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Edited Transcript of GPC earnings conference call or presentation 21-Feb-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Genuine Parts Co Earnings Call

ATLANTA Feb 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Genuine Parts Co earnings conference call or presentation Tuesday, February 21, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Sid Jones

Genuine Parts Company - VP of IR

* Paul Donahue

Genuine Parts Company - President & CEO

* Carol Yancey

Genuine Parts Company - EVP & CFO

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Conference Call Participants

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* Chris Horvers

JPMorgan - Analyst

* Matt Fassler

Goldman Sachs - Analyst

* Greg Melich

Evercore ISI - Analyst

* Bret Jordan

Jefferies LLC - Analyst

* Chris Bottiglieri

Wolfe Research - Analyst

* Brian Sponheimer

Gabelli & Co. - Analyst

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Presentation

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Operator [1]

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Good day everyone and welcome to the Genuine Parts Company fourth-quarter 2016 earnings conference call. Today's conference is being recorded.

(Operator Instructions)

At this time I would like to turn the conference over to Sid Jones, Vice President Investor Relations. Please go ahead.

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Sid Jones, Genuine Parts Company - VP of IR [2]

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Good morning and thank you for joining us today for the Genuine Parts Company fourth-quarter and full-year 2016 conference call to discuss our earnings results and outlook for 2017. Before we begin this morning, please be advised that this call may involve forward-looking statements regarding the company and its businesses.

The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. We'll begin today with comments from our President and CEO, Paul Donahue, Paul?

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Paul Donahue, Genuine Parts Company - President & CEO [3]

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Thank you Sid, and let me add my welcome to all of you on the call this morning. We appreciate you taking the time to be with us.

Earlier today we released our fourth-quarter and year-end 2016 results. I'll make a few remarks on our overall performance and then cover the highlights by business.

Carol Yancey, our Executive Vice President and Chief Financial Officer, will provide an update on our financial results and our guidance for 2017. After that, we'll open the call to your questions.

For some perspective on our performance, total sales in the fourth quarter were up 2.7% to $3.78 billion, while net income was $152.5 million and earnings per share was $1.02, compared to $1.07 in the fourth-quarter 2015. For the year, total sales were $15.34 billion, which is up slightly with net income at $687 million and earnings per share at $4.59, compared to $4.63 in 2015.

These results represent the total sales and earnings across our Automotive, Industrial, Office, and Electrical Operations which we'll discuss in more detail throughout this call. We executed on many of our initiatives in 2016 and we believe we entered a new year as a stronger, more diversified global distributor.

While there is no question the US sales environment was challenging throughout the year, our international operations in Canada, Mexico, and Australasia, helped the quarter look stronger, more positive results. In addition, we continue to build on the revenue and cost benefits derived from the growing scale associated with our portfolio of distribution operations and we remain committed to further optimizing our enhanced buying power for indirect and direct spend.

Together with the shared talent, best practices, transportation, technology, systems and common distribution processes; we expect to derive improved efficiencies, productivity and lower overall cost structure which would ultimately drive profitability and add value to our end customers. During the past year, we utilized our strong balance sheet to further strengthen the company and generate cash flow.

Although we cannot control the weather or the ongoing downturn in the energy sector, we remain focused on our long-term growth targets. This included ongoing investment in our core business and targeted complementary acquisitions that contributed to our performance in 2016 and will continue to enhance our results as we move forward.

We have a proven track record as a disciplined and successful acquirer and acquisitions remain an important element of our growth strategy. In 2016, we invested more than $400 million of capital for 19 new businesses with estimated annual revenues of more than $600 million.

Turning now to more details on our performance by business segment. We'll begin with our Automotive Operations which were 53% of our total revenues in 2016. For the fourth-quarter ended December 31, our global automotive sales were up 2.4%. Improved from the 1.5% increase in the third quarter and our strongest quarterly performance of the year.

Comparable sales were up approximately 1%, which is improved from the prior two quarters. For the full year, global automotive sales were up 1.2%.

In the US, which represents over 70% of our total automotive revenues, sales were up slightly in the fourth quarter and improved from the low single-digit declines we experienced in the second and third quarters. This includes essentially flat comparable sales, which we believe is the most meaningful metric in measuring our core US automotive sales performance.

This metric covers 100% of our revenue stream and over time it will replace any reference to just our US company-owned stores which represent only one-third of our total US automotive sales and just over one-quarter of global automotive sales. With that said, as we make this transition we also want to be consistent in our quarterly reporting for 2016.

For your reference, US company-owned, same-store sales increased 0.5% and for the full year were slightly positive. Now turning back to our total US results, the slight increase in fourth-quarter sales was driven by a stronger December and equally positive contributions from our commercial and retail platforms.

Our commercial growth in the fourth quarter was driven by sales to our Napa AutoCare Center customers, which grew to 17,200 members in 2016. An increase of nearly 500 members from 2015.

This growth area was offset by slight sales declines to our major accounts and fleet customers, which experienced weaker demand patterns throughout most of 2016. We believe our DIY or retail sales growth in the fourth quarter was at least partially due to December's turn in the weather, which drove increased demand for cold weather parts like batteries, starters, and heating and cooling products.

