Genuine Parts Company (GPC) Q4 2017 Earnings Report, Transcript and Summary

Good day and welcome to the Genuine Parts Company Fourth Quarter and Year-End 2017 Earnings Call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] At this time, I would like to turn the conference over to Sid Jones, Senior Vice President, Investor Relations. Please go ahead.

Good morning and thank you for joining us today for the Genuine Parts Company fourth quarter 2017 conference call to discuss our earnings results and current outlook for 2018. I'm here with Paul Donahue, our President and Chief Executive Officer and Carol Yancey our EVP and Chief Financial Officer. Before we begin this morning, please be advised this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results as reports under Generally Accepted Accounting Principles. A reconciliation of these measures is provided in the earnings press release issued this morning, which is also posted in the Investors section of our website. Today's call may involve forward-looking statements regarding the Company and its businesses as well. 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, including this mornings' press release. The Company assumes no obligation to update any forward-looking statements made during this call. Now, let me turn the call over to Paul.

Thank you, Sid and let me add my welcome to our fourth quarter 2017 conference call. We appreciate you taking the time to be with us this morning. Earlier today, we released our fourth quarter and full year 2017 results. I'll make a few remarks on our overall performance and then cover the highlights by business. Carol Yancey, our Executive VP and Chief Financial Officer will provide an update on our financial results and our outlook for 2018. After that we'll open the call to your questions. So, to recap our fourth quarter sales and earnings performance across our global platform total GPC sales were up 11.3% to $4.2 billion with net income at $108 million and earnings per share at $0.73. Alliance Automotive Group our European acquisition, which closed on November 2nd of 2017 performed in line with our initial projects and contributed approximately $250 million or 6.8% to sales and $0.07 in earnings per share. For the year, total sales were a record $16.3 billion, a 6.3% increase compared to 2016. Net income was $617 million and earnings per share were $4.18. AAG contributed 1.7% to sales and the same $0.07 earnings per share. During the fourth quarter, there were several events that impacted our reported results which are highlighted in our press release and which Carol will discuss further. In summary, in addition to AAG's two months of operations discussed above, we had transaction related costs associated with the acquisition and recorded a tax expense related to US tax reform. Before these items fourth quarter sales for our core operations were up 4.5%, net income was up 8.5% and earnings per share of $1.12 were up 10%. For the full year, our core operations were up 4.6% in sales, net income was flat and earnings per share of $4.64 were up 1%. When we combine these core results with AAG's two months of operations our earnings per share were $1.19 for the fourth quarter and $4.71 for the full year. So, an active fourth quarter for us and we are proud of our teams and the good results they delivered. The fourth quarter was marked by progress in several areas and our teams delivered our strongest comparable earnings growth since 2013. The diversity in our operations combined with an ongoing strategy to drive both organic and acquisitive growth enabled us to deliver the 11% total sales increase for the fourth quarter. The acquisitions we have made to-date and those we may execute going forward, are intended to expand our businesses and further enhance our global footprint and ultimately create additional shareholder value. In 2017, we acquired 15 businesses with proximally $2.1 billion in annual revenues including approximately $1.7 billion at AAG and another $150 million in sales at the three other businesses we acquired in the fourth quarter. In addition, in April of 2017, we made a minority investment in Inenco Group, a market leading industrial distributor in Australasia which we're planning to add to our industrial platform within the next 12 to 24 months. Overall, acquisitions added 8.5% to the sales in the fourth quarter and we anticipate that each of these new businesses will positively contribute to our future results. As we review our 2017 performance total fourth quarter sales were driven by increases across automotive, industrial and electrical groups. Turning to our global automotive group sales for this segment were up 16.7% in Q4, including an approximate 1% comp sales increase and a 4% total sales increase before the positive sales contribution from AAG. In our US automotive operations, total sales were up 2% in the fourth quarter with comp sales up 1%. And while 1% comp sales increased short of our long-term expectations, we did show sequential improvement from Q3 results. Comparable sales to retail customers outperformed our sales to commercial accounts. The sales results are consistent with the past several quarters, which we have attributed to challenging business conditions across many of our major accounts, fleet and now auto care customers. That said, we continue to see many of our major accounts performing well and our auto care customer group was improved from third quarter. We have several initiatives in place to further build the sales potential with our major accounts and fleet customers and we will be launching new and enhanced benefits for industry leading auto care program which is now grown to over 17,500 members. We expect these initiatives as well as the further expansion of other value-add services such as our auto tech training which impacts thousands of repair shops and even more automotive technician to drive stronger sales with our commercial customers in 2018. In retail, our sales growth stems from initiatives such as the NAPA rewards program which now has 6.5 million members and additional 1 million members from last quarter and our retail impact store initiative which now totals approximately 500 stores. Our retail sales at these stores continue to outperform our total network driven by strong increases in average ticket values or basket size. In 2018, we'll expand this retail initiative further with the conversion of another 200 to 300 stores comprised of both boat company owned stores and independent owned stores. In addition to these growth initiatives, we're optimistic for the gradual strengthening of the overall aftermarket industry as well as our US automotive sales for several reasons. We expect the demand for failure and maintenance parts to increase due to the impact of a more normalized winter season, something we haven't experienced for two years. We expect a number of vehicles in the aftermarket sweet spot stabilize in 2018 after falling for the past few years due to the historically low new car sales in the post-recession years of 2008 through 2011. And finally, the long-term fundamental drivers for the automotive aftermarket remains found with a growing total fleet relatively stable fuel prices which continue to drive more miles driven amongst consumers. Based on the most recent data available, total miles driven increased 1.1% in November and are up 1.3% for the 11 months. We also expect our ongoing acquisition to positively contribute to our future sales. During 2017, we added four automotive store groups including the fourth quarter acquisition of Monroe Motor Parts as well as Stone Truck Parts, the heavy-duty operation to our US network. These types of accretive tuck-in acquisitions