純正零件 (GPC) 2017 Q3 法說會逐字稿

Good day, and welcome to the Genuine Parts Company Third Quarter 2017 Conference Call. Today's conference is being recorded. (Operator Instructions)

At this time, I'd like to turn the call over to Sid Jones, Senior Vice President, Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us today for the Genuine Parts Company Third Quarter 2017 Conference Call to discuss our earnings results and current outlook for the full year.

Before we begin this morning, please be advised that this call may involve forward-looking statements regarding the company and its businesses. The company's actual results could differ materially from any forward-looking statement due to several important factors described in the company's latest SEC filing. The company assumes no obligation to update any forward-looking statements made during this call.

We'll begin today with comments from our President and CEO, Paul Donahue. Paul?

Thank you, Sid. And welcome to our third quarter conference call. As always, we appreciate you taking the time to be with us.

Earlier today, we released our third quarter results. I'll make a few remarks on our overall performance and then cover the highlights by business. Carol Yancey, our Executive Vice President and Chief Financial Officer, will provide an update on our financial results and our current outlook for 2017. After that, we will open the call to your questions.

To get us started, let's recap our third quarter sales and earnings performance across our global Automotive, Industrial, Office and Electrical operations.

Total GPC sales were up 4% to $4.1 billion with net income at $158 million and earnings per share at $1.08. These results include approximately $18.5 million in pretax transaction costs primarily related to the previously announced acquisition of Alliance Automotive Group in Europe, or AAG, which we look to close in November.

Before the $0.08 per share impact of these costs, adjusted earnings per share were $1.16 compared to $1.24 in the third quarter last year. As a diversified global distributor, we continue to benefit from the balance of serving a broad range of geographies and end markets. While our U.S. Automotive, Office and Electrical businesses are operating in challenging end markets today, our Industrial and international Automotive businesses are operating in more favorable market conditions and generating stronger growth. To that end, our investment in AAG, a leading European-based automotive parts distributor, which we'll discuss later in our remarks, underscores the growth opportunities we see internationally.

In total, the diversity in our operations, combined with an ongoing strategy to drive both organic and acquisitive growth, enabled us to deliver a 4% total sales increase despite the challenging operating environment, one less billing day in the third quarter relative to last year and the disruption caused by 3 hurricanes and an earthquake in Mexico.

Total comparable sales were up 1% in the third quarter, and we stand at plus 1% for the 9 months during September. While positive, this was below our expectation for 2% organic growth in the second half, which we were targeting through our share of wallet and digital initiatives as well as the ongoing expansion of our products and service offering. As a result, our net margins continued to be pressured in the third quarter.

As we will discuss, in addition to organic growth, we are looking at opportunities to capture cost savings and enhanced productivity, which will enable us to increase margins despite pressures on the top line.

Turning to our acquisition strategy. We believe the ongoing headwinds in key markets and geographies continue to provide opportunities for accretive transactions. The acquisitions we have made to date, and those we may execute going forward, are intended to grow our businesses and further enhance our footprint, so that we may capitalize on the upturn in our markets and create additional shareholder value.

Through the third quarter, we have acquired businesses with approximately $215 million in annual revenues and made a minority investment in Inenco, a market-leading industrial distributor in Australia. Acquisitions added 2% to sales in the third quarter, and we anticipate that each of these new businesses will positively contribute to our future results.

For the fourth quarter, we have announced plans to add 3 additional businesses, AAG add Monroe Motor Parts in the Automotive Group and Apache Hose & Belting Company in the Industrial segment with total estimated annual revenues of $2 billion. We are excited to expand our global platform with these new businesses and look forward to their future contributions in both the quarters and years ahead.

Turning to our global Automotive operations. Automotive was 52% of our total revenues in the third quarter of 2017. For the quarter, our total Automotive sales were up 3.6% from last year, consistent with the second quarter, and with comparable sales on a global basis up approximately 1%.

In our U.S. operations, total sales were up 2% in the third quarter with flat comparable sales. Across our customer segments, comparable sales to retail/DIY customers continue to outperform our sales to commercial accounts. On the commercial side of the business, sales remained pressured by slow demand across our customer base with sales to NAPA AutoCare Centers and major accounts down just slightly.

Our major account business fluctuated by customer, and we see a number of major accounts where we performed quite well, but we also have a number of other accounts where we are off year-over-year. We are pleased to report a slight uptick in our fleet business in September, especially in the energy and ag markets. This is a segment of our commercial business that has been challenged most of the year.

We look at our product groups, batteries, rotating electrical, tools and equipment and heavy-duty sales all posted positive gains, while categories such as ride control, exhaust and heating and cooling remained soft, consistent with the second quarter. These sales trends correlate to the warmer-than-average winter weather and milder summer temps, both of which extended the pressure on demand.

By geographical region, the Mountain region, which experienced the harshest 2016 weather conditions in the country, continued to outperform. And the Northeast, and the Western division also had solid results in the quarter. Likewise, despite the impact of Hurricane Harvey, the Southwest division generated a slight Q3 sales increase. The Southeast division had a more difficult quarter as it dealt with Hurricane Irma, but we would expect our business in both of these regions to snap back in the fourth quarter. The Atlantic, Central and Midwest regions all underperformed.

