Genuine Parts Company
Q1 2018 Earnings Call Transcript

Published: 19 Apr 2018

[Operator:]

Good day and welcome to the Genuine Parts Company, first quarter 2018 conference call. Today's conference is being recorded. At this time all participants are in a listen-only mode. [Operator Instructions]. At this time, I would like to turn the conference over to Sid Jones, Senior Vice President of Investor Relations. Please go ahead.

[Sid Jones:]

Good morning and thank you for joining us today for the Genuine Parts Company, first quarter 2018 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 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 may also 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 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.

[Paul Donahue:]

Thank you, Sid. And welcome to our first quarter 2018 conference call. We appreciate you taking the time to be with us this morning. Earlier today we released our first quarter 2018 results. I'll make a few remarks on our overall performance and then cover the highlights across our three businesses

[Carol Yancey:]

Thank you, Paul. We’ll begin with the review of our key financial information and then we will provide our updated outlook for 2018. As Paul mentioned, total sales in the first quarter are up 17.4% or up 2% before acquisitions and a 1% favorable impact of foreign currency translation. Our gross margin for the quarter was 31.3% compared to 29.6% last year. This strong increase primarily reflects the higher gross margin associated with AAG’s operations, as well as other higher gross margin acquisitions and it also includes the benefit of increased supplier incentives in our industrial business. These favorable items were offset by $5.8 million in deal cost that was reported to cost of goods sold in the first quarter as well as the negative impact of lower supplier incentives at S.P. Richards. We remain focused on enhancing our gross margin through several key initiatives, including continued supplier negotiations both globally and across our businesses, the ongoing investment and a more flexible and sophisticated pricing strategies as well as improved analytic capabilities around SKU profitability. The pricing environment remains somewhat inflationary through the first quarter and we would expect this to continue, especially if the steel and aluminum tariffs take effect in the coming months. At this point there is much uncertainty on this issue and it’s really too early to determine the potential impact of tariffs on price inflation, but as we said before, we’re generally able to pass along these types of increases to our customers. Our cumulative supplier price increases for first quarter of 2018 were flat for automotive, up 1.3% in industrial and up six-tenths of 1% in office. Turning to our SG&A, total expenses for the first quarter are $1.2 billion, representing 26.3% of sales. This is up from last year as our expenses for the quarter reflect the operating cost at AAG, including incremental depreciation, amortization and interests, as well as $7.2 million in deal costs reported during the quarter. In addition, we continue to experience the lack of leverage on our comparable sales in both, the U.S. automotive and business products division, as well as ongoing pressure from rising costs in areas such as payroll, freight and including fuel delivery and IT and digital. To offset these and other increases we continue to enhance the cost saving initiatives across our business and we will remain focused on showing more progress in this important area in the quarters ahead. With that said, we also outlined in our year end call certain incremental costs that would be necessary to support our long term savings plan which will overall pressure our SG&A to some degree. All-in however, we’re confident that we can improve our cost structure to positively impact our long term profitability. Now let’s discuss the results by segment. Automotive revenue for the first quarter of $2.6 billion was up 30% from the prior year and operating profit of $185 million was up 22% with an operating margin of 7.2% compared to 7.7% margin in the first quarter of 2017. Primarily the decline in operating margin reflects the deleverage of expenses in our U.S. automotive business. Our industrial sales of $1.5 billion in the quarter are an increase of 8%. Operating profit of $112 million is up 8% and their operating margin is 7.2% compared to 7.3% last year with the slight decline due to the combination of motion with EIS’s lower net margin. That said, we expect to see a strong performance from industrial in the quarters ahead, which does lead to margin expansions for the year. Our business product revenues were $474 million down 5% from last year and their operating profit of $22 million is down 31% and their operating margin is 4.6%. This business continues to operate in a challenging environment and this is pressuring their profitability. Our total operating profit in the first quarter was up 11% on the 17% sales increase and our operating profit margin was 6.9% compared to 7.3% last year. Our teams are working hard to improve on these results in the quarters ahead. We had net interest expense of $23 million in the quarter, up $17 million due to the increase in debt associated with the AAG acquisition as well as an increase in rate for the quarter. With that said, we continue to expect net interest expense to be in the range of $93 million to $95 million