Greetings, and welcome to the Genuine Parts Company Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sid Jones, Senior Vice President, Investor Relations.
Thank you, sir. You may begin.
Good morning and thank you for joining us today for the Genuine Parts Company Q3 2018 conference call to discuss our earnings results and current outlook for the full year. I'm here with Paul Donahue, our President and Chief Executive Officer and Carol Yancey, our EVP and Chief Financial Officer. Before we begin this morning, please be advised that this call may include certain non GAAP financial measures, which may be referred to during today's discussion of our results as reported under generally accepted accounting principles. A reconciliation of these measures is provided in the earnings press release issued this morning, which is also posted in the Investors section of our website. Today's call may involve forward looking statements regarding the company and its businesses.
The company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest SEC filings, including this morning's press release. The company assumes no obligation to update any forward looking statements made during this call. Now, let me turn it over to Paul.
Thank you, Sid, and welcome to our Q3 2018 conference call. We appreciate you taking the time to be with us this morning. Earlier today, we released our Q3 2018 results. I will make a few remarks on our overall performance and then cover the highlights across our business. Carol Yancey, our Executive Vice President and Chief Financial Officer, will provide an update on our financial results and our current outlook for the full year.
After that, we'll open the call to your questions. So we entered the Q3 with positive momentum, having just reported record sales and earnings in the Q2. Our teams carried this momentum over into the 3rd quarter, producing a strong sales performance, while also improving our total operating margin, earnings and working capital position. This was encouraging as the quarter also presented our teams with a few challenges. The unfortunate passing of Tim Breen, one of our key business leaders, the termination of our proposed merger agreement with Ascendant and the effects of Hurricane Florence all impacted our businesses and our associates in the quarter.
Despite these challenges, our team stayed focused and delivered total GPC sales of $4,700,000,000 up 15.3 percent driven by the favorable impact of strategic acquisitions and a 4.3% comp sales increase. This 4.3% comp sales increase has improved from the 3.4% increase we delivered in the 2nd quarter and 2% in the Q1. It's also worth noting our performance this quarter was our strongest comp growth rate since the Q4 of 2014. Net income was $220,000,000 and earnings per share was at 1.49 dollars Excluding the net impact of transaction and other costs related to the acquisition of Alliance Automotive Group and the recently terminated agreement to spin off the Business Products Group, net of a $12,000,000 termination fee, Adjusted net income was $218,000,000 up 28 percent and adjusted earnings per share was 1.48 dollars up 29%. We'll kick off our business segment overview with our Global Automotive Group.
Total automotive sales were up 23.3 percent in the 3rd quarter, including a 3% comp sales increase. This has improved from the 2% increase in the 2nd quarter and a 1.5% increase in the 1st quarter. So we are pleased to see the steadily improving comps, which are driven primarily by our U. S. Automotive results.
Our total sales also benefited from acquisitions net of an unfavorable foreign currency translation of approximately 2%. We'll first review our performance for our largest business segment, our U. S. Automotive division. Sales for our U.
S. Automotive operations were up 4.9% in the Q3 with comp sales up 3.2%. This is much improved from the 1.5% comp increase we delivered in the Q2 and the slight increase we reported in Q1. This is also our best U. S.
Sales comp since the first quarter of 2016. This year, steady improvement in our core sales reflects the ongoing execution of our sales plan, as well as the continued strengthening of the underlying sales conditions for the automotive aftermarket in the U. S. The warmer than average temperatures for much of the quarter came on the heels of a hot summer and a colder winter, which likely increased parts failure and maintenance and drove the improved demand. Our growth in Q3 was fueled by increased sales to both our retail and commercial customers, and for the first time in 2 years sales to the commercial segment This was driven by the continued strengthening of our NAPA Auto Care sales, which were up 3.4% for the quarter.
This is a significant commercial program for NAPA and we are encouraged by the positive sales trends with these accounts. Looking forward, we believe the improving conditions will drive further commercial growth for both our auto care and major account customers. And while our major account sales lag the strength of our overall growth in the Q3, we are optimistic for stronger sales in the quarters ahead. Turning now to our retail business, our growth in this segment reflects the positive impact of initiatives such as NAPA rewards program, now 8,500,000 members strong, expanded store hours and our retail impact store project. We have completed the rollout of the retail impact initiative to our company owned stores and have now shifted our focus to our independently owned stores.
We expect these strategic initiatives to drive further sales growth for our retail segment, which represents 20% to 25% of our total U. S. Automotive sales. So in summary, we are encouraged by the ongoing improvement in the sales environment for our U. S.
Automotive operations and its positive impact on our operating results. As mentioned in last quarter's call, we believe this trend will continue in the quarters ahead for several reasons. We are seeing the positive shift in demand for failure and maintenance parts due to return of normalized weather patterns. We expect the number of vehicles in the aftermarket sweet spot to further stabilize and ultimately become a tailwind in 2019 2020. The long term fundamental drivers for the automotive aftermarket remain strong with a growing and aging fleet and increasing miles driven among consumers.
We also expect our ongoing acquisitions and overall footprint expansion to further contribute to sales. Previously, we discussed the addition of Smith Auto and Sanal Auto Parts to the NAPA network, and these businesses are performing well for us. Most recently, we announced the acquisition of Hastings Auto Parts, a 4 store group in the Detroit area, which joined NAPA on October 1. Hastings significantly enhanced our presence in the Detroit Metro area and will contribute approximately $10,000,000 in annual sales. We welcome the Hastings leadership group to our NAPA team.