Turning to retail. We continue to produce solid mid-single-digit sales comps via several initiatives. Our growing NAPA Rewards Program is available in-store and online and now has more than 5.5 million members. This program has helped drive consistent retail growth, and we continue to experience higher retail tickets and more frequent visits from our NAPA Rewards members, underscoring the program's success. We continue to look at ways to further expand and enhance NAPA Rewards in 2018.

We are also making progress with our Retail Impact initiative. The 350 stores updated for this initiative through September, which is up from 275 in June, continue to outperform our overall retail growth with high single-digit retail sales comps. We are very pleased with these results, which exceeded our expectations, and we remain on track to have approximately 500 of these Retail Impact stores completed by the end of 2017. The retail end customer has more choices today than ever before, so it is encouraging to see our initiatives driving sustained growth in the NAPA retail segment.

We also expect our ongoing acquisitions to positively contribute to both our commercial and retail sales. In addition to the 3 automotive store group acquisitions and Stone Truck Parts added to our U.S. network earlier this year, we announced this morning the addition of Monroe Motor Products to our Automotive parts business effective November 1 of this year.

Monroe, a 100-year-old auto parts chain, is based in Rochester, New York. This leading regional player with $25 million in revenues, 17 stores and a large hub, fills a significant void for our U.S. Automotive parts business in the Rochester trading area. We are pleased to welcome Michael Gordon and the Monroe team to the GPC family and look forward to working with them to expand our market share in the Rochester market.

Across our U.S. Automotive aftermarket, the long-term fundamental drivers for our business remain sound. The size of the vehicle fleet continues to grow. The average age of the fleet is up to 11.7 years. Fuel prices remain favorable for the consumer, and miles driven continues to post steady gains. Total miles driven increased 0.008% in July and are up 1.5% year-to-date. The national average price of gasoline was $2.76 in September, up $0.30 from June and more than $0.40 from last year. We can expect to see further increases in miles driven albeit at a slower rate.

Despite these sound fundamentals and the benefit of our U.S. Automotive acquisitions, which are meeting our expectations and driving sales growth, our organic growth has been below expectations. Cyclical factors, such as 2 consecutive mild winters and vehicle age demographics, has created a challenging environment. While we expect these industry conditions to improve in the quarters and years ahead, we are also focused on pulling the levers we do have control over to ensure we are well positioned as market conditions improve. To that end, we are taking a close look at cost and productivity measures across this business and will be implementing initiatives to enable us to more quickly respond to market changes and ensure we are achieving an improved productivity and efficiency wherever possible.

So now let's turn to our international Automotive businesses in Australasia, Canada and Mexico. These operations account for nearly 1/3 of our global Automotive revenues and, as a group, delivered a 5% total sales increase, including a 3% comparable sales increase in local currency.

In Australia and New Zealand, third quarter sales were up low to mid-single digits driven by a slight increase in comparable sales and the ongoing benefit of acquisitions. The Asia Pac business operated with 559 total stores across Australasia in the third quarter and has plans for further store expansion in the future.

We were pleased to bolt on strategically important tool and equipment distributor to our New Zealand operation in Q3. The combination of Soco tool and equipment and Repco positions our team as the #1 player in the equipment market as well as giving us access to a new range of customers. Further, the underlying fundamentals for the Australasian aftermarket remain solid with a growing car part driven by record car sales, relatively low gas prices and upward trends in miles driven.

Turning to NAPA Canada. Both total sales and comparable sales strengthened further in the third quarter, increasing in the mid- to high single-digit range from last year. We achieved this growth with strong execution of our strategy, along with a favorable Canadian aftermarket sales climate.

Areas of outsized growth continue to be our heavy-duty truck parts business, our paint business and our overall business in Western Canada.

Finally, in Mexico, our sales remained strong, growing by high single digits and reflecting our continued expansion of the NAPA Mexico footprint. Today, we have 39 total stores with plans to open additional stores in the quarters ahead.

Before concluding our review of the Automotive segment, we want to spend a few minutes on our pending acquisition of Alliance Automotive Group. This acquisition is valued at $2 billion and is expected to generate an estimated annual revenue of USD 1.7 billion while also delivering accretive margins and positive net cash flows. As a reminder, we expect the acquisition to be immediately accretive to earnings in the first year after closing.

For 2018, incremental diluted earnings per share is estimated at $0.45 to $0.50, and adjusted earnings per share, which exclude the amortization of acquisition-related intangibles, is estimated at $0.65 to $0.70. With this acquisition, we'll enter the European markets with critical scale and a leading market position, and we are looking forward to working with the very talented AAG team to build on their strengths and drive continued outperformance.

AAG is poised to contribute significant sales growth and earnings accretion to GPC and also serves to enhance the GPC platform for long-term, sustainable expansion across the global Automotive parts industry. We have received all applicable regulatory approvals to proceed with this acquisition and expect to close in November.

We can also report that just last week, AAG received final regulatory approval and closed on their acquisition of GROUPAUTO Poland (sic) [GROUPAUTO Polska]. So we enter the fourth quarter with a continued focus on accelerating our comp sales growth while also focusing -- while also looking forward to the opportunities presented by our pending acquisitions and longer-term acquisition strategy.