for the year. Our total amortization was $21 million for the first quarter, an increased from the $11 million last year, primarily due to the amortization related to AAG. For 2018 we are updating our full year amortization to be $86 million to $87 million. Our depreciation expense of $37 million for the quarter was up $10 million from last year and for the full year we’re updating our total depreciation to be in the range of $140 million to $150 million. So on a combined basis we now expect depreciation and amortization of approximately $225 million to $235 million. The other line which typically reflects our corporate expense was $44 million for the first quarter and this includes approximately $13 million in transaction related costs incurred in the quarter. Excluding these costs our corporate expense was $31 million which is up $6 million from the prior year and this is primarily due to the costs for our retirement plan valuation. For 2018 we continue to expect our corporate expense to be in the $115 million to $125 million range, excluding transaction related costs. Our tax rate for the quarter was 23%, much lower than the 34% tax rate in the prior year, due mainly to the lower tax rate enacted by the Tax Cuts and Jobs Act of 2017. In addition our tax rate was positive impacted by the favorable mix of U.S. and foreign earnings in the quarter. Our first quarter rates are typically our lowest quarterly rates each year and for the full year we currently expect our 2018 tax rate to approximate 26%. Now let’s discuss the balance sheet which remains strong and in excellent condition. Our accounts receivable at $2.6 billion are at 27% from the prior year and up 4% excluding the impact of acquisitions, primarily AAG as well as foreign currency. The 4% increase compares to our 2% comparable sales increase for the first quarter. So we have some work to do on improving this metric, but we do remain pleased with the quality of our receivables. Our inventory at March 31 was $3.8 billion or up 15% from March of last year. It’s down slightly excluding AAG and our other acquisitions as well as foreign currency. This improvement highlights the positive impact of our current initiatives to improve the inventory levels in our core businesses and we are very focused on maintaining this key investment at the appropriate levels as we move forward. Accounts payable was $3.8 billion at the end of the quarter is at 17% or at 2% excluding acquisitions as well as foreign currency. The 2% core increase reflects the lower levels of purchasing activity across our businesses, especially in U.S. automotive and business products which is slightly offset by the benefit of improved payment terms with certain suppliers. At March 31 our AP inventory ratio was approximately 100%. Working capital of $1.8 billion at March 31 compares to $1.6 billion last year. So effectively managing our working capital continues to be one of our top priorities and we look forward to showing further improvement in the quarters ahead. Our total debt of $3.3 million at March 31 compares to $1 billion in total last year and it continues to reflect an approximately $2 billion in borrowings that were assumed in the fourth quarter of 2017 related to the AAG acquisition. Our debt arrangements vary in maturity and at March 31 the average interest rate on our total debt was 2.84% with approximately $1.5 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 the financial capacity to support our growth initiative, including strategic acquisitions and investments such as AAG in Europe and the Inenco Group in Australia, which we believe creates significant value for our shareholders. So in summary, our balance sheet remains the key strength of the company. In the first quarter we generated $138 million in cash from operations, which has improved from last year. Our cash flow has continued to support our ongoing priorities for the use of cash, which we believe serves to maximize shareholder value. For 2018 we expect cash from operations to be in the $950 million to $1 billion range and free cash flow of approximately $400 million. Our priorities for cash remain the dividend reinvestment in our businesses, share repurchases and strategic acquisitions. These priorities have not changed even with the savings from tax reform and the cash associated with the pending spin-off transactions. Regarding the dividend, 2018 marks our 62nd consecutive year of increased dividend paid to our shareholders. Our annual dividend of $2.88 represents a 7% increase from the prior year. We invested $32 million in capital expenditures in the first quarter which is up from $25 million in the prior year. For the year we continue to plan for capital expenditures in the range of $200 million to $220 million, an increase from 2017 due to the impact of AAG as well as certain additional investments that we are planning and associated with our anticipated tax savings. We did not purchase any of our common stock in the quarter and as of today we have 17.4 million shares authorized and available for repurchase. We have no set pattern for these repurchases that we expect to be active in the program and the quarters 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 now turning to our guidance for 2018, based on our current performance, our growth plans and initiatives, as well as the market conditions that we see for the future, we are maintaining our full year 2018 sales and earnings guidance as follows