Our accretive tuck in acquisitions remain an important part of our growth strategy and we see additional opportunities to expand our U. S. Store footprint. Now let's turn to our international automotive businesses in Canada, Mexico, Europe and Australasia. These operations account for 40% of our total automotive revenues and delivered a collective 5% total sales increase, including a 2.7% comp sales increase.
We'll lead off with our key North American automotive operation. Total sales were up mid single digits at Napa Canada and up low single digits in Mexico. In Canada, we continue to drive our core sales growth with the solid execution of our sales initiatives, while also adding strategic tuck in acquisitions to further expand our Canadian presence. We continue to look for further growth in Canada and Mexico as we move forward. Turning to Alliance Automotive Group.
This business continues to operate well across its European footprint in France, the UK, Germany and Poland. Comp sales grew low to mid single digits and were positive across all four regions, with the strongest results in Germany and the UK. Additionally, the European team continues to drive strong sales growth from its ongoing acquisitions. AAG's robust acquisition strategy resulted in several additional bolt on acquisitions in Q3, including TMS Motor Spares, which closed on August 31st. TMS headquartered in Carlisle, England is a leading automotive parts distributor and adds 24 locations to the AAG network.
TMS further expands our U. K. Footprint with 7 locations in England and provides for our 1st company owned stores in Scotland with 17 locations there. We expect this strategic acquisition to generate We also announced AAG's October 2nd acquisition of Platinum International Group, headquartered in Manchester, England. Platinum is a leading value added battery distributor, serving primarily the automotive industry from 9 U.
K. Locations and 1 in the Netherlands. Platinum strengthens AAG's position in the U. K. Battery market and is expected to generate estimated annual revenues of $75,000,000 We want to welcome both the TMS and Platinum teams to the AAG family.
Wrapping up our AAG overview, we continue to work towards the closing of the previously announced acquisition of the Hennig Group in Germany. They are a leading supplier of light duty and commercial vehicle parts with 31 branches across Germany and estimated annual revenues of $190,000,000 Subject to final regulatory approvals, we currently expect to close on the Hennig acquisition later in Q4. The addition of these businesses, a full pipeline of other potential acquisitions and our continued focus on underlying core growth is supported by relatively solid economic fundamental across the European markets we serve. We are also pleased with the continued progress on our integration plans And as we approach the 1 year anniversary of this acquisition, we remain encouraged by the opportunities we see for our European operations and are confident the AAG team will continue to deliver for GPC. Our growing operations in Australia and New Zealand posted another solid quarter.
Total sales in local currency were up mid single digits, while comp sales were up low to mid single digits in the 3rd quarter. The Asia Pac team continues to drive its sales growth with a combination of initiatives to grow core sales and accretive acquisitions, while also executing on plans and initiatives to enhance our customer service capabilities and overall operating performance. We expect Asia Pac's growth plans combined with the continued backdrop of solid economic and aftermarket fundamentals to generate strong results in the quarters ahead. In summary, our U. S.
Business continues to strengthen with September being our strongest average daily sales month of the year. This strong finish to the quarter enabled our U. S. Team to post another quarter of improved comp sales growth. Our European operations performed well with solid core growth and the added benefit of ongoing acquisitions.
Our remaining international automotive businesses in Australasia, Canada and Mexico are all performing to plan. We continue to build size and scale as we expand our automotive operations around the globe. So now let's turn to our Industrial Parts Group. The sales environment for this business remains strong across our operations in the U. S, Canada and Mexico.
Total sales of $1,600,000,000 were up 8.3% in the 3rd quarter, including a 7% comp sales growth plus the benefit of acquisitions. This 7% sales comp further builds on the 4% to 6% comps achieved over the previous 5 quarters and reflects Industrial's strongest sales comp since the Q4 of 2014. This ongoing pattern of solid sales growth is consistent with the positive impact of our growth initiatives for this business and the favorable economic and industry specific factors benefiting the industrial marketplace. These include the continued strength in major industrial indicators such as the Purchasing Managers' Index, industrial production, active rig counts and U. S.
Exports. Further supporting the broad strength across the industrial marketplace, all 14 of our major product groups, including the Electrical Specialty Group, posted sales gains in the quarter, and each of the top industries we serve were up as well. Iron and Steel, Chemicals and Allied Products and Oil and Gas Extraction Industries were especially strong, with each showing low double digit increases. On October 1, we announced the acquisition of a Hydraulic Supply Company in Sunrise, Florida. HSC is a leading full service fluid power distributor with a broad product offering of hydraulic, pneumatic and industrial components and systems.
HFC operates from 30 locations primarily in the Southeastern U. S. And further enhances Motion's footprint for additional Fluid Power product. HSC is expected to generate estimated annual revenue of $85,000,000 We'd like to extend a warm welcome to John Serra and the HSC team to our industrial operations. We are encouraged by the strong results in the industrial business thus far in the year.
Looking forward, we expect our plans and initiatives to drive both core and acquisitive growth combined with the extended industrial growth cycle, which still has strength to support strong results for this segment in the quarter ahead. We also remain pleased with our investment in Anenco, the Australian based industrial distribution While we currently have a 35% investment in Anenco, we will look to increase our investment in 2019. Their strategic supplier base lines up well with Motion and they give us a stronghold not only in Australasia, but also in strategic markets like Indonesia and Singapore. As we reflect on our industrial performance and future growth prospects, we are especially proud of the resilience this team has demonstrated following the loss of Tim Breen, the President and CEO of Motion Industries. On August 20, we announced Tim's sudden passing and we are all deeply saddened by the loss of such a good friend and colleague.
