I know you announced a couple of new acquisitions. Is it possible just to sum up I guess the annualized revenue that you acquired and just how we think about that factoring into the full-year guidance? I suspect that the numbers are going to be reasonably small contributors, but anything we need to factor in as we build up our organic versus acquisition model for Q4?

Well, we have contemplated those acquisitions in our guidance. The one that Paul mentioned, the Covs acquisition doesn't close to December 1. So there is a very small amount that would go in there. But if you look at the ones we've already exposed on, you’re talking about something around 140 million on an annual basis and that excludes the Covs deal but hasn't closed yet.

And these are acquisitions -- the $140 million are for acquisitions you announced today?

They are the ones going back to January 1.

Okay, got it.

We have had about 7. But those are in our 2015 guidance already.

So the new news we would have to add to our models is kind of immaterial for the rest of the year?

That's correct.

And then finally interesting commentary on office products and I guess wondering for your insights on the independents sort of bearing the brunt of the slowdown. When do you typically see that in a cycle? I know that there can be some volatility by channel, so I don't want to make too much of it, but you did call it out. So curious for your read from the field on what that typically means. A – Tom Gallagher: Well, the independence this is two consecutive quarters at the independent side of the business that has been down and we see further consolidation happening in that customer segment currently. We see more of that continuing honestly as we work away through year end but our expectation would be that the independent side of the business would be positive for us in 2016, probably have another quarter or two were to be negative ahead of us yet.

It sounds like you have visibility, Tom, to some consolidation by actual deals that have happened that are changing the landscape a bit and then those run their course. A – Tom Gallagher: Well there are some of that, that’s right, that’s right. And we have visibility to some that we think are going to happen.

Fair enough. Got it. Okay, thank you so much, guys. A – Tom Gallagher: Thank you.

Your next question comes from the line of Seth Basham with Wedbush Securities.

Good morning and thank you for taking my question. My first question is on the industrial side looking at the margin performance there, which was very good all things considered. Can you help us understand a little bit more on the gross margin side versus SG&A side where you saw more pressure and how you expect that to play out in the fourth quarter?

So on the industrial side and their growth margin is actually down and then their SG&A is not improved either. That’s the one area that I mentioned that - look the size the top line, it's also the volume incentive, so their volume incentives are down similar to their sales decrease in the quarter and we would expect those to be down for the full year as well. So they are just not getting the same level and so that’s going to be, I think both pressure on gross margin and SG&A. So where their margins down 10 basis points through the nine months given where we have guided to for the full year we could see a little more pressure on that operating margin for the rest of the year.

Got it. So only a little bit more than 10 basis points. Does that mean 2030 or even more severe than that?

Well, we’d hope that will not be more severe than that. Look we are really hopeful that - right now we just don’t know but hopefully it’s something what you described.

Got it, okay. Moving on, on the auto side, looking at the core business on the wholesale side in the U.S., this is the second quarter in a row that you've talked about ticket counts being negative, not dramatically so, but any more color there why that's happening, Paul?

Yes, and I think you and I talked about that last quarter. Look there is a couple of things happening here, one certainly vehicles, vehicle quality is a heck of lot of better today and I think we’re seeing some of that impact on the number of cars coming into the bays. But what you do see when they do come in that the repair is at a higher price which were seeing and we’re pleased to see as our average ticket value continues to - continues to go up in the right direction. So, it's something that we’re watching a bit Seth you are correct it is two consecutive quarters and we’re going to continue to monitor it but we would expect that to bounce back in 2016.

Got it. Is there one segment of your wholesale business that is showing more weakness? Is it the up and down the street garage customer?

No, not really, Seth. I mean if you - the numbers that we shared with you, our auto care business continues to be strong and that's, that’s all different sizes of shops. Our major account business continues to be solid, so there is no one area jumping out.

It maybe reflective but what’s happening with the car counts in the bays and I think there is some inconsistency across the board in the industry with car counts I think some are experiencing increased car counts and others are flat to may be down just slightly.

Understood. Okay, thank you very much and good luck.

Your next question comes from the line of Tony Cristello with BB&T Capital Management.

Thanks, good morning. Tom, can you sort of maybe categorize a little bit how this slowdown feels versus other slowdowns you've experienced? The severity doesn't seem like it's as bad in any way, but the beginning stages here I guess give pause and I think you even alluded to watching some things to maybe give you an indication how this may play out.

