Good day, and welcome to the Genuine Parts Company Second Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. At this time, I'd like to turn the conference over to Mr.
Sid Jones, Vice President, Investor Relations. Please go ahead, sir.
Good morning, and thank you for joining us today for the Genuine Parts Company's Q2 2016 conference call to discuss our earnings results and outlook for the full year. Before we begin this morning, please be advised that this call may involve forward looking statements regarding the company and its businesses. The company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward looking statements made during this call. We'll begin this morning with comments from our
Chairman, Tom Gallagher. Tom? Thank you, Sid, and let me add my welcome to all of you on the call this morning. We appreciate you taking the time to be with us. I would start by saying that I've anticipated this call with somewhat mixed emotions.
On the one hand, I've been on every one of our calls since we started doing them in February of 2000 and 1. So today is my 63rd call, but it's also my last. As you know, Paul Donahue was named Chief Executive Officer on May 1 and Paul is only the 5th Chief Executive in our 88 year history, certainly indicative of the management stability within our organization. I will continue to serve as Chairman of the Board and as such I will remain active around GPC. But going forward, Paul and Carol will be doing all of the work on these quarterly calls.
And I just couldn't feel any better or more positive about the future of our company with Paul as our President, Chief Executive Officer and Carol as Executive Vice President and Chief Financial Officer leading the way. These are 2 very talented and capable executives and they are highly regarded both inside our organization and externally as well and they will do a fine job in leading our company and creating shareholder value in the years ahead. With that said, I want to thank each of you on the call for your past and ongoing support of Genuine Parts Company and I'll turn the call over to Paul.
Thank you, Tom. I appreciate the kind remarks and the ongoing support. I am both honored and humbled to follow you as CEO of this great company. You have had an admirable 46 year career at GPC and the performance of the company under your leadership for the last 12 years has been impressive. That said, working closely with you for the last 9 years has been invaluable and I feel well prepared for this new role and importantly, the composition of our management team remains in place to build upon our performance.
So thank you and I look forward to working with you in your role as Chairman. GPC has a long and rich 88 year history of steady, consistent growth and sound financials and has been an effective steward of capital. Under my leadership, we intend to build on these achievements over the many years to come. In my first 75 days as CEO, I have taken considerable time to visit with our operations, both around the globe and across our business segments, and I am more encouraged than ever about the good work being done and the growth opportunities available in each of our businesses. As this quarter would indicate, we have our share of challenges to overcome, but I also believe we can reinvigorate our sales growth in the coming quarters.
This is our most critical near term objective and I am committed to making this happen. We will provide more details later in the call to this point. Now turning to our Q2, I will make a few remarks on our overall results and then cover our performance by business. Farrell Yancey, our Executive Vice President and Chief Financial Officer, will provide an update on our financial results and our guidance for the full year. After that, we will open the call to your questions.
A quick recap of our 2nd quarter results shows sales for the quarter were $3,900,000,000 which was down 1%. Net income was $191,400,000 down 2% and earnings per share were $1.28 in line with the Q2 of last year. Total sales in the quarter included a 2% benefit from acquisitions right across our automotive, industrial and office businesses and you will hear more on our acquisition activity as we review our business results. Currency exchange was still a headwind to our overall results with the strength of the U. S.
Dollar versus the Canadian, Australian, New Zealand and Mexican currencies impacting our results by approximately 1% on the revenue line and $0.01 per share EPS. Turning to our automotive operations. For the quarter ended June 30, our global automotive sales were down 0.07% and included an approximate 2% benefit from acquisitions, offset by a currency headwind of approximately 1.5%. Our U. S.
Results were down 2% in the quarter, which compares to a 4% increase in the Q1 and primarily due to the softness in demand associated with the mild winter and early spring. While we are not pleased with this deceleration, we would point out that our 2nd quarter sales in 2012, the last year we had similar mild winter patterns, we were also down 600 basis points from the Q1. So, we have seen this pattern before and would expect to show more normalized growth within the next few quarters as the impact of weather plays out and we execute on our growth initiatives. Our U. S.