He will be truly missed. Randy Breau and Kevin Stoehr, both very talented and seasoned executives, have stepped up to lead the Motion team, and we are certain that the Industrial Group is in very capable hands as we move forward. And we know Tim would be very proud of his Motion team. So now let's turn to S. P.
Richards, our Business Products Group. This segment reported total sales of $496,000,000 up 1.3% for the Q3. The increase was driven by the growth in comp sales and marks the first positive sales comp since the Q3 of 2015. And more encouraging, this improvement reflects the increase in sales for 3 of our product categories, core office supplies, technology and FBS, our facilities, break room and safety supplies category. As mentioned earlier, our definitive agreement with Ascendant announced in April, whereby GPC would spin off the SPR business and merge it with Ascendant was terminated in September.
Despite our best efforts to proceed with this agreement, Ascendant's Board of Directors determined that the competing acquisition proposal from Staples was a superior proposal as defined in the merger agreement. While we disagree with this determination, the SBR and Ascendant merger agreement was terminated and GPC was paid a $12,000,000 termination fee. Considering these circumstances, GPC will continue to operate the S. P. Richards business.
We believe that with further industry consolidation, there is significant opportunity for this business to grow and deepen its relationships with both independent dealers and other customer channels, and we'll continue to invest in these growth opportunities when and where appropriate. Finally, we extend our thanks to all of our associates at S. P. Richards. Our team led by Rick Toffen has done a terrific job of staying focused on what truly is important and that is providing exceptional service to all of our customers.
So that is a summary of our consolidated and business segment sales results for the Q3 of 2018. We were pleased to show progress in our operations and report improved results and we'll continue to build on these positive trends as we move through the Q4 of the year and on into 2019. So with that, I'll hand it over to Carol for her remarks. Carol?
Thank you, Paul. We will begin with a review of our key financial information and then we will provide our updated outlook for 2018. Our total sales in the 3rd quarter were up 15.3% or up 4% on a comp basis, which excludes acquisitions and a 1% unfavorable foreign currency translation. Our gross margin for the 31.43 percent, which compares to 29.95 percent last year. Consistent with the first half 2018, this strong increase primarily reflects the higher gross margin associated with AAG and other acquisitions.
In addition, we continue to see improved margins in our core U. S. Automotive and industrial businesses. The industrial business has also benefited from a slight increase in supplier incentives. We remain focused on enhancing our gross margins through several key initiatives, including ongoing supplier negotiations, both globally and across our businesses the investment in more flexible and sophisticated pricing and digital strategies, improved analytic capabilities around product and customer profitability.
We expect these initiatives to support our current gross margin rates in the quarters ahead despite the growing competitiveness across the markets we serve. The pricing environment has been more inflationary in our industrial and business product businesses thus far in 2018. We also saw the initial signs of inflation in our automotive segment in the Q3, and we would expect to see this trend continue over the balance of the year and into 2019 due to the current tariff regulations. While the impact of tariffs has been fairly minimal through the 9 months, the most recent list of goods subject to the 10% tariff is extensive and something that our teams are managing with our suppliers as we move forward. We continue to expect to pass along any increases to our customers as we have thus far.
Our cumulative supplier price is through the 9 months of 2018 were up 0.4 percent in automotive, up 3.2% in industrial and up 1.5% in office. Our SG and A and other expenses for the Q3 were $1,190,000,000 which represents 25.2 5% of sales. This has improved from the 1st and second quarters due primarily to our stronger core sales growth. In addition, while we continue to experience ongoing pressure from rising costs in areas such as payroll, freight and delivery, our teams are addressing these factors and making progress on our cost saving plans and initiatives. Finally, we would add that our 3rd quarter SG and A included a $3,100,000 benefit associated with transaction and other costs related to AAG and the attempted transaction to spin off S.
P. Richards, which is net of the favorable impact of a $12,000,000 termination fee. Now we will discuss the results by segment. Our automotive revenue for the Q3 was $2,600,000,000 which is up 23% from the prior year. And our operating profit of $227,000,000 was up 27% with operating margin point 6% compared to 8.3% margin in the Q3 of 2017.
The increase in operating margin relates to the improved leverage on our 3% comparable sales growth in the U. S. And reflects our 1st quarterly margin expansion since the Q1 of 2016. We're optimistic for further expansion in the quarters ahead. Our industrial sales were $1,600,000,000 in the quarter, a strong 8% increase from Q3 of 2017.
Our operating profit of $119,000,000 is up 10% and our operating margin is 7.6% compared to 7.4% last year, with the 20 basis point increase due to another quarter of solid gross margin expansion and leverage on expenses from the 7% comp sales increase. The industrial business has been consistently strong since the start of 2017. And based on our outlook for continued strength, we expect to see further margin expansion at Industrial as we move forward. Our business product revenues were $496,000,000 up 1% from the prior year. Their operating profit of $20,000,000 was down 17% and their operating margin is 4%.
So despite positive total sales growth and the first positive comp for this group since the Q3 of 2015, this business continues to be pressured by the lack of expense leverage, challenging industry conditions and an unfavorable product and customer mix shift. With that said, we have plans and initiatives in place to further improve revenues for the Business Products Group to better leverage our expenses and stabilize the margin. Our total operating profit in the 3rd quarter was up 18% on the 15% sales increase, and our operating profit margin was 7.7% compared to 7.6% last year. This is our best performance of the year, and while pleased to report the margin improvement, we will continue to execute on our initiatives to deliver further expansion. We had net interest expense of $22,000,000 in the quarter, and for 2018, we expect net interest expense to be in the range of $96,000,000 to $98,000,000 This is down from our previous guidance of $98,000,000 to $100,000,000 and is primarily due to lower interest from the decrease in debt as well as some beneficial cross currency strategies.
