Q3 2019 Earnings Call
Greetings and welcome to the genuine parts company third quarter 2019 earnings Conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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I would now like to turn the conference over to your host Mr. said Jones Senior Vice President Investor Relations for genuine parts company. Thank you you may begin good morning, and thank you for joining up today for the genuine parts company third quarter 2019 conference call to discuss our earnings results and outlook for 2019.
I'm here with poll Donahue, our chairman and Chief Executive Officer in Carol Yancey, Our executive Vice President 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 todays discussion of our result as reported under generally accepted accounting principle.
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 me also involve forward looking statements regarding the company in this business is.
The company's actual results could differ materially from any forward looking statements due to several important factors described in the company's later, if you see filings, including this mornings press release.
The company assumes no obligation to update any forward looking statements made during this call.
Now I'll turn the call over to poll for his remarks. Thank you said and let me add my welcome to our third quarter 2019 conference call.
We appreciate you taking the time to be with US This morning.
Earlier today, we released our third quarter 2019 result.
I'll make a few remarks on our overall performance and then covered the highlights across our businesses.
Carol Yancey will provide an update on our financial results and our current outlook for the full year.
After that we will open the call to your questions.
So to recap our third quarter performance across our global platform.
We're pleased to set a quarterly sales record achieving the 5 billion dollar quarterly sales Mark.
The first time in our company's history.
This represents a 6.2% sales increase from Q3 of 28 team and follows a 2.3% total sales increase it last quarter.
With the improvement driven by a 1.2% comp sales increase.
6.7% benefit from strategic acquisitions.
These items were partially offset by a 1.7% headwind from foreign currency translation and the decline in sales related to the auto Todo divestment earlier in the year.
Net income in the third quarter was $227 million and earnings per share were $1.56 cents.
Excluding the impact of transaction and other cost an income related to acquisitions and divestments.
Adjusted net income was 219 million or $1.50 cents per share.
This compares to $1.48 reported in the third quarter of last year.
Our teams are active this quarter executing our strategy to further optimize our portfolio.
This included actions to complete the and then co industrial acquisition in Australasia, the sale of B. I S and the investment in spares box, Australia's leading online automotive and accessories business.
We made significant progress in several areas this quarter and we are excited for the growth opportunities. We see ahead.
I will cover each of these areas as we review our business segments.
Our global automotive sales, which represented 56% of our total revenues were up 5.3% from last year and improved from 1.4% in Q2.
Comparable sales were up 1.8% with towards improved from the 1.3% in Q2.
And acquisitions added another 6.5% the sales.
This growth was partially offset by an approximately 2% unfavorable foreign currency translation.
And a 1% impact from the sale of the auto total business in Mexico.
In our North American operations, U.S. automotive sales were up 2.5% on a comp basis, and our Canadian automotive business posted 3.8% sales comp.
We remain confident and the ongoing strength of the North American automotive aftermarket.
And expect these markets the game positive momentum over the balance of the year and well into 2020.
For the second consecutive quarter, we had positive sales growth with both our commercial and retail customers.
Lets sales to the DIFM segment performed very well and outpacing our DIY sales.
Among our DIFM customer segments.
Sales to our Napa Autocare center customers continue to outperform our overall commercial sales growth.
This customer group represents approximately 18000 independent repair shops in the U.S.
And another 2000 in Canada, So obviously, a very key segment to us.
We were also pleased to see stronger growth with our major account customers with sales increases in each of our categories, including our fleet.
And government customers National tire centers regional accounts and we dealers.
Now turning to our retail segment, while our team generated a positive revenue increase in the quarter. We have experienced a few headwinds in this segment of our business.
We believe this reflects a combination of lapping strong comps associated with our impact store rollout in 2018.
Continued slowing of our transaction counts, which we have seen across the industry and finally timing related to major promotional events.
Our team has launched a series of initiatives, which we expect to improve this trend in the quarters ahead.
While Carol will provide more financial details later, it's worth adding that both our U.S. and Canadian businesses delivered improved profitability and strong margins in the quarter.
So a solid quarter for our North American automotive operations, and we expect to continue to build on this positive momentum.
In Europe , we continue to operate in a challenging sales environment. Although we are pleased to report an improvement in our core sales performance relative to the second quarter.
Overall, our sales comps were down mid single digits, an improvement from the high single digit decline in Q2.
Across our geographical regions, we saw a significant improvement and our largest market, France, which posted a slight increase in the quarter.
Germany was down slightly while the UK was our most challenged region region as it continues to feel the effect of Brexit.
Along with tough comps fueled by a series of onetime event in 2018.
The UK labor market remained strong despite a decline in unemployment in Q3.
While domestic growth is showing signs of slowing and overall business sentiment is plumping.
That said the news coming out of the UK. This past week is somewhat encouraging and we remain hopeful the UK and European Union can reach an agreement sooner rather than later.
The A.J. team has made progress in executing on their sales and cost savings planned.
And we believe we are beginning to see the impact on our business both on the revenue and cost side of the ledger.
Specifically related to sales one key initiative to highlight would be the Q3 Q4 rollout.
The Napa brand across several product categories.
