Greetings, and welcome to the Genuine Parts Company Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Sid Jones, Senior Vice President of Investor Relations.
Good morning and thank you for joining us today for the Genuine Parts Company Q2 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 EDP and Chief Financial Officer. Before we begin this morning, please be advised that this call may include certain non GAAP financial measures, which may be referred to during today's discussion of our results as reported under Generally Accepted Accounting Principles. A reconciliation of these measures is provided in the earnings press release issued this morning, which is also posted in the Investors section of our website. Today's call may also involve forward looking statements regarding the company and its businesses.
The company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest SEC filings, including this morning's press release. The company assumes no obligation to update any forward looking statements made during this call. Now, let me turn the call over to Paul.
Thank you, Sid, and welcome to our Q2 2018 conference call. We appreciate you taking the time to be with us this morning. Earlier today, we released our Q2 2018 results. I'll make a few remarks on our overall performance and then cover the highlights across 3 businesses: Automotive, Industrial and Business Products. Carol Yancey, our Executive Vice President and Chief Financial Officer, will provide an update on our financial results and our current outlook for 2018.
After that, we'll open up the call to your questions. So to recap our 2nd quarter performance across our global platform, total sales were a record $4,800,000,000 up 17.6 percent, driven by the favorable impact of strategic acquisitions and a 3.4% comp sales increase, which has improved from the plus 2% in the Q1. Net income was 227,000,000 dollars and earnings per share at $1.54 was also a new record. Excluding the impact of transaction and other costs related to the acquisition of Alliance Automotive Group and the agreement to spin off the Business Products Group, adjusted net income was 234,000,000 dollars up 23%, and adjusted earnings per share was $1.59 also up 23%. As we look to our Global Automotive Group, total sales were 27.7% in the 2nd quarter, including an approximate 2.1% comp sales increase, which compares to a 1.5% increase in the 1st quarter.
We are pleased to see our comps headed in the right direction. We also had the benefit of acquisitions and favorable foreign currency translation. Breaking it down further, sales for our U. S. Automotive operations were up 4% in the 2nd quarter, with comp sales up 1.5% and improved from the Q1.
We were encouraged by the positive shift in the underlying sales environment for this business, which we believe reflects a continuing favorable effect of this winter's more normalized weather as well as the summer heat across most of the U. S. In both May June. After a slow start out of the gates, largely due to the cold and wet conditions at the start of spring, our sales were much improved in both May June. By market segment, sales to our retail customers continue to outpace sales to the commercial segment.
Although our commercial comps were improved from the Q1 and reflect our strongest results over the past 9 quarters. By customer segment, we are encouraged to see stronger results in both NAPA Auto Care and major account sales. NAPA Auto Care sales were plus 3% for the quarter, while major account sales were up slightly for their first positive comp in several quarters. Looking ahead, we believe the improving conditions for underlying sales demand, combined with our ongoing initiatives, continue to enhance our value added services for both existing and new commercial customers. This should drive further sales growth in the upcoming quarters.
Turning to our retail business, we remain pleased with the continued solid growth in this segment, due primarily to initiatives like the NAPA rewards program, expanded store hours and our retail impact store project. These initiatives continue to drive incremental sales growth. And while retail remains at 20% to 25% of our U. S. Automotive sales, it is an important segment of the overall market.
In summary, we are encouraged by the improvement in our U. S. Automotive comp sales in the Q2, and we expect to see demand across the aftermarket continue to strengthen. As we head into the second half of twenty eighteen, we are seeing the positive shift in demand for failure and maintenance parts due to the continuing impact of more normalized winter weather patterns and the record heat across much of the U. S.
Thus far this summer. We expect the number of vehicles in the aftermarket sweet spot to further stabilize and ultimately become a tailwind in 2019 and into 2020. The long term fundamental drivers for the automotive aftermarket remain sound with a growing total and aging fleet and an increasing increase in miles driven among consumers. We also expect our ongoing acquisitions and overall footprint expansion to positively contribute to our future sales. In addition to the 5 Smith Auto Parts stores added to our U.
S. Network in March, which we discussed last quarter, we recently added the Sanal Auto Parts to our network of independent NAPA Auto Parts stores. SANAL Auto Parts is a 44 store 4th generation business with market leading position in New Hampshire, Vermont and Maine markets. SANIL represents the largest independent changeover in the history of NAPA, and we want to welcome both David and Bobby Siegel and the entire Sannal team to the NAPA and GPC family. The addition of Smiths Auto and Sanal Auto Parts to our overall store network as well as other accretive tuck in acquisitions remain an important part of our growth strategy and we see additional opportunities to expand our U.
S. Store footprint. So now let's turn to our international automotive businesses in Canada, Mexico, Europe and Australasia. Collectively, these operations delivered a 2nd consecutive quarter of 6% total sales growth, including a 2% comp sales increase and accounted for approximately 40% of our total automotive revenues. Starting with our other North American automotive operations, total sales were up mid single digits at both Napa Canada and in Mexico.
In Canada, sales were driven by low single digit comp sales growth and acquisitions, including the addition of Universal Supply Group on December 31, as we discussed last quarter. The Napa Canada team remains focused on their initiatives and with positive industry fundamentals and a stable economy at their back, we expect continued growth in our Canadian operations over the balance of 2018. Now turning to Alliance Automotive Group. This business continues to operate well across its European footprint in France, the UK, Germany and Poland. The team at AAG posted mid single digit sales comps for the 2nd quarter and continues to benefit from ongoing acquisitions.