Turning now to our Industrial business. Motion Industries represented 30% of our third quarter total GPC revenues and was up 7.1% in the quarter. This is consistent with the strong growth we saw in the first and second quarters and includes a 4% comparable sales increase, which is also consistent with the first half of 2017.

We remain encouraged by the continued strength in our Industrial sales thus far in 2017, which reflects both improving organic growth and acquisitions. In addition, the industry has benefited from favorable market conditions as broad-based industrial indicators, such as industrial production and the PMI index, as well as rig count and the level of exported goods, have all trended positive. These factors drive greater customer demand across the diverse markets we serve, and we expect to see this continue in the quarters ahead.

A review of our Motion business by industry sector, product category and top customers shows that we are performing well across all operation. Of our top 12 industries, 10 sectors showed solid sales gains, including top-performing areas such as iron and steel, lumber and wood, equipment rental and leasing, oil and gas, equipment and machinery and aggregate and cement. So Industrial's solid third quarter and 9-month performance was broad-based.

Finally, as announced this morning, we expect Motion to close on the acquisition of Apache Hose & Belting Company on November 1. Apache is based in Cedar Rapids, Iowa and is a premier distributor specializing in the value-added fabrication of belts, hoses and cut and molded products used in a wide array of industries and applications. Apache serves both the industrial and ag markets and, combined with Motion, creates a market-leading, value-added offering in the belting and hose business. We expect Apache to generate estimated annual revenues of $100 million, and we look forward to working with Tom Pientok and the Apache team to further build on this business.

In summary, we are encouraged by the solid results in our Industrial business thus far in 2017 and see no slowdown in sight for the quarters ahead.

Turning now to EIS, our Electrical distribution segment, which was 5% of the company's total third quarter revenue. Sales for this group were up 11.6% in the third quarter due primarily to the Empire Wire and Supply acquisition on April 1. The addition of Empire further expanded EIS' wire and cable business, and in particular, it strengthens our overall capabilities to serve the industrial robotic and automation markets. This new business continues to perform well as does the overall wire and cable segment.

Our core Electrical business, including fabrication operations, has softened slightly from the first half of the year. We expect these trends to stabilize, and overall, we continue to look for solid total sales growth at EIS in the quarters ahead.

And now a few comments on our Office Products business, which was 12% of the company's Q3 revenue. The Office Products Group reported a 4.7% decrease in both total sales and comparable sales as the ongoing decline in demand for traditional office supplies continued to pressure sales across all our channels. The exception to our declining comp sales trend would be the facilities, breakroom and safety supplies category, which is growing significantly and now stands at approximately 35% of total sales for the Office Group.

Unfortunately, the sales increase for this important product group was not enough to offset the decrease in sales of traditional office supplies, furniture and tech products.

Our third quarter results are consistent with recent sales trends and highlight the significance of our efforts to expand SPR's products and services offering in a large and growing FBS market. While our team has done a solid job of executing our strategy to diversify this segment, with deteriorating trends and the changing landscape of the industry, including the strategic shift inside our customer base, we are reviewing whether the current plan is adequate for sustained growth and profitability in accordance with our long-term objectives.

So that recaps our consolidated and business segment sales results for the third quarter. Overall, total sales of plus 4% were relatively consistent with the first 6 months of 2017. Given our margin profile, however, our challenge is to overcome the industry-wide headwinds in the U.S. Automotive, Office and Electrical segments of our business and produce stronger organic growth. This is essential as we look to build on the opportunities presented by our acquisition strategy and improve our profitability.

So with that, I'll hand it over to Carol and -- who will provide you a financial update and our updated outlook for the year. Carol?

Thank you, Paul. We'll begin with a review of our key financial information, and then we will provide our updated outlook for 2017.

Our total sales in the third quarter were up 3.9%, including a 1% increase in comparable revenues. Our gross margin for the quarter was 29.95% compared to 30.4% last year. The decrease is due primarily to lower supplier incentives recorded in the quarter associated with lower-than-expected purchasing volume. In addition, we experienced product mix shifts in several of our businesses, U.S. Automotive, Office and Electrical, which also pressured our margins.

For the 9 months, gross margin of 29.9% remains fairly steady with the prior year as the more favorable gross margin trends in the first 6 months mostly offset this quarter's decline. With that said, we remain focused on enhancing our gross margin through several key initiatives, including continued supplier negotiations, the ongoing investment and a more flexible and sophisticated pricing strategies as well as improved analytic capabilities around SKU profitability.

We continue to see a somewhat inflationary pricing environment across our businesses in the third quarter with each of our businesses showing at least slight inflation through the 9 months of the year. Our cumulative supplier price changes through September stand at 0.003% increase for Automotive, 1.8% increase for Industrial, 0.006% increase for Office and increase of 1.3% for Electrical.

Turning to our SG&A. Our total expenses for the third quarter were $981 million or $962 million before the $18.5 million in transaction costs primarily related to our pending European acquisition. On an adjusted basis, our total expenses were up 6% from last year and at 23.5% of sales, and we continue to experience the deleveraging of expenses associated with the slower organic sales environment in several of our businesses.

In addition, rising labor, freight and delivery, IT and digital investments as well as continued acquisition costs are also driving our increase in operating expenses. These items are offsetting our previously planned cost savings initiatives, as Paul mentioned before, but we have another round of plans and initiatives underway to further capture additional cost savings and enhance our productivity.