We believe the introduction of a quality private label offering will further distinguish our European business from the competition in provide incremental growth opportunities for us.
As it relates to cost savings our efforts, thus far are having a positive impact on our European operating profits.
We expect to generate additional expense reductions in the periods ahead.
In addition, we also made progress with our European M&A strategy during the quarter.
We continue to integrate the parts point acquisition, which closed on June 1st with our overall European business and this group performed according to plan.
Likewise, we closed on the Todd acquisition in France on October Onest.
This strategic acquisition positions us as the market leader in the heavy duty segment across the French market.
As a reminder, parts point and Todd are expected to add 330 million, an 85 million in annual revenues.
So despite current market conditions, we see many good things, taking shape and our European business and we remain committed to our growth and integration plans for this important to segment of our automotive operations.
Now turning to Australia, New Zealand, our team continues to outperform the market with solid comp sales growth of 4.2% for the quarter.
This represents our strongest core sales growth in 2019, despite more challenging economic conditions across the region.
We were also pleased to complete our for our first full quarter with our 87% investment in spares box, which closed on July one.
As a reminder, spares boxes, Australia's leading online automotive parts and accessories business.
And while not material to our financial results.
This partnership served to enhance our understanding of the digital marketplace.
And grow our digital sales capabilities in Australasia and potentially across all of our global operations.
So thats a review of our global automotive business and now we will turn to our industrial business.
Our global industrial parts group continues to post further with their portfolio optimization initiatives.
With the closing of the and then co acquisition on July one and the sale of VI Us on September Thirtyth.
We will address both transaction shortly but overall this group had a solid quarter with sales up 1.7 billion up 9.9%, including an approximately 1% comp sales increase.
And a 9% benefit from acquisitions.
This group also improved their operating margin by 30 basis points for the second consecutive quarter and 50 basis point, if we exclude yes.
So we're pleased with the continued progress in our industrial business.
The softness we have seen in our topline growth is not unexpected given the overall slowdown we have seen in the industrial economy.
This has translated the mixed results across our product than industry sector sales with eight of our 14 product categories and seven of 12 industries positive in the third quarter.
With the slowing us manufacturing trends the motion team continues to look for strategic tuck in acquisitions as part of its overall growth strategy and effective October one acquired the fluid power house headquartered in Ontario, Canada.
Have ph as a full service fluid power distributor with four locations and projected annual sales of $20 million.
Our industrial business in Canada has been growing at a high single digit pace or better.
For 11 consecutive quarters, and we're excited to bolster their position in the fluid power segment.
We have also further diversified our industrial footprint with the entry into Australasia.
We were pleased to close on the and then co acquisition in Australasia on July one and they have hit the ground running.
And then co is a leading industrial distributor in this region with operations in Australia, New Zealand in Indonesia.
And this business performed very well in the quarter, providing accretive sales and profitability.
We continue to believe that net income was an excellent strategic fit with motion in North America and presents tremendous opportunities for global industrial growth.
Finally during the third quarter, we announced a definitive agreement to sell the electrical specialty group of motion industries.
And this transaction ultimately closed on September Thirtyth 2019.
As background, we had determined that this was in the best interest at the company given its lower growth and lower margin profile relative to our core industrial operations.
We were very pleased to complete the sale of this business and take another step forward and our strategy to optimize our portfolio and best positioned CPC for sustainable long term growth.
Now, let's discuss S.P. Richards, our business products group.
For the third quarter comp sales for this business were down approximately 1%.
The sales decrease primarily reflects the slower sales in our core office supplies and technology category.
As well as slower sales whether national accounts group.
In contrast, our facilities on safety supplies business delivered another quarter of solid results and we expect continued growth from this category in the quarters ahead.
Despite the softness on the topline the BPG team has stabilized its operations with improved profitability and a 40 basis point year over year improvement in operating margin for the quarter.
This is significant progress and especially impressive given a devastating fire that occurred era at our Atlanta, DC and head office in mid July .
First we want to say how pleased we are to report that no. One was injured during this unfortunate event.
Second our team was well prepared with an effective business continuity plan, enabling them to get back up and operational in a matter of days.
We are proud of our team for their attention that safety and servicing our customers under very difficult circumstances.
So thats a recap of our consolidated and business segment results in the third quarter of 2019.
But before I turn it over to Carol for her remarks.
We wanted to update you on our action plans and progress in accelerating our ongoing cost savings plans and developing aggressive expense reduction initiative.
These efforts are designed to more effectively address our cost structure drive meaningful savings and deliver incremental value.
So today, we are pleased to announce that we have plans in place to generate annualized savings of $100 million by the end of 2020.
And as Carol will discuss later these are meaningful cost reductions that will help drive operating margin expansion in the years to come.
Our team is committed to this mission and excited to work together to achieve these savings.
So with that I'll hand, it over to Carol.
Thank you Paul will begin with a review of our key financial information and then provide you with our updated outlook for 2019 with our third quarter total sales of 5 billion, representing a 6.2% increase our gross margin for the quarter was 32.4% compared to 31.4% and 28.
I mean with the Empire improvement in margin relating to several factors.