[Paul Donahue:]

Thank you, Carol. As we reflect back on the first quarter we have several accomplishments we’d like to highlight. We established a new sales record at $4.6 billion and up 17%. Our adjusted earnings per share of $1.27 increased by 18% from 2017. We reiterated our full year sales and earnings guidance with sales at plus 12% to plus 13% and comparable EPS of plus 19% to 22%. We completed our first full quarter with AAG and this business continues to perform well and we are making progress on our integration. We took two significant steps to optimize our portfolio, further enabling us to focus on our higher growth and higher margin global automotive and industrial businesses. First, we combined EIS with Motion to form a larger and stronger industrial products group with expected revenues exceeding $6 billion annually. In addition we entered into an agreement to spin off the business products group and form a new company with Essendant. We made significant IT investments in the quarter to improve our digital capabilities and enhance our B2C online offerings, as well as enhance our operational efficiencies and productivity in the U.S., Canada, Mexico and Australasia. We generated solid cash flows improving our cash from operations relative to 2017 and finally we increased our 2018 dividend for the 62nd consecutive year. So with these accomplishments we move forward in 2018 better positioned to address our challenges and maximize the growth opportunities available to us. We remain focused on both organic and acquisitive sales to drive long term sustained revenue growth and will continue to execute on our plans and initiatives to enhance our gross margins, reduce cost and build a highly productive and cost effective infrastructure. We expect our focus in these key areas to improve the operating performance in our core businesses and for the company overall. As always, we look forward to updating you on our progress again in July when we report our second quarter 2018 results. So with that, we’ll turn it back to Ashley and Carol and I will be happy to take your questions.

[Operator:]

Thank you. [Operator Instructions] We’ll take our first question from Christopher Horvers with JP Morgan. Please go ahead.

[Christopher Horvers:]

Thanks, good morning everybody.

[Paul Donahue:]

Hey, good morning Chris.

[Christopher Horvers:]

I want to first focus on the U.S. NAPA business. Can you share how much the impact of Easter was by itself and I understand the weather headwinds in March with all the nor easters that came up the east coast, but at the same time it would seem like you had a pretty favorable January. So I just wanted to get your thoughts there. Do you think it – is it fair to you know call out weather in March and not acknowledge the strength in January?

[Paul Donahue:]

Yeah, so Chris the – and it’s a fair question. The cadence of the quarter, certainly January started out pretty good and that cold weather helped our business for sure. February was pretty good as well. Where we began to see it tail off was in March and specifically in the second half of March. Easter had an impact. Probably to address your question specifically, Easter was probably less than 0.5% overall impact, but you know the – you take three nor easters that hit the Northeast in the month of March, we had numerous DC store shutdowns in both the Northeast and Atlantic and that absolutely had an impact. What we see right now Chris is that certainly too much winter weather is not a good thing. We’ve seen our Ag business is off to a slow start, agriculture business. Our break business which is, you know we are usually taking off this time of the year is soft, but look in the long run the cold weather is a benefit for us. We think we’ll see a pick up most likely in Q2 and on into Q3 as parts fail, maintenance come into play, pot holes begin to take their toll. So longer term it is going to be a positive for us.

[Christopher Horvers:]

And then, you know it sounds like you know with the slightly positive U.S. comp and DIY better, was do-it-for-me thus down negative and I am just curious, you’ve been around this business for a long time, what do you think has changed in the do-it-for-me business, because it’s you know clearly DIY doing better than do-it-for-me is something very different from what had occurred for a long period of time.