AAG remains on plan for both sales and profit, and we are pleased with the continued progress on our integration plans, including our initiatives to drive synergies. As mentioned before, AAG's robust acquisition strategy resulted in additional bolt on acquisitions again in the Q2. We also announced on June 7, the addition of the Hennig Group in Germany, a leading supplier of light duty and commercial vehicle parts. Hennig has 31 branches across Germany and is expected to generate annual revenues of approximately $190,000,000 We are excited to welcome the Hennig team to our German operations and expect to close on this transaction in the September October timeframe. The addition of the Hennig business, a full pipeline of other potential acquisitions and our continued focus on underlying core growth is supported by relatively solid economic and industry fundamentals.
We are encouraged by the opportunities we see for our European operations and are confident that the AAG team will drive strong results through the balance of the year and beyond. In Australia and New Zealand, total sales in local currency were up mid single digits, while comp sales were up low single digits in the 2nd quarter, consistent with the Q1. The Asia Pac team is doing an excellent job of balancing their strategy to generate both comp sales growth and accretive acquisitions, including important e commerce investments to enhance our digital capabilities. We expect our continued focus in each of these areas, coupled with sound economic and aftermarket fundamentals to drive continued solid results. Before we launch into a review of our industrial business, allow me to summarize our global automotive results.
After a slow start to the quarter, our U. S. Business rebounded in the months of May June and finished out the quarter with improved comps. Our European acquisition, AAG, continues to outperform and we expect continued great things from this team. Our remaining international automotive businesses in Australasia, Canada and Mexico continue to perform to plan, and we are optimistic for a solid second half from this group.
So now let's turn to our Industrial Parts Group. We are pleased to report the sales environment for this business remains positive. Total sales for industrial were up 8.7% in the 2nd quarter, including 6.5% comp sales growth plus the benefit of acquisitions. These increases improve on the already solid growth we reported last quarter and reflect the positive impact of our ongoing growth initiatives and favorable economic and industry specific factors. These would include the continued strength in major industrial indicators such as Purchasing Managers' Index, industrial production, active rig counts and U.
S. Exports. In addition, 13 of our 14 major product groups, including the Electrical Specialties Group posted sales gains and all 12 of the top industries we serve were up as well. The aggregate and cement, equipment and machinery, chemicals and allied products industry sectors were especially strong, with each showing low double digit increases. The broad strength across our products and customer base indicates a strong industrial economy, a promising sign for the balance of 2018 and well into 2019.
Our industrial management teams at Motion and EIS continue to work closely together and are making progress to generate additional revenue opportunities, economies of scale and improved efficiencies in the combined organization. The combination of these two businesses into a larger and stronger industrial group was absolutely the right decision for our teams and the opportunities we see ahead for this business are encouraging. As we look to the second half of the year, we expect continued strong results from the Industrial Group. We also remain pleased with the ongoing growth at Inenco, the Australian based industrial distribution company we partnered with in 2017. This business is performing well, having just closed its fiscal year with a record setting performance.
This group surpassed the A500 $1,000,000 threshold for the first time in their fiscal year 2018. As the NCO further expands its footprint across Australia and New Zealand with acquisitions such as HCD Flow Technology in New Zealand, which we announced last quarter, while they also expand their presence in Indonesia and Singapore, we are further encouraged for the future growth prospects for this business. As a reminder, we currently have a 35% investment in Anenco, and we look forward to further investing in this business within the next 12 to 18 months. This quality organization will be a great addition to our global industrial group. Now a few comments on S.
P. Richards, our business products group. This segment reported flat sales for the 2nd quarter, which was a vast improvement from the 5% decrease recorded last quarter. While this business faces headwinds and the demand for traditional office products, our diversification into the facilities, break room and safety supplies category is offsetting some of these headwinds. With that said, we continue to work towards the closing of our definitive agreement with Ascendant announced back on April 12, whereby GPC will spin off the S.
P. Richards business and merge it with Ascendant, another national business product wholesaler. As discussed last quarter, this transaction made sense for several reasons. Primarily, the newly combined company is in the best interest of all stakeholders as it will be better positioned to effectively compete in the business product space with greater ability to support their customer community. Additionally, this allows GPC to further strengthen our focus on our core and larger higher growth and more profitable automotive and industrial businesses.
Since we last reported on April 19, you are likely aware of several developments involving this transaction with Ascendant. Despite these developments, our agreement remains in place and subject to regulatory and Ascendant shareholders approval. We continue to expect to successfully close on the agreement. We believe the combination of Ascendant along with S. P.
Richards creates a stronger, more diversified business as together these talented management teams and complementary cultures with a shared commitment to serving customers will be better positioned for future success. Likewise, for employees, the new company will have the scale and depth to compete more effectively. We look forward to supporting the S. P. Richards and Ascendant team in facilitating a seamless integration.
So that is a summary of our consolidated and business segment sales results for the Q2 of 2018. We are pleased to report improved results with many positive developments to build on as we move through the back half of the year. 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 an update of outlook for our 2018. Our total sales in the Q2 were up 18% or up 3% before acquisitions and a slight benefit from foreign currency translation. Gross margin for the 2nd quarter was 31.55% compared to 30.24% last year. Consistent with the Q1, this strong increase primarily reflects the higher gross margin associated with AAG and other acquisitions, as well as the benefit of increased supplier incentives in our industrial business.
These items were partially offset by lower supplier incentives for the Business Products Group. We remain focused on enhancing our gross margins through several key initiatives, including continued supplier negotiations both globally and across our businesses, the ongoing investment in more flexible and sophisticated pricing strategies and improved analytic capabilities around product and customer profitability. The pricing environment has been somewhat inflationary in our Industrial and Business Products businesses thus far in 2018, and we would expect this to continue with the ongoing rhetoric around new tariffs. With the latest round of tariff talk, we could also see an inflationary impact in automotive. However, there is still a fair amount of uncertainty around its timing and ultimate impact.