These include more flexible on sophisticated pricing strategies favorable product mix and the benefit of higher supplier incentives.
In addition, the parts point and and then co businesses have higher gross margin profiles.
These factors drove improved gross margins and all three of our business segment and we continue to expect our 2019 gross margin rate to remain relatively in line with our current run rate.
Pricing environment across all three of our segments has been relatively inflationary thus far in 2019 and automotive the price increases primarily relate to the impact of tariff, while industrial and business products have seen increases associated with general inflation in areas such as raw material pricing.
Oddities and supplier freight.
Thus far we had been successful in passing on the price increases to our customers to protect our gross margin. So we continue to believe that the current levels of inflation have been a net positive to our result, and we expect us to continue to the balance of 2019.
Specific to tariffs their impact on a third quarter, primarily reflects the 25% tariff on last one through three items all their business products was also impacted by the 15% tariff on the list for eight items, which was effective September 1st.
With this in mind the impact of tariffs on our Q3 sales was approximately 2% for U.S. automotive.
Immaterial for industrial and approximately 1% for business products.
We would add that the tariffs have had no impact on our gross margin.
Turning to our SDMA. These expenses were 1.3 billion in the third quarter.
13.5% from last year and 25.3% of sale.
Our SDN expenses continue to be impacted by the effect of rising costs in areas, such as payroll freight and delivery.
In cyber security as well as ongoing investments to improve our efficiencies and productivity.
The parts point and then co businesses also had a higher s. DNA profile and this was a factor in the increase.
In addition, we're seeing the deleveraging of expenses due to slower comparable sales growth and certain operations.
As Paul mentioned earlier, we been enhancing our initiatives and intensifying our efforts to reduce our costs and more effectively leverage our expenses.
While these efforts are still in the early stages of implementation, we've made significant progress and we expect to generate meaningful savings as we move forward.
By the end of 20 to 20, we expect to generate annualized savings of $100 million and we will continue to evaluate opportunities for additional cost reduction in the years beyond.
As part of our commitment to drive efficiencies and eliminate redundant costs, we're focused on a variety of cost saving initiatives.
We intend to reorganize and streamline several functional areas across our operations, including numerous back office responsibilities.
In addition, we expect to consolidate and ultimately reduce our total number of distribution facilities and to enhance the automation utilized in distribution and back office functions.
These actions will require organizational changes and we're currently working on a number of workforce initiatives to successfully drive this process.
While also maintaining excellent customer service.
We look forward to providing more details on these plans and initiatives as they are finalized and launch and executed in the coming quarters.
So now let's discuss the results by segment.
Our automotive revenue for the third quarter was 2.8 billion up 5% from the prior year and our operating profit of 222 million was down 2% with an operating margin of 8.0% compared to 8.6% margin in the third quarter of 2018.
This quarter, the 60 basis point decline in margin directly relates to the challenges we're facing in Europe and as mentioned, we expect to see improvement in Europe as well as all of our automotive operations through the saving plans that will be implementing through the next 12 months.
Our industrial sales were 1.7 billion in the quarter as strong 10% increase from Q3 2018.
Our operating profit of 138 million was up 15.4% and their operating margin improved to 7.9% from 7.6% last year.
With a 30 basis point increase due to gross margin expansion and the leveraging of expenses.
The industrial business continues to operate well with 11 consecutive quarters of solid sales and operating results.
Our business products revenues were 492 million down 1% from the prior year.
There are operating profit of 21.6 million is up 9% and their operating margin improved at 4.4% from 4.0% last year. So it's nice to see the margin expansion and continued steady results for this business.
Our total company operating profit in the third quarter was 381 million up 4% on a 6% sales increase.
And our operating profit margin was 7.6% compared to 7.7% last year.
We had net interest expense of 25 million in the third quarter, which is up slightly from the second quarter and up from the 22 million in the third quarter last year.
Looking ahead, we're currently expecting net interest to be in the $92 million to $93 million range for the full year, which is down from our previous estimate of 97 to 98 million.
This improvement reflects our lower projected interest rates and debt levels for the balance of the year.
Our total amortization expense was 26 million for the third quarter and we continue to expect full year amortization to be approximately 100 million.
Our depreciation expense was 42 million in the third quarter and we are narrowing the range for our full year depreciation expense to 170 to 175 million for the year.
On a combined basis, we expect depreciation and amortization to be in the range of 270 to 275 million for 2019.
Continuing with the segment information presented in our press release, the other line, which primarily represents our corporate expense was 26 million in the third quarter, including an approximate 12 million benefit associated with the transaction costs and other income related primarily to the and then go acquisition.
And the sale of yes.
The acquisition of the final 65% interest and in Enco resulted in a 39 million dollar gain on the revaluation of our original 35% investment.
This was partially offset by transaction costs and the 6 million dollar net loss related to the sale of E F.
Excluding these items, our corporate expense was 38 million or a $6 million increase from last year, and primarily relates to payroll pressures increase legal and professional fees ongoing investments in IP cyber security digital and overall omnichannel initiatives.
For 2019, we're narrowing our expected range for corporate expense to 130 to 135 million.
Our tax rate for the third quarter was 25.3% an increase from the 24.5% rate in the prior year, primarily due to transaction and other associated costs.