[Paul Donahue:]

Well, I again – and Chris look, it would be fair to point out that our NAPA business is not like our peer groups. We are improving our retail business and we’ve had an initiative to upgrade our stores for some time. But retail for us DIY is still less than 25% of our overall business. We’re still largely driven by our DIFM business and our commercial business. As I mentioned, we saw improved results in our auto care business which we have 17,000 NAPA auto care centers. That business was up low single digits, which has improved. Major accounts while improving somewhat from previous quarter, we’re still challenged and what we hear in the marketplace Chris is that overall their business overall is pretty much flat. So specifically on your question about our DIFM business it was pretty much flat in the quarter.

[Christopher Horvers:]

Understood. And then one last one. Just as you think about the SG&A dollar growth, can you talk about where that played, the SG&A dollars played out relative to your expectations for the first quarter and you know what’s the stripping out all on the acquisitions. What’s sort of the core growth rate in your, you know the SG&A structure this year. Thanks very much.

[Carol Yancey:]

Yes so Chris, when we look at SG&A in the quarter and where our expectations were, so our core growth in U.S. automotive was not quiet where we thought it would be, much about what Paul mentioned earlier, what we saw certainly in March and then our business products division, their core growth was a little bit worse than what we saw. So having said that, it’s Q1 and what we certainly, we look at the 300 basis point increase. Looking at, you got the deal costs in there, you got AAG, you’ve got increased interests in amortization and that would be about half of the increase. The rest is really from the lower core growth and payroll is the biggest driver there. So we look at our businesses and we look at headcount and we look at headcount being flat as an organization, but these wage pressures, the increases we are facing in fuel, I mean those are real dollars. So the headwinds on wages and fuel are real and that was probably a little worse than we thought in the quarter and we mentioned the additional investments we are going to be making in IT and digital and certainly that was planned for. So where probably we were short was the lower core growth and then seeing the additional stronger wage pressures and increases in fuel and deliveries.

[Christopher Horvers:]

Thank you.

[Operator:]

And we’ll take our next question from Matt Fassler with Goldman Sachs. Please go ahead.

[Matt Fassler:]

Thank you so much and good morning to you. My first question just based on quantifying the impact of AAG to gross margin and I’m not sure whether that’s intrinsic marginrate and if it is that much higher, curious as to why or whether it’s just kind of P&L geography. I know we saw this popup to a smaller degree in Q4 when you only had ownership of that business for part of the quarter, but just so that we can model that appropriately over the next couple of quarters, if you could talk about why this is driving the reported gross margin so much higher.

[Carol Yancey:]

Yeah, happy to take that. So gross margin was up 170 basis points in the quarter and I would tell you AAG was about 100 basis points, and the remaining amount is due to improvement on the industrial side and also slight improvement on the automotive side offset by declines in business products. The reason that AAGs gross margin is stronger and we’ve spoken to – sometimes we’ve have acquisitions, Asia-Pac in particular and now AAG that come in with a higher gross margin and higher SG&A, but these are comparable from an operating margin basis. The big driver for AAG and I think we mentioned this early on when we made the acquisition, they have growth revenue that is more around slightly over $2 billion but the GAAP reported revenue, so growth billings will be much higher. The GAAP reported revenue is more like $1.7 billion. So when you look at the gross margin and the SG&A you are going to have higher gross margin by lowering your sales number.

[Matt Fassler:]

Understood. The second quick question I have relates to operating leverage in the automotive business. If you think about the underlying intrinsic business ex-acquisitions, can you talk about the kind of sales growth that you think you need to breakeven in terms of automotive unit margin?

[Paul Donahue:]

Yeah Matt, this is Paul. We generally take about 3%. We have been kind of mired in this flat to 1%, 2% comp growth here now for few quarters in the row and we got to generate some top line growth. I covered our growth pillars with you earlier. Our team is laser focused on driving top line growth so that we can leverage that fixed expense that we have, but we generally look at 3% as a must.