Our total amortization expense was $24,000,000 for the Q3, which is an increase from $12,000,000 last year, primarily due to the amortization related to AAG. For 2018, we expect full year amortization to be in the range of $88,000,000 to $90,000,000 Our depreciation expense was 37,000,000 dollars for the quarter, and for the full year, we continue to expect total depreciation to be in the range of $140,000,000 to 150,000,000 On a combined basis, we expect depreciation and amortization of approximately $230,000,000 to 240,000,000 dollars The other line, which represents our corporate expense, was $29,000,000 for the Q3, which includes an approximate $3,000,000 benefit associated with transaction and other costs, net of the favorable termination fee that we recorded in the quarter. Excluding this benefit and the transaction and other costs that were incurred in the Q3 of 2017, our adjusted corporate expense was $32,000,000 or a $6,000,000 increase from last year, which is primarily due to payroll pressures, including incentive and variable pay, increased costs for minority interest and ongoing investments in IT and security initiatives. For the full year, we currently expect our corporate expense to be in the range of $120,000,000 to $125,000,000 range, excluding transaction related costs.
This compares to our previous guidance of $115,000,000 to $125,000,000 Our tax rate for the 3rd quarter was 24 point 5%, down significantly from the 35.7% tax rate in the prior year, due mainly to the benefit of the U. S. Tax reform. Looking forward, we continue to expect a 25% tax rate for 2018, and we anticipate a higher 4th quarter tax rate as we finalize our provisional tax reform adjustments. So now let's turn to a discussion of the balance sheet, which remains strong and in excellent condition.
Our accounts receivable of $2,700,000,000 is up 23% from the prior year and up 7% excluding the impact of acquisitions, primarily AAG and foreign currency. This increase is greater than our 4% comp sales increase for the 3rd quarter, but it primarily relates to 1 less collection day in September. We remain pleased with the quality of our receivables. Our inventory at September 30 was $3,500,000,000 which is up 5% from September of last year and down 1% excluding AAG, our other acquisitions, as well as foreign currency. Our teams continue to improve the inventory levels in our core businesses and we'll continue to manage this key investment to the appropriate levels as we move forward.
Our accounts payable of $4,000,000,000 at September 30 is up 23% in total and up 9% over the prior year, excluding AAG, other acquisitions and foreign currency. The benefit of improved payment terms with certain suppliers, and at September 30, our AP to inventory ratio improved to 114% from 110% at June 30. We are especially pleased with our progress in managing our trade payables and its positive impact on our cash flows. Our total debt of $2,900,000,000 at September 30 is up from $1,100,000,000 last September, but is down from $3,200,000,000 at June 30. The increase from September last year reflects our borrowings for the AAG acquisition in the Q4 of 2017.
Our debt arrangements vary in maturity and currently the average interest rate on our total debt stands at 3%. We're comfortable with our current debt structure and have a strong balance sheet and financial capacity to support our growth initiatives, including strategic acquisitions and large investments such as AAG and the Anenco Group in Australia, which we believe serves to create significant value for our shareholders. So in summary, our balance sheet is a key strength of the company. Turning to our cash flows. We have generated $926,000,000 in cash from operations for the 9 months in 2018, which is much improved from the last year due to the increase in net income and the improved working capital position.
Our cash flows continue to support our ongoing priorities for the use of our cash, which we believe serves to maximize shareholder value. For 2018, we're increasing our projected cash from operations to the $1,000,000,000 to $1,100,000,000 range, up from our previous guidance of $950,000,000 to $1,000,000,000 Likewise, we expect free cash flow to be in the range of 400 to $450,000,000 Our priorities for cash remain the dividend, reinvestment in our businesses, share repurchases and strategic acquisitions. Regarding the dividend, 2018 represents our 62nd consecutive year of increased dividends paid to our shareholders. Our 2018 annual dividend of $2.88 represents a 7% increase from 2017. We've invested $92,000,000 in capital expenditures thus far in 2018 and for the year we're planning for capital expenditures in the range of $175,000,000 to $200,000,000 which accounts for the impact of AAG and certain technology, facility and productivity investments that we have planned for in association with our tax savings.
Regarding our share repurchase program, we have 17,400,000 shares authorized and available for repurchase, and we expect to be active in the program over the long term. We continue to believe that our stock is an attractive investment and combined with the dividend provides the best return to our shareholders. So now let's turn to our guidance for 2018. Based on our performance thus far in 2018, our growth plans and initiatives, including our announced acquisitions and the market conditions that we see for the foreseeable future, we expect total sales for 2018 to be in the range to of +14 percent to+15 percent, and this guidance excludes the benefit of any future acquisitions and represents an increase from the previous guidance of +13 percent to +23 percent total sales growth for the automotive segment, which is an increase from the previous guidance of +21 percent to +22 percent. Plus 7% to +8 percent total sales growth for the Industrial segment, which is an increase from the plus 6 percent to plus 7% previously.
And a sales decrease of -1% to -2% for business products, which has improved from the prior guidance of down 3% to down 4%. On the earnings side, we currently expect adjusted earnings per share, excluding any transaction related costs and fees incurred during the year, to be in the range of $5.60 to $5.70 This represents a small change from our previous EPS guidance of $5.60 to $5.75 and better reflects our performance through the 9 months as well as our expectations for the Q4. So that's our financial report for the Q3, and we're pleased to build on the positive momentum from the first half of twenty eighteen and show progress in several areas, including SG and A, our total operating margin and working capital. As we noted before, further progress in these areas remains a top priority for us as we move forward. And at this point, I'd like to turn it back to Paul.