With that said, we expect to be able to pass along any increases to the customers. Our cumulative supplier increases through the 6 months of 2018 were flat for automotive, up 2% in industrial and up 1.1% for office. Turning to our SG and A, total expenses for the Q2 were $1,220,000,000 representing 25.33 percent of sales. This is up from last year due to the higher operating cost model at AAG as well as incremental depreciation, amortization and interest associated with the acquisition. In the quarter, we also incurred $9,000,000 in transaction and other costs related to AAG and the pending transaction to spin off S.
D. Richards. In addition, we continue to experience the lack of leverage on our comparable sales in the Automotive and Business Products segments as well as ongoing pressure from rising costs in areas such as payroll, freight and delivery, IT and digital. Finally, as we discussed in prior calls, we increased the level of technology and productivity investments this year, which we believe will generate longer rising cost environment and generate meaningful savings. This is essential as we work to improve our operating margin in the automotive segment and specifically the U.
S. Automotive business. This is a top priority for us and we're fully committed to taking the necessary steps to get this done. Now let's discuss the results by segment. Our automotive revenue for the Q2 was $2,700,000,000 up 28% from the prior year, and operating profit of $244,000,000 was up 18% with an operating margin of 8.9% compared to the 9.7 percent margin in the Q2 of 2017.
Primarily, the decline in operating margin reflects discussed. Our industrial sales were $1,600,000,000 in the quarter, a 9% increase from quarter 2, and our operating profit of $125,000,000 is up 12% and our operating margin is 7.8% compared to 7.6% last year with the 20 basis point improvement due to a solid gross margin and improved leverage on our expenses with a 6.5% comparable sales increase. We expect to see continued margin expansion at Industrial over the balance of the year. Business products revenues were $483,000,000 flat with the prior year and their operating profit of $21,000,000 is down 29 percent with an operating margin of 4.4%. Although we saw sales stabilize for this group in the 2nd quarter, the business product segment continues to operate in a challenging environment and faces unfavorable products and customer mix shifts.
Both of these issues are pressuring their profitability. Our total operating profit in the 2nd quarter was up 12% on the 18% sales increase, and our operating profit margin was 8.1 percent compared to the 8.5 percent last year. This change in margin is consistent with the Q1, and as we said $25,500,000 in the quarter and for 2018 we expect net interest expense to be in the range of $98,000,000 to 100,000,000 dollars which is an increase from our previous guidance of $93,000,000 to 95,000,000 dollars for the Q2, which is an increase from the prior year due to the amortization related to AAG. For 2018, we're updating our full year amortization to be $88,000,000 to $90,000,000 which is up from the prior guidance of $83,000,000 to $85,000,000 Our depreciation expense was $31,000,000 for the quarter, up $4,000,000 from last year. For the full year, we continue to expect total depreciation to be in the range of $140,000,000 to $150,000,000 And on a combined basis, we would expect depreciation and amortization of approximately $230,000,000 to 240,000,000 dollars The other line, which typically reflects our corporate expense, was $43,000,000 for the 2nd quarter, and this includes $9,000,000 in transaction related costs incurred in the quarter.
Excluding these costs, our corporate expense was $34,000,000 which is consistent with the Q2 of 2017. For 2018, we continue to expect our corporate expense to be in the $115,000,000 to $125,000,000 range, which excludes transaction related costs. Our tax rate for the 2nd quarter was 24.4%, which is an increase from the 23% in the quarter as expected, but down significantly from the 36% tax rate in the prior year, which is due mainly to the benefit of U. S. Tax reform.
In addition, our tax rate was positively impacted by the favorable mix of U. S. And foreign earnings. We are updating our full year estimate for the approximately 25% from the previous estimate of 26%. Now let's turn to a discussion of the balance sheet, which remains strong and excellent condition.
Our accounts receivable of $2,700,000,000 is up 23% from the prior year and up 3% excluding the impact of acquisitions primarily percent increase is in line with our 3% comparable sales increase for the quarter. So we made progress in improving on our receivables during the quarter. In addition, we remain pleased with the quality of our receivables. Our inventory at June 30 was $3,500,000,000 up 5% from June of last year and down 3% excluding AAG, our acquisitions and foreign currency. Inventory at June 30 highlights the positive impact of our current initiatives to improve the inventory levels in our core businesses, and we're very focused on maintaining this key investment at the appropriate levels as we move forward.
Accounts payable of $3,800,000,000 at June 30 is up 16% in total and flat with the prior year excluding AAG, other acquisitions and foreign currency. Our flat core payables is primarily driven by the 3% decrease in inventory, which is resulting from the lower levels of purchasing activity in our U. S. Automotive and business products groups. These factors were partially offset by the benefit of improved payment terms with certain suppliers and at June 30, our AP to inventory ratio was an approximately 110%.
Our total debt of $3,200,000,000 at June 30 is consistent with our debt at December 31 March 31, and it reflects our increase in 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 2.98%. We're comfortable with our current debt structure and we have the strong balance sheet and financial capacity to support our growth initiatives, including strategic acquisitions and investments such as AAG and the Anenco Group in Australia, which we believe creates significant value for our shareholders. So in summary, our balance sheet remains a key strength of the company. Turning to our cash flows, we've generated $455,000,000 in cash from operations for the 6 months in 2018, which has improved from last year.