Streamlining our cost structure is essential to improve our profitability, and we have several action plans underway to accomplish this goal. Some specific examples include further consolidation or closing of select facilities, including distribution centers, branches and underperforming stores. Our past efforts in this area are positively impacting our operations, and they've served to maintain our total headcount at relatively flat despite the addition of several acquisitions during the year. With that said, we recognize the need as well as the opportunity for even greater operational efficiencies as well as more significant cost savings.

Additionally, we're piloting a variety of cost savings programs to improve our exposure to the increasing freight and delivery costs. While some of these initiatives will take some time to produce meaningful benefits, the expected savings will position us for improved profitability in the quarter and years ahead. So although we have much work ahead of us, we're excited for the opportunity to achieve a lower-cost, highly effective distribution infrastructure for our businesses.

Now we'll discuss the results by segment. Our Automotive revenue for the third quarter of $2.2 billion was up 3.6% from the prior year, and our operating profit of $178 million is down 10% with an operating margin of 8.2% compared to 9.4% margin in the third quarter of last year. We're very disappointed with the margin decline in Automotive, which we attribute to several factors, including lower supplier incentives and a product mix shift the lower-margin products, including more commodities, which impacted our gross margin as well as the deleveraging of expenses and a rise in expenses, such as freight and delivery, legal and professional, insurance and ongoing wage pressures. These headwinds were especially extreme in the quarter given our expectations for a somewhat stronger comparable sales growth, especially in the U.S. Automotive group.

Our Industrial sales of $1.2 billion in the quarter were a 7% increase from the prior year. Operating profit of $95 million is up a strong 10.5%, and our operating margin has improved to 7.6% compared to 7.4% last year as this segment continues to benefit from both organic and acquisitive sales growth as well as improved gross margins and SG&A leverage.

Office Product revenues of $510 million were down 5% from last year, and their operating profit of $24 million is down 21% with an operating margin of 4.7%. The margin for Office remains under pressure due to the accelerated decline in organic sales and a deleveraging of expenses. In addition, this segment had a fairly significant decrease in supplier incentives in the quarter. As Paul commented earlier, we're currently reviewing our plans to address these trends in this business.

The Electrical/Electronic Group sales were $199 million in the quarter, up 12% from 2016. Operating profit of $13.5 million is down 5%, and the margin for this group is 6.8%. So despite strong total sales growth, organic sales remains challenged for EIS, and it continues to pressure our margins. We're also impacted by ongoing customer and product mix shifts, which are offsetting the positive impact of their cost savings initiatives in this business.

So our total operating profit in the third quarter was down 5%, and our operating profit margin is 7.6% compared to 8.3% last year. So a challenging quarter, which we expect to correct in the quarters ahead through gross margin and operating expense initiatives that we discussed earlier.

We had net interest expense of $8.2 million in the quarter, up $3 million from the prior year, due to an increase in our debt levels and certain variable interest rates. With these factors in mind, we're updating our net interest expense to be in the range of $26 million to $27 million for the year, excluding any financing costs for the pending AAG acquisition.

Our total amortization expense was $11.8 million for the third quarter as compared to $10.3 million last year. We currently expect our full year amortization to be approximately $46 million, which excludes the amortization associated with the pending AAG acquisition.

Our depreciation expense of $28.4 million for the quarter is up slightly from last year. For the full year, we continue to expect total depreciation to be in the range of $110 million to $120 million. And on a combined basis, we expect depreciation and amortization of approximately $155 million to $165 million.

The Other line, which primarily reflects corporate expense, was $43.9 million for the quarter. This includes $18.5 million in transaction costs primarily related to the pending AAG acquisition. Excluding these costs, this line is up $4 million from the $21 million last year essentially due to the $7 million gain recorded in the prior year for a sale of real estate last year.

So overall, our corporate expenses are trending down slightly from 2016 despite higher costs associated with personnel, legal and professional, IT, security and digital, which we're managing very carefully. For 2017, we continue to expect corporate expense to be in the range of $105 million to $115 million range. This excludes the transaction costs as noted above.

Our tax rate for the third quarter was 35.7% compared to 36.4% last year. The decrease in the quarterly and the year-to-date rates primarily relates to a higher mix of foreign earnings, which are taxed at lower rates, and in addition, the recently adopted change in accounting for stock-based compensation has also positively impacted our 2017 rate. For the full year, we expect our tax rate to be approximately 35.5%.

So now let's turn to a discussion of the balance sheet, which remains strong and in excellent condition. Accounts receivable of $2.2 billion is up 6% from the prior year. This is in line with our average daily sales growth for September. We also remain pleased with the quality of our receivables. Our inventory at quarter end was $3.4 billion, up 7% from last year, and this is improved from the 9% year-over-year increase reported in June

In addition, excluding acquisitions and FX, our inventory is up 4% year-over-year and up just less than 1% from the year-end. We're very focused on maintaining this key investment at the appropriate levels as we move forward.

Accounts payable of $3.3 billion at September 30 is up 6% despite slower purchasing activity across several of our businesses, most notably in the U.S. Automotive group. Offsetting these lower purchases is the ongoing benefit of improved payment terms with our suppliers as well as acquisitions. At September 30, 2017, our AP-to-inventory ratio was 98%.