Our nationwide NAPA Rewards program has now grown to more than 3 million members and we believe we are seeing the benefit of that as well. Lastly, as part of our retail impact initiative, we rolled out 166 updated retail concept stores in 2016, exceeding our goal of 150.

As a reminder, this initiative includes things like installing all-new interior layouts and graphics, extending store hours, and increasing training for our store Associates. Although small on the overall scheme of total sales today, these updated stores continue to produce low double-digit retail sales growth.

The steady uptick in sales gives us confidence in the long-term positive benefits of this initiative and we are on plan to accelerate the project with an additional 300 stores in 2017.

Now moving on to the trends we're seeing across the US automotive aftermarket. The fundamentals drivers for our business remain sound. The size of the vehicle fleet continues to grow. The average age of the fleet remains in excess of 11.5 years. Lower fuel prices remain favorable for the consumer and miles driven continues to post substantial gains.

Miles driven increased 4.3% in November, the most recent data available and is up 3% for the 11 months. November marked 33 consecutive months of increases in miles driven, with lower fuel prices continuing to drive this key metric. The national average price of gasoline was $2.34 in the fourth quarter and just $2.25 for the full year. Positive indicators for further increases in miles driven and ultimately driving additional parts purchases in 2017.

Now let's turn to our international automotive businesses in Australasia, Canada, and Mexico. Combined, these operations account for nearly 30% of our global automotive revenues and as we mentioned earlier, these operations outperformed with an 8% local currency increase in the fourth quarter and for the year.

In Australia and New Zealand, fourth-quarter sales improved by low double-digits, driven by solid comparable sales growth as well as the benefit of acquisitions. In total, the Asia backed business expanded their footprint with 52 new stores in 2016 and we see opportunities for further expansion in the future.

We are also encouraged by the generally favorable economic conditions in this region, as well as solid fundamentals such as a growing car part, driven by record car sales, relatively low gas prices and upward trends in miles driven. At Napa Canada, sales held steady with low single-digit sales growth in the fourth quarter.

This performed fairly well given the tough conditions in 2016 and we anticipate a more favorable overall sales environment in 2017. Similar to the US and Australasia, the total vehicle fleet is growing due to record new vehicle sales and gas prices remaining at historically low levels.

These fundamentals bode well for Napa Canada's continued growth prospects in 2017. Finally, in Mexico, our sales grew low double-digits as well, as we expanded our Napa Mexico footprint to 33 total stores during 2016.

We have plans to add additional stores in the periods ahead and are encouraged by the long-term growth prospects we see for Napa in Mexico. We were pleased to close the year with improved automotive sales results in the fourth quarter.

While we made progress in the US, we intend to build on these results and we are encouraged as we move ahead in 2017. Furthermore, we expect continued strong results in our international automotive operations which have performed well for us.

For 2017, we remain focused on expanding our business with our key commercial platforms, Napa AutoCare and major accounts, executing on our retail strategy and continuing to drive global expansion via new store openings as well as targeted strategic acquisitions. Now let's turn to our industrial business, Motion Industries which represents 30% of our total revenues in 2016.

Industrial was up 4% in the fourth quarter, which is significantly improved from the 1% decrease in the third quarter and also our strongest quarterly performance since the fourth-quarter of 2014. In addition, comparable sales were up slightly, which is much improved from the decrease in comparable sales in each of the prior six quarters.

For the full year, motion sales are essentially unchanged from 2015. We are encouraged by the early signs of strengthening market conditions for industrial business, as evidenced by the year-end uptick in indices such as the industrial production and the PMI numbers.

In addition, the energy sector is making progress in it's recovery with the increase in rate counts translating into much improved sales to this sector. Lastly, the level of exported goods continues to improve from the 6% to 8% declines we experienced in 2015 and the first-half of 2016. It is an especially positive sign for equipment and machinery customers in the OE sector. Each of these trends bode well for the overall industrial marketplace.

Today the question is more of the sustainability as these indicators have been quite choppy over the last several periods. That said, we entered 2017 encouraged by the prospect for stronger industrial sales.

A review of our Motion Business by industry segment, product category, and top customers, further supports our fourth-quarter improvement. We saw an increase in the number of sectors generating positive sales gains, with food processing, aggregate (inaudible), pulp and paper, and oil and gas, all outperforming.

It is worth pointing out that oil and gas improved from a double-digit decline in the third quarter, to a double-digit increase in the sales in the fourth quarter; so solid improvement for this sector in just one quarter. And we have more of our product categories and top 20 customers generating sales increases in the fourth quarter.

A positive trend across the business which we expect to build upon in the quarters ahead, both organically and via strategic acquisitions.

Moving on now to EIS, our electrical distribution segment. Sales for this group were basically flat in the fourth quarter and much improved relative to our results in the first three-quarters of 2016.