For the full year, we continue to expect our 2019 tax rate to be approximately 25%.
Now, let's turn to our balance sheet, which remains strong and in excellent condition.
Accounts receivable at 2.7 billion is up 3% from the prior year. This compares to our 6% total sales increase and represents a 2.5% increase excluding acquisitions foreign currency and the impact of yes. So we did a good job of managing this account and we remain pleased.
With the quality of our receivables.
Our inventory at September Thirtyth was 3.7 billion up 5% from September of last year.
Excluding acquisitions foreign currency and yes, our inventory was up less than 1% and we're very pleased with the progress our teams are making in maintaining this key investment at the appropriate levels.
Our accounts payable at 4.2 billion is up 4% due mainly to the increase in purchasing volumes and to a lesser degree the benefit of improved payment terms with key global partners.
At September Thirtyth, our APC the inventory ratio was 113%.
Our total debt of 3.4 billion at September Thirtyth is down from the 3.9 billion at June Thirtyth due primarily to the repayment of debt as a result of our strong cash from operations in the third quarter.
At September Thirtyth, our average interest rate on our total outstanding debt stands at 2.23%, which has improved from the 2.63% at September Thirtyth last year.
We remain comfortable with our current debt structure, and we have a strong balance sheet and the financial capacity to support our future growth initiative and our ongoing priorities for effective capital allocation.
As mentioned, we had strong cash flows in the third quarter and we've generated 745 million in cash from operations, thus far in 2019.
For the full year, we continue to expect approximately 1 billion in cash from operations and free cash flow, which excludes capital expenditures and the dividend to be in the $300 million to $350 million range.
So we expect our cash flows to continue to support our ongoing priorities for the use of cash, which we believe serves to maximize shareholder value.
Our key priorities for cash remain the reinvestment in our businesses strategic acquisitions, the dividends and share repurchases.
We have invested 183 million in capital expenditures, thus far in 2019 up 91 million from 2018. This reflects our growing global platform and the planned increase in our investments in areas, such as technology and productivity in our facilities.
For the year, we're updating our capital expenditures to the range of 250 to 300 million.
Regarding the dividend 2019 represents our 60 threerd consecutive year of increased dividends paid to our shareholders.
Our 2019 annual dividend of $3.05 represents a 6% increase from 2018 and it's approximately 54% of our 2018 adjusted earnings which is in line with our targeted payout ratio.
Turning to our share repurchase program, we have purchased approximately 800000 shares of our common stock thus far in 2019 and today, we have 15.6 million shares authorized for repurchase.
We expect to be active in the program over the long term and continue to believe that our stock is an attractive investment and combined with the dividend provides the best return to our shareholders.
So now let's discuss our current outlook for 2019.
We are updating our full year 2019 sales and earnings guidance in consideration of several factors.
These factors include our results through the nine months of the year, our current growth plans and initiatives.
Market conditions, we see for the foreseeable future across all of our operation The September Thirtyth sale at Eas and the ongoing impact of a strong us dollar.
With these items in mind, we expect our full year sales to increase approximately 3.5%.
This updated sales outlook represents a change from our previous guidance for plus four and a half the plus 5.5% sales increase.
And it accounts for the sale of yes, as well as the incremental impact of foreign currency translation relative to our previous guidance.
As is customary this guidance excludes the benefit of any future acquisitions.
By business, we are guiding sales to be at three and a half to for 4% for the automotive segment, which has changed from our previous guidance of plus 4% to 5% and primarily due to the impact of foreign currency and a challenging sales environment, which we continue to face in Europe .
Plus four to plus 4.5% for the industrial segment, which is down from the plus seven to plus 8% previously primarily related to the sale of E. S.
And down approximately 1% for the business products segment.
On the earnings side, we expect diluted earnings per share to be in the range of $5.44 to $5.52.
Which accounts for the transaction and other costs and income incurred through the nine months in 2019.
And we are updating our outlook for adjusted earnings per share to $5 and 62 $5.68 from the previous from 65 to 575.
This represents a five to seven cents change in earnings primarily due to the sale of Eas.
As a reminder, adjusted diluted earnings per share excludes any nine month and future transaction and other costs.
That completes our financial update and our outlook for 2019, and I will now I'll turn it back over to Paul.
Thank you Carol we were pleased to perform in line with our expectations for the third quarter and would highlight several accomplishments.
We had record quarterly sales, surpassing 5 billion in sales for the first time and our company's history.
We achieved another quarter of positive comp sales growth in our USA Canadian and also relays in automotive businesses as well as our industrial business.
We further improved our gross margin was 105 basis point year over year game.
Our industrial business continued to perform well generating a 30 basis point margin improvement.
The business products group further stabilize posting a 40 basis point margin improvement.
We improved our working capital position and generated strong cash flows.
And finally, we expanded our global footprint via several diversified acquisitions, both by segment and geography, including unencumbered and spares box on July one and the fluid power House and Todd on October one.
In addition to these accomplishments we have made strong progress on our ongoing business transformation.
We continue to take steps to optimize our portfolio of businesses as demonstrated by the sale of VI us on September Thirtyth.