are an important part of our growth strategy and we expect additional opportunities in the future. Now let's turn to our international automotive businesses in Australasia, Canada, and Mexico. As a group, these operations delivered a 5% total sales increase in fourth quarter including a 3% comp sales increase in local currency, which is consistent with the third quarter. In Australia and New Zealand, total sales were up low to mid-single digits once again in Q4 driven by a slight increase in comp sales and the ongoing benefit of acquisitions. The Asia-Pac business finished 2017 with 560 stores across Australasia and like our other businesses has plans for further store expansion in the future. Further underlying fundamentals for the Australasian aftermarket remained solid as we enter 2018 with a growing car part driven by strong car sales relatively low gas prices and upward trends in miles driven. These positive trends are underpinned by an overall healthy Australian economy. At NAPA Canada, sales remained strong in the quarter with total sales up mid to high single-digit and comp sales up mid-single digits. These results include and are highlighted by a strong performance from our heavy-duty truck parts business as well as solid results across Western Canada. In addition, we announced on December 31 NAPA Canada added Universal Supply Group to its operations. Universal in a Kingston, Ontario based operation with 21 stores which sell auto parts, heavy duty truck parts and paint and body parts. The addition of Universal Supply strengthens our core presence in eastern Ontario market. So, our team in Canada is headed into 2018 with solid momentum and we look forward to another strong year from our Canadian team. Our automotive operations continue to expand in Mexico and this team finished 2017 with sales up mid-single digits. During 2017, we expanded our NAPA Mexico footprint with eight new auto parts stores and entered 2018 with 42 total stores. We have plans for further expansion of our store base and accelerate revenue growth in the quarters ahead. Finally, we want to add that the operating results at Alliance Automotive Group for November and December reflect a solid start to this group. As you might imagine there is an incredible amount of planning and other work associated with an acquisition of this size, but our teams both in Europe and the US are doing a terrific job of staying focused on the business throughout this process. So, looking back at our first 60 days in Europe things have gone extremely well and our talent management team is in position to drive strong results in 2018. We enter our first full year with the AAG team excited for the growth prospects we see for this business across all of our operations in France, the UK, Germany, and Poland. So, in summary, our fourth quarter global automotive results were in line with our expectations both before and after the added contribution from AAG. We entered 2018 optimistic for further improvement in our results for this largest business segment of GPC. Now turning to our industrial business, motion industries posted another impressive quarter with sales up 7.4% consistent with the first three quarters of the year. Overall, motions fourth quarter capped off an outstanding year in 2017 with solid mid-single digit comp sales growth further enhanced with their pneumatic engineering acquisition and the addition of Apache Hose & Belting Company. This combination of strong organic growth and acquisitions also led Motion to significantly expand their operating margin. Favorable conditions in the industrial economy during 2017 drove solid growth across all product categories in the industries we serve. Each of our major product categories posted sales gains in the top 12 industries where we compete. 10 sectors were up again for the fourth quarter with strong growth in the sectors such as equipment and machinery, iron and steel, lumber and wood products, aggregate and cement, equipment rental and leasing, and oil and gas extraction. We expect the strong industry conditions we experienced in 2017 to continue into 2018. The industrial indicators we follow including industrial production, the purchasing managers index, rate counts and the level of exporting goods remain solid and should drive ongoing customer demand across the diverse markets we serve. Turning now to EIS, our electrical and electronic materials group. Sales for this business were up 8.9% in the fourth quarter driven by the addition of Empire Wire and Cable in April of last year. Empire was an important strategic acquisition for EIS as it further expanded EIS's wire and cable offering and strengthen its capabilities to serve the industrial robotic and automation markets. This ties in well with Motion's expansion in this sector including its Braas in 2016 and the addition of Numatic Engineering in 2017. The EIS and Motion businesses have a growing number of common attributes including their product offering, suppliers and in many cases their customers. To that end on January 1 of this year, we announced that we were combining the EIS operation in the motion and the industrial parts group. As a result, beginning our first quarter, with our first quarter of 2018 reporting in any comparable prior year period EIS will be identified as Motion's electrical specialties group. The combination of these two segments will provide strong economies of scale and greater efficiencies which we intend to leverage. The opportunity to build synergies by sharing talent, physical resources greater [ph] and scale and value added expertise in each respective market channel is highly compelling. Most importantly, we anticipate this combination will create value for both our customers and all our stakeholders. Our management teams are excited for the opportunities they see as a combined operation and are working closely to maximize their future potential as a $6 billion industrial group. Likewise, with the planned addition of Inenco in Australasia which also provides us an entry into growing markets like Indonesia, Malaysia, and Singapore our outlook for the global growth prospects for this group is promising. Now a few comments on S.P. Richards, our business products group which reported a 2.2% decrease in total sales for the fourth quarter. This business continues to be challenged by the continued pressures and demands through traditional office supplies, although the facility break room and safety supplies category continues to be a bright spot as they accelerate revenues and close 2017 at approximately 35% percent of total sales. Our fourth quarter business products group results reflect the continuation of challenging trends and the changing landscape of the office products industry. That said, our team remain focused on diversifying this business while building greater size and scale in the growing FBS market. This is a key element of our overall growth strategy and an important consideration as we continue to evaluate our long-term outlook for this business. So that recaps our consolidated and business segment sales results for the fourth quarter of 2017. Overall, the 4.5% sales growth before AAG was consistent with the first nine months of 2017 and we were pleased with the two months contribution from AAG which provided us with total sales growth of 11.3% for the fourth quarter. Importantly, we also made progress with our profitability and improved our operating margin for the first time in several quarters. We credit our teams for improved execution while striving to improve our overall operating performance. While we have work yet to do, we are encouraged with our progress in Q4. So, with that, I'll hand it over to Carol for her remarks. Carol?