Total EIS sales were down 5% for the year and were 4% of the company's total revenue. The market served by EIS closely followed those with motion, so our fourth quarter included a sequential improvement in comparable sales, as well as the accretive benefit of the CPS acquisition in October.

Looking ahead, we remain focused on our initiatives to drive meaningful sales growth at EIS over the long-term. And finally, a few comments on the Office Products Business which represents 13% of the company's 2016 revenues.

The office group reported a 4% increase in sales for the fourth quarter, driven by a 12% sales contribution from acquisitions and the facilities break room and safety supply category. Total sales for the year were up 2%.

Excluding acquisitions, comparable sales were down in the fourth quarter due to the decline in sales to our independent reseller and mega-account customers. Sales to these customers were partially offset by the increase in sales to e-tailers, as well as our growing FBS distribution channel.

On the product side, sales in the traditional office supplies, furniture, and tech products, each posted sales decreases. Offsetting these declines with a substantial growth in our FBS category sales, which we have expanded to diversify overall products and service offerings.

FBS sales were 31% of our total office sales in the fourth-quarter of 2016, versus just 20% in 2015. As we move ahead to 2017, we remain focused on the continued expansion of our FBS business, including strategic acquisitions, as well as a key initiatives to grow our overall share wallet and market share across our product categories and sales channels.

So that recaps our consolidated and business segment sales results and in summary, we are pleased that the fourth quarter was our strongest quarterly sales performance of the year. With improved comparable sales trends in the automotive, industrial, and electrical businesses relative to the second- and third-quarters of 2016.

Generally, we believe that we operated in more favorable market conditions as the fourth quarter progressed. And our teams were in position to capitalize and post improved results.

In 2016, we executed on several of our initiatives to overcome the challenging sales environment and position the company for sustainable long-term growth. A few of the highlights include: strong growth in our international automotive operations, 19 strategic acquisitions that enhanced our products and services offering, effective asset management that further strengthen our balance sheet, key capital expenditures and IT investments including digital to support future growth and distribution efficiencies, and finally return of capital to shareholders via the dividend and share repurchases. So with that I will hand it over to Carol, who will provide a financial update and our outlook for 2017. Carol?

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Carol Yancey, Genuine Parts Company - EVP & CFO [4]

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Thank you, Paul. We will begin with a financial review of our fourth-quarter income statement and the segment information and then we'll review a few key balance sheet and other financial items. And finally we'll provide our outlook for 2017.

As Paul mentioned, total sales in the fourth quarter are $3.78 billion were up 2.7%, including a 1% decrease in comparable revenues. For the full year, total revenues of $15.34 billion were up slightly and also include a 1% decrease in comparable sales.

Gross margin for the fourth quarter was 29.9%, up 17 basis points from the fourth quarter in 2015. For the year, gross margin is 30%, up 16 basis points from 2015.

This improvement was primarily driven by the combination of product mix shift to higher-margin categories and also the benefit of our higher-margin acquisition, which is partially offset by lower supplier incentives. Overall we were encouraged by our gross margin expansion in 2016 and as we look ahead to 2017, we remain focused on further enhancing our gross margin for the long-term.

The pricing environment across our businesses remains relatively unchanged from the prior quarter, with deflation in the automotive and electrical segments and just slight inflation in industrial and office. Our supplier price changes in 2016 were negative 7/10 of 1% in automotive, positive 4/10 of 1% in industrial, positive 3/10 of 1% in office and negative 1.2% in electrical.

Turning to our SG&A, our total expenses for the fourth quarter were $895 million, up 7% from last year and 23.7% of sales. For the year, total expenses of $3.5 billion were up 3% from 2015 and 23% of sales.

The increase in operating expenses as a percent of sales primarily relates to the deleveraging of expenses across our businesses for most of the year. We also increased our spending for planned IT investments and experienced cost increases in areas such as insurance, legal, and professional.

Lastly, we had increased cost in 2016 related to those 19 acquisitions which we would expect to eliminate as we further integrate these businesses into our existing operations. As we mentioned earlier, several of these acquisitions also operate with higher gross margin and higher operating cost models, so this impacts our SG&A comparison as well.

To offset these increases, we have implemented enhanced cost control measures and we're focused on assessing the optimal cost structure for our businesses. As we mentioned in our last call, our businesses are rationalizing their facilities to streamline their cost structure where appropriate; which serves to reduce our distribution cost, as well as our headcount and payroll related costs, which are significant expenses for us.

In 2016 we consolidated or closed several DC's and branches and we expect to see these savings in our future results. We also see more opportunities for further consolidation ahead.

Our investments in technology, which we noted earlier were stepped up in 2016, are allowing us to do more and more of this type of rationalization while also maintaining our excellent customer service standards. So you can look for us to continue making progress towards a lower cost and highly effective distribution infrastructure across our businesses in 2017 and beyond.

In looking at our results by segment, our automotive revenue for the fourth quarter was $2 billion, up 2% from the prior year. Our operating profit of $160 million is down 5%, with the operating margin for this group at 8% compared to 8.7% in the fourth-quarter last year. And this is primarily due to the deleverage expenses due to our US sales results.