Finally, we strengthened our focused on sustainable.
Value, creating initiatives to drive meaningful enduring efficiency.
Including the cost reduction actions, we discussed today.
We will also continue to execute on our aggressive initiatives to improve topline performance.
We plan to achieve this by incrementally growing revenue through new business generation.
Executing our digital strategy and finally, securing strategic bolt on acquisitions.
We are focused on creating significant long term value for our shareholders and we will continue to update the investment community as we make progress towards this important objective.
We thank you for listening and what that will turn it back to the operator, and Carol and I will take your questions.
Thank you at this time will be conducting a question answer session. If you'd like to ask a question. Please press star one on your telephone keypad a confirmation Tom will indicate your line is in the question Q.
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Our first question comes from the line of Christopher Horvers with Jpmorgan. Please proceed with your question.
Thanks, Good morning, everybody.
Okay.
So first of clean up question did Bolton Napa and motion have one last Sunday in the quarter and what was the approximate comp benefit.
Two though to that.
Yes, so we really while we did have.
It really an extra day in the third quarter and we were short a day in Q1 and it varies depending on the business and that geography in the segment. So we would say it was more of a minimal impact.
Minimal I'm sort of so I guess, maybe historically said 50 basis points, so something less than that.
Nothing less than that Thats, correct and motion did have one less.
They did yes, okay got it.
And then could you maybe first on the on the motion side can you can you talk about.
That those core motion comps acts that acts that extra day noise.
Did it did it turned negative in September and how are you thinking about the outlook over the coming quarters. Given the fact that you know the PMI has been.
I think negative and back to back months.
Yes.
So Chris Thanks for the question the look our motion business. Despite the decline two months in a row NPM API and if you go back further Chris PMI has been decline for six consecutive months and 10 out of 13, so not a.
Not a new phenomenon by any stretch our motion business. We're pleased with the way the guys delivered in the quarter.
Much like our overall business their strongest month of the quarter was August they had a good month in August .
July and September were both slightly weaker than August but.
Again, we're very very pleased with the way that team delivered in what is clearly a slowing industrial environment, but as we have seen in this cyclical business in the past Chris they they've they've done the right things in terms of cost takeout and Fortunately we are.
Deliberate we're able to deliver nice operating margin improvement in the quarter.
Got it and then just having today will run through the numbers, but I guess, you think about what's the sort of implied.
Motion comp for the fourth quarter.
Chris that would be similar to what it was in Q3, so around a 1% comp and one other just item to note. We're really pleased to have.
Expansion in a different geography in the industrial business going into Q4 and beyond Wes and then Cowen Australasia, they're not quite a susceptible to some of the things that we're seeing in North America. So as we look ahead.
Bill strong reported total sales, but a similar comp for Q4.
Got it and then just lastly, the somewhat similar discussion around view us Napa business, how Howard how did you see the monthly trends acts that the extra day noise.
And then how whats implied.
You asked novel comp here for the fourth quarter.
So I'll take the first part of the question, Chris the the cadence of the quarter again very similar to what I described in industrial.
Good August very good August for the team here in the us.
September not a surprise, we were up against our strongest comp.
Of the year in in September .
And then July what I'd say about July we got off to a.
Better start in July and I think I might even have commented on it during the last call we saw that.
Slow in the second half of of the month of July , but but all in all very similar to the cadence that we outlined for industrial and as far as guidance.
Looking forward I'll, let carol tackle that one yes sure Chris as we look as we just ended the nine month with U.S. automotive comping around 3%, we would expect to be similar in Q4 with around a 2.5% to 3% comp.
Perfect. Thanks, much best of luck Thanks, Chris.
Thank you. Our next question comes from the line of Scot Ciccarelli with RBC capital markets. Please proceed with your question.
Hi, Good morning. This is actually Gustavo dollars on for Scott today, Thanks for taking my questions.
Based on sort of strategic M&A.
And in particular automotive and sort of industrial.
Challenging there a lot of sort of puts and takes market by market.
Sort of update us on how the M&A environment or opportunities out there it looks like right now versus say two or three years ago and maybe even.
So directionally touch on what kind of multiples you're seeing in the market today versus prior years.
Sure I'll call I'll I'll touch on that the.
From our vantage point from an M&A standpoint, we we will embark upon our classic strategy at GPC to always be on the look out for strategic bolt on acquisitions.
Across our different business segments and geographies.
A classic coupled for us this past quarter were.
The Todd acquisition in France, which which bolsters, our heavy duty footprint and positions us that number one in that market.
The fluid power house acquisition for arc.
Motion business, which strengthens our fluid power business and in Canada. So those those are our dark our classic approach to M&A and certainly we will continue to look at bolt on acquisitions at our our strategy is generally to look for 1% to 2%.
Per year in in bolt on acquisitions in terms of the larger more strategic acquisitions like a gee.
We're going to be more focused on integrating notes, though those more strategic acquisitions in in 2020 and beyond.
And then in terms of valuations.
The the valuations that we look at it in our and our bolt on acquisitions that really has not changed in previous years.
Those most of those type acquisitions, we know the players they know us.