Thank you, Paul. We'll begin with a review of our key financial information and then discuss our outlook for 2018. As Paul mentioned sales in the fourth quarter up 11% or up 2% before acquisitions and 1% favorable impact of foreign currency. For 2017, our total sales increase of 6% includes 1.5% comparable sales growth, a slight benefit from foreign exchange and a 4.4% increase from acquisitions. Our gross margin for the quarter was a reported 30.52% compared to 29.92% last year and reflects the benefit of increased supplier incentives in our industrial business as well as the higher gross margin associated with AAG's two-month results. The favorable impact of these items was slightly offset by the $5.6 million purchase accounting costs recorded in the fourth quarter. Before the impact of the AAG acquisition and the related purchase accounting cost, our adjusted gross margin would have been 30.2% in the fourth quarter or 30 basis point increase. For the full year, our reported gross margin of 30.08 compares to 29.98 in 2016. Before our accounting for AAG our adjusted gross margin would have been 30%. Looking to 2018, we remained focused on enhancing our gross margins through several key initiatives including continued supplier negotiations both globally and across our businesses. The ongoing investment and more flexible and sophisticated pricing strategies as well as improved analytic capabilities around SKU profitability. We experienced a somewhat inflationary pricing environment in 2017 with at least slight inflation in each of our business segments for the year. Our cumulative supplier price increases for 2017 were three tenths of 1% increase for automotive, 2% percent increase for industrial, 1.3% increase for electrical and six-tenths of 1% for office. Turning to our SG&A our total expenses for the fourth quarter were $1.6 billion, which includes the impact of AAG's two months of operations as well as transaction related costs of $25 million. Excluding these items, our total SG&A would have been $939 million or at 5% and 23.78% of sales which is an increase of 10 basis points from 2016, but improved from the cost increases we reported in the past several quarters. So, despite the challenge of leveraging our expenses with less than 3% organic sales growth, our teams did a good job of managing their expenses during the quarter and we benefited from favorable year-end expenses an area such as incentive compensation, legal and professional, and insurance. With these fourth quarter results, our total expenses were $3.9 billion for the full year including two months with AAG and $43 million in transaction related costs of which $18.5 million was recorded in the third quarter. Excluding these items our total expenses were $3.77 billion, up 7% and 23.51% of sales or a 40 basis points increase. As referenced earlier, our expenses were up in 2017 for several reasons including the lack of leverage on low single-digit sales comps. Rising costs in areas such as wages and labor, freight and delivery, IT and digital investments. To offset these and other increases, we continued to enhance our cost saving initiatives and while we have much work ahead of us we were encouraged by our progress in the fourth quarter. With that said, our goal of achieving a lower cost highly effective distribution infrastructure will take time and our SG&A outlook includes certain costs that we deem necessary to support this objective as we move forward. In addition, we're considering certain accelerated investments in 2018 to take advantage of our projected tax savings related to the tax cuts and job. We expect this process to pressure our overall SG&A to some degree but we're confident in the positive impact on our long-term profitability. We'll now discuss the results by segment, our automotive revenue for the fourth quarter of 2.3000000000 was that 17 percent from the prior year and our operating profit of $183 million is at 14.5% with an operating margin of 7.9 percent as compared to 8.0% in the fourth quarter of 2016. Excluding AAG, automotive fourth quarter sales would have been 2.1 or a 3.8% and our operating profit would have been $169 million or 5.7 percent increase reflecting an 8.2% operating margin. This 8.2% core margin is a 20 basis-points improvement from the fourth quarter in 2016 and it's much improved from the 120-basis points year-over-year decrease we reported in the third quarter. So, with this quarter's core operating performance and our expectation for an improved more normalized operating margin at AAG in 2018 relative to its two-month contribution in 2017. The automotive group entered 2018 with positive momentum which is encouraging. Our industrial sales were 1.2 billion in the quarter, a 7.4% increase from 2016. Operating profit of 103 million was up a strong 27% and their marketing margins significantly improved at 8.3% compared to 7.0% last year. The industrial group continues to benefit from both organic and acquisitive sales growth as well as improved gross margin including the favorable impact of supplier incentives as well as SG&A leverage. We're very pleased with the margin expansion for this segment. Our business product revenues were $466 million down 2% from last year and operating profit of $14 million is down 31% and their operating margin is 2.9%. As Paul discussed earlier, this segment remains under pressure due to the continued challenges facing the industry and as we evaluate our outlook for this business, our teams remain focused on the further diversification into the growing FBS market. The electrical electronic group sales were $193 million in the quarter up 9% from 2016. Their operating profit of $13.5 million is down 13% and the margin for this group is 7.0%. This decline reflects the lack of organic sales growth as well as ongoing customer and product mix shift. So, our total operating profit in the fourth quarter was up 13% on our 11% sales increase and our operating profit margin improved by 10 basis points to 7.4%. If we exclude the two months of AAG, our operating profit was up 8% on a 4.5% sales increase and our operating margin was up 30 basis points to 7.6%. So much improved operating performance for us in the fourth quarter and one that we will look to build on going forward. We had net interest expense of $17.4 million in the quarter which is up $12.6 million primarily due to the increase in debt associated with the AAG acquisition. With this in mind, we expect our net interest expense to be in the range of $93 million to $95 million for 2018. Our total amortization expense was $18 million for the fourth quarter which is an increase from the $12.5 million last year due to the amortization related to AAG. For 2018 we expect full year amortization to be in the range of $83 million to $85 million Depreciation expense of $32 million for the quarter was up $5.5 million from 2016. For 2018 we're projecting total depreciation to be in the range of $135 million to $145 million still on a combined basis, we