Our working capital of $1.5 billion at September 30 is consistent with the prior year and down from year-end.

Overall, we continue to maintain a relatively steady level of working capital from quarter-to-quarter, but we're certainly not satisfied at our current levels. We're currently looking for opportunities to further improve on our working capital management.

Our total debt of $1.1 billion at September 30 has remained fairly steady over the last several quarters, although it's up from September a year ago from $775 million. Our average cost of the debt is a low 2.49%. And in today's low rate environment, we're comfortable using our strong balance sheet and financial capacity to finance our pending European acquisition, which will add approximately $2 billion in debt to our balance sheet.

AAG represents an excellent growth opportunity for GPC, and we're comfortable with our anticipated capital structure with debt at approximately 2x EBITDA.

So in summary, our balance sheet will remain a key strength of the company. Thus far, in 2017, we've generated cash from operations of $542 million, and we're updating our full year cash from operations to approximately $750 million to $800 million and free cash flow, which excludes capital expenditures and the dividend, in the $200 million to $250 million range. While lower than previously estimated, our cash flow remains solid, and it supports our ongoing priorities for the use of cash, which we believe serves to maximize shareholder value.

Our priorities remain the dividend, reinvestment in our businesses, share repurchases and strategic acquisitions. Our 2017 annual dividend of $2.70 per share marks our 61st consecutive year of increased dividends paid to our shareholders. This represents approximately 57% of our prior year earnings and a 3% dividend yield. We look forward to recommending our 62nd consecutive dividend increase in 2018.

Our investment in capital expenditures was $43 million in the third quarter and stands at $97 million for the 9 months. For the year, we continue to plan for capital expenditures in the range of $140 million to $150 million.

Over the first 9 months of the year, we purchased approximately 1.9 million shares of our stock, and today, we have 17.4 million shares authorized and available for repurchase. This includes the 15 million share authorization that was approved by our Board of Directors at their August board meeting. We have no set pattern for these repurchases, but we expect to remain active in the program in the periods ahead as we continue to believe that our stock is an attractive investment and, combined with the dividend, provides the best return to our shareholders.

So that concludes our financial update for the third quarter of 2017. And in summary, we are not satisfied with our current results, and we're taking further action to enhance our gross margins and streamline our cost structure across all of our businesses. We're absolutely focused in these areas, and we look forward to reporting to you on our progress.

So now let's turn to our guidance for 2017. Based on our current performance, our growth plans and initiatives and the current market conditions, we're updating our full year 2017 guidance as follows: we're increasing our total sales guidance to the plus 4% to plus 4.5% range from our previous guidance of plus 3% to plus 4%. This outlook includes the benefit of our acquisitions closed through September 30 as well as the Apache and Monroe acquisitions announced today, which will close on November 1, but no other future acquisitions. We currently expect a slight benefit from currency translation for the full year.

By business, we're updating our sales outlook for the Automotive segment to approximately 3.5% from the previous plus 3% to plus 4%. We're updating sales for Industrial to plus 5.5% to plus 6% from our previous plus 4% to plus 5%. We're updating sales for the Office segment to approximately 2% from the previous plus 2% to plus 3%. And finally, we're updating sales for the Electrical segment to plus 8% to plus 9% from our prior guidance of plus 7% to plus 8%.

On the earnings side, we're updating our guidance for the full year earnings per share to $4.47 to $4.52 per share. We're also guiding to an adjusted earnings per share in the range of $4.55 to $4.60, which compares to our prior outlook of $4.70 to $4.75. Our adjusted earnings per share excludes any fourth quarter 2017 revenue, earnings or expenses, including transaction costs associated with the pending acquisition of AAG as well as the transaction costs recorded in the third quarter of 2017, as noted in our press release and today's call.

We would add that our outlook for adjusted earnings per share reflects our expectation for a slight increase in fourth quarter earnings relative to fourth quarter of 2016. So while we underperformed in the third quarter, we're taking the corrective action necessary to improve our profitability in the quarter and years ahead.

With that said, we thank -- we close by saying thank you to all of our GPC associates for their continued hard work day-in and day-out.

At this point, I'll turn it back over to Paul.

Thank you, Carol. We entered the fourth quarter focused on generating stronger organic sales growth as well as maximizing the benefits of our acquisitions. Next month, we expect to close on the Alliance Automotive Group in Europe as well as the Apache and Monroe Motor Parts acquisitions announced earlier today. We believe in the long-term benefits of our acquisition strategy and are excited to add these businesses to our operation.

As mentioned before, we also move forward intensely focused on the plans and initiatives underway to reduce costs and improve our profitability, with the objective of enhancing gross margins and building a highly productive, cost-effective infrastructure. While this has always been our focus, we understand we need to take steps now to be more nimble in challenging environments and ensure we are positioned to capitalize on opportunities as the market begins to recover.

While we have consistently stated that our businesses fit best under the GPC umbrella, we also continually assess the contribution of each business to our long-term financial objectives for sustained revenue growth, cash flow generation and profitability. Although we are not satisfied with this quarter's result, we are optimistic with the opportunities that lie ahead, and we move forward with a heightened sense of urgency as we focus on maximizing shareholder value and positioning the company for long-term success.