It’s an interesting question Tony. On the one hand we looked at a set of data points that would indicate that things are going along, okay. On the other hand you look at a different set and they suggest to you that it’s in consistent what the first set of data might indicate. Right now it feels like we’re in a grind-it-out mode in several of our businesses and there seems to be quite a bit of caution on the part of a number of our customers primarily in the non-automotive businesses in terms of CapEx and investing for future growth. And I think people are being very careful about how they’re spending their money right now on investing for the future. So, right now from at least from my perspective we still have a couple of quarters I think to work our way through this and I think it’s going to be a gradual path forward not anything that’s going to be a hockey stick type recovery. I think it’s going to be slow for another quarter or two and then hopefully we’ll start to see the evidence of that. And if you look at the disconnect, on the industrial side the disconnect between industrial production and capacity utilization, they seem to be going in different directions right now and historically they tend to move in line with one another. So again, just they’re conflicting sources of information currently.

Okay. And was there something in particular on the office side as well, which seems to be holding up better that gives you a little bit of a pause in a different manner than what you've seen in industrial?

On the office products side, we thought like the team together a pretty darn good quarter having anniversaried the two significant impacts. Being up 3% in the current environment I think is reflective of some good work being done by the office products team. The thing that gives us a little bit of pause though is, we actually thought we might be just a slightly better as we went into the quarter, we thought it might be a little bit stronger than the way it turned out and we saw some deceleration as the quarter progressed as I mentioned and that’s continued on into the first half of October. So we don’t have the sense right now as to what the real cause but what we do know and talking with our primary vendors is that this is not unique to S.P. Richards or Genuine Parts, they're seeing this across most of their customer base and it just seems to be a temporary slowdown that hopefully we will reverse itself as we work our way through the quarter.

Okay, that's great color. Maybe if I can ask one more, on the automotive side, you are having very good success in terms of the DIY and gaining some traction with various initiatives. Maybe if you could just add a little color to that in terms of is it simply you're a much higher percentage commercial business and so adding that emphasis on DIY is easy to gain that share? Is there something you are doing perhaps differently than what your traditional DIY-focused retailers would? Or is it a situation where even your affiliates are seeing an increased appetite for that type of product and maybe they are gaining some share from what seems to be a competitive marketplace with some disruption over the last couple of years?

Yes, Tony this is Paul, I would tell you that and we’ve talked about it a bit in previous calls. We have put a renewed focus on our DIY business. We've addressed many of the fundamentals expanding our store hours, additional training for our folks, we’ve added some personnel in the stores, and we’ve also are testing out a new retail store format Tony that we've began to roll-out in 2015. And it’s very early yet, but we’re pleased with the results and we'll be reviewing that the balance of this year and make a decision as we go into 2016. Generally what takes place, you mentioned our affiliates are independent owners, they will many times let us pioneer some new ideas and certainly new approaches. I think they will get on board when they see the kind of success that we're driving in the retail side. Many of our independent owners do a heck of a job today on the retail side of the business anyway. So it's early yet, Tony, but I would tell you we're pleased with the results that we are seeing.

Okay. Now that's great. I appreciate the time. Thank you.

Thank you.

You're welcome. Thank you.

Your next question comes from the line of Carolina Jolly with Gabelli & Company.

Thanks, good morning. So looking at your results, you've got some challenged end-market promotions. Has this distress made any potential acquisition targets, maybe something similar to Lake Erie, more willing to discuss a potential sale?

Well, as you know, it takes a willing seller and a willing buyer. We are a willing buyer. We just have to find more willing sellers that are willing to sell at prices that we think are favorable to the shareholders of Genuine Parts Company. I mentioned in my comments that we have a couple more that we think we'll announce prior to year end, none of which will have any material influence on Q4. But will help us as we go into the first quarter of next year. So there are a number of conversations that are going on. A couple are further along and we feel confident that we'll get a few closed by year end and hopefully we can generate some additional interest from some others.

Okay. Great. Thanks.

Thank you.

Your next question comes from the line of Bret Jordan of Jefferies.

Morning. A good question. I guess as we talk about Mexico, and it was about a year ago that you began to go to Mexico with the NAPA brand as opposed to Auto Todo. Could you give us any color on how the traction is building there as you are rebranding?

You bet, Bret. It was - you've got a good memory, it was just about exactly one year ago that we launched our initiative in Mexico and bringing the NAPA brand down to Mexico. We - where we are currently, we're on track, we're on target. We expect to end the year with 20 to 25 NAPA stores in the region. I would also tell you that probably since we last talked, we're in the process of recruiting a couple of strong entrepreneurial independent owners who are opening stores down in the region as well. So - so far we're on track.