Thank you, Carol. In our closing comments last quarter, we alluded to a few areas requiring improvement and we outlined our plans to drive these improvements. We called out the need to show progress in our core operating results, specifically our U. S. Automotive margins.
We discussed the need to drive core sales growth to better leverage our fixed expenses. We also discussed rising costs and the need to aggressively attack operating costs while continuing to provide exceptional customer service. We are pleased we can report progress in just about every facet of our U. S. Automotive operations along with our other business units.
As we look to the highlights from the Q3, there are many. Sales remained strong at $4,700,000,000 and up 15%. Comp sales were up 4.3%, our strongest comp increase in almost 4 years driven by improvement across all of our business segments. Automotive comp sales plus 3%, including a 3.2% increase for our U. S.
Operations, the strongest comp since Q1 of 2016. Industrial comp sales at plus 7%, the strongest comp since Q4 of 2014. And finally, Business Products grew comp sales 1.3%, their strongest comp growth since Q3 of 2015. We saw continued gross margin expansion and improving SDA expense trends. Our operating margin expansion driven by 30 basis point improvement in Automotive and 20 basis point improvement in industrial.
Adjusted EPS of $1.48 was up 29% And we strengthened our balance sheet and improved our operating cash flows with excellent working capital management. We announced strategic acquisitions with automotive adding TMS and Platinum in Europe and Hastings in the U. S. And Industrial adding HSC. And finally, we increased our full year sales guidance to plus 14% to plus 15% and we fine tuned our full year adjusted EPS guidance to plus 19% to plus 21% over last year.
So it was a productive quarter for GPC and we entered the final quarter of 2018 with plans and initiatives to further improve on our operating results. We remain committed to an organic and acquisitive sales strategy to drive long term sustained revenue growth, while also focusing on the continued improvement in our gross margins and cost management. We are excited for the future and as always, we look forward to updating you on our progress when we report again next quarter. With that, we'll turn it back to the operator and Carol and I will be happy to take your questions.
Thank you. We will now be conducting a question and answer Our first question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question.
Thanks. Good morning.
Good morning, Chris.
Nice acceleration in Napa U. S. And upside in industrial. Thank you. I wanted to ask a little bit about the do it for me side of NAPA in the U.
S. Looking at the past few quarters, we had you about down 1% in the U. S. Do it for me in 1Q and then up a similar modest amount in 2Q. It seems like the do it for me side accelerated to call it a 4% to 5% trend.
Is that about right? And broadly, can you talk about the category performance that you saw that drove this acceleration?
Sure, Chris. Happy to do so. When you say category, you're talking product categories, Chris?
Yes, please.
Yes. So strong, strong quarter in our battery business, strong quarter in our filter business. Those two categories are 2 of our single largest categories. We had another good quarter in our tool and equipment business. So those would be 3 that certainly would warrant being called out.
But we also I called out Auto Care, our NAP Auto Care business, which was a $1,000,000,000 plus business for us. We had our really our second really good quarter in a row. Many of the initiatives our team has put into place are beginning to take hold, which is great to see. And on the major account side, our nationally branded chains all showed solid growth in the quarter as well. So a combination of things and Chris, we always talk about the weather that certainly did not hurt us at all in the quarter as well.
So I had a question about that. I mean, I could understand having strong AC business given the hot summer in July August in the battery, but you commented that September was your best month, I think in the U. S. On a day basis given the extra Sunday that you had. So what would you attribute the strength in September to?
Is it just that sort of lagged effect? Is it more pricing coming through on the inflation front? Any comment there?
Well, September was still again, if you go back to the weather, Chris, September was still a really warm month in many of our markets. But I think it's also, as we have said many, many times on these calls that the weather tends to build on itself. So you had a really cold winter followed by a hot summer. That hot summer, the batteries and the like aren't going to fail immediately when you hit the months of June July. It does tend to build on itself.
And I think what we saw with our strong average daily sales in September was just really the culmination of all that wear and tear and certainly we saw it in the failure, failure type products as well as the maintenance products.
Yes. And then understood. And then the last question is on the inflation front, I mean some of the CPI data seems to be accelerating here in the Q3. You talked about auto inflation, I think 40 bps cumulatively through the 1st 9 months. And I think the first half was sort of flat.
So does that imply that maybe 100 bps of the comp acceleration is pricing coming through on the inflation front?
Yes. I think on the inflation front, we did see a bit of inflation in Q3. And you mentioned the 40 bps that really is what we saw in the latter part of the 9 months. We'd be lucky to get to a full point by the end of the year, maybe more like a half to maybe 3 quarters of a point at the end of the year, excluding any kind of tariff impact. So again, positive for us to see, but truly not a significant impact on our true same store sales.
I mean, we had just as Paul mentioned, strong commercial growth, with a couple of our major wholesale type programs and improvement across the board in a lot of product categories.
Understood. Thanks very much. That's great.
Thanks, Chris.
Our next question comes from the line of Scot Ciccarelli with RBC. Please proceed with your question. Hi, Ciccarelli with RBC. Please proceed with your question.
Hi. This is actually Jonathan Leivas on for Scott this morning. Thank you for taking my question and really nice quarter guys.
Thank you. Thank you.
Yes. Could you give us a sense of what geographies performed well, especially in the U. S. Auto side of the business?
Yes, happy to, Jonathan. We saw real strength in some of our biggest markets. We were certainly led in the quarter by our Midwest business. Our Midwest team had a terrific quarter with strong single digit comps. Our Northeast part of the country also had a very strong quarter and that team has been performing well all year.