would expect depreciation and amortization of approximately $220 million to $230 million. The other line which reflects our corporate expense was $56 million for the fourth quarter and that includes $31 million in transaction related costs associated with the AAG acquisition. Excluding those costs, our corporate expense was $25 million compared to $23 million in the fourth quarter of 2016. For the year, this line was $160 million or $111 million if you exclude the $49 million in total transaction related costs that were recorded in the third and fourth quarters of 2017. This is up from the $95 million in the prior year as we had the benefit of certain real estate gains in 2016. For 2018, we're projecting our corporate expense to be in the range of $115 million to $125 million. Our tax rate for the fourth quarter was 51.3% which reflects $51 million in provisional tax expense related to the transaction tax on foreign earnings as well as the revaluation of deferred tax assets and liabilities as was required by the Tax Cuts and Jobs Act enacted in 2017. Excluding the impact of this expense as well as the two months of operation for AAG and any transaction related costs for that acquisition, our income tax rate would have been approximately 35%. This has improved from the 35.5% tax rate in 2016 due to the favorable mix of US and foreign earnings as well of the change in accounting for stock-based compensation. For 2018, we expect further shift in our US and foreign earnings associated with the full year of AAG operations, as well as the estimated benefit of tax reform on the US federal rate. So, we expect our tax rate to be 26% to 27% with provisional tax savings resulting from the tax reform that are currently estimated to be $80 million to $90 million. So now turning to our balance sheet, which remains strong and in excellent condition. Accounts receivable at $2.4 billion is up 25% from the prior year and it's up 3% excluding the impact of acquisitions, primarily AAG as well as foreign currency. This 3% increase compares to our 4.5% sales increase in the fourth quarter and we remain pleased with the quality of our receivables. Our inventory at December 31 was $3.8 billion are up 17% from the prior year and basically flat excluding AAG, our other acquisitions and foreign currency. We're very focused on maintaining this key investment at the appropriate levels as we move forward. Accounts payable of $3.6 billion at year-end is up 18% in total and up 3% excluding AAG, other acquisitions as well as foreign currency. The 3% increase reflects lower purchasing activity across our businesses during the latter part of the year offset by the benefit of improved payment terms with certain suppliers. At December 31 of 2017, our AP to inventory ratio was 96%. Our working capital of $1.8 billion at December 31 compares to $1.7 billion in 2016 and excluding AAG is $1.4 billion. Effectively managing our working capital is an ongoing priority for us and we see additional opportunities for improvement in 2018. Our total debt of $3.2 billion at December 31 compares to $900 million outstanding in 2016 and reflects an approximate $2 billion in borrowings the same in the fourth quarter related to the AAG acquisition. Our debt arrangements varying maturity and at December 31 our average interest rate on our total debt was 2.7% with approximately $1.7 billion in debt at fixed rates. We're comfortable with our current debt structure and we're fortunate to have a strong balance sheet and a financial capacity to support our growth initiatives including strategic acquisitions and investments such as AAG and the Inenco Group, which we believe creates significant value for our shareholders. So, in summary, our balance sheet will remain a key strength of the company. In 2017, we generated $815 million in cash from operations and our free cash flow which excludes capital expenditures and the dividend was $253 million. Our cash flow were in-line with our forecast and continue to support our ongoing priorities for the use of our cash, which we believe start to maximize shareholder value. Looking ahead we're planning for another strong year for cash generation in 2018 with our cash from operations estimated at $950 million to $1 billion and our free cash flow estimated at approximately $400 million. Our priority for cash remain the dividend, reinvestment in our businesses, share repurchase and strategic acquisitions which Paul covered earlier. Regarding the dividend, yesterday the board approved a $2.88 per share annual dividend for 2018 marking our 62nd consecutive year of increased dividends paid for our shareholders. This represents a 7% increase from the $2.70 per share paid in 2017 and it's approximately 61% of our 2017 adjusted earnings, including the benefit of AAG's two months. Our capital expenditures were $55 million in the fourth quarter and $157 million for the year. For 2018 we're planning for capital expenditures in the range of $200 million to $220 million an increase from 2017 due to the impact of AAG and certain investments that we're planning on in association with our anticipated tax savings. In 2017, we purchased 1.9 million shares of our common stock and today we have 17.4 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. We continue to believe that our stock is an attractive investment and combined with the dividend provides the best returns to our shareholders. So, this concludes our financial update for the fourth quarter of 2017 and as Paul mentioned before, it was a very active quarter for us and we're proud of our teams for all their efforts including the added work related to the AAG acquisition as well as tax reform. Additionally, while we have more work ahead of us we're encouraged by the progress in our operating performance and we're well positioned to further strengthen our results going forward. So now, turning to our guidance for 2018. Based on our current performance our growth plans and initiative as well as the market conditions that we see in the future we're [ph] our full year 2018 guidance as follows. We expect total sales to be in the plus 12% to plus 13% range including the benefit of any 2017 acquisition such as AAG but no future acquisitions and no impact from foreign currency. By business we expect plus 19% to plus 21% sales growth for the automotive segment and this includes plus 2% to plus 4% sales growth excluding AAG. For the industrial group, we expect plus 4% to plus 5% total sales growth and for business products we expect sales to be down 3% to down 4%. On the earnings side, we expect earnings per share to be in the range of $5.60 to $5.75. This EPS guidance includes the benefit for a full year of operations with AAG as well as approximately $80 million to $90 million and lower provisional income taxes related to the Tax Cuts and Jobs Act. With that said, we'd like to thank all of our GPC associates for the continued hard work and dedication. And at this point, I'll turn it back over to Paul.