Our industrial sales were $1.2 billion in the quarter, a 4% increase from 2015. Operating profit of $81 million is up a strong 12% and their operating margin is improved to 7.0% compared to 6.5% last year. This segment benefited from a favorable product mix shift as well as progress with their ongoing cost reductions and facility rationalization.

Our office products revenues were $476 million, up 4%, including the benefit of acquisitions which contributed nearly 12% to sales. Operating profit of $20 million is down 40% and the operating margin is 4.2% due to a variety of factors including the decrease in organic sales, as well as rising costs associated with serving a growing number of sales channels including e-tailers.

The office team is working hard to drive significant cost savings in this business, which we realize needs to happen soon. The Electrical/Electronic Group sales were $177 million in the quarter, which is flat from the prior year.

Our operating profit of $15 million is down 4% and the margin for this group is a solid 8.7% compared to 9.1% last year. This team has also been working fast to reduce their facilities and related costs and we believe these savings will begin to flow through the results in 2017, so we're encouraged by that.

Our total operating profit for the fourth quarter was 7.3% compared to 7.9% last year and for the full year, is 8% compared to 8.4% in 2015. Not the margin expansion we look to achieve each year but we recognize the need for improvement and we're focused on driving cost savings and improved margins across our businesses in the future.

We had net interest expense of $4.8 million in the quarter and $19.5 million for the full year. We currently expect net interest expense to increase slightly in 2017, in the range of $21 million to $22 million.

Our total amortization expense of $12.5 million for the fourth quarter, was $41 million for the full year. We estimate total amortization expense of approximately $43 million in 2017.

Our depreciation expense of $27 million for the quarter, was $107 million for the full year. For 2017, we expect total depreciation to be in the range of $115 million to $125 million. So our total depreciation and amortization combined, would be approximately $160 million to $170 million for 2017.

The other line which primarily reflects our corporate expense was $23 million for the quarter and $95 million for the full year. In 2017, we expect corporate expense to increase slightly to the $100 million to $110 million range.

Our tax rate for the fourth quarter was approximately 35.5% compared to 38.4% last year. For the full year, our tax rate was 36% compared to 37.2% in 2015.

The reduction in the rate for the quarter, as well as the year, is due to a higher mix of foreign earnings which are taxed at lower rates and also a more favorable non-taxable retirement plan valuation adjustment. In 2017 we expect our income tax rate to be in the range of 36% to 36.5%.

Net income for the quarter of $152.5 million and EPS with $1.02 for the quarter. For the full year, our net income was $687 million and earnings per share of $4.59.

Now we'll turn and discuss the balance sheet which we further strengthen in the fourth quarter with effective working capital management and strong cash flows. Our cash at December 31, was $243 million, a $31 million increase from 2015, even as we increase our spending for capital expenditures and acquisitions.

Our cash position remains strong and it continues to support our growth initiatives across each of our distribution businesses. Accounts receivable of $1.9 billion at December 31, is up 6% from the prior year and this reflects our stronger sales in the month of December.

Our inventory at the end of the quarter was $3.2 billion which is up 7% from the prior-year, primarily due to acquisitions. Our teams effectively manage our inventory levels and we will continue to maintain this key investment at the appropriate levels as we move forward.

Accounts payable at December 31, was $3.1 billion, up 9% from 2015, due to the ongoing benefit of improved payment terms and acquisitions, as well as other payables initiatives. At December 31, 2016, our AP to inventory ratio was 96% compared to 94% at December 31, 2015.

Our working capital of $1.7 billion at December 31, was a slight increase from the $1.6 billion in the prior year. Effectively managing our working capital remains a high priority for the company and we expect to show continued improvement in the quarters ahead.

Total debt of $875 million at December 31, compares to $625 million in total debt in 2015. The increase is primarily related to the 19 acquisitions we made during 2016.

Our total debt to capitalization is approximately 21% and we're comfortable with our capital structure at this time. We continue to believe that our current structure provides the company with both the flexibility and the financial capacity necessary to take advantage of the growth opportunities that we may choose to pursue in the future.

In summary, our balance sheet is in excellent condition and remains a key strength of the company. We generated strong cash flows in 2016, with cash from operations at $946 million and free cash flow which deducts capital expenditures and dividends at $399 million.

In 2017 we are planning for another strong year of cash flow and we would expect cash from operations to be in the $900 million to $1 billion range and our free cash flow would be approximately $400 million. We remain committed to several ongoing priorities for the use of our cash, which we believe serve to maximize shareholder value.

These include strategic acquisitions which Paul covered earlier, share repurchases, the reinvestment in our businesses, as well as the dividend. We purchased 420,000 shares of stock in the fourth quarter and 2 million shares for the full year.

We've also purchased another 60,000 shares thus far in 2017, and today we have 4.2 million shares authorized and available for repurchase. We expect to remain active in the program in the periods ahead, as we believe our stock still represents an attractive investment and combined with the dividend, provides the best returns to our shareholders.

