Greetings, and welcome to the Genuine Parts Company First Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Sid Jones, Senior Vice President, Investor Relations.

Good morning, and thank you for joining us today for the Genuine Parts Company first quarter 2019 conference call to discuss our earnings results and outlook for 2019. 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 that this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results as reported 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 also 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, including this morning's press release. The company assumes no obligation to update any forward-looking statements made during this call. Now, I will turn the call over to Paul for his remarks.

Thank you, Sid. Good morning and thank you for joining us for our 2019 first quarter conference call. Earlier today, we released our first quarter 2019 results. I will make a few remarks on our overall performance and then cover the highlights across our businesses. Carol Yancey, our Executive Vice President and Chief Financial Officer will provide an update on our financial results and our current outlook for 2019. After that, we'll open the call to your questions. To recap our first quarter performance across our global platform, total sales were $4.7 billion, up 3.3% from Q1 of 2018, driven by 3.3% comp sales increase and a 2% benefit from strategic acquisitions, net of a 2% headwind from foreign currency translation. Net income in the first quarter was $160 million and earnings per share were $1.09. Excluding the impact of currency losses and transaction and other costs related to the sale of Auto Todo, one of our two automotive parts businesses in Mexico, adjusted net income was $187 million, or $1.28 per share, up 1% from adjusted EPS in Q1 of 2018. Overall, our sales and earnings were in line with our plan for the first quarter, which assumed a stronger currency headwind than we were expecting for the full year, as well as one less selling day relative to Q1 last year. In addition, as discussed in our year-end call, our plans accounted for the sale of the Auto Todo business. We can report we've successfully closed on the sale of this business in the month of March. We are pleased to report another quarter of positive sales comps across each of our business segments, while also benefiting from the favorable impact of ongoing strategic acquisitions. Our sales performance was indicative of the continued improvement in our U.S. automotive…

Thank you, Paul. We will begin with a review of our key financial information and then we will provide our updated outlook for 2019. Our total sales of $4.7 billion in the first quarter were up 3.3%, driven by improved sales in each of our business segments. Our gross margin for the quarter was 31.8% compared to 31.3% in 2018, with the improvement in margin relating to several factors. Primarily the increase reflects higher margins in our automotive and industrial businesses due to their ongoing margin initiatives, including global supplier negotiations, more flexible and sophisticated pricing strategies and favorable product mix. In addition, the increase in supplier incentives due to improved volumes for these segments also had a positive impact on gross margins. In the Business Products Group, our gross margin was pressured due to unfavorable shifts in product and customer mix. Moving forward we continue to expect our 2019 gross margin rate to remain relatively in line with our current run rate, assuming reasonable inflation of 1% to 2% and consistent levels of volume incentives. The pricing environment remain inflationary across our businesses in the first quarter with tariff price increases for raw materials, commodities and supplier freight each having an impact on our total costs. We continue to pass along our price increases to customers to protect our gross profit dollars and to maintain our gross margin wherever the market conditions will allow. And we would say that the current levels of inflation have been a net positive to our results. We expect this to continue through the balance of 2019. Our supplier price increases thus far in 2019 have impacted our purchases by one half of 1% in automotive, 1.2% in industrial and 2% in office. Turning to our SG&A, these expenses were $1.2 billion in the…

Thanks, Carol. We entered 2019 excited for the opportunity to build on the positive momentum generated last year. And for the first quarter, we were pleased to report accomplishments in a number of areas. Our total sales and earnings were in line with our plan. Our teams produce positive sales comp in each of our business segments; we experienced the continued strengthening of our U.S. automotive business; we reported another quarter of consistent and steady growth in our Canadian and Australasian automotive businesses, our industrial business remain strong and continues to perform well; we further stabilized our results in our Business Products Group; we closed on two accretive acquisitions, Hennig Group for the automotive business and Axis in industrial. We closed on the sale of our legacy Auto Todo business in Mexico. And finally, we announced entry into the Benelux region of Europe with the addition of PartsPoint Group planned for June of 2019. We enter the second quarter of 2019 focused on further strengthening of our global platform, driving consistent and sustainable sales growth and improving our operating results. We plan to support these objectives with a strong balance sheet, strong cash flows, and effective capital allocation. We believe our continued focus in these areas will create significant value for our shareholders as we move forward through the year. These are exciting times to Genuine Parts Company and we're optimistic for the future and the additional growth opportunities we see across all of our businesses. As always, we look forward to updating you on our progress when we report again. So with that, we'll turn it back to the operator and Carol and I will take your questions.