Our cash flows continue to support the ongoing priorities for the use of our cash, which we believe serve to maximize shareholder value. And for 2018, we continue to project cash from operations in the $950,000,000,000 to $1,000,000,000 range and free cash flow of approximately $400,000,000 Our priorities for cash remain the dividend, reinvestment in our businesses, share repurchase and strategic acquisitions. Regarding the dividend, 2018 represents the 62nd consecutive year of increased dividends paid to our shareholders. Our 2018 annual dividend of $2.88 represents increase from 2017. We have invested $65,000,000 in capital expenditures thus far in 2018, which is up from $54,000,000 in 2017.
For the year, we continue to plan for capital expenditures in the range of $200,000,000 to 220,000,000 dollars with the increase from 2017 mainly due to the impact of AAG and certain technology, facility and productivity investments that we're planning for in association with our tax savings. We have not purchased any of our common stock in 2018 and today we have 17,400,000 shares authorized and available for repurchase. We have no set pattern for these repurchases, but we expect to be active in the program over the long term as we continue to believe that our stock is an attractive investment and combined with the dividend provides the best return to our shareholders. So now let's turn to our guidance for 2018. Based on our current performance, our growth plans and initiatives, as well as the market conditions we see for the foreseeable future, we now expect total sales to be in the range of +13 percent to +14 percent excluding the benefit of any future acquisitions and any impact from foreign currency.
This represents an increase from the previous guidance of +12 percent to +13 percent. By business, we're currently expecting +21 percent to +22 percent total sales growth for the Automotive segment, which is an increase from the previous guidance of +19 percent to +21 percent. +6 percent to plus 7 percent total sales growth for the Industrial segment, which is an increase from the previous plus 4% to plus 5% and a sales decrease of minus 3% to minus 4% for the Business Products Group, which we continue to include in our guidance until the spin off transaction is closer to completion. This estimate is unchanged from the prior guidance. On the earnings side, we continue to expect adjusted earnings per share excluding any transaction related costs incurred during the year to be in the range of $5.60 to $5.75 This EPS guidance includes the benefit of a full year of operations with S.
P. Richards, the Business Products Group. So that's our financial report for the Q2, and we closed the first half of twenty eighteen with positive momentum, and we look forward to building on that over the second half of the year as we address those areas in need of improvement such as our SG and A and automotive operating margin. Again, this is a top priority for us, and we look forward to reporting to you on our progress in the quarters ahead. Before turning it back over to Paul, I'd like to thank all of our GPC associates for their continued hard work and dedication to GPC.
We appreciate all you do, and now I'll turn it back over to Paul.
Thank you, Carol. To recap the Q2, we have several accomplishments to highlight. Although we also have a few areas requiring improvement and we plan to address these head on. We fully recognize the need to show progress in our core operating results, and the key here is to improve our automotive margin, specifically in our U. S.
Operations. To this end, our team is focused on driving core sales growth to better leverage our fixed expenses. We have more work to do to execute on our sales initiatives and maximize the growth opportunities available to us, and we are also focused on ensuring a steady gross margin along with an efficient cost structure. Rising costs in several areas have continued to offset our savings initiatives. So we must work to eliminate even more cost while continuing to provide exceptional customer service.
We are committed to taking action to deliver cost savings in every aspect of our U. S. Automotive business. From an execution standpoint, we can and we will do better. Our team has delivered a much needed lift in revenues this quarter, and now we must increase our intensity around our execution and deliver improved results.
As we look to the highlights from the Q2, there are many to report on. We established a new sales record at $4,800,000,000 and up 18%. We established a new earnings record with EPS of $1.54 up 19%. We improved on our automotive sales comps in our U. S.
Operations, and we continue to perform well in our international automotive businesses. Our Industrial segment produced strong sales growth and improved on their profitability with an expanded operating margin. We stabilized our business product sales and continue to work towards the spin off of this business. We improved the strength of our balance sheet and generated strong cash flows to support our capital allocation plans. We announced a significant strategic acquisition in Germany that will strengthen our position in this key market.
And we increased our full year sales guidance to plus 13% to plus 14% and reiterated our full year adjusted EPS guidance at +19 percent to +22 percent over last year. With these accomplishments, as well as our other action plans to address areas requiring improvement, we entered the second half of twenty eighteen focused on improving our operating results. We will continue to emphasize an organic and acquisitive sales strategy to drive long term sustained revenue growth, and we'll continue to execute on our plans and initiatives to enhance our gross margins, reduce costs and build a highly productive and cost effective infrastructure. We expect our focus in these key areas to improve the operating performance in our core businesses and for the company overall. As always, we look forward to updating you on our progress again in October when we report our Q3 2018 results.
So with that, we'll turn it back to the operator and Carol and I will take your questions.
Our first question comes from Bret Jordan, Jefferies. Please proceed with your question.
Good morning, guys.
Good morning. A
couple of questions on AAG. Sort of mid single digit comp in Europe. Is that do you think better than the market? Are you gaining share there or was the market very strong in Europe?
Brett, I think that overall as we modeled that business and did our due diligence, we believe we're outperforming right now. Our thoughts going into the year would be really on the low side of positive comps, and we out outperformed. And I would really call out our team in the U. K, where we had strong single digit comps in the U. K.
And Germany, we did just fine as well. So a really good performance by the AAG team.
And how do we think about their EBITDA margin? I guess, it sounds like their gross margin is high, but maybe some incremental SG and A in that business mix?