Okay, and then one other regional question. You mentioned some of the energy states were a little softer than the average in performance in the quarter. How about the West ex the energy states? If you go all the way out to the coast, how was the regional performance there?

Yes. So the west - and I did mention our team out West, but they are holding their own, Bret. They were right at the overall growth number for the commercial business and our overall business. So West is holding up okay. We're seeing, as I mentioned solid growth up and down the East Coast, all the way down into the southern and Florida groups, most of our softness or where our softness is, it's almost directly tied to some of those oil and gas markets.

Okay. And then one last question, as you were talking about M&A, is there any thought about increasing the Company-owned store base within NAPA, either just buying in independents as they retire or doing something more structural there? I mean, obviously, as you are getting a retail operation, you get maybe a better return on the average store. Is there a thought about upping the Company-owned store count?

I think you'll see that happen as time goes on, Bret. Our basic philosophy is we'll own the stores in and around the major metropolitan areas and we'll have good independent owners in the outlying areas. And I don't think that will change materially going forward. But as a percentage of our total automotive volume going out a few years, you'll probably see the corporate stores represent a little bit higher percentage of the total volume than the independent stores do today.

All right. Great, thank you.

All right, Bret.

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

Hey, guys. Thanks for letting me in under the wire here. Couple of things, first of all, I guess, obviously, we did see at least a slight deceleration in auto despite what seemed to be pretty favorable weather for most of the quarter. So for the sake of focusing on an admittedly short-term issue, I guess the question is probably for Paul. Do you have concerns that we could start to see a little bit of incremental softening if the mild weather we've seen for most of the fall here continue deeper into the quarter?

Scot, you hit it. Our - we did see slight deceleration as the quarter progressed. We had a really strong both June and July saw a little bit of a downtick, slight downtick in August and September. It's early yet, but we're certainly optimistic that the quarter will come in as we projected. But I think as Tom mentioned in his comments, in the overall environment that we're in, we are in a - we are definitely in a grind it out kind of mode right now as we go into the fourth quarter.

So would you attribute the little bit of deceleration that we saw in auto to weather or was it something else, just so it's kind of clear for everyone?

No, I don't think it's tied to weather, Scot. Actually the weather throughout the summer and even into September we had I think a warmer than normal summer, which resulted in some good numbers for us and categories like air conditioning was strong, batteries were solid in the quarter. So no, I don't think it attributable to weather at all.

Well, you've mentioned before that you guys are exposed to more industrial related to stuff in NAPA than maybe some of your competitors are. Is that where you are seeing it, some of the items that you've mentioned before on that front?

No, as I mentioned in a previous question, where we are seeing softness, it is directly in some of the more dominant oil and gas markets, Southwest for sure, some of the mountain areas, which includes some of the fracking country up in the Dakotas and Montana. We do - do a lot of business in the fleet, Scot. We do a lot of heavy duty business. We do a lot of heavy duty filter business and we are seeing some fairly significant declines in those categories in those markets.

Okay, I knew you mentioned the geography. I was just trying to clarify on the product. That's helpful. And then previously, I think, as Carol mentioned, you guys are comfortable with the receivables. Can you help us understand how much exposure you have to some of these troubled end markets? You've referenced mining, oil, gas, etc. and is there a point where you start to consider changes to terms to some of these customers as you try and protect against potential losses, just given the strain on some of their own balance sheets?

Actually, we very closely monitor accounts receivable and certainly what you are speaking about in the industrial area, right now, we're not taking steps, additional steps to modify anything. But I can tell you its just a constant focus on our receivables. We feel like we're in pretty good shape. We actually already have an outlook and an estimate for what our full year bad debt expense will be and we don't have anything that we're concerned about. I think our customers and the terms that we have, we have a pretty close insight as to what's going on. So I wouldn't see anything there.

Got you. Okay. Thanks a lot, guys.

All right.

I've got just one last point. Keep in mind that I think across the enterprise our team has done a very good job in accounts receivable management. Carol pointed out earlier that we are down 1% in receivables year-over-year, which I think is a pretty good job.

Thanks, Tom. I appreciate that.

We'd like to thank everybody for participating in this quarter's conference call. And if you have any further questions, let us know. But we appreciate your interest in and support of the company and we look forward to talking to you again after our fourth quarter earnings in February. Thank you.

This concludes today's conference call. You may now disconnect.