At this time, we will be conducting a question and answer session. [Operator Instructions]

And before we turn to Q&A this morning we want to mention that we're going to have our inaugural Investor Day at GPC's headquarters in Atlanta on Tuesday, June 4th. We will also have a store tour and reception beginning on the afternoon of June 3rd. This event is for institutional investors and analysts and will be a great opportunity to hear from our business leaders. If you're interested in joining us or have any questions, please email us at investor_day@genpt.com. Operator, please continue. Our first question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question.

Thanks. Good morning.

Good morning, Chris.

Can you -- just first that clarification the 3.5% U.S. that includes a headwind for one less day or that excludes that headwind?

Yes, that includes Chris.

So it would have been 4.0 ex-that, is that right?

Well, we would give -- we would say it's about 1.5%, 1.6% for the shorter day in the quarter. So probably more like a 5% on an average day basis.

Average daily basis. Got it. And then in terms of -- I want to dig in a little bit on the cadence both in the U.S. business, U.S. NAPA business, as well as in Motion. So maybe first on the U.S., the U.S. NAPA business, was there a lot of noise around tax refunds or weather in February, how would you describe the overall cadence of the business? And then on Motion, you did a six in the fourth quarter, which decelerated pretty sharply. How would you describe sort of cadence to that business, and then how you're thinking about that going forward?

Yes. So we'll start with U.S. automotive Chris, and pleased to report that business got stronger as the quarter progress. So, January soft out of the gates a little bit with a warmer first half of January polar vortex kicked in, in the second half and we’ve really took off from there, we had a good February and a better March for the automotive parts business. On the industrial side, pretty consistent and one thing I'd point out Chris, when you mentioned the slowdown. The industrial business if you break out just the core motion business, that business was up 7% in the quarter which is pretty consistent with where we've been the last really two plus years. The Motion business, as you look at the average daily sales really good January, softened a bit in February and then rebounded nicely again in March.

Understood. And then typically if you could just maybe share some light on April and refresh on what the U.S. NAPA business look like last year from a cadence perspective, in 2Q I think that some of the more DIY-oriented auto parts retailers out there talked about, April being pretty tough because of the weather last year. Is that something that you experienced and could you share any comments on how things are trending now?

Well, Chris, there's not a lot we can say at this point about Q2. The one thing I would mention then and we always end up talking a good bit about weather on these calls. Blizzard in early April are necessarily great for the automotive parts business where we're ready to get into the spring selling season break fees. And so it's early yet, but look, what we're encouraged mostly about Chris is the turnaround we're seeing in our U.S. automotive business. We have new leadership in place, we've seen steady improvement over the past few quarters. The weather has certainly normalized with the exception of what we saw in early April. Industry fundamentals continue to be really sound and we're seeing nice improvements in our -- both our AutoCare and our major account business on the DIFM side. So, lot to be encouraged about as it relates to our U.S. automotive business.

Super, have the great rest of the year, guys.

Thanks, Chris.

Thanks, Chris.

Our next question comes from the line of Scot Ciccarelli with RBC Capital Markets. Please proceed with your question.

Good morning, guys.

Good morning.

Hi. Sounds like there's a lot of moving pieces on the auto side that impacted EBIT margins. Can you provide some more color specifically on what you saw with the U.S. auto margins, please?

Yes, so as it relates to our automotive margins, and we kind of as we talked about in our comments, we have seen continued improvement from our automotive gross margins and that would be across the board and also include U.S. automotive. So gross margins has been improved for all of last year. We're running on probably six or seven quarters. When we look at our U.S. SG&A, little bit of headwinds there that we've called out before, but what I would tell you is they were more flattish. And so we had improved margins for Canada, for Australasia, flattish for U.S., and as we mentioned, with kind of a loss of leverage for Europe that's where we really saw the pressure in our automotive margins.