No. Actually, when we look at their operating margin, their automotive businesses. So they actually carry a slightly higher operating margin, and there isn't really any concerns with SG and A with that group. I can tell you, when you have mid single digit comps and you're growing a little bit better than the industry, they're doing a really nice job on the margin side. So they are at plan with where we told you guys back last year with the $0.45 to $0.50 EPS on a full year basis and probably more at the high end of that number.
Okay, great. And then the question I have to ask, any regional performance spreads in the quarter in the U. S?
Yes, Brett. Certainly, the strength for us this past quarter was in our warmer markets. So our Southeastern division had a strong quarter, our Southwestern division had a strong quarter. And if you look out west, we did just fine. They outperformed what we call our colder weather division, so the Midwest, the Central, Northeast, even the mountain.
And again, that April soft start with we had snow across the Midwest still in the month of April, That certainly had an impact on our Northern divisions, but they rebounded nicely in May June.
Okay. And then one last question. You said you would probably be passing through anything you see in tariffs. Have you had any conversations or have your suppliers been opening the conversation about higher pricing? Obviously, even before tariffs, they were seeing labor and maybe some materials input inflation.
But what do you expect for inflation in the second half? It sounded like it was flat in the second quarter.
Yes. So on the tariff side for automotive, and you're right, we're flat in price increases for the first half. We certainly expect we've had some increases and some decreases first half. We certainly expect to see something second half of the year. When we speak specifically to tariffs, I think what's been effective thus far to date has been negligible, especially when you look at this is just our U.
S. Automotive business, primarily what we're talking about year to date. So we absolutely have had conversations with our suppliers. They're ongoing. We've got a team that's very involved with this.
And we would be looking at any increases, whether it's raw materials, freight, interest rates, tariffs, we're looking at it very broadly. We've got teams in place that are working with our global sourcing offices. We've got modeling going on. We're going to use a lot of database negotiations with our suppliers. But at the end of the day, it's going to be something that we pass along to the
Our next question comes from Seth Basham, Wedbush Securities. Please proceed with your question.
Thanks a lot and good morning.
Good morning, Seth.
Nice improvement in the U. S. Comps, but I was wondering if you could address some of the margin weakness in the U. S. Can you just break down how the margins performed between gross and SG and A and what some of the drivers are specifically?
Yes. So Seth, when we look at our automotive margins and the business. So combination, flat to slightly up on gross margins. We had a little bit of customer and product mix issues in the quarter that were a headwind on gross margin. But the primary issue is SG and A.
And what I would call out is what we're seeing is probably about half of the margin deterioration is freight and diesel fuel and delivery related and also IT investments, which we've called out and the other half is payroll. And so two things I would say is that, these increases in payroll and specifically freight and delivery are greater than what our, say, 5% sales increase is excluding AAG. And so we had particular issues in the quarter with freight. You guys have seen it. April, it particularly spiked.
It stayed up very strong in the Q2. We had some additional driver regulations. There's labor shortages. So our teams are working very hard to deal with those freight increases that are greater than our sales. And so we're working on that and considering and looking at a number of things from passing it along to the customers.
And the other thing with payroll, as you know, again, with payroll increases, some of the minimum wage increases and some of the unemployment, And quite honestly, incentive compensation swing this year compared to last year, which is a function of the improved sales. All that with a up slightly comp that we don't leverage on is really what's weighing on those U. S. Automotive margins. But having said that, and you heard Paul say it, we've got a lot of plans in place for the second half to hopefully narrow that gap and make up some progress there.
That's helpful color. How do you think about the pricing power of your business in the U. S. Given these rising costs that everyone else is facing? Do you have an ability to pass along those higher costs
in the form of higher prices? Yes, we do, Seth. And if you look across our businesses in the U. S, whether it be industrial auto or business products. Our intent as and it's no different in 2018 as it has in past years, we do intend to pass those along.
And when you look at our size and our scale in the automotive sector, we certainly believe we have the ability to pass those along, not here not just in the U. S, but across the globe as well.
Fair enough. And then just thinking about the cadence of your sales for the quarter in the U. S, and you talked about softer April and stronger May June. Did was May your strongest month and then a bit of deceleration in June? And how did the July period start off for you?
No, the well, Seth, look, April was a train wreck. April weather really, really put us in a bit of a hole coming out of April. We saw and I'm speaking just to U. S. Automotive right now, but it was a similar trend across all of DPC.
We saw it rebound nicely in May and it held up in June. So there was no slide in June. And July with the heat that we're seeing across the U. S. Is holding up just fine.
So as we predicted last quarter, that combination of that brutally cold winter we had coupled with the heat that really kicked in May, June and is holding in July, that bodes well for the aftermarket.
Our next question comes from Elizabeth Suzuki, Bank of America Merrill Lynch. Please proceed with your question.
Hey, guys. So regarding your guidance, you had raised the sales growth outlook and the tax rate was lowered for the full year, but the EPS range is still the same. Do you think is there some conservatism being baked into that earnings outlook, particularly given the uncertainty around tariffs? Or do you think costs are already trending higher than you previously expected, so you're just going to keep the outlook for EPS the same as it was?
Yes. So what we looked at, certainly, we looked at where we are thus far through the 6 months. So there's certainly a consideration that we're a bit behind through the 6 months. We had implied kind of flattish operating margins on a full year, and we're a little bit behind now. So that's part of it.
We are implying, a little bit stronger comp growth when we've got a range for second half. And if we come in a little bit stronger there that would give us more comfort. But the other thing I'd point out is we called out a couple of cost increases for second half. So interest, amortization, we even have a little bit of FX in the second half. So I think our second half margins would be somewhat comparable to what you saw in the first half, and we hope to kind of narrow that range.