Thank you, Carol. Reflecting on 2017, our 90th year of operation, we had a number of accomplishments and milestones that better position the company for sustained long-term growth. We surpassed $16 billion in total sales for the first time in our company history. We expanded our global footprint with 15 strategic acquisitions across both existing and new markets adding $2.1 billion in annual revenues. In automotive, we acquired Alliance Automotive Group entering the European market with significant size, scale, and talent. In industrial, we expanded our presence in the growing robotic sector while also acquiring 35% of Australasia's leading industrial distributor. We made significant IT investments to improve our digital capabilities and enhance our B2C online offerings across North America and Australia. We made progress in managing our cost to drive savings at a lower cost structure resulting in improved operating margin in the fourth quarter. We generated solid cash flows returning $569 million to our shareholders in dividends and share repurchases. And finally, yesterday our board approved a 7% increase in the 2018 dividend, our 62nd consecutive year of increased dividends paid by the company. So, we enter 2018 excited for the opportunities ahead and well prepared to build on our accomplishments. We also have the added benefit of a generally strong economy across most of our global markets as well as future savings associated with tax reform. In addition, we believe tax reform has the potential to drive additional growth in US investment and the economy overall further benefitting US companies including GPC, our GPC associates and our key stakeholders. So, in closing, we look forward to operating with three primary business segments in 2018. By group our projected revenues will break down as 57% automotive, 33% industrial and 10% business products. We are market leaders in each of these segments and will continue to focus on both organic and acquisitive sales to drive long term sustained revenue growth. We also moved forward with plans an initiative to enhance our gross margins, reduce our cost and build a highly productive and cost-effective infrastructure. We expect our focus in these key areas to improve the operating performance in each of our businesses and for the company overall and ultimately maximizing shareholder value. We look forward to updating you on our progress again in April when we report on our first quarter 2018 results. So, with that we'll turn it back to the operator and Carol and I'll be happy to take your questions.