We're not we're not getting into a bidding war and it's a very.
It's a very same environment, if you would.
Got it thank you.
You're welcome.
Thank you. Our next question comes from the line of Matt Mcclintock with Raymond James. Please proceed with your question.
Hi, Yes, good morning, everyone.
I wanted I wanted to open to focus on European automotive for a few minutes.
I believe that you said that the French business.
Returned to positive or slightly positive growth this quarter I wanted to dig into that a little bit what did you actually see and that business during the quarter dot topped up broader wrong that improvement that'd be the first question.
And thanks for the question Matt.
Look what I would say first and foremost is we were we were very pleased.
To see our European business rebound in Q3.
As you know Q2 was it was a challenge so the team.
Rebounded nicely the French team, which is our single largest market.
In Europe had a solid quarter and delivering a.
Cost of sales increase after a significant decline in Q in Q2.
I think that the initiative that they put into place we'll continue to drive here going forward, but the French team did a good job, where where we saw softness in the quarter was in the UK and again, we believe those those issues that we face in the UK our larger.
The transitory were.
Pleased to see that perhaps there may be a resolution to the Brexit.
Issues and that will certainly help our business going forward, if they're able to reach resolution.
That's actually my follow up is the Brexit deal that apparently was reached today if that actually does go into place is that something that would remove an overhang of immediately and your business or is that something that you would think would have to play out over a period of quarters before the overhang is removed. Thanks, Yes, thats. Good question, Matt and I wish I could I wish I.
I could give you a specific answer it's hard to say.
But but but but I will tell you that.
There has been this.
A bit of malaise in the marketplace folks aren't sure.
With all the uncertainty around Brexit and in the past number of quarters I think it just weighed on on business in general.
So if they are to reach resolution if it makes its way through parliament and they do reach resolution I don't know that we'll see an immediate bounce back, but I do expect there to be a bounce back for sure and I would also add mapped to the initiatives that we're taking.
You know whether it happens or not we're in we're getting aggressive in introducing our Napa brand into the UK, We launched a couple of product categories in in Q3 and intend to accelerate that in Q4 going forward, so whether they reach resolution or not are.
Our team stands ready to improve that business.
I appreciate the color best of luck, you're you're welcome. Thank you.
Thank you. Our next question comes from the line of Daniel Ambre with Stephens Inc. Please proceed with your question.
Yes, Hey, good morning, Thanks for taking my questions.
Wonderful and North America automotive organic group saw a nice acceleration in the two year stack basis can you talk about how much you think youre programs like the store remodels loyalty or Napa Autocare are driving that growth versus just an industry acceleration, we've seen as weather improve.
Yes, Daniel Thanks for the question, what I would tell you about our Napa business in in Q3, and it was a very similar trend as we saw in Q2 is our DIFM category, which is our largest segment by by.
A large percentage.
Performed very well on the quarter I would point out our Napa Autocare business.
As a very bright spot in the quarter our team.
Napa Autocare team continues to do a terrific job and we also saw a better lift in our major account business. So both both did quite well we've got opportunities on the retail side, we saw our retail business.
Softened in Q2 that carried into Q3.
The VIX, we've we've anniversaried some.
Some of the new retail initiatives that we have been driving the last few years.
But we're confident our team, we'll get that business back on track, but DIFM.
Is the real highlight for us in Q3 as it was in Q2.
Thanks Thats helpful. And then maybe following up on the last question I think you mentioned, you're rolling up another brand across product categories. In Europe can you help us think about how much of your business in Europe today is private label and how does that compare to existing players and then how the consumer responded so far.
To the new brand.
Yes, it's probably a bit early Daniel too.
To give you an update on how they've responded to the Napa brand. The I will tell you that.
Our our team was excited we launched it at a major show.
In Q3, a lot of excitement a lot of but as they know the Napa brand in the UK.
What I would say overall about private private brands in Europe . It varies by it varies by market, So very little private label in Germany.
A bit more in France, and the UK would be the strongest market for private label, which is why we chose to UK to launch first but.
Make no mistake, our intent will be to move into.
France, Germany, and the Netherlands, with the Napa private brand.
Got it. Thanks, so much does look you're welcome. Thank you.
Thank you. Our next question comes from the line of Kate Mcshane with Goldman Sachs. Please proceed with your question.
Hi, good morning, Thanks for taking my questions.
I just wanted to go back and ask about the savings.
In terms of timing is there aren't going to be any impact to 2019 and then.
Of the $100 million, you've identified are you able to identify how much could flow through versus how much needs to be reinvested given.
Changes you mentioned.
Yes. So I appreciate the question as we kind of look ahead at the 100 million and your comment specifically about 2019, well were what we're planning for is that we would have annualized $100 million by the end of 2020 and that would be a net number that would flow in but it would be.
Over a number on several quarters as it comes and in doing the things that we're talking about and we're obviously still working on our plans instead of looking at a number of initiatives in areas.
We could have some costs in Q4 that come out of either head count related our facility related as we look ahead those would be onetime type nonrecurring that we could have in Q4, but again, we're going into 2020 with the expectation that at the 100 million annualized by the end of the year and then we.