And look, as you mentioned, with just all the uncertainties right now, we just felt it was appropriate to leave the range that we have at this point.
Yes, that makes sense. And as you mentioned, an inability to leverage cost in the auto business this quarter, but comps were above 2% globally. So what do you think is the bogey for where your comp needs to be in order to get operating leverage in this current environment?
Well, we've said in the past that that comp is around more of a 3% number to get us there. Having said that, when you've got these kind of increases in freight and delivery, we're working awful hard to get that to where it needs to be. So having 1.5 or 2 is certainly helping us, but we need to get 3% or above. And the reason we're comfortable with that is we can look at our industrial business and see what we've done there, their margins and their improvement. And we know also historically what we've done in the past.
So a number of these projects we have will be helping us try to narrow that gap.
And Liz, I would just add to the comments Carol just made, the 3% number. The good news is that we were there and a little above that number in both May June.
Great. Thank you. That's very helpful.
You're welcome.
Our next question comes from Christopher Horvers, JPMorgan. Please proceed with your question.
Thanks. Good morning, everybody.
Hey, Quinn.
Good morning.
I wanted to my first question is on the gross margins. Can you remind us of what the sort of acquisition benefit was in the gross margin? What I'm basically trying to figure out is if I look at the core gross margin rate performance and ex acquisition in 2Q versus 1Q, is it did you see a similar up year over year or was there some degradation in the performance in 2Q versus 1Q and what would have driven that?
Yes. So when you look at Q2 specifically, our core gross margin without AAG would be up slightly, so more around a 10 basis points or 20 basis points up. That is primarily due to Industrial's strong performance in their core gross margin, their improved supplier incentives, and that is being offset by the lower supplier incentives and product mix customer mix issues and business products. And then the core automotive is up slightly as well. When you ask specifically about Q1 to Q2, there is a little bit of a shift in Q2.
It's small and that's primarily we would call out a little bit of the mix issues in the quarter. Some of our categories in automotive, be it batteries, tools and equipment, commodities, chemicals, those carry the lower gross margin. So a little bit of mix shift. But I think when you look out kind of full year, you're going to see us have an up slightly gross margin and that should carry through.
Understood. And maybe, as you think about a core growth rate or comp in industrial 6.5 percent accelerating on a 1 year 2 year really very impressive. The margins haven't really flowed through. You would think at that pace that you would see more OI rate expansion. So is there something different about the cycle?
Is it some of this the freight costs that you're referring to? Is the vendor allowance dynamics different around the cycles? Is it the mix of the business that's growing? Curious how you think about the long term potential of the industrial operating income rate, considering how strong it is at this point?
Yes. So the one thing I would call out, our industrial business has performed quite well. As you recall, we combined the electrical division within Motion. Motion. So when you look at their performance in the quarter, Motion standalone was actually up 30 basis points in the quarter, so nice improvement there.
The supplier incentives are moving in line with sales. This team is doing a terrific job on their balance sheet, working capital inventory. So we're always going to be mindful of that. On a long term basis, we're looking for their margins to be at 8% to 8.5%. You're going to see more incremental margin improvement, the 10%, 20%, 30 basis points, because it's a competitive environment out there.
So as they are having these increases, they're working very hard with their customers, especially those under contract to pass them along. So it remains a competitive environment, but we're pleased with this 30 basis point improvement that we have thus far. And on a long term basis, I think you can expect to see about this rate going forward.
And Chris, I would just add, our industrial business really shows no signs of slowing down. And as you commented, they're building upon quarter after quarter. I mean, this rebound really began in Q4 of '16, carried all the way through last year and now the first half of this year. And when you look at key indicators, whether it be the manufacturing capacity numbers or the PMI numbers, rig count, all those continue to be very positive. So we're bullish on our industrial business and expect to see continued good results from this group.
And that's a good segue. As you think about the energy business, the energy business and your exposure to that, I'm just curious what you're seeing. I'm surprised it wasn't up. You didn't mention that as a low double digit grower. Is there something different this time in terms of the amount of hiring that's been happening as oil prices have come up?
Is it that has been more automated and then there's been more investments, so there's less sort of less need in terms of for parts of existing products versus the cycle?
I don't think so, Chris. The one thing I would point out is we look across our divisions across the Motion business. So I look at the if you were to ask about the regionality in our industrial space, our best performing operations are down in the Southwest part of the U. S. And again, we're stacking these increases on top of quarter after quarter and over last year.
So when you asked specifically about our oil and gas extraction business, it's up mid to high single digits. So still comping very well.
Yes. And then my last question is
just for the peeling of
the onion on the automotive business. You talked about the West and the South being stronger because it didn't have April. I don't know if you have this in front of you, but if you just focused on the May and the June side, was the performance in sort of the North Central and Northeast more similar to the other areas of the country?
Yes, they rebounded nicely. Again, I've mentioned this on a number of times, and we talked about it last quarter as well. The Midwest, which I visited just recently, spent time with our owners up in Illinois and Minnesota. These guys, the farmers couldn't get in the field. They had a foot of snow towards the end of April.
Once that snow cleared, we got into May June, those businesses rebounded nicely, but they had just they were coming out of quite of a hole in April.
Understood. Thanks very much everyone.
Yes. Thanks, Chris.
Our next question comes from Greg Melich, MoffettNathanson.
I guess a quick follow-up on the auto trends and then want to fully understand the guidance. Paul, when you talked about that bounce back in those markets like the Midwest and the Northeast, are those areas now actually running ahead of the rest of the country? Is there some sort of catch up from that or are they just sort of back to a more normalized trend? And then I had a follow-up.