Some of our warmer markets, the Southeast and Southwest performed well. Again, the Southeast has been stepping up most of the year for us. So those would be those would be 4 that I would definitely call out.
Yes. Thank you for that. And just a quick follow-up if I could. What kind of could you perhaps quantify or discuss, you mentioned it briefly at the beginning, but the impact of Hurricane Florence in the quarter that had on the business? I know you just mentioned the Southeast was strong, but any impact it had there?
Yes. So, well, first off, Jonathan, I appreciate you asking that question. We had 2 events. One really hit in October and that would be Michael, but Florence definitely had an impact across our business and more in our Atlantic division, which is up in the Carolinas. We had close to I think 100 stores closed at one time in Napa, but we also had many of our motion branches that were closed.
We'll pick up some of those sales with storm related type products, generators, cleanup supplies and the like. And but I will tell you a good bit of our focus was really assisting both our associates as well as our independent owners just helping get back on their feet and recover from some of the damages in the stores. Michael, which as we know was I think the worst hurricane to hit the U. S. In 50 plus years.
We still have parts of the Panhandle that do not have electricity. We had stores as well as motion branches in the Panhandle. Panama City had significant damage, significant water damage, but other stores in the Panhandle as well as South Georgia as well were impacted.
Got it. Thank you very much for the color.
You're welcome.
Our next question comes from the line of Matt Fassler with Goldman Sachs. Please proceed with your question.
Thanks so much. Appreciate it. I want to start with a couple of quick ones on automotive. First of all, you spoke about the pace of the trend through Q3 and through September in particular, can you talk about the organic automotive comp implied in your guidance for the Q4?
Sure. What we're implying for an automotive comp guidance would be similar to where we are through the full year. So if you look at automotive and our total automotive comps excluding AAG, through the 9 months is around 2 percent. So we would assume in Q4 that we would have 2% to 3% comps, but maybe more towards the 3% range. So that's implied in our guidance.
Got you. And I know that we're only on October 18, so it's only 18 days. Anything that you've seen quarter to date to shake you off that?
Well, that's consistent with what our implied Q4 guidance is. So again, we're going to be comfortable with that range.
Got you. Understood. And then second question, in industrial, you spoke about some of the factors, some of the crosswinds, I guess, impacting the ability to leverage in that business and your sales have clearly recovered and you're closing the gap with your peers on the comp store sales line as well. Can you talk about what you need to see or what you can do to extract more leverage from that sales strength? Is it a function of industry conditions?
Is it a function of getting the comp above that 7% level? If you could talk maybe if there are cost initiatives that are underway and I know you referred to some of them that you think could get more traction as we move through the year and then into 2019?
Yes. So, great question. And look, we are pleased with, where industrial is from a sales basis. And actually, as we've called out all year, they've had really nice improvement on the gross margin line. So for the quarter year to date, nice close to 40 bps improvement on the gross margin line.
Where the headwinds are is in SG and A. And as we've pointed out all year, I mean, they saw, as with many businesses, significant increase in freight and freight related costs. So to the tune of 20 to 25 basis points is what we're seeing. We saw it Q2 and seen it in Q3. Also have some payroll pressures, which again we've talked about before.
So it's causing them despite having the strong 7% growth, causing them not to quite have as much leverage on the SG and A side. Having said that, our industrial teams are working really hard, to make sure that they can pass along, these increases and look forward to passing those along. You don't always are able to pass it along as quickly as you'd like because so much of their business is under contract. But they're working hard to kind of drive the freight recovery through higher costs of invoicing. And they're also looking to leverage better on their staffing levels and just overall SG and A.
So again, we see improvement there, but really the things that are holding us back are on the SG and A line.
And Matt, I would just add to that. The team at Motion is always looking at opportunities to consolidate facilities and branches where possible and where necessary. We're also looking at further investing in productivity enhancing technology in our operations as well. And then last is, as we do in our automotive business, we're just looking constantly at tools that will help us optimize our pricing approach and pricing strategies.
Understood, guys. Thank you so much for that.
Welcome. Thanks, Matt.
Our next question comes from the line of Elizabeth Suzuki with Bank of America Merrill Lynch. Please proceed with your question. Great. Thanks. Good morning, guys.
Just one question on, as we look out to next year and you guys start to do your planning, do you think there's any reason to believe that if we have a normal winter that demand would, for some reason, be slowing in 2019 in the auto business, particularly versus 2018? I mean anything in like the macro or demographics that you're seeing, fleet of vehicles that you think is would be cause for concern on the demand side?
Elizabeth, thanks for your question. No, there is nothing on the horizon that would suggest that we should see a slowdown in our parts business here in the U. S. If anything, we think some of the tailwinds that we'll get from the car park, the aging of the car park as we further distance ourselves from 2,008 and 2,009 will actually be a benefit. So you started out with assuming we have normal weather, That's always an impact.
We'll just we'll continue to hope for the best. But no, we're bullish on our parts business here in the U. S. And expect to see it to continue to perform well.
Great, thanks.
You're welcome.
Our next question comes from the line of Seth Basham with Wedbush. Please proceed with your question.
Thanks a lot and good morning.
Good morning, Seth.
My first question is on gross margins, another good performance, of course, driven by AAG. I was hoping you could quantify the contribution of the gross margin increase from AAG as well as the gross margin improvement in the U. S. Auto business?
Yes. So what I would speak to on gross margin, if you strip out the impact of AAG, our gross margin in the quarter was up probably 20 basis points to 25 basis points. And I would say that that came from a combination of the industrial improvement that I talked about earlier and also the U. S. Automotive improvement as well.