[Matt Fassler:]

And is that breakeven higher today, given both some of the discretionary investments that you are making also you spoke about the backdrop in terms of wages and fright and obviously that something that everyone is coping with. Does that take that number above 3% or is 3% still, is leverage still at...

[Paul Donahue:]

No, 3% is a good number Matt and we are absolutely our committed to the investments that Carol mentioned. But 3% is a good number.

[Matt Fassler:]

And then very quickly finally. So I think you said in the other line items, just to understand P&L geography of the dealer related costs. I think you broke out $13 million of cost, part of it in gross margin, part of in SG&A, in your initial comments. Then you also saw about $13 million in other line item. I just want to make sure, and I’m like just be in my own confusion that I understand where exactly that $13 million that we exclude, resides in your disclosure.

[Carol Yancey:]

Yeah, so in the segment information there are no deal costs in any of the operating segments. So we put the deal cost of $13 million the other net line and then when you look at the income statement, we had $5.8 million in cost of goods sold and $7.2 million in SG&A.

[Matt Fassler:]

Got you. So you broke it out on that divisional P&L and you just articulated it where it shows up on the consolidated P&L, that’s very helpful.

[Carol Yancey:]

Correct, but it’s all the same $13 million.

[Matt Fassler:]

Perfect. Thank you so much guys.

[Paul Donahue:]

Thank you, Matt.

[Operator:]

And we’ll take our next question from Scot Ciccarelli with RBC Capital Markets.

[Scot Ciccarelli:]

Good morning guys, Scot Ciccarelli.

[Paul Donahue:]

Hi, Scot

[Scot Ciccarelli:]

I had two questions. Hi, the first is, I know it’s probably hard to figure out just given the changes occurring, wage expense, etc. Can you give us an idea how much of your cost structure in the auto business is fixed versus what you consider is variable?

[Carol Yancey:]

Well, I would tell you on SG&A when we look at our cost in SG&A and we’ve said as always at least two-thirds of our costs are payroll and payroll related. Having said that, when you look at facilities and a portion of the payroll being fixed, we are probably 55%-ish that we would say would be fixed, and that why when we talk about what we need to leverage, it keeps at that 3%ish growth in order to leverage.

[Scot Ciccarelli:]

Alright, so 55%...

[Carol Yancey:]

Now having said that, we are working hard to make sure that we are address our cost base and whether we look at rationalization of facilities, investments in productivity improvements, optimizing our fright and delivery, all these things to help take some of these costs that could be fixed to lower basis.

[Scot Ciccarelli:]

Got it, understood. And then secondly, can you also comment on merchandise margin performance in the U.S. auto business just given the concerns out in the market place regarding price transparency?

[Carol Yancey:]

Yes, so our gross margin on the U.S. automotive business was flat. We actually, I think this is our second quarter where we’ve seen flat to maybe just up slightly gross margin and we’ve talked about we are not seeing impact on our gross margin as it relates to price transparency. Having said that, we are looking and always trying to optimize gross margin dollars, we got several initiatives going on. So not really – again part of that gets back what Paul mentioned, being the next that we have of commercial versus retail too.

[Scot Ciccarelli:]

Understood, okay thanks a lot guys.

[Paul Donahue:]

Thanks Scot.

[Carol Yancey:]

Thanks.

[Operator:]

And we’ll take our next question from Bret Jordan with Jefferies.

[Bret Jordan:]

Hey, good morning guys.

[Paul Donahue:]

Good morning.

[Carol Yancey:]

Morning.

[Bret Jordan:]

I was on a hare late. Did you talk about regional performance in the U.S. auto market?

[Paul Donahue:]

We did not Bret, but I’m happy to talk about it. We got a – about five of our eight divisions across the U.S. that are pretty well grouped together and they range from a point down to a couple of points up, so a very narrow band. Our outliers, and we’ve got a couple of outliers, certainly one would be the Northeast as you might expect. As Chris asked earlier, that winter weather certainly has been a boon for Northeast business and our Northeast business has performed quite well. Despite the interruptions with the nor easters that business has performed quite well. On the flip we’ve got one of our businesses, one of our divisions in the mid-Atlantic area that would include Memphis, Richmond that part of the country. They’ve been hit hard again with winter disruptions and we’ve had a number of store closers DC closures. They are not equipped to handle the snow like they are in the Northeast. So that’s pretty much what we’ve seen through Q1.