So with that, we'll turn it back to the operator, and Carol and I will take your questions.

(Operator Instructions) And we'll go first to Bret Jordan with Jefferies.

Could you talk a little about the cadence in Auto? As the quarter went, were there any particularly weak or strong months in the period?

Yes. The good news, Bret, is that the month of September was, for the U.S. group, was our best month of the quarter. August was a little softer. But as I said, September, we rebounded nicely on an average daily sales basis. If we look across our total Automotive business, similar pattern, September was the strongest of the 3 months for our global Automotive business.

Okay. And how do you think you did relative to the underlying market? As you sort of look across the board, I guess, it's hard to see everybody's POS. But do you think you are relatively keeping pace? Or were there any supply issues?

No. We -- look, I would -- being the first one out, Bret, we haven't had the advantage of seeing our competitors' numbers. But with flat comp numbers in the U.S., I'm guessing we're within range of most. I don't believe we're giving up market share. As I mentioned in my prepared remarks, we saw nice growth in our DIY business. Again, I think that's directly related to the things that we're doing and the initiatives we have in play. The soft -- we saw a little bit of softness in the DIFM business. But again, we've got, I think, initiatives to get that turned as we head into the home stretch here.

Okay. On the margins in auto, you talked about the supplier incentives being down as well as the negative mix. Could you kind of bucket those? And I guess, from a supplier standpoint, I'm hearing a lot across the board, people trying to get their inventory levels down. Have you taken within your total inventories the Auto content down? And maybe if you could just sort of, within the margin, talk about how much is lower incentive versus lower-margin mix.

Yes, Bret, I'll answer that in 2 ways. One is specifically the Automotive margins, which were down 120 basis points for the quarter. I would say 3 predominant factors and of equal weight. One would be the lower rebates. The other would be the lower organic sales that we had planned for better organic sales. And then the other would be the SG&A, which is not only leverages issue but it's some of the costs we've pointed out, be it IT, digital, wage pressures. I mean, look, Automotive headcount is flat. But when you layer in the wage pressure, the cost of insurance benefits, that's weighing on there. And the other thing in SG&A that we've called out is the delivery, the freight, the diesel fuel, that really wasn't anticipated. There was definitely some spikes up related to some supply issues and the hurricanes. And for us, the cost of delivery was a factor. And so that's the Automotive margins. And then just when you look at the total gross profit in the quarter, we were down 46 basis points. 20 of that was related to the volume incentive in rebates, and that's a combination of Automotive and Office.

Was there any AAG expense in the Auto in the SG&A in the quarter?

No, the cost that we called out, the $18.5 million, is all in the corporate expense Other line, and none of it flowed through the operating margins.

Okay. And since you said the word hurricane, what do you think you lost to the hurricanes in the quarter?

Well, from a sales standpoint, it's 0.5 point, and that's pretty representative across all 4 of our segments. It was a little bit higher in Industrial. And there is an impact on the profit side as well. So we believe that was probably $0.01 or $0.02 in the quarter as it relates to that, but definitely 0.5 point on the sales.

As you know, Bret, we haven't been through these before, our expectations. And especially in the Southwest and our guys in the Southwest were obviously overwhelmed with Hurricane Harvey. The guys in the Southeast where we think we lost a couple of points in the Southeast with Irma. We do expect we'll see a snapback. Now how quickly that comes, exactly when that comes, we think it'll be in the fourth quarter. But we do expect there will be a little bit of a snapback. We sold a lot of generators, supplies, mops, brooms, buckets, bottled water, et cetera, but we would hope to see some hard parts bouncing back in Q4 as folks recover.

And Bret, I don't think I answered your inventory question for Automotive. Our -- primarily, our Industrial business has made the improvement in inventory. But I would tell you, sequentially, from Q2 to Q3, Automotive did take some inventory out of the system. So there is more work to be done there, but we are keeping a mindful eye on the level of inventory and as it relates to these volume incentives.

And we'll go next to Scot Ciccarelli with RBC Capital Markets.

Another couple of Auto margin questions, actually. You guys just talked about roughly equal impacts from rebates and spending and deleverage. Would you expect all of those pressures to kind of continue on a go-forward basis? Or why wouldn't they continue? Number one. Number two, are you guys starting to see a more competitive environment on the pricing front? Historically, this industry hasn't experienced that. But just given the magnitude of margin swing, which is bigger than what we've seen in the last decade, pretty much, just trying to figure out if there's something else that we need to be aware of.

Yes. I'll start with this, and then I'll let Paul comment on the pricing side. As it relates specifically to some of the things we called out factored into our guidance, the $0.15 lowering guidance, we have contemplated some similar numbers as it relates to the volume incentives for the rest of the year as well as some of this SG&A pressure because I don't think that's going to alleviate too quickly. Having said that, and Paul mentioned this, we're now moving to some further steps that need to be taken. So while we had made changes related on having a level of comparable sales, since we're not there, we're going to kind of the next set of changes. So it takes us a couple of quarters to come out. But I think the volume incentives, certainly, that would be assumed to recur, and that's what's factored into our guidance adjustment.