Now these are being offset by a decline on the business product side, which is primarily related to the mix issues that we've faced basically all and we would expect to be able to continue to see, improvement. And we would expect to be able to continue to see improvement there.
Got it. So with industrial up 40 bps or so, I would suggest the U. S. Auto business is probably up somewhere in the 20 bps range year over year for the quarter?
Yes, that's a fair estimate.
All right, great. Thank you. Then secondly, as we think about the impact of tariffs, you guys mentioned that you expect to be able to pass along any tariffs that you price increases related to tariffs going forward. Can you give us some perspective on if you've already started raising prices as of tariffs and if you've been able to recoup all those costs?
Yes. So I think the first comment I've mentioned is on the industrial side, you saw pretty heavy inflation that they've seen year to date, 3.2%. That some of that is indirectly tariff related because there are a number of their manufacturing partners that have materials and components from China that could be part of their final product. So there is some implied tariffs that's in the industrial business and we talked about passing that through and there is a little bit of a lag there. But as it relates to the automotive side and business products, I mean, through the 9 months, we would say that there was minimal impact of tariffs.
As you know, the more significant tariff, the List 3 came into effect the last quarter of or the last week in September. So as we look ahead on that, we would expect to be working and we have been working very closely with our suppliers, and our intention would be to pass those along to the customer.
Hey, Seth, I would just add a couple of comments to what Carol said. One of the things that doesn't get talked about much as we discuss tariffs, there's a positive outcome to the situation with tariffs as well and that's promotion. If you recall, one of our top performing business segments this past quarter is in iron and steel. We've got mills coming back up online in the U. S.
And those are a few of our biggest customers for Motion. So that business is benefiting from the tariffs, continues to do very, very well. But at the end of the day, Seth, our expectation is that we will pass along the price increases as we have in the past. But I would also tell you that we'll monitor the situation very closely. We'll watch where we are lining up competitively in the marketplace and we'll
As a mitigation strategy, would you look to find other sources for some of those products coming from China?
Yes, we would, Seth. And I would just say that the 40% is our total amount of our imports coming into the Automotive Parts Group. We would say directly out of China is closer to 20%. But as I said, we'll continue to monitor it. And if we have to look for alternative sources, we will do so.
The advantage of having an extremely strong brand like Napa is we can shift and we can shift very quickly to other countries and other sources if we find that we can't remain competitive in a particular market.
Got it. Thank you very much and good luck.
Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.
Hi, good morning guys. Hey, Bret. A question on AAG, and as you lever working capital, I guess, how have done on an AP to inventory basis in Europe? And then as you build in incremental businesses like the battery distribution, how do we think about maybe EBITDA margins looking out a year or 2 given the business mix?
Yes. So I'll start off with our core existing business, primarily automotive with the impact of some extended terms with some of our U. S. Vendors and then also more normalized level of purchasing. So we have not seen the impact of the working capital improvement specifically for AAG.
But having said that, we've got a number of things in process, and we know that we will be able to achieve both the synergies and the working capital improvement within the next at the end of 3 years is what we've got out there. So we're certainly encouraged by the opportunities we have coming on working capital from AAG and know that there are opportunities there.
And then, Brett, I would just the second part of your question, with some of our acquisitions, our expectations is those will not be dilutive to our overall margins. And as you know, we've been quite active on the M and A front in Europe and we intend to continue to be. I think what has been encouraging for us in 2018 is our core growth and we continue to see same store sales in the 4 markets we currently compete in, in the 3% to 4% range. And that's been that's honestly been very encouraging for us and we expect that and intend to keep that moving forward. We're excited with the acquisitions of both TMS and Platinum and then Hennig, which will be, we suspect, finalized in Q4.
All three will be additive to AAG in 2019.
Okay, great. And then one final question on the U. S. Auto. You mentioned national accounts were strong.
Have you picked up new national accounts? Or is this strength with existing national accounts? I'm just I guess the real question is, is your 3.2 U. S. Comp, do you think that that's a share gain number?
Or do you think that was sort of in line with the underlying market growth?
Well, I guess, Brett, we'll have to wait and see how the other public companies report. You never quite
was hoping you
were going to tell us.
That was the point.
When you're the first one out, you'll have to kind of wait and see. But look, we're pleased with the 3.2. And as I said in my prepared remarks, Brett, our team has worked awfully, awfully hard and it's great to see the turnaround and the continued sequential improvement in our same store sales. I would just give you a little bit more color on our major account business. The growth that we're seeing, I called out our nationally branded chains.
They are doing well. Where we've seen a little bit of a softness is in some of our government business and a bit of our fleet business. And that's an opportunity for us to get that back on a growth curve in Q4 and on into 2019.
Our next question comes from the line of Greg Melich with MoffettNathanson.
Hi, thanks and great quarter guys. I wanted to follow-up on a couple of things. I think you mentioned that pressure was more on SG and A and you mentioned freight costs showing up in SG and A. Is that the reason that the guidance actually was unchanged or trimmed a little bit at the top end despite sales being stronger? Was there anything else that sort of factored into that the guidance shift calculation?
Yes, I'll just mention and you're right on the payroll and the freight, both of those in Q2 and also Q3 are growing at a pace much greater than our sales. So if sales are growing without AAG 5%, freight and delivery is up something like 10%, 11% and payroll is up 6% or 7 percent. So you're certainly seeing that and we're expecting that to continue in Q4. The real modification and again, we were pleased to be able to raise our sales guidance when we considered where we were thus far in 9 months, consider the acquisitions and then quite honestly, net of an FX headwind, we were pleased to raise the sales guidance. We really just fine tune the earnings guidance based on where we are thus far.