Results varied widely by geographical region with our better performing markets in the Western, Southern and Mountain regions of the country. The Central, Eastern and Southwest regions of the country all underperformed. Again, we would attribute the soft results in the Central and the Eastern regions to the mild winter temperatures and this is evident in the sales trends for our weather related goods such as batteries, heating and cooling and ride control products, which were weak through most of the Q2. We are pleased to report however that our batteries and air conditioning sales recovered significantly with the hot June temperatures with both up double digits. In the Southwest, we remain challenged by the ongoing negative impact of the oil and gas sector on fleet and general installer business.
Same store sales for our U. S. Company owned store group were flat in the Q2 and this compares to a 3.6% increase in the Q1. The cadence of the quarter saw our team post a low single digit increase in April, likely bolstered by the shift in the timing of Easter, followed by a low to mid single digit decline in May and flat results in June, so a mixed cadence with the month of May being our most challenging month. Taking a deeper look into our same store sales for the quarter, our commercial wholesale side of the business slightly outperformed the retail DIY business, driving the overall flat same store sales results.
Despite the ongoing DIY initiatives across our company owned store group, fairly weak market conditions resulted in a slight sales decrease for our company owned retail sales. We believe, however, that the current market conditions will prove to be short lived, and we remain confident in the long term positive benefits of our retail initiatives. As a reminder, these broad initiatives include installing new interior layouts and graphics, extended store hours, increased training for our store associates and the nationwide launch of our NAPA rewards program to name just a few. Furthermore, we continue to expand on our retail impact initiative, which was initially piloted at 20 stores in 2015 with plans to implement this concept in 150 company owned stores in 2016. We are encouraged by the positive impact of these initiatives at our updated stores with early results exceeding our expectations on both the retail and commercial sides of the business.
For the Q2, our retail transaction counts were down low single digit, while our average basket size was up low single digit. Moving along to our core commercial wholesale business, this segment of our automotive business was basically flat in the second quarter, which compares to a 4% increase in the Q1. The core drivers for our commercial wholesale business continue to center around our major accounts business and our NAPA Auto Care Centers, and the results for these key customer groups are good measures for the weak market conditions we encountered this quarter. On the major accounts front, sales were down low single digits, which we believe reflects the challenging sales environment these customers are seeing. Sales for our auto care centers were up low single digits driven by the ongoing increase in memberships, now totaling over 16,400 members strong.
As an additional point of reference, our fleet business was off slightly for the quarter. Our average wholesale ticket value was down slightly with no benefit from inflation and we are flat in the average number of tickets. Turning now to our import parts business in the U. S, we continue to be encouraged by the strong underlying growth for this business. And with the added benefit of Olympus Import Parts, a $25,000,000 business acquired this past February, we have positive momentum in this category as we enter the second half of the year.
We continue to make solid progress with the integration of the Olympus business, and we are excited about the growth prospects for our import parts business overall. Given the positive attributes of this product offering, we closed on another import parts acquisition in Canada on July 1, which we will cover a little bit later in the call. Also on the acquisition front, we are pleased to report that we closed on an Atlanta based heavy duty truck parts business on May 1. Global Parts operates 6 branches in 3 states and with expected annual revenues of approximately $20,000,000 serves as a nice complement for our growing business in the heavy duty segment of the U. S.
Automotive aftermarket. Moving on to the trends we are seeing across the U. S. Automotive aftermarket, the fundamental drivers of our business continue to be positive. The average age of the fleet remains in excess of 11 years, the size of the fleet continues to grow, lower fuel prices remain favorable for the consumer and miles driven continues to post substantial gains.
After strong growth of 3.5% in 2015, miles driven increased 2.6% in April, the most recent data available and is up 3.7% year to date. April marks 26 consecutive months of increases in miles driven with lower fuel prices continuing to drive this key metric. The national average price of gasoline was $2.35 in the 2nd quarter, well below last year and a positive indicator for further increases in miles driven and ultimately driving additional parts purchases. Before closing out our automotive review, we want to update you on our international businesses, which include Canada, Mexico, Australia and New Zealand. In Australia and New Zealand, our core automotive business is performing well and we have made significant progress with the integration of the Cubs acquisition and its 21 branches in Western Australia.