[Bret Jordan:]

Okay, great. And then the comment on inflation, I guess not seeing a lot in the first quarter in auto. What’s your expectation hearing more about Asian labor and obviously some material inflation and the cost of factoring for your suppliers? Do you think the bias is to more inflation in the second half of the year?

[Carol Yancey:]

We do. In talking to our merchants and our suppliers, we do think we are going to be at a half a percent or maybe even a full percent for the year maybe in the later part of the year. And as far as, there is still a lot of uncertainty around the tariffs as I mentioned, so we are still just waiting on that but I think we are coming off of five consecutive years of having deflation. So the fact that we can come up with flat to up slightly, we do think we’ll see that in the back half of the year?

[Bret Jordan:]

Okay and then one last question, on Smith Auto and some of the deals you have done, Merle's and of the little acquisitions. What’s the percentage of auto sales that are company owned stores now versus independent?

[Paul Donahue:]

It’s a good question, perhaps let me think on that for just a minute. You are right to point out Smith and Merle's and we’ve had three or four others in the past number of quarters. It’s still holding fairly steady when you look at independent versus company stores, independence would acquire for better than two-thirds of our overall business.

[Bret Jordan:]

Okay, great, thank you.

[Paul Donahue:]

And the mix of stores is staying pretty much the same.

[Bret Jordan:]

Okay great, appreciate it. Thank you.

[Paul Donahue:]

You’re welcome.

[Operator:]

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

[Jacob Moser:]

Hey guys, this is Jacob Moser for Chris.

[Carol Yancey:]

Good morning.

[Jacob Moser:]

So now that you have been involved with AAG for almost 6 months. We’re curious to see what you’re going about differences in the European market. And then for the semi related, like how mature is – thinking in terms of the growth outlook. Will that most be at Greenfield and existing markets there or do you think mostly growth in Europe will sort of opportunistic M&A driven.

[Paul Donahue:]

Yeah, I’ll take that one. Look the difference in between the European market place and the U.S. What we found, and again it’s early. But it’s very similar, we’ve got many of the same suppliers when you think about our large global supplier base, its folks like Bosh, NGates and SchaefflerKYB, NGK they supply us around the world. The folks at AAG have a, they are more commercially oriented, much like we are here in the US. They have a blend of both company stores and independently owned stores. So the differences are really very subtle. If you think about our growth outlook, one of the things that drew us to Europe and to AAG is we are very bullish on the growth opportunities in the future and we think that the consolidation that is taking place now in Europe will only accelerate and certainly we intent to be part of that consolidation. But at the same time our folks at AAG are seeing, are seeing good comp store growth as well. So we are very bullish on our future and with our European partners.

[Jacob Moser:]

Great. Thanks for talking the question.

[Paul Donahue:]

You’re welcome. Thank you.

[Operator:]

And we’ll take our next question from Greg Melich with MoffettNathanson. Please go ahead.

[Mike Montani:]

Hey guys good morning, its Mike Montani on for Greg.

[Carol Yancey:]

Hey Mike.

[Mike Montani:]

Just wanted to ask if I could a couple of quick ones. One was, if you could talk a little bit about some of the other acquisitions that you had made year to date thus far besides the AAG. Just want to make sure we have accurate total incremental revenue contributions in the model.

[Carol Yancey:]

So it was really minimal in the quarter. We talked about Smith Auto that was the one that Paul mentioned. In Europe there was eight single store acquisitions that are just small bolt on acquisitions, but really in the quarter its Smith Auto that we mentioned earlier.

[Paul Donahue:]

And just as a reminder Mike, you know AAG was actually late last year. So that was not a 2018 acquisition.