And look, FX had a negative impact of, let's say, $0.02 in the quarter and there may be a little bit more pressure in Q4. As I mentioned, we still have the pressures from payroll and freight. We called out a little bit of a corporate expense number too. So just really just narrowing refining where we think we're going to be based on where we are through 9 months.
Got it. And Carol, another follow-up on the balance sheet and then Paul had a strategy question. We're at a level now we have, I guess, 1.5 times debt to EBITDAR, so plenty of ability to do other things. When the new lease accounting comes in, we get back to around 3 times debt to EBITDAR. Is that do you think about a rough add a little bit over a turn when we think about the new standards or you haven't been able to look at that yet?
Actually, if we were still looking at that. When you look at our minimum lease payments, which is something like $1,100,000,000 and when you add some of the other items that will go in there, You're probably fairly close, but quite honestly, as I think all companies are facing this, I think there'll be a consistent change in how everybody looks at this and whether everybody pulls it out and looks at it without leases or it just adjusts. But again, the idea is we have a reasonable level that we're at right now. We certainly have capacity and flexibility. And with our working capital improvement, we're really pleased with that.
So I don't think the lease number is going to change the basic strategy of our capital allocation or our debt or our acquisition strategy.
Got it. And Paul, there's been a lot of, you mentioned the retail side of the auto business. For the first time in a while, it's great to see do it for me growing faster than it. But we have seen a lot of competitive shifts and actions going on this summer and just this week, Advance doing a store within a store with Walmart. I'd like to just hear your opinion if something like that would be interesting to sort of or is it something that could put too much conflict with the do it for me side of the business?
Or are there other considerations that you think about just thinking about doing something like that?
Yes. Greg, as far as yesterday's announcement, it's a bit early for us to have any real specific reaction. We didn't really get any detail as what their plan is or how the mechanics of this are going to work. What I would tell you from Genuine Parts Company and NAPA, what we're excited about and we'll continue
to invest in is
our own which is our flagship here in the U. S. We're seeing over 3.5 which is our flagship here in the U. S. We're seeing over 3,500,000 visits now per month.
We have customers both click and collecting in our stores as well as having products shipped directly to home. To our
new site there and
averaging 25,000 a day. To our new site there and averaging 25,000 a day in terms of site visits. We launched in Canada as well. So we're focused on our omni channel strategy. Greg, feel good about what we're doing.
We feel good. And I'm glad you called out that our commercial business, which is our real focus. And when you think about the new sites and the announcements of yesterday, I think that's going to be more DIY centric than it would ever be DIFM centric.
Got it. Thanks a lot and good luck.
You're welcome. Thank you.
Thank you. Due to time constraints, our final will come from the line of Chris Bottiglieri with Wolfe Research. Please proceed with your question.
Hey, thanks for fitting in. I want to follow-up on the 20% China, it sounded lower than I was expecting. Is that just the direct source mix or does that include Chinese sales from U. S. Suppliers that they're sourcing in China?
Yes, it's both. And again, I just want to be clear that what we gave out, so for our U. S. Automotive business, which again is probably about, if you look at our total cost of goods sold for the company, U. S.
Would be, say, 75% to 80%. When you look specifically at automotive, we said 40% is directly sourced outside the U. S. And 20% of that would be China impacted by tariffs. And so as we work and look down through industrial, I mentioned, very, very small amount, it's more indirect.
Office products, we would have something like 10% of their cost of goods sold that's subject to the Chinese tariffs, even though they source a lot more outside the U. S, there's products that aren't subject to it. So at the end of the day, when you look for GPC in total, you're talking about less than 10% of our cost of goods sold in total, something more like maybe 7% or 8% that's impacted.
Chris, I would also you start to break it down on the automotive side and you start to look at the various product categories that are impacted that we know of right now. You also need to look at what's not impacted. So our biggest categories, which I mentioned earlier, where we saw significant growth in Q3, batteries, filters, oil and chemicals, none of those product categories are impacted by the tariffs. The tariffs really you're looking at undercar, some brake rotors, friction, chassis type products. So, yes, it's impactful.
We've got cross functional teams working between our pricing groups, our sourcing groups, our product groups that are pouring through the data. And again, as I said in my earlier comments, our intention is that we will pass it through as we normally do, but we will also continue to monitor where we are from a competitive standpoint.
That's really helpful. And then these numbers you provided, are those just tariffs that have already been passed or does this include proposed tariffs that haven't officially been passed there yet?
So what we're talking about is the List 3, the 10% tariff, about $200,000,000,000 in goods that just went into effect at the very end of September. And so what we're talking about is what is specifically impacted by the ones that have just been passed.
Got you. Okay.
And remember, sorry, there was no really no impact, virtually no impact on our business through the 9 months.
Got you. That makes sense. And then just unrelated, I was hoping you could give an update on your U. S. Fleet business, I would think with like rig count and oil kind of rebasing.
Just want to get a sense for how that business is performing and to what extent that's contributing to your high levels of commercial comp growth?
Yes. I mentioned earlier, Chris, when I break down our major account business, you really got to get into the detail and look at the various segments. Our major account business was basically flat, down slightly in Q3. But our nationally branded chains all performed well in the quarter. Where we saw some where we saw a bit of softness was in our fleets and some of our government business.
So our team is working really hard to understand where some of that softness is coming from in the fleet business and we're going to work really hard to turn that around in Q4 and heading into 2019.
Got you. Okay, that's helpful. Thank you for the time.
All right, Chris. Thank you.
Thank you. We have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments.
Well, we want to thank each of you for listening to and participating in our earnings call today, and we look forward to reporting back to you with our Q4 results in February. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.