[Operator Instructions] We'll go first to Bret Jordan, Jefferies.

Hi Bret.

I got a little late on the call, but I'm not sure if you touched on regional performance in auto and maybe the cadence through the quarter and what you've seen early 18?

Yes. Happy to address it Bret. We didn't talk about it specifically, but the cadence for the quarter for GPC a little slower out of the gates in October but we had a good November and a good December both. So, when you have the three up, it equated to a 5% overall increase. Our automotive business and I know specifically of interest to you was the kind of in a similar pattern a really good November and an okay December. If we look across the geography Bret, where we are seeing outperformance in Q4 was in our northern division. So, for us that's the northeast, the central, mid-west in the mountain. Those northern divisions all performed well, a little softer growth in the southern what we would call our southern divisions. But certainly, see a nice growth in the northern regions and what's part of that you have to attribute to the weather patterns.

Yes, great. And then on the Alliance business do you have a fairly common vendor base will there be a lot of synergy as far as leveraging the suppliers there? And I guess the follow-up to that will those suppliers also be able to deleverage from a working capital standpoint are the extended payables programs something you can put into the European business?

Yes. So, it's a little early yet Bret. Actually, our team had a number of meetings last week over in Europe with our global supplier base, and as you would imagine many of our top suppliers in the west, our top suppliers to us in Europe and Australasia for that matter so great companies like [indiscernible] Baash, Gates and Scheffler, Axalta, Delphi they are strategic suppliers for us across all of our markets right now. And yes, we think there's opportunity in a number of areas but honestly, it's just a bit early yet.

And Bret, we do see opportunities from a working capital standpoint. We've already been in discussions and started programs with our banks that would be able to include our European operations. And so, all discussions that we're having we look at it from a comprehensive wide program including the working capital side.

Give us sort of ballpark and what cash might come out of the Alliance working capital? I mean with their inventory was going into it.

We don't but I can tell you and looking at and giving you what was improved guidance and cash from operations and free cash flow, we've contemplated some improvement in there. But won't specifically break that out.

Okay, great. Thank you.

Okay. Bret.

And we'll take our next question from Chris Horvers, JPMorgan.

Thanks. Good morning.

Good morning, Chris.

I have a follow-up question on Bret's question. As you think about the US NAPA comp outlook. You saw nice improvement from 3Q to 4Q putting up a one comp in the US. How are you thinking about this year and how do you think about sort of the sustainability which of what I assume was a pretty good start to the year?

Well, as we look into 2018 and certainly Chris as you would imagine this cold weather, we expect to ultimately be a nice boost for us. Our comps as you mentioned for 2017 were in the 1% range and for 2018, we were expecting still in the 1% to 3% range and certainly, our teams are going to be pulling every lever to get us to the top end of that range. It's early yet, and again I think this colder weather as reflected in the strong performance we're seeing in our northern divisions, I think longer term that's going to give a boost to our US automotive business.

Understood. And then on the margin front, you mentioned I think that ex-AAG gross margins are up 30 basis points year-over-year. Was there anything unsustainable about that whether it when their allowances sort of catch up in the fourth quarter that won't necessarily be indicative of how we think about modeling 2018?

Yes. I would point out on the gross margin. So, look there was in the Q4 probably two-thirds of that 30 basis points related to incremental rebase and primarily in our industrial group. The other 10 basis points is the core improvement. We had some favorable mix shift and some automotive product categories in the quarter as far as how the category has performed as well as Motions for business. To say that's not sustainable, I mean look, we're modelling similar core growth for industrial going into 2018 and looking for similar margin improvement. So, we would have to assume that that would stay in the numbers and we actually feel pretty good about gross margin. We were really pleased to see the Q4 opportunities and the trends that presented themselves.

So, it sounds like no less than 10, but maybe not all the way up to 30?

Look. One other thing I'd point out Chris and with AAG and the acquisition, I mean we're going to have sometimes acquisitions come in with a little different gross margin and SG&A, but you have similar operating margins. But you've seen us, like I said we had some good improvement in the quarter and I hope we can sustain being around that 30% or slightly better. And look, some of the things we're doing in the pricing area, that's also going to help us on the gross margin side.