No, back to more normalized, Greg. And the if I look at the Northeast, for instance, they're going to get skewed with the I mentioned the big changeover that we're going to have really starting to take hold here in the second half of SANTL Auto Parts up in New England. So that our Northeastern business is going to benefit greatly from adding that business. But no, we've returned back to more normal growth patterns across the northern sector of the U. S.
Great. And then a follow-up on a bigger picture question on tariffs and passing through. What percentage of your product in the auto business is imported either indirectly or direct? And how historically it's been so long since we had any inflation in auto parts. What's the history or what do you think it takes in terms of timing for that to actually flow through to the end market?
Yes, I'll take the first part of that question, Greg, and I'll let Carol weigh in on the second half of your question. As we look across our businesses and what percentage of their business is coming out of China, whether it be on a direct sourcing standpoint, which is still relatively small for us. But our manufacturer suppliers who manufacture and bring parts in from China. Our automotive business is about 40%, and SP Richards is greater than that on the office side. Motion is significantly less than that number.
So that's kind of how it breaks down by business.
And I think the only other thing I'd add is, as we mentioned before, with this tariff, and again, while there's a lot of uncertainties, this really does not impact our European Automotive business or our Australasia business. So this 40%, Paul mentioned, was really, a U. S. Automotive number. And as far as the how long and passing it through, look, one of the things is and we saw this with the 1st round that came into play, when these things go into effect, there's a number of discussions that go on with suppliers.
There's a lot of modeling that's done. We can look at early buy ins. We can look at when the market can bear it. I mean, we may even have opportunities to have margin increases in certain areas. So it's going to be I mean, we will have time and at the effective date that's out there tentatively rumored to be September 1 on this List 3 that we have, we would have time to work with our suppliers on passing those through.
Great. And so it sounds like something more for Q4 in terms of
Well, look, we're watching it very closely. But we don't know right now. We don't have anything factored in, but we would say later in the year for sure.
Greg, the list 3 that Carol referenced is the one that we're all keeping a very close eye on. We really, as she mentioned, it's negligible to this point, but everybody is keeping a close watch on List 3.
Perfect. Thanks. Good luck, guys.
Yes. Thank you.
Our next question comes from Chris Bottiglieri, Wolfe Research. Please proceed with your question.
Hi, thanks for taking the questions. Quick clarifying one, that 5% comp growth or mid single digit rate you said, sited in Europe, is that all same store sale or some of that like square footage growth?
It's a combination of both, Chris. We our AAG business in Europe, we've done a number of small bolt on acquisitions. That's kind of been their historical pattern, and we've continued that as we've stepped into that business. Again, where we were pleasantly surprised is the strength of our comp number in the quarter. And again, hats off to our team in the U.
K. And in Germany, they've done a terrific job.
Got you. Okay, that's helpful. And then earlier in the conversation, you started talking about productivity investments. Can you just maybe remind us what you're doing there and types of projects you're working on? And if there's a way to quantify the extent that those are currently impacting margins?
And is there a point where you lap those or you kind of see this thing like a multiyear process?
Well, first thing I would say, this is a multiyear process. It's being driven, GPC and it's actually being driven globally. I sat through a recent meeting with our senior operations team and these are projects that are in Australia, they're in Canada, they're in Europe. It's putting further automation as an example further automation in our facilities. So our distribution centers and enhancing those facilities, In some cases, moving to newer, more improved facilities, consolidating facilities, putting in automation.
We're also looking at on the technology side, we look at automation there and whether it's back office shared services. We certainly have projects there. So some of it is warehouse management type software and enhancements there. Pricing is the other thing I'd call out, and we call our technology and productivity. Investments in our pricing, data analytics and software, and actually working with a group to use the data that we have and be able to have a more optimized pricing strategy for our retail and wholesale business.
So that's some of where our investments are going to. As far as again, a multiyear process and as far as calling out, I think, again, it's probably too hard to really specifically talk about it, but it would fit into what our long term margin goals are going forward.
Got you. Okay. And then just one final unrelated question. You mentioned that the NAPA Auto Care Centers are seeing really strong growth right now. And then the national accounts still a bit lighter.
Can you talk about maybe what do you think is driving that variance between the 2 customers? I think they have like kind of similar demand patterns, but anything you can maybe talk to that could be explained that gap?
Yes. First, I'd point out that the growth that we saw both out of our NAPA Auto Care Centers and the major accounts is the best growth that we've seen in a number of quarters. We can do better and we will do better, but we're very pleased to see it headed in the right direction. NAPA Auto Care Centers, Chris, if you think about it, we've got a bit more of a captive audience there. They fly our flag.
They fly the Napa brand. They use our training a lot of our systems. Our guys are well entrenched there with our auto care centers. So our expectation would always be that auto care centers are going to outperform. Major accounts, that's a competitive business for sure, and our competitors are all chasing that business as well.
Again, we were pleased to see a positive increase in the quarter because it's been a while since we've seen our major accounts post a positive comp. So we're encouraged by that.
Got you. Okay, very helpful. Thank you. Appreciate it.
You bet. Thanks.
Our next question comes from Matt Hasler, Goldman Sachs. Please proceed with your question.
Thanks so much My first question relates to your guidance, your revenue guidance. Can you talk about how much of the change in the revenue guide, that hike in the revenue guide relates to your 2nd quarter performance? And then on the forward, how much of it would relate to your organic outlook versus acquisitions versus what I think is probably a slightly less helpful FX outlook for you guys?