Capital expenditures were $74 million in the fourth quarter and $161 million for the full year. For 2017 we're planning for capital expenditures in the range of $145 million to $165 million.

Turning to the dividend, yesterday our board of directors approved a $2.70 per share annual dividend for 2017, which marks our 61st consecutive year of increased dividends paid to our shareholders. This is a 3% increase from the $2.63 per share paid in 2016 and it's approximately 57% of our 2016 earnings.

This concludes our financial update for the fourth quarter and the full year and in summary, we operated in an overall challenging sales environment throughout most of the year. But our teams worked hard to overcome these challenges and we were in a position to take advantage of the improving market conditions in the fourth quarter.

Moving forward in 2017, we're focused on driving greater efficiencies and cost savings and this is a critical objective for us across our businesses and we look forward to reporting to you on our progress. Now turning to our guidance for 2017.

Based on our current performance and our growth plans for 2017, as well as the market conditions we see for the foreseeable future, we are establishing our full-year 2017 guidance as follows. Total sales would be in the plus 3% to plus 4% range, including the carryover benefit of our 2016 acquisitions; that no future acquisitions and net of a slight headwind from currency translation.

Comparable sales growth is projected to be plus 2% to plus 3%. Buy business, we would expect automotive and industrial to be up 3% to up 4% in total sales growth. Office to be up 2% to up 3% sales growth and electrical to be up 1% to up 2% sales growth.

On the earnings side, we would expect our earnings per share to be in the range of $4.70 to $4.80 for 2017, which represents a low to mid single-digit increase from the prior year. We would also add, that this full-year earnings growth will likely be weighted for the third- and fourth-quarters of 2017.

With that we would just close by thanking all of our GPC Associates for their continued hard work and commitment to the future growth of the company and at this time I'll turn it back over to Paul.

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Paul Donahue, Genuine Parts Company - President & CEO [5]

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Thank you, Carol. As we enter 2017 we remain committed to our global growth initiatives, which include the execution of fundamental initiatives to drive greater share of wallet with our existing customer base.

An aggressive and disciplined acquisition strategy focused on both geographical, as well as product line expansions. The building out of our digital capabilities across all four of our businesses. And the further expansion of our US and international store footprint.

We remain confident that our ongoing focus in these four key areas, along with our initiatives to drive significant cost savings, will positively impact our future results and produce the steady and consisting growth we look to achieve each year. With that will turn it back to Dana, and Carol and I will take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Chris Horvers, JPMorgan

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Chris Horvers, JPMorgan - Analyst [2]

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Good morning.

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Paul Donahue, Genuine Parts Company - President & CEO [3]

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Good morning.

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Chris Horvers, JPMorgan - Analyst [4]

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A couple questions, you mentioned the cadence of sales are weighted to the back half. I'm thinking about Napa and Motion in particular.

Do you think they build up relatively evenly, from the fourth quarter of this year into the back half or do you expect some bumps along the road in specifically around Napa? You talked about a good December.

Weather hasn't been as great here in the first quarter and then you've got the tax refunds that others have talked about. I'm trying to get some understanding about how to think about those two divisions.

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Carol Yancey, Genuine Parts Company - EVP & CFO [5]

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Two things Chris. One is our comments about the back half of the year were more specific to the earnings. We were more commenting on the plus 2%, plus 5% in earnings we would expect to see more of that in the back half of the year.

In the second thing is we spoke to sales. Q1 last year was our strongest quarter, as you think about that, (technical difficulty) knowing that quarters two, three, four were more similar.

You specifically called out industrial and I would just mention with the industrial, again, we saw great improvement in their sales in the fourth quarter. The guidance that we gave you for them, those sales increases would be pretty even across the quarters in 2017 unless we see something outside of our control in the economy that we are not anticipating.

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Paul Donahue, Genuine Parts Company - President & CEO [6]

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Chris, staying on industrial for a minute. You look at all the macro numbers, as we look at them, whether it be the ISM number rate counts.

We're seeing significant improvements. We've been through these cycles in the downturns in industrial before. It does feel and we see it in both Motion and our electrical business, that these two businesses are now poised for much better growth in 2017.

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Chris Horvers, JPMorgan - Analyst [7]

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Understood and just to clarify that 1Q strongest quarter, that was a reference to Napa correct?

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Carol Yancey, Genuine Parts Company - EVP & CFO [8]

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Yes.

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Chris Horvers, JPMorgan - Analyst [9]

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So segue to Motion. You've consolidated facilities, you've invested in technology.

How should we think about the long-term margin potential of the business? After the crisis, you got back to an 8.1% operating margin. Before the crisis, the prior peak, I believe it was 8.4%.

How do you think about -- what's the potential earnings power, in a peak state and then the time to get back to that?

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Carol Yancey, Genuine Parts Company - EVP & CFO [10]

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A couple of things there, is you're right. They've made -- they've closed over 50 branches and a couple of distribution centers; they've done a terrific job on the cost side.

As we had mentioned before, they had an impact of lower volume incentives as it related to this business. So if this business picks up, you do see the margins coming back and we've seen some nice improvement in their quarter gross profit and then they've got some acquisitions coming in.