And then my last question is Motion had very strong operating profit expansion, 8.3% in the fourth quarter. And if I look back historically, that low 8% range on an annual basis is where that business seems to [ph] out on sort of when you get into that very strong macro environment. So, is that where that enforce you a good read on how to think about 2018 overall?

Yes, well [ph] and again I would point out from Motion, so that improvement it was about a-third, a-third, a-third with incremental rebates, leverage on their core growth with SG&A and then just improvement in their core growth profit. So, as we look to more what their annual margin was in the high seven's, we would expect it to go up closer to the eight. But long-term, we're always looking for kind of an 8%, 8.5% for the industrial group.

And Chris, I would just make a comment. I want to appreciate you calling out Motion. Motion had a very good year across the board. They had essentially 7% increases every quarter last year. We're excited about our acquisition, investment in Australia, basically the motion industry industries of Australia with the Inenco Group and look forward to expanding that investment in the coming 12 to 24 months. We're very bullish on our industrial business. If you look at all the key indicators from the PMI, industrial production there is no reason we shouldn't see another good year out of our industrial business in 2018.

Thank you.

Thank you, Chris.

And we'll take our next question from Chris Bottiglieri with Wolfe Research.

Hi, thanks for taking the question.

Hi Chris.

Hi, just had a quick clarifying question. It's not like the, you might actually see this explicitly. But it's not like the math you gave on the call, what it suggested a 5.7% operating margin for AAG in the quarter. One I guess is that correct? And then two I was trying to contextualize the 30-basis points pressure, I mean it's put that on 6% of sales, it seems like [ph] repurchase accounting. Is that the right way to think about that or is there an outstanding SG&A adjustment?

Well, let me take this in two parts. So first of all, you're doing some math to get to the automotive margin and I would tell you, we put AAG in for two months and two months is not necessarily representative of the full year for 2018. I mean you definitely have some seasonality. December in Europe, I mean you had two less selling days in France, one less selling day in the UK and you've got your level of fixed cost. So, we didn't give guidance on those two months that we are reiterating our confidence in our guidance in a more normalized margin for 2018. So, that's the first comment, the second comment is there is no purchase accounting or one-time deal cost in our automotive operating margins. We put everything in the other line and the purchase accounting and all that is in that other line. So, and going forward we would always pull that out of the operating segment.

Yes, that's okay. I understood that. And then, just wanted clarification on the weather gap. I think you just contextualized it. But were you able to say with the weather gap actually was between kind of the northeast markets and the rest of the country and had the compare to Q3? Just want to understand how much of that were actually contributing to the quarter?

Yes, Chris for Q4 we saw about two full points of gap between our northern businesses and our southern business. And if you look at Q3, that gap was even more narrow it was closer to a point in Q3. But look the November numbers that we saw and we had good month in November, that also happen to be the coldest month in Q4. So, once again there is a direct correlation in our U.S. automotive business tide to the weather pattern. So again, we're bullish looking ahead at some of this winter weather that we're seeing, we'll be positive for our U.S. business in 2018.

And then, I guess somewhat related; I think you talked to the south being weaker, would have thought like it was a rig count and what we're hearing on demand for fleet -- fleet sales etcetera, like heavy duty trucks; can you talk about just generally speaking how your energy markets in heavy duty business is performing relatively?

That's a great question, Chris, and I would tell you that our energy markets and specifically our southwestern division, they had a good quarter, they outpaced the balance of our southern division. So if you think -- I mean, when we talk about our southern divisions, we're stretching coast to coast and the southwest and our energy markets absolutely outperformed the balance of our southern divisions.

And we'll go next to Matt Fassler, Goldman Sachs.

My first question is sort of a follow-up from Q3. I think there was one business, I believe automotive where rebates worked against you from a gross margin perspective in Q3. If I'm right in recalling that, did that issue in essence go away in Q4?

Yes. So in Q3 we called out some onetime sure off [ph] related to automotive and our business product segment and that was adjusting to what our purchasing levels were, our sales levels; so you had a little more of a true-up in Q3. Q4 was less of a headwind but still had it on the business product side. What helped us on gross margin in Q4 from automotive, we had some product mix shift that were a little bit better, so we had product categories that have higher margin, that didn't perform as well in Q3, those performed better in Q4. And then said the other way, we had lower margin product categories that were performing really well in Q3 that were driving down margins; so we had some product mix favorable side changes in Q4. So definitely not as much incentive noise in Q4.

Understood. And then you spoke about tax reform and the amount you're going to flow through; could you help us quantify the discretionary investment if you can do so that you chose to make -- given that tax reform hasn't [indiscernible] a bit of a windfall and I'm going windfall to your net income run rate?