[Mike Montani:]

Yeah, got it. Okay and then if I could just follow up a little bit; you guys had mentioned there was optimism around industrial and seeing some margin expansion there as we work through the year. I guess I am just wondering, is the same sentiment fair for the U.S. automotive division give the thought that the comps will be improving here, at least towards that two to three range it looks like?

[Paul Donahue:]

Yeah, well certainly two different industries. I’ll make be touch on industrial first Mike and you are right, we are very optimistic. You know we had a terrific year last year with Motion and we have seen that continue on in the first quarter. Last year each quarter we were up 7%, first quarter this year we were up 8%. So they continue to rock along, PMI numbers, rig counts, industrial production, all are positive. Manufacturers are bullish right now about the U.S. and so we don’t see any slowdown in industrial. Automotive, it’s a different industry, differ business, but we are optimistic about our U.S. automotive business as well. We think as I mentioned earlier that certainly this winter weather that we experienced in Q1, although I think being offset somewhat with business disruptions in Q1, I think we will see the benefit in Q2 and beyond and again, most of the fundamentals in automotive remain positive. So there is no reason we shouldn’t continue to grow our U.S. automotive business and get it back into those 3% to 4% comps that we historically have posted.

[Mike Montani:]

Okay and if I could just ask about sourcing for a minute, I know you all have done a lot of work in the past sourcing out of Asia. Can you just update us on what percentage of the buy you all will be doing there, especially in light of the S.P. Richards divestiture? How to think about just kind of the ability to source from other countries as well if that were to come up?

[Paul Donahue:]

Yeah, so Mike we have a sourcing office in China, we’ve had it for well over 10 years that services all of our businesses. The amount of volume rolling through that office as a percentage of our total is still a small percentage and a bit of that was in our office products business. What I would comment on Mike is, you know as we now move into Europe and Australia and New Zealand continues to expand, as we look across our souring and our supplier base, you have really four different sources if you will. You have your U.S. exclusive suppliers, you have European exclusive suppliers, you’ve got global suppliers of which I’ve already listed a number of those and then you have of course Asian sourcing as you just mentioned. We are working very closely with our team in Europe and working through that suppler base and that sourcing model and we think there is real opportunity for us to continue to build and to drive global synergies across all of our businesses.

[Mike Montani:]

Great. Thank you.

[Paul Donahue:]

Thank you.

[Carol Yancey:]

Thank you.

[Operator:]

We’ll take our next question from Elizabeth Suzuki with Bank of America.

[Jason Haas:]

Hi, this is Jason Haas for Elizabeth Suzuki. Thank you for talking the question. So I just got a follow-up regarding your comments on inflation. Can you provide color on what product categories you have the best pricing power in and might be the best position to pass along any inflation that we might see?

[Carol Yancey:]

Well actually, the comments that we have, I mean right now we are flat in automotive and what we would look for if we do have some inflation in the back half of the year to around a half a point, those increases would be passed along to customers. So it wouldn’t necessarily be a different there is product categories and how we pass that along. Because these would be increases of such that are passed along in the broad market; this is not something specific to us or to a certain supplier. So they would be broad market related. And quite honestly, that’s how the potential would be with tariffs or any of those changes is that it would be broad based. So out of those we’ve got color on exactly what categories as we are going to come in, but we think about it in a much broader sense.

[Jason Haas:]

Thanks, and then as a follow-up. So we’ve seen the weather in April has been a lot colder than last year. So I’m curious just quarter-to-date if you have seen any sort of pickup in demand or do you think the weather is going to kind of push those sales later maybe into May or June?

[Paul Donahue:]

Well its, Jason I mean it’s early to comment on that, but what I would tell you is we need to get on with spring. I know you guys are getting some winter weather up there still in the northeast. We had – just last week we had over a foot of snow in the Midwest, many parts of the Midwest, that’s not great for our business. We are in the time of the year where farmers got to get out in the field and we do a ton of business with agriculture, fields are frozen, covered with snow. This is break season; the break season is now really being delayed. So look I think that business will come but it’s getting pushed out a bit because of this unseasonably cold winter weather in late March and April.