So just to be very specific, so flat U.S. EBIT margins, is that basically what the message is?

Yes.

Got it. Okay. And then can you clarify your comment regarding inflation, when you talk about your costs of goods change that you already highlighted for the different categories, is that all the flow through? Because I thought the expectation was a little bit higher inflation than what you pointed out specifically on the auto side?

Yes, so what I commented on is the price increases we've received thus far in Q1 on our purchases. And when we look forward, what our full year expectations are, we would say for automotive, for example, they were only up half a point in Q1. And some of that is flowing through to the sales line, and obviously, for all of our businesses. But as you know, the timing and the way that that can be passed through, you're probably getting more like half of that benefit that's flowing through on the top line. But our full year inflation expectations for automotive would be more like 1% to 1.25% on a full year basis. And then for industrial and business products, probably more like a 2%.

Got it. Okay. Very helpful. Thanks, guys.

Thank you.

Our next question comes from the line of Chris Bottiglieri with Wolfe Research. Please proceed with your question.

Hi. Thanks for taking the questions. A couple of clerical ones upfront. What was the difference between the U.S. auto up 2.5% and the comp 3.5%, did you close doors or something else that caused that spread?

Well, it's a combination of things, Chris, your comment of closed stores is accurate from a year ago. But there's also consolidation of stores, as well as stores that we sold off. So if you go back a year ago from Q1, it was about -- the impact was about 60 stores that were -- that would fall in one of those buckets of consolidated closed or sold. And that was the explanation for the difference in the comp versus total.

Got you. That's really helpful. Okay. And then Easter. So last year, Easter was like a combined one point headwind for the Northeaster [ph] and the Easter shift. So what I understand how much you think you benefit of this quarter from Easter? And then similarly, what do you think the headwind will be for Q2 as we kind of think through the cadence?

Yes, so Chris last year. I believe our comment was it was about a half point. And we feel that's about what we've picked up in Q1 of this year. So as we look at April falling in -- or Easter falling into April, we would expect it to be about the same.

Okay, got you. Okay. And then my first real question, I know this is a lot. But -- so Europe, I guess, one key quantify, that you are going to grow, I don’t think you've done that yet. And then two, if I'm following the call correctly, Europe's about 20% of your automotive sales or it sounds like it drove that 40 basis points margin decline. So is that right that 20% of your business drove a 40 basis points decline?

Well, let me comment on your first question on the overall comp. I think you asked that did you not Chris for Europe.

Yes, for Europe, please. That will be really helpful. The comp in the prior acquisitions.

Yes, so our total sales were up high-single digits in Europe, which was largely driven by acquisitions if you go back and look pure organic, and that would be between the UK, France and Germany. Our organic would be down about 1% year-over-year.

And just a comment on the automotive margins, as we've mentioned before, our European business does carry a higher operating margin than what the total number is. So there's 1% comp decline and knowing that we really can't leverage on that. And look, our teams have got plans in place to address that over the balance of the year. But how quickly that happened in the quarter and then being able to react to it did drive the basis point decline in the quarter. But again, we're working hard to turn that around over the balance of the year. And I would tell you in the balance of the year, we would expect to show margin improvement on a full year basis of more in the magnitude of 10 to 15 basis points for both automotive and in total.

Chris, just an additional comment or two about Europe since you raised the question. We see the issues that we're facing there, which I think a number of companies are facing is largely transitory. And you've couple some of the economic what we believe are short-term challenges with the fact that in our markets between the UK, France and Germany they literally had no winter weather. And just as we see here, we never talk about the weather in Europe, but just as it impacts our U.S. automotive business that had a huge impact on our European business. So few short-term challenges, but ones that we believe are largely transitory and we'll get by.

That makes a lot of sense. Good luck. Thank you.

Thank you.

Thank you.