Yes. I mean, I'm going to start with the FX, and I think you're spot on. I mean, we had about 0.5 point improvement in the first half, and it is not going to be as helpful in the second half. So we've modeled a slight headwind in the second half that would have us that may be flattish, maybe up slightly for the full year. The second thing I'd remind you is AAG came on November 1 last year.
So you have that 2 months of revenue for AAG. I can tell you our guidance for second half versus first half is really largely based on where we are today. I mean, the run rate that we have today and then mentioning the AAG 2 months in FX, we have not modeled in any acquisitions that haven't closed yet, and that would include the Henning acquisition in Germany because that has not closed yet.
Got you. That's very helpful color. Secondly, you spoke about your confidence in the aging of the auto fleet and the sweet spot stabilizing and helping the business going forward. You all have presumably pretty good visibility to the years of cars that you're servicing. Are you other than the fact that this certainly should play out just based on everything we've seen historically?
Are you seeing any evidence as cars make their way through your system that the dilution or the pain from this issue is abating and that the vintages are starting to help you out?
You know, Matt, we have been saying now for some time that our hope and our expectation was that we would begin to see a little bit of a lift in the second half of this year, but certainly more so in 2019. And look, it's hard to 0 in exactly why all of a sudden here in the months of May, June and certainly into July, things have really picked up. Is it all weather related? Is it partly due to the coming out of that low we saw from the 'eight, 'nine SAAR. But the fact is business is picking up and I think it's certainly a combination of factors, including really a good job by our team in the field.
That's super helpful. And then one final question because we do get a lot of questions on the tariff team. Presumably, the 40 percent of the products you said it is coming from overseas for the U. S. Auto business are final goods or finished goods that are sourced from overseas.
Correct me if I'm wrong, but beyond that, are there components that would contribute to or that are found in some of your purchases that would make the underlying number a little bit better? Just trying to understand not just the direct pressure, first order pressure, but whether there's additional potential inflationary pressure for the industry
from those inputs?
No, it would largely be the finished goods that we're bringing in. Matt, we saw back when the steel and aluminum tariffs went in back in June, so it's still very, very early. We've seen some folks kind of push through a few small price increases due to what's happening, and that's across our a couple of our businesses. But it's very minimal, and it's look, it just started to really take hold in June. So I think that's a bit early to tell.
But the majority of what we're referring to on that 40% is all finished goods.
Perfect. Thank you so much, Paul. Appreciate it.
You're welcome. You bet.
Our next question comes from Scot Ciccarelli, RBC Capital Markets. Please proceed with your question.
Hey, guys. It's Scot Ciccarelli. Thanks for taking the question here, Vascepa. I'm sure it feels like the horse is cool at this point, but I did have one more on the auto side. Trying to quantify train wreck if we can, call it, was the business in the U.
S. Down like kind of 2% to 3% in April or was it even worse than that?
No, you're in the range and it was probably a poor choice of words. But no, it's you're right in that range, Scott.
Got it. Okay, that's helpful.
And is there any kind of
difference in terms of DIY or commercial performance when you have those kind of wet and cold conditions in the spring? Or is that kind of uniform across the business?
Well, as we've reported now for a number of quarters, our retail business continues to outperform. And our retail business, once again, was up mid single digit in the quarter, and that's a number of quarters in a row. What we are encouraged about is the slight lift that we saw on the wholesale side, which it's been a challenge. We've been battling that flat to even slight declines on the wholesale business. So it's really encouraging to see a lift in our wholesale business as well.
Got you. Okay. And then the last question here. Should we expect tables and inventory to largely stay at these levels? Or did something particularly happen or influence that ratio this quarter?
So, we would expect to be around this level, the 100% to 110%. We did have a reclass in the quarter in inventory, and it was about $200,000,000 related to sales return and that moved from inventory to current assets. So that probably spiked it in the quarter, but that's going to stay there the rest of the year. So but again, I think we made good progress on working capital and you can expect us to stay around that level.
Can I ask a clarification on that? So there was what $200,000,000 of incremental inventory turned in the quarter or is that like an accounting function of some sort?
No, it's an accounting. It was related to the new revenue recognition guidance that was effective for this year. So it was reclassing an inventory amount to other current assets.
Got it. Okay.
All right. Thanks a lot, guys.
You bet, Scott.
Our final question comes from Carolina Jolly, Gabelli and Company. Please proceed with your question.
Thanks for taking my question. Most of my questions haven't been answered. But just I guess 2 clarifying ones. The do it yourself growth that you've been experiencing, would you attribute any of that to general industry growth or is that all of your investments in that segment?
Well, it's hard to say. We'll wait and see how our competitors report, Carolina. But I as I have said in quarters past, our retail team is doing a terrific job, and our bar was set a bit low. And our team has done a terrific job of really upgrading our stores, which we've hit now most of our company stores have been revamped, expanded store hours. We have revamped our product assortment.
All of that I believe is having a very, very positive contribution to our retail numbers.
Great. Thanks. And then just another clarifying one. I know this has been asked a lot, but as far as the automotive margin breakdown, would you say that the 40% that is international, did they actually see margin expansion where there it was really all the U. S.
That we saw some of that deleveraging and additional costs that you went over?
So basically our international automotive margins had expansion and that's a function of their core sales being mid single digits. So we actually did have expansion year to date in the quarter for our international business. And remember, AAG is in there as well and that carries a higher margin. So I want to be clear, it was only the U. S.
Automotive.
Okay, great. Thanks so much for answering.
You bet. Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to management for closing remarks.
We want to thank you for your participation in today's conference call. We look forward to reporting to you in our Q3 call in October, and thank you for your support and your interest of Genuine Parts Company.