[Jason Haas:]

Thanks.

[Paul Donahue:]

You are welcome.

[Operator:]

We’ll take our next question from Seth Basham with Wedbush Securities.

[Seth Basham:]

Thanks a lot and good morning.

[Carol Yancey:]

Good morning.

[Seth Basham:]

I have a follow-up question along those lines. Just thinking about your performance in the quarter in the U.S. auto business, can you provide color on how weather sensitive versus non-weather sensitive categories performed overall?

[Paul Donahue:]

Yeah, it’s a good question Seth. When you look at our key product categories, I guess not surprisingly with a little more severe winter weather, batteries were our number one growth business and I would tell you it’s a little bittersweet because we had a good -- we had a really good quarter in batteries and we had some service interruptions early in the quarter that I think it even could have been better. Our tool and equipment business was good, our hydraulics business was good, chemicals as you would expect performed quite well, so all of those categories were strong in the quarter. Where we saw some underperformers was around our under car business. So again going back to what I had mentioned earlier, when you get into March we generally consider the month of March as the kickoff of break season and with some of the weather that we had across the U.S., I think that’s going to get pushed out a bit.

[Seth Basham:]

Got you, a follow-up on that, March beginning the break season. With your commercial customer focus, how does weather play into that? I can understand DIY-ers not being able to work on their cars outside, but it wasn’t so bad that it created difficulties in taking cars to a shop to get fixed.

[Paul Donahue:]

No, it certainly wouldn’t Seth but I just think that consumers are putting it off and it also certainly relates to, when you look at the categories performing well just as batteries it directly relates to failure. So I think just some of your maintenance categories are just going to get delayed, going to get pushed out a bit, and that’s regardless of whether it’s DIY or DIFM. I think that’s the case.

[Seth Basham:]

Got you. Thank you and then one housekeeping item, you may have addressed this before, but thinking about the seasonality of AAG business, can you remind us how it compares to the U.S. or the Global Auto business?

[Paul Donahue:]

Very similar, very similar to the U.S. and on that note Seth as I now give the weather report across the U.S. I can talk about Europe as well and we got hit hard. The UK was basically shutdown for two days in Q1 that impacted AAGs business. I think we would have seen, I don’t think – I know we would have seen even stronger numbers out of that team without that, but the weather patterns are very, very similar the U.S.

[Seth Basham:]

Thank you.

[Paul Donahue:]

You’re welcome.

[Operator:]

And we have time for one more question. We’ll take our last question from Carolina Jolly with Gabelli.

[Carolina Jolly:]

Hi, thanks for fitting me in. Just one question I guess. This is another quarter where you have seen some weakness in your national account business. When you talk to those customers, do they give you any other factors outside of weather that might be affecting your business?

[Paul Donahue:]

Well, and I didn't glean this directly from conversations with our major account customers. But as you look across some of the headwinds, Carolina you would have to, I mean certainly weather isn’t always going to be near the top of the list. But let’s face it, vehicles and parts are seeing less failure these days. Vehicles are much better made, the quality of vehicles are much better made and I think you are just seeing less failure. But I do believe in the long run this major account business will bounce back. We don’t believe we are losing any market share with our key partners. We’ll continue to drive to try to grab a greater share of their spend. As I mentioned in our key growth pillars that is absolutely our first and foremost is grab a greater share of wallet. So the business is there for our teams. We just got to promise that we got to execute a bit better.

[Carolina Jolly:]

Alright, thanks a lot.

[Paul Donahue:]

You’re welcome.

[Operator:]

And that does conclude our question-and-answer session for today. I would like to turn the conference call back over to management for any additional or closing comments.

[Carol Yancey:]

We’d like to thank you for your participation in today’s first quarter conference call. We thank you for your support at Genuine Parts Company and we look forward to talking to you with our second quarter results. Thank you.

[Operator:]

And that concludes today's conference. We thank you all for your participation and you may now disconnect.