Our next question comes from a line of Elizabeth Suzuki with Bank of America. Please proceed with your question.

Great. Thanks, guys. From a foreign exchange standpoint, when do you think the year-over-year impact starts to reverse or improve, because you're only expecting about a 1% headwind for the year and it was a 2% headwind this quarter. So, do you think there's a risk to the 2019 outlook if foreign exchange plays out somewhat differently than the way you're modeling?

Yes, so a couple comments, as we mentioned earlier, we do expect you to be very similar to Q1. So definitely a greater impact in Q2 at a similar rate as it was in Q1. So we would expect to see it a little bit better for Q3 and Q4. We based our guidance and we've modeled that full year 1% based on the rate that we started with at the beginning of the year. As we look ahead, we think that's still appropriate, but obviously we'll continue to keep an eye on that over the balance of the year.

Okay, great. And how quickly can you adjust pricing or anything else or your contracts to offset factors like both the supply or price increases or foreign exchange and when there are a rapid changes, is it a three months impact or six months? Like how long is that usually an impact on your earnings?

Yes, look I would say our teams have done a really good job in the gross margin area, and we're balancing a lot of things that are coming in. So with having more of an inflationary environment has given us an opportunity to drive a little bit of lift in our gross margins. We are balancing any currency impact that comes into there. And then, as we look at what our pricing constraints may be, we also look at pricing opportunities. As we've mentioned before, both our automotive team and industrial teams are doing a lot around pricing, data analytics, their pricing strategy and being more nimble and being able to react quicker. So, we are obviously looking at that as it relates to the market and the competitive environment. But again, if we just look at our gross margin, we feel like we've done a pretty good job of getting those pass through.

Great, thank you.

Thank you.

Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.

Good morning, guys.

Good morning.

On the European business I guess, could you sort of bucket what was winter versus the economic issues you referenced maybe as far as impact?

It's hard to say Bret, how it splits out between the two both are certainly impactful. I would say though, if you were to ask me, which was more impactful in the quarter. I would say it was the weather. And, look the European economy has not been the greatest in the last few quarters. So the outlier is that really, really warm weather they had in Q1 that really impacted the business, especially as it relates to a lot of our winter goods category categories that were impacted greatly in the quarter. So hard to break it down specifically, but if you were to ask me, I'd say weather was more impactful than some of the economic issues.

So how is the cadence, I guess, is the cadence stabilizing or did it improve as the quarter went as you got out of the cold weather selling season or is it just continuing to drag?

It was pretty flat throughout the quarter. I mean, pretty straightforward. You've heard me mentioned earlier, our total sales in Europe are up high-single digit, our comps were down one which were pretty consistent through the three month period.

Okay. And then, Carol, as far as payables in Europe, how you find the ability to manage the working capital over there with a few deals done now?

Yes, so great question. And we still continue to believe and are pleased to see some improvement in our synergies, both from margin initiatives and on the payable side. So in working with a lot of our global suppliers, we do have programs that have been put in place, we have additional terms that have been negotiated, those will be falling more in the second half of the year. And that's actually been factored into our working capital guidance that we've given. So those are actually coming along quite well. And there's even an offset that comes to the U.S. where we're getting some improved terms based on European supplier relationships. So it actually works on both sides.

Great. And then, Paul, one last question on U.S. auto, could you comment on any major regional dispersion that either outperformance or underperformance in the U.S.?

Yes, much like Q4, Bret, the strength and not surprisingly is those cold weather region. So our best performing region again in Q1 was our Midwest team who had just an outstanding quarter followed right closely by our Central Division and our Mountain Division also had a very strong quarter. Northeast was good. And then trailing those four northern divisions would be our southern businesses, which were flat to down -- or flat to up low-single digit, good business but certainly the outliers were the strong performance in our northern divisions.

All right, great, thank you.

Thank you.

Our next question comes from the line of Michael Montani with Evercore ISI. Please proceed with your question.

Great. Thanks for taking the question. Just wanted to ask first of if I could, for Carol, with the 3% plus organic growth, just wanted to think through for the remainder of the year what kind of organic growth do you think you would need to show leverage on SG&A given some of the headwinds that you had flagged?