I would just mention, we always have a stated goal of improvement each year in operating margins. As far as the bounce back in the range. I mean for all of our businesses, we still target the 8.5% to 9% for operating margins. I would not necessarily expect that within 12 months but I think you're going to see a nice bounce from them.

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Chris Horvers, JPMorgan - Analyst [11]

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I guess asked another way, between the acquisitions and the costs that you've taken out of the business, did you create a structural potential that is higher than you've seen in prior peaks?

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Carol Yancey, Genuine Parts Company - EVP & CFO [12]

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I would not say higher than what we've seen in prior peaks. I mean remember, they're just at 7.3% right now. I mean we've got a ways to go, but 8.5% would be a really nice margin for them.

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Chris Horvers, JPMorgan - Analyst [13]

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Very nice. Understood, thanks very much.

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Carol Yancey, Genuine Parts Company - EVP & CFO [14]

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Thank you.

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Operator [15]

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Matt Fassler with Goldman Sachs

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Matt Fassler, Goldman Sachs - Analyst [16]

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A little more color and you probably have covered this in a fragmented way as to why you would expect the earnings to be second-half weighted more so than the sales. The sales were fairly even. Just talk about what it is moving the margins around that will work more to your benefit in the second half of the year.

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Carol Yancey, Genuine Parts Company - EVP & CFO [17]

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Really, if you look at it from the cost structure. I mean, we've said it takes a bit of time for us to get those costs out and look, we were not happy with where we ended up the year and fourth quarter.

We've got more work to do in SG&A. When we look at what we've done in terms of facility rationalization and we look at our headcount and we look at our cost structure, freight, legal and professional, insurance, wage pressures. We've just got to work hard at continuing to get those costs out and that's not a quick thing that happens in just a quarter, so that's why we're giving a little bit of the earnings to say it will probably be more back-half loaded.

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Matt Fassler, Goldman Sachs - Analyst [18]

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Great and the second question. Obviously, tuck-in acquisitions and some bigger ones, have been a pretty consistent part of the story over the past several years. Can you just clarify, other than the dividends, what kind of free cash flow deployment you have baked into the guide?

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Carol Yancey, Genuine Parts Company - EVP & CFO [19]

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What we have assumed in our cash flow guidance that we gave, was very similar to what we had this year. We would have an amount set aside, if you will, for of course the dividend, the CapEx number we gave you, share repurchases of a similar amount and then for acquisitions.

You can count on the 1% to 2%-ish on acquisitions in terms of revenue. So that is modeled into our cash flow guidance.

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Paul Donahue, Genuine Parts Company - President & CEO [20]

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Matt, we were very active in 2016 with 19 acquisitions and $600 million in annualized revenue. Quite a bit more active than we were in prior years.

It's (technical difficulty) when we look at businesses and partnering with businesses; it is hard to gauge. You just never know when they're going to come along, when the right one's going will come along.

But, I will tell you that we will remain active not only across all four of our businesses but across all of our geographical regions as well.

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Matt Fassler, Goldman Sachs - Analyst [21]

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Just to be clear, is that [470] to [480] include any buyback or any acquisition that is new buyback or new acquisition in 2017?

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Carol Yancey, Genuine Parts Company - EVP & CFO [22]

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No. It would just be the normal ranges that we've discussed. We have not -- the acquisitions that have already taken place in our numbers in 2016 and roll into 2017 is what's contemplated in our guidance.

But in the earnings guidance, it would just be a normal buyback. That is usually around 1% to 1.5% of our shares.

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Matt Fassler, Goldman Sachs - Analyst [23]

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Great, thank you so much guys.

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Paul Donahue, Genuine Parts Company - President & CEO [24]

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Thank you.

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Operator [25]

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Greg Melich, Evercore ISI

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Greg Melich, Evercore ISI - Analyst [26]

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Two questions. First I'd start with the business and particularly the inflation-deflation trends.

Can you give us an update from last year earnings on each businesses? What are you thinking or seeing this year when you plan your guidance for inflation or deflation by business?

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Carol Yancey, Genuine Parts Company - EVP & CFO [27]

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We just finished our fifth year of deflation on the automotive business. And I can't say were planning for anything much different than that.

In the other businesses, this was definitely a much lighter than normal year. So we're not really planning for much. But look, there are so many unknowns out there in the economy right now.

Certainly with new legislation, some of the trade and tax issues that are being thrown about. We don't know what will come. But right now we're contemplating a similar number in 2017 for inflation, which would not be much.

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Greg Melich, Evercore ISI - Analyst [28]

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Great and the second one is a little more big picture. If you just take your guidance this year, that low-to-mid single-digits EPS growth. I think now it's been a couple of years we're you've been at slower growth than the normal objective which is high single digits. The question is, is something changed in the business or what -- do you think this is a cyclical or secular or how should we think about that?