So, these are our best estimates right now as you guys know, this is all provisional and we've done the best we can, estimate what that is and looking at the $80 million to $90 million in both cash and EPS savings, you're going to see us evaluate that and put it in our usual priority, so we certainly mention the 7% increase in the dividend this morning. We've mentioned incremental investments in our business and when you look at our CapEx, we certainly had to include an amount in there for AAG but there could be an estimated $25 million to $45 million in incremental CapEx that we've put into our 2018 guidance. And then we want to invest in our facilities technology investments, probably go at a quicker pace since this has presented itself. And then lastly, we're looking at some programs that would directly benefit our people and this can be in areas like training and talent and compensation and certainly investments in our facilities also benefit our employees as well; so that's all been reflected in our guidance.

So the $5.60 to $5.75 includes what you might do with some of that money out of P&L?

Yes. And look, I know on the $5.60 to $5.75, I mean we've talked about -- there are some investments that we're having to make in our North America automotive business and those are incremental investments, we've got additional CapEx, we've got some headwinds on the business product segment. And then we did have and we've called out, we did have some favorable one-time adjustments in Q4 that were in insurance, legal and professional; those things present themselves with maybe $0.15 to $0.20 EPS headwind, and that's been contemplated in the guidance that we've given you but we're still putting out there plus 19% to plus 22% increase in EPS.

We'll take our next question from [indiscernible].

I guess bit of a follow-on to Matt's question if you think about reinvesting and thanks for outlining all that but I didn't mention -- it didn't seem like there is anything on the gross margin side could there be given that some of these -- the investment in people and facilities could be in supply chain? And then I had a follow-up.

You're spot-on, I appreciate the additional clarity. We have a long list of projects we've meet in doubt with our Canadian team, our U.S. team and it ranges anywhere from pricing, software and optimization and investments in people, data analytics to supply chain reinvention, to using more predictive analytics in our inventory modeling and supply chain. Facilities is around whether it's conveyers or our warehouse management system combining facilities, you can definitely get productivity improvements, you can get gross margin improvements, so we haven't necessarily put it on each line item, we're just telling you that those investments will benefit us in the long-term.

And my follow-up was on the motion industries; I think Paul, you've called out how well it's done and how the outlook there seems to be improving. If we look at your guidance for this year on motion; how much of the growth -- I think last year 7% was sort of the numbers that kept put up for this year how much do you expect of the growth to be acquisition as opposed to organic?

So last year's full year numbers had a comp number of 4% and acquisitions of 3% and that's what got you to the 7%. We're giving you the plus 4% to plus 5% which would imply a comp of 3% to 4% and acquisitions of 1% to 2%; that acquisitions is carryover from 2017 acquisitions, it's nothing further. I can tell you we certainly hope to be at the higher end of that 3% to 4% and -- but right now we felt like it was appropriate to start with 3% to 4%. Paul mentioned all the favorable fundamentals, we had a presentation from their management team yesterday and we certainly all feel encouraged by the long-term fundamentals but right now we're going to start-off the year with kind of a similar comp into '18.

And we've got a really high performing management team at motion and if the right opportunities come along on the acquisition front we will absolutely step into them and continue to look at tuck-ins and bolt-ons for our motion team. But that team we expect to have another really good 2018 and I would just add to Greg, welcome back, it's good to hear your voice again.

And we'll take our next question from Curtis [ph], Bank of America Merrill Lynch.

A very quick question on the new revenue recognition standards for franchisees; just wondering if there is any implications for the numbers for your guys in terms of going forward or perhaps historical numbers?

Actually we've been working on that for two years now, we did a lot of analysis, a lot of work on it and came up with a very immaterial minimal adjustment; so really no impact on the company which is why it's not really called out. And so because of our -- the way that we just recognize our product sales and again, we looked at a lot of different things that we will not be reporting much of an impact.

We'll go next to Carolina Jolly, Gabelli.

I guess as I look to some of the more global occurrences, it looks like we're getting some still tariff and maybe some change to trade agreements. Are we able to expect due to past prices right away or is there some lag in that?

Carolina, you were kind of breaking up on us. Can you repeat that question?

So as we see some -- these steel tariffs come through and some change to the trade agreements potentially, are we -- do we expect GPC to pass price along or is there some type of lag in that?

I'm sorry, I didn't catch it the first time but I understand what you're asking now. And absolutely if we absorb raw material increase and that our suppliers come to us with increases we will absolutely pass those along and don't anticipate any lag period between us accepting those price increases and us passing those increases along. That said Carolina, we with our scale now in Europe, Australasia and of course, across North America, we are evaluating all of our global supplier base and as the question was asked earlier, we've got some great global strategic suppliers that we'll give every opportunity to partner with us as we move forward. But in terms directly to your question, we will absolutely pass along any price increases that we've received.

And due to time constraints, I'd like to turn it back to management for closing remarks.

We'd like to thank you for your participation in today's conference call. We appreciate your support at Genuine Parts Company and we look forward to reporting out on our first quarter results in April. Thank you and have a great day.

That concludes today's conference. We thank you for your participation. You may now disconnect.