Scot, relative to market pricing pressures, I can tell you that as it has been in recent years, the pricing atmosphere across the Automotive aftermarket is pretty stable and pretty same, fortunately. As we look at our primary competitors, there has not been folks out there trying to lead with price. With that said, I will tell you that internally, we are reviewing our pricing approach, our approach to pricing in the market. One of the things that we've -- our team has begun to implement is looking at zone pricing, which is not new for most retailers, but it is new for NAPA. So that's -- that is something that we are in the process of implementing and we believe will have a positive impact on our overall margins.

I appreciate that. I guess, what I was just trying to think through is one of the concerns in the industry, and you guys are aware of this, is pricing transparency given some of the online competition. I know you guys effectively sell a private label product. Are there any concerns that, that pricing transparency where you do see stuff, March may be 15% to 20% less that an online competitor as opposed to an Automotive specialist could wind up creating that pricing pressure just broadly for the environment?

Yes. Listen, Scot, am I -- are we concerned? Sure, we're concerned, and it's something that we pay very close attention to. I will tell you, I had the privilege of sitting through a session last week. We had 8 of our largest and best NAPA AutoCare Centers here in the building. And so our folks coming in and talking to these folks about online pricing and what they see in the marketplace, sure they are. Is it driving their decision-making in terms of how they’re pricing their jobs? They're not. And so is it a concern? It is. But do we believe that the pricing transparency is having a negative impact on our margins? We don't think so at this point.

And Scot, one of the things I'd mention that we didn't really talk about, the product mix in the quarter for Automotive. Paul mentioned the categories that performed well, be it tools and equipment, batteries, rotating electrical, those are typically at lower gross margin. The ones that didn't perform as well, under car heating and cooling that relates to whether the mild winters or the mild summers, those are more of the higher gross margin. So we did have some mix shift in our gross margin for Automotive in the quarter. That's hard to say what that's going to be in Q4, but that's not necessarily indicative of online issues.

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

I just want to talk about the difference between DIFM and DIY. Can you maybe just provide a little commentary on, because I know, obviously, a lot of this is self-help. You're kind of just a little base, but you're also kind of resetting the stores. So can you maybe talk about the DIY performance of the stores you aren't resetting and kind of where you think industry trends are in DIY? And then I have a related follow-up.

Yes. So you hit on it exactly, Chris. We are -- we certainly think that we are outpacing the rest of the industry, and that's largely due to the initiatives that we've spoken to over the last number of quarters on these calls. Our team has improved the look in 350 stores. We'll -- we have another 150 slated for the balance of the year. The stores that we have reset, we are seeing high single-digit increases in our retail business. Those stores we have not reset, we are seeing mid-single-digit to lower single-digit increases. But the good news in our DIY business, our ticket count is up, our traffic count, so the number of tickets is up. And again, I give credit to our team and the good job that they're doing in the field. They -- we're getting folks into our stores today that perhaps were not our shoppers in previous years.

Got you. Okay. And then kind of like more of an industry question. I would think DIFM is still a younger car to DIY. So I wonder if there's like air pocket from lapping stocking are. Is there -- I guess, what are the chances we are seeing this first in DIFM? Maybe that's one reason why DIFM is slowing down a little bit harder, quicker. And then two, is there something about DIY that, in general, where the -- some of the product sales are less tied to vehicle age? Just any thoughts there, I'd appreciate it.

Well, I think you -- I think your point is accurate, Chris. I think that, that trough that we've seen is absolutely impacting the DIFM. So going back through the recession '08, '09 and even, I believe, end a little bit of '10, whereas we would normally be seeing those 17, 18 million vehicle counts coming into our sweet spot, they're coming in at a much reduced rate. So I absolutely believe that is impacting the DIFM side. And then when you look at as it relates to DIY, when you have an average vehicle now on the road at 11.7 years, we're seeing a lot of cars coming in 13-, 14-, 15-year-old vehicles that, to your point, they're ending up coming into our stores and taking the DIY route more so than the DIFM route. So I think your point is valid.

That was really great to hear. But just one clerical question. For the Poland acquisition, did you -- was that included in the original [apprec] estimate? Or does that go up technically now that you closed it?

The -- you're talking about the earnings per share number that we gave you for 2018?

Yes, but (inaudible)

That is staying in the Poland acquisition.

The Poland acquisition, isn't that 55 or what was that accretion number?

It was.

We'll go next to Matt Fassler with Goldman Sachs.

A couple of follow-up questions. First, on Automotive margins. One relates to whether you're seeing any trend between private label, which I think is the bulk of your volume at NAPA relative to brands, and whether that's having an impact on margin and mix. And then also, we've heard a lot about vendor incentives in Industrial over the years. We've heard less about it in Auto. If you could just kind of talk to us, is this a new innovation? Or is it just frankly, the delta in your sales versus expectations that’s leading us to hear more about it here in 2017?

Yes, Matt, I'll take the first part of that, and I'll let Carol touch on vendor incentives. As it relates to private label versus brand and the impact on margin, 90% of what we sell in the U.S. stores, Matt, is NAPA-branded product. We do sell OE parts through our acquisition we did a number of years ago through our Altrom business. But 90% of what we sell is private brand. And we haven't seen a significant shift away from private label, from our NAPA brand into the OE brand. And as it relates to the vendor incentives, I'll let Carol touch on that.