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Carol Yancey, Genuine Parts Company - EVP & CFO [29]

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One of the things that we've assumed for this year, is core growth of 2% to 3%. As you know, in distribution business, core growth of 2% to 3% makes it very difficult for us to leverage or to have margin improvement.

So that's why we're giving an earnings number of plus 2% to plus 5% but certainly know that we are not happy there and we have a lot of work we are doing. I don't think it's anything more than just probably a lower level of sales growth but we would still expect, and, again our long-term objectives are still to have a much higher core growth and more a 4% to 6% going forward.

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Greg Melich, Evercore ISI - Analyst [30]

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Got it. If the top line was mid single-digit, you would still see the earnings at the high single-digit?

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Carol Yancey, Genuine Parts Company - EVP & CFO [31]

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Yes

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Paul Donahue, Genuine Parts Company - President & CEO [32]

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Right. Greg, we have not come off of our long-term objectives on the numbers side but based on what we see today; we believe that the guidance we provided is achievable. But I can also tell you that our team is focused on not only reaching that guidance but absolutely exceeding it this year.

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Greg Melich, Evercore ISI - Analyst [33]

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Great. Good luck. Thanks

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Paul Donahue, Genuine Parts Company - President & CEO [34]

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Thank you

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Operator [35]

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Bret Jordan, Jefferies

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Bret Jordan, Jefferies LLC - Analyst [36]

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Good morning. A question on the fourth quarter. I guess if we look regionally, I mean obviously some of those northern markets that were soft, got better.

But could you, talk maybe -- the southern, western and northern markets and maybe what the dispersion of results was? Like what the spread between the strongest and weakest markets were and then maybe a little bit on product category strength; anything that was a particular outlier?

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Paul Donahue, Genuine Parts Company - President & CEO [37]

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I will take the regional question first, Bret. First and foremost, I'm very pleased to tell you that every one of our regions saw improved sales results in the fourth quarter.

We also saw that gap narrow from what we had seen in Q3 and even a little bit into Q2. We saw that gap narrow by about 100 basis points. We're still -- our strong regions are still in the South but I can tell you we saw improved results in the Midwest. And we saw improved results in the central part of the country as well.

That December blast of cold definitely helped. These January warm temps are not helping us a whole lot. But that is what it is.

Your second question, Bret, regarding product performance. Our best-performing categories and probably not surprising in Q4, were anything related to engine and electrical systems. So batteries, starters, alternators all performed well in Q4. Filtration performed well. Some of the -- where we saw a little bit of downturn, was in some of our T&E, tool and equipment, especially on some of the large equipment and some of our paint categories were off just a bit.

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Bret Jordan, Jefferies LLC - Analyst [38]

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Okay great. Anything -- as you think about the larger tool categories. That sort of a real shift in the consumer side there or any thoughts on that?

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Paul Donahue, Genuine Parts Company - President & CEO [39]

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No I don't think so but I think it's timing. We have a robust tool and equipment business and I think it's more one of timing.

I don't think there's anything that changed dramatically in Q4 that would have impacted those sales. I think we'll see that rebound in Q1 going forward.

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Bret Jordan, Jefferies LLC - Analyst [40]

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Okay and then just one question on your 2017 outlook for auto growth of 3% to 4%. How does that stack up US versus international?

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Carol Yancey, Genuine Parts Company - EVP & CFO [41]

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We would be stronger on the international side than on the US. That assumes core growth of 3% to 4% as well.

We got a little bit of a currency headwind built in and a little bit of acquisitions but I think you are going to see similar with (technical difficulty) this year. A little stronger internationally then the US side.

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Paul Donahue, Genuine Parts Company - President & CEO [42]

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I would just reinforce Carol's comments, Bret. We continue to be very bullish on our international operations. And that's really all of them.

Australia, New Zealand, we think we have expansion potential in those markets. Mexico, we will continue to expand our footprint there. In Canada, despite a challenging environment out West, our team up there had a good year. Where we need to turn it up is here in the US and absolutely our team is focused on getting that done this year.

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Bret Jordan, Jefferies LLC - Analyst [43]

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Okay great. Then one last question. On Motion, you called out oil and gas as having double-digit improvement in the fourth quarter.

Is that -- are we seeing some structural change you think in that space or are we just -- the bar got low enough that we had a good quarter? (multiple speakers)

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Paul Donahue, Genuine Parts Company - President & CEO [44]

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I'm sorry?

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Bret Jordan, Jefferies LLC - Analyst [45]

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Are we calling a turn in the oil and gas (laughter)

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Paul Donahue, Genuine Parts Company - President & CEO [46]

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I'm not sure I'm ready to go there. All I know, is where we were a year ago in the depths Bret -- we're double the price of a barrel of oil today than we were a year ago.

Rigs are coming back online. We're seeing a lift in that Southwest -- we do big business down in the Southwest and we're seeing a nice lift across that part of the country, really in all of our businesses.

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Bret Jordan, Jefferies LLC - Analyst [47]

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Okay, great. Thank you.