Obviously would be continuing to look for other opportunities as we move ahead or certainly not going to stop with just this initial look at the first 100 million.
Okay. Thank you.
If we could just go back.
Automotive industry, and what you've seen that.
Have been in place can you talk us through the impact on sales from inflation versus.
Net.
And just.
What you think impact was in the third quarter from tariffs specifically.
Yes, so as we.
And again, we commented that primarily we're talking about for automotive and is less one through three the 25% tariff that went up on July 1st.
That was in Q3 about 1.9% on our sales for us automotive.
It was about 1% first half so we would expect US similar amount for Q4, so we'd have kind of unblended, 1.5% full year basis for U.S. automotive.
For the industrial business has really immaterial and for business products. It was about 1% in Q3, and we would have a similar amount for Q4. They do have less for B that comes in as of now 12, 15, but there could be around 1% for them also in Q4.
And again I guess I would just leave you with our teams have down a tremendous job navigating through all the puts and takes as it relates to tariffs and we have successfully become much more agile and nimble and moving prices and being able to pass those through and have seen no impact.
On our gross margins.
Okay. Thank you and then my final question on automotive you mentioned the timing of promotional events.
We're certain promotional events brought forward or where they pushed into Q4.
They were pulled forward.
Great and.
Honestly, we think that we'll balance those out as we roll into Q4, we begin to have.
To hit some colder weather and.
We think we're going to be find going forward I'd also just.
Comment cadence you ask about the U.S. automotive business I think one thing that we would absolutely stress is the health of the overall.
Aftermarket when you look at.
Miles driven which we saw a nice jump in July gas prices down considerably year over year. The average age all the fundamentals continue to be really solid per for automotive aftermarket and when I look at our performance.
In the quarter, it's plays to our strength, which is DIFM and I think that that that plays very well for us going into Q4 in 2020.
Okay. Thank you.
You're welcome thank you.
Thank you. Our next question comes from the line of Greg Melich with Evercore ISI. Please proceed with your question.
Hi, Thanks.
While the follow up a little bit on the tariffs and inflation Carol in the past you guys have talked about general inflation and your Cogs.
Could you give us those numbers are highlight how much of the.
Inflation is occurring is related to tariffs as opposed to just some other inflation that might be out there.
Yeah happy to do that Greg what we saw the tariff and inflation for U.S. automotive are virtually the same so that the inflation that they've had to be it on the Cogs side are passing through on a sale side more like I wanted a half to 2% has generally been inflation, our industrial business is running around to pursue.
Sent for inflation Menderes is more indirect tutera, you would talk about raw materials and supplier freight and things like that and Thats a normal level for them and then business products they'll probably running about 3% in total for inflation with about 1% tariff related.
Got it and then maybe as a follow up to that.
Why why is this quarter through the peak benefits to sales in terms of pass through was that just.
The timing of on the Terror said when you flow through.
Is there something else, we should be watches so so what kind of ebb and flow that.
No I guess going forward.
I guess, if you recall the original 10% tariffs that we were onder thats, how we operated through the first half of the year. So the pass through on pricing was about 1% and again, we didn't take that fold first 10% tariff that will we did take about half of that we pass through and that led to us.
Got a 1% impact first half the terrace, one at July 1st% to 25% and again, we didn't take that full amount, but we knew our second half would be more pronounced. So that's why we've said all along second half would be around 2% first half was 1%.
Got it and then and this is maybe of a bigger picture question.
We know the do it for me was stronger and you guys totally winning their lead into that.
Yeah, why a little softer do you think theres is there any evidence that the consumer.
Having trouble with any of this inflation Arabia deferring any.
Decisions.
You know, it's it's a great question, Greg and one that certainly we've we've contemplated as well because.
We have seen a bit of softening on the retail upfront I think it's a maybe a bit early yet to make a call there, but what I will tell you is we are watching it very very closely.
When and one of the one of the key staff to we obviously always monitor closely are.
The number of tickets flowing through our our stores and then obviously the average basket side basket size, both retail and wholesale was very healthy.
This quarter.
Our retail tickets were down more so than our wholesale tickets.
But so I would tell you we're monitoring that closely.
We are monitoring our competitive.
Stand in the in the marketplace.
And we'll react if and when necessary, but I think it's maybe just a bit early yet to make that call.
That's helpful. Thanks, a lot good luck. Thank you Greg.
Thank you. Our next question comes from the line of Seth Basham with Wedbush Securities. Please proceed with your question.
Thanks, a lot and good morning, good morning.
Good to hear that you have some.
Plans for further cost savings as we think about the outlook for 2020 from those savings would it be appropriate to think that you'll be able to drive as gene a leverage assuming that normalized sales environment in line with your long term guidance.
Yes, like that hundred million dollars is about a 50 basis point and operating margin improvement and we would expect to drive again with as you mentioned a normal comparable sales growth, we would expect to drive.
DNA improvement operating margin improvement.
Great.
And then as it relates to gross margin in the quarter, you talked about supplier incentives, providing some benefit can you give little bit more color as to what segment that was in and.
Sustainability of those types and sense.
Yes, so actually in all three of our segments. We had gross margin improvement the larger share. The gross margin improvement is coming from what I call just the core gross margin and that is from.