Yes, so as we mentioned, and we are definitely seeing that operating margin improvement on our industrial business, and again, that's coming through there greater comp, and we're seeing the nice improvement there. On the automotive side are and we've pointed out our U.S. automotive, even with a comp of 3.5%, while those margins were flat in Q1, that's the best they have been in eight quarters. We've seen tremendous progress they've made in some areas such as payroll and freight with some of their investments. So some of the things that are staying in the SG&A, which would -- whether it's depreciation and IT and some of the investments we're making and still some headwinds on payroll and freight. We're definitely making progress. And I would say by the end of the year, we would see margin improvement. So we're close to having that comp now and as we kind of mentioned, Europe was the one thing that was really a headwind on the margin. So certainly end of the year if comp stay in that 3% to 4% range, we would expect to have that 10 to 15 basis point margin improvement.

Okay. And then if I could, just from an U.S. Automotive perspective, I was hoping that you guys could unpack a little bit kind of the traffic versus ticket dynamic within 3.5% comp. And then secondly, I apologize if I had missed this, but did you give a split in terms of the DIY versus the DIFM comp?

Yes. Mike, I'll take both of those. The -- between DIFM and DIY, both showed positive sales growth in Q1 and both were up in the low to mid-single digits range. So we're pleased with the growth we're seeing in both. Even more pleasing is the fact that for another quarter, I believe in fact two quarters in a row now, we've seen improvement in our number of invoices running through our stores, but also the average ticket size coming through. And as you know, Mike in recent quarters, while we've seen an increase in the size of the invoice, our number of tickets were down, very pleased to report this quarter that we're seeing a lift in both for the second consecutive quarter. So great job by our team in the U.S.

Great, thank you.

You're welcome.

Our next question comes from the line of Carolina Jolly with Gabelli. Please proceed with your question.

Hi, it’s Brian Sponheimer pinch hitting for Carolina.

Good morning.

Hi, everybody. Couple of questions on the acquisitions that you've made in Europe and maybe the valuation multiples that you're seeing their relative to the attractiveness of making similar acquisitions in your core markets.

Well, Brian, a couple of comments. So the couple of acquisitions that we've done, one which we closed on, which was Hennig, which is an automotive parts business in Germany that closed earlier in Q1. And then, we recently announced PartsPoint Group out of the Netherlands and Belgium, which we hope to close in early June. I would say from a valuation and multiple standpoint it's very similar to what we've seen in the U.S. these are not -- these businesses we've got relationships with again much like our approach here in the U.S., Brian. And we're not getting into bidding war auctions with private equity. So it's been very same I will leave it at that.

Just kind of following on that, for both auto and for motion you chose Australia first for international expansion in Australasia. What are the dynamics as far as Motion either looking into Europe or further in the U.S. as far as acquisitive growth there, given that your suppliers are large multi-national companies and your customers are large multi-national companies.

Yes so -- I'm sorry, Brian, didn't mean to cut you off. Look, our industrial business has been a solid performer for going on 10 quarters now. We're excited to move into Australasia. We took a 35% investment in an En. Co. [ph] a couple of years ago. We’ve gotten to know that team very well, we've gotten to know their business and the market that they serve today, which is generally Australia, New Zealand as well as into Southeast Asia. Great business one that we hope to close on the balance later in 2019. That will give us a nice foothold in that part of the world with a $400 million MRO player which arguably is a leader in their market. We have no designs right now on taking our industrial business into Europe, Brian. But -- and partly because we have big opportunities to continue to grow here in the U.S. as big as we are we still have less than 10% market share. So we think we have ample opportunity to continue to grow in North America as well as we'll look at potential bolt-on opportunities in Australasia as well.

All right terrific. Well, thank you very much.

You're welcome.

Ladies and gentlemen we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

We like to thank you today for your participation in our first quarter earnings call. We thank you for your support and interest in Genuine Parts Company. And we look forward to reporting out our second quarter results in July. Thank you and have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.