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Paul Donahue, Genuine Parts Company - President & CEO [48]

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Thank you

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Operator [49]

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Chris Bottigleri, Wolfe Research

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Chris Bottiglieri, Wolfe Research - Analyst [50]

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Thank you for taking my question. One first clerical one on clarification. Do you have the currency movements in M&A activity for the non-office segments [I don't think you gave it out this quarter].

Two, just wanted to confirm what your definition of a comp is for your non-automotive. Is that measured by branch; maybe speak at a high level, what your comp number means for your business?

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Paul Donahue, Genuine Parts Company - President & CEO [51]

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I will take comps first and then let Carol address your first question. As we are identifying and defining comps, Chris, we're excluding new stores, new branches. [Where] branches closed over the past 12 months and we're also excluding acquisitions.

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Chris Bottiglieri, Wolfe Research - Analyst [52]

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Got you.

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Carol Yancey, Genuine Parts Company - EVP & CFO [53]

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You specifically asked about FX in the quarter for the non-automotive?

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Chris Bottiglieri, Wolfe Research - Analyst [54]

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Let's say you have in the past, given out the FX impacts and the M&A impacts for each segment. (multiple speakers)

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Carol Yancey, Genuine Parts Company - EVP & CFO [55]

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There was virtually no FX impact in the quarter, it was just negligible. And the acquisition impact in the quarter -- it was around 2% for automotive and it was around 4% for industrial. And it was around 11% for office and then electrical was 1%, so in total they were about 4%.

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Chris Bottiglieri, Wolfe Research - Analyst [56]

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Very helpful. Just a quick high-level question. Given the improving -- I mean you were extremely inquisitive in 2016 which was nice to see.

How do you think about the backlog right now that industrial sentiment is improving and probably global sentiment -- around the markets right now? Are you having a harder time building the acquisition pipeline?

Have you seen any changes in your conversations, anything to think that your pace with M&A may slow near term? Thank you.

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Paul Donahue, Genuine Parts Company - President & CEO [57]

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That is a great question, Chris. I will say that we have a robust acquisition pipeline and really across all four of our businesses and as I think I mentioned earlier, in all of our geographical regions.

I think what we're seeing is that in some parts of our business, when we do an acquisition and I'll point out one that we did in industrial with the acquisition of Braas in Q3 of last year. What that brings us is additional players in that space.

When they see that GPC is, one, that we are inquisitive and two, that we are a good partner. We have more and more some of these folks coming to us as opposed to us tracking them down.

We feel good about our prospects for 2017. I'll mention -- we did mention earlier, we did 19 acquisitions last year. I don't know that will be at that level of activity but we certainly expect to be to be active again in 2017.

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Chris Bottiglieri, Wolfe Research - Analyst [58]

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Great. That is very helpful. Thanks for your time

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Operator [59]

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Brian Sponheimer, Gabelli

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Brian Sponheimer, Gabelli & Co. - Analyst [60]

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Thank you for putting me in here.

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Paul Donahue, Genuine Parts Company - President & CEO [61]

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You bet Brian.

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Brian Sponheimer, Gabelli & Co. - Analyst [62]

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Just a question on Napa. You're not the only ones who have reported some margin degradation there and you're not getting the comp leverage but I'm just curious about the pricing environment relative from a competitive standpoint and then also any pressure or pushback from the manufacturers themselves?

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Paul Donahue, Genuine Parts Company - President & CEO [63]

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No. What we're seeing is has been fairly typical in recent years Brian, the pricing across the marketplace is rational.

We're not seeing -- and our supplier partners are partnering with us as they always have. We're not seeing any significant shifts there either.

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Brian Sponheimer, Gabelli & Co. - Analyst [64]

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Okay. Terrific. Just -- conversations with suppliers.

If we were to have a situation where there's some order adjustment tax that was fairly draconian for the industry by nature. Any talks with them about potential on-shoring or areas that you can speak to?

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Carol Yancey, Genuine Parts Company - EVP & CFO [65]

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I would say its probably premature. It's early to have discussions with suppliers about what changes they are going to be making and what changes we will be making.

I think we're all taking a bit of wait and see, to see what ultimately happens. I think, as we think about this, what amount is going to be borne by the supplier and what amount borne by us, what amount passes on to the customer.

I think in theory, a lot of this is probably going to end up being passed along to the consumer and in terms of inflation and what we see in the cost of products. But we have not started -- again it is early to be having discussions with what changes may happen in the supply chain. But know, that we will work with our suppliers and hopefully come up with the best solution that we can.

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Brian Sponheimer, Gabelli & Co. - Analyst [66]

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Terrific. Much appreciated and good luck in 2017.

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Paul Donahue, Genuine Parts Company - President & CEO [67]

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Thank you Brian

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Operator [68]

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That does conclude today's question-and-answer session. I would now like to turn the conference back over for any additional closing remarks.

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Carol Yancey, Genuine Parts Company - EVP & CFO [69]

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We want to thank you for your participation in the call today. As always, we thank you for your support of Genuine Parts Company and we look forward to reporting to you in Q1. Thank you.

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Operator [70]

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Again, that does conclude today's presentation. We thank you for your participation.