Favorable product mix to all the initiatives we've done in the area pricing, so significant buy side and sell side initiatives that we're doing in all of our businesses has improved gross margin we have had.
Because we have better growth, we have had positive supplier incentives and those have primarily been in automotive and office products.
And then as we mentioned we do have a little bit of an uplifting gross margin from PPG parts point, and then kind of that carry a higher gross margin that really that core is what's driving this which is just us delivering on our buy side and sell side initiatives and again doing it with a good bit of tariff impact and inflation.
Got it.
Can you just to provide a little or color on the gross margin benefit and gene a headwind associated with the PPG and then call.
Yes happy too so when you look at our gross margin as Paul mentioned it was up 105 basis points. If you exclude the purchase accounting adjustments we had.
About a third of that was related to the two new acquisitions. So two thirds of that was from our core business being up and then on the DNA side. When you look at our S. DNA man. If you take out again, the onetime costs are SDMA was up around 120 basis points.
I would tell you a similar 30 to 40 basis point impact for PPG and unencumbered.
So our core business again should be improving a bit when you take out some of these things and it's important to kind of look at the operating margin side as well.
Understood. Thank you very much.
Thanks.
Thank you Sir our next question comes from the line of Chris Bottiglieri with Wolfe Research. Please proceed with yes with your question.
Hey, guys. This is actually take Moser on for Chris Thanks for taking the question.
Okay.
So I'm just I'm, just wondering upto 100 million of cost reductions.
I think you guys said you still had some remaining from the $25 million synergy targets.
Decision. So is this all incremental to that 25 million.
Yes. It is that 25 million as it relates to AG, which we are on track and that was on all related to gross margin and global procurement.
Does hundred million is in the area invest DNA. So it is more on payroll and facility and freight related.
Okay got you and is it possible to quantify how much of that $25 million synergies.
Has come through at this point.
No. We have we said we would achieve that by the end of three years.
And we are on track to receive that so it may look if we would argue that we're on track its in our gross margin number but it's.
The bulk of our improvement is coming from all the other stuff that we're doing.
Gotcha, Okay, and then just you said you pay down some debt in the quarter.
So I think now you're around three times debt to EBITDA versus maybe.
During the half historically.
Have you changed are you thinking about leverages leverage and where do you see that shaking out.
Yes, so what we had in the quarter is we had some really nice improvement in our working capital and we were able to take that improvement in our working capital and use that to pay down some of our debt on the proceeds from the sale of VI assets had NFS Ben redeploy.
Played on the two other acquisitions that we made earlier in the quarter.
So when we look at where our debt was and it had ticked up a bit at the end of Q2, and obviously, we're pleased with where it is now expected to come down maybe just a little bit more by the end of the year, we're comfortable with where it was before and we're comfortable with where it is now what we really look at is having flexibility.
And looking at what the right opportunities are so again, we're still comfortable with the amount of leverage we have today and we'll certainly take it up for the right opportunity.
Alright, great. Thanks for taking my questions. Thank you.
Thank you ladies and gentlemen, our final question. This morning comes from the line of Bret Jordan with Jefferies. Please proceed with your question.
Hey, good morning, guys from Brett.
Carol I would think about the forecast on inflation is it fair to think that 20, you might have first half inflation similar to second half a 19 of a negligible in the second out just as we lap both second lifts as list of tariffs I.
I mean like I again, assuming tariffs kind of stay where they are and I think the year over year, what you've laid out make sense on we don't really see any other end.
Other inflationary things that would command, but I would think that would be reasonable first half versus second half 2020, Okay. And then a question on private label in Europe . When you think about the margin profile a private label.
What is that the delta over there and I guess to sell private label it into price it more aggressively against the market. That's used to branded I mean, how do you think you can pick up margin over there with a with a bigger private label program.
Well, maybe I would start bread bye.
Just mentioned in again the initial launches in the UK Weve launched private.
Private label batteries as well as some suspension.
Products.
They will be priced a bit more aggressively than than where our core product categories are today, what we've seen in the UK, Brent and you've probably seen on I know you follow it pretty closely over there is is a little bit above a flight to value.
Given given the challenges they're having in their economy.
And Thats why certainly we we think we've got a big opportunity with the Napa private brand.
Okay, Great and then want to clean up our regional performance in the U.S. snap on any particular strength or weakness.
Yes, very similar Brett to Q2, which was our northern tier.
Divisions. So that would include our group in the northeast, which led the way again for us.
In Q2 Q3, the central part of the you as the mountain.
Midwest, all all really performed well.
Southwest.
Did did just fine where we saw a bit of.
A bit of softness was out west.
Which we also saw in Q2 and a little bit in the Atlantic. We we think the Atlantic may.
May have benefited a year ago from some.
One time, one time sales via the hurricanes coming through so we're up against some bigger comp so I wouldn't read too much into that but the northern.
Northern part of the us really really performed well for us.
Thank you.
You're welcome Thank you Brett.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to management for any final comments.
We'd like to thank you for participating in our call today, and we look forward to reporting out our year end numbers. So thank you for your support of genuine parts company.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.