Yes. Look, I would say, in general, it's a -- you're right, we talk more about it on the Industrial side because it is a little bigger component of their margin. It's not as large of a component on the Automotive margins. But having said that, it's something that we factor into our profitability each year, and we do it based on achieving certain volume levels and purchasing levels. And as we, again, contemplated through the first 6 months, we expect a stronger comparable growth for the second half. And as we got into third quarter, our purchases were actually down something like 6%. So -- and again, we could have made a decision to go out and buy that inventory regardless of needing it to get those volume levels, but we're working hard on keeping that inventory down. So we just felt it was appropriate to adjust our rebate assumptions. Having said that, that's not anything new. It's more of a function of the lower organic sales. And I'd point out, on the Motion side, look, with -- having core growth of 3% to 4% on the Industrial side, and we've talked about their incentives over the years, all the improvements they've done, you see what it does with leverage, and you're seeing the 20 basis point improvement. And that's not all just incentives and volume rebates; that's just the core business.

Understood. If I could ask a quick follow-up, actually, the Office business. It sounds like that business is somehow in a bit of shorter leash at this point. Are you -- is this business still part of your long-term plans? And at what point do you think you'll decide on that question?

Yes. So Matt, as we've talked before in these calls and in one-on-one meeting, when we review every one of our businesses, and we have 4 different businesses we go to market today, Auto and Industrial and of course, Office and Electrical, and we review them all, and we review all of our geographical regions as well. And all need to meet the expectations that we have, both on the volume -- top line and bottom line. And in the past, we have, as I think we've talked, we have moved away from businesses that failed to meet those expectations. All that said, Matt, there is no intention at this point to move away from our Office Products business. We're in the midst of a multi-year diversification strategy. And honestly, the growth that we're seeing in facilities, breakroom and safety, which is now, gosh, it's 35%-plus of our overall business, we're seeing good movement, and we're seeing good trends. The challenge that we have, it's that core, the core Office supply business. And unfortunately, the growth we're seeing in FBS is not -- right now, is not able to make up for the decline we're seeing in the core. But I will tell you, just like all of our businesses, we watch and monitor very closely, and we certainly expect our Office group to step up just like all of our businesses. The last thing I would say, Matt, on Office is there has been a bit of a change in customer dynamics. So one of the big, well, there's only 2, so one of the big players that went private is making certain procurement decisions, which has had an impact on the wholesalers as well. So yes, we've got a number of challenges, but our team, I believe, is addressing them, and I still am positive about the outlook going forward.

And we'll take our next question from Seth Basham, Wedbush.

Sorry to return to the question around auto margins, but just a little bit more clarity. In terms of 120 basis point decline in EBIT margins, can you give us a little bit more sense of how much of it was gross versus SG&A deleverage?

It was slightly more on the gross margin side than the SG&A side because, again, the -- what I mentioned was the rebates for them and then the lower organic growth and then we had some product mix shift. So a little bit more so on gross margin than SG&A.

Got it. That's helpful. And in terms of the performance of independent versus company-owned stores in the U.S., was there much difference?

No, not really, Seth. The -- our flat comp that we saw across the business in the quarter was pretty consistent, both with our independents and our company-owned stores as well, so not a big variance there.

Got it. And then lastly, as it relates to your thought process around store and facility closures, how are you thinking about that? Is it all differently now in the Auto segment based on the sluggishness that you've seen over a number of quarters?

Yes. So Seth, let me take that in 2 parts. From a distribution center standpoint, we've got a vast distribution network, 47 DCs here in the U.S. We've got -- I'm sorry, 57 DCs here in the U.S., sorry. I'm thinking about one of the other businesses. We've got a number in our other markets as well. So one of the things that we're evaluating is our distribution center infrastructure. We've got a third-party that we're working with to really help us evaluate whether our go-to-market strategy today is the absolute most efficient for our business. So that's under review. As it relates to our stores, Seth, there's nothing new there. We are -- I mean, through our history, we are constantly opening and closing stores, underperforming stores in markets throughout the U.S. And that hasn't changed any, and I don't see that changing going forward. But we closed, gosh, we'll close 100 stores a year, and we'll open 100 stores. So actually, we'll -- this year, we'll surpass that number. So that's nothing new for us.

Got it. If I could sneak one last one in. Just regarding service levels, so margins in Auto were soft. You said there wasn't any change in the pricing environment. But is there a change in the service level environment? In other words, are you adding more services, whether it be quicker deliveries, et cetera, to try to drive sales in the past or just leaving some SG&A pressure?

No. There has been no major shift in our service proposition that we provide our customers, Seth. We think that going back to our vast distribution center network with our 6,000 stores, we deliver to our stores every night. And we'll hot shot to our stores and their independent owners during the course of the day. So we have not -- we certainly have not pared back on any of our services that we provide our customers, and we don't see that in the cards going forward either.

And with no additional questions, I'd like to turn the call back to management for additional comments or closing remarks.

We'd like to thank you for your participation in today's call. We appreciate your support of and your interest in Genuine Parts Company, and we look forward to reporting out at our next quarter. Thank you.

And that does conclude our call for today. Thank you for your participation. You may disconnect at this time.