Likewise, we are excited by the June 1 acquisition of AMX, a Melbourne based retailer of aftermarket motorcycle accessories and parts with 4 stores and approximate annual revenues of $12,000,000 Our team in Australia has a multiyear growth plan for this business, which further expands our growing product offering in the motorcycle category. With these acquisitions, our footprint in Australia and New Zealand has now grown to 527 locations, resulting in net new store growth of nearly 100 locations over the past 3 years. At Napa Canada, we continue to produce low to mid single digit sales growth despite the ongoing economic challenges associated with the oil and gas slowdown impacting Western Canada and of course the devastating wildfires in Fort McMurray, Alberta back in May. On July 1, we closed on the acquisition of Auto Camping, a leading distributor of original equipment import parts in Canada. Auto Camping with 20 locations across Canada specializes in original equipment automotive parts for European vehicles and they sell to foreign repair specialists as well as original equipment dealers.
This business should generate approximately US50 $1,000,000 in annual revenues and much like the Olympus acquisition in the U. S, complements our existing product offering and distribution capabilities for import parts in Canada. Finally, in Mexico, our sales growth continues to gain momentum as we expand our naphtha footprint. We have 21 NAPA stores in Mexico today and have plans for additional store growth in the future. We are encouraged by the long term growth prospects we see for NAPA in Mexico.
So in summary, the Q2 proved challenging for our U. S. Automotive business, although this was partially offset by the ongoing strength of our international operations. We believe the weakness in our U. S.
Sales relates to the impact of mild winter and early spring and we expect to improve on this quarter's performance as we move ahead. Our plans call for expanding our business with our key commercial platforms, NAPA Auto Care and major accounts, executing our retail strategy and driving global expansion via new store openings as well as targeted strategic acquisitions. Let's turn now to our industrial business. Motion Industries ended the quarter the quarter down approximately 2%, which compares to a 2.5% decrease in the Q1. After adjusting for acquisitions and currency, core industrial sales were down an approximate 3%, basically unchanged from their adjusted sales decrease in the Q1.
So for the Q2 overall, our industrial business seems to have stabilized, which is consistent with the industrial indicators we tend to follow such as the industrial production and capacity utilization. With that said, a quick review of our business by industry segment, by top customers and by top product category shows that the markets remain uneven and choppy. Among our top 12 industry segments, 3 generated sales increases, 7 were down and 2 were essentially flat. Looking at our top 20 customers, 15 of them increased sales, while 5 were down, consistent with what we saw in the Q1. And among our top 12 product categories, we saw 6 that increased and 6 that were down, also consistent with the Q1.
So the takeaway here is that our results were quite mixed among our customers and product lines with solid results in a number of areas being offset by weaker results than others. We have been operating in this type of difficult and choppy environment since the Q1 of 2015 and as mentioned before, believe we are seeing at least some early signs of a stabilizing industrial economy. This would certainly bode well for a stronger cycle ahead. Shifting to the Q3 and the balance of the year, we will be executing on our initiatives to grow market share and further expand our distribution footprint to generate sales growth. We remain active with strategic bolt on acquisitions for this business and expect to close on a few of these over the balance of the year.
We can tell you that effective August 1, we will close on OpCo, a regional industrial safety products distributor, with estimated revenues of approximately $20,000,000 Moving on now to our electrical business, EIS. Sales for this group were down 5% and remained challenged by many of the same factors that impacted our industrial business, Things such as the ongoing challenges for customers in the oil and gas segment, lower defense spending, lower copper pricing again in the quarter, which cost us 1% of sales growth, the impact of the stronger dollar on our export oriented customers and just the overall sluggish economic climate. We are expecting to see these factors carry over to some degree to the balance of the year, but it's interesting to look at the individual performance of the 3 segments that comprise EIS. The Electrical segment is our largest, representing 40% of disc group revenues and sales were down low double digits. Fabrication was down low single digits and our wire and cable business was up low single digits with each representing another 30% of the EIS business.
So certainly there is room for improvement across the EIS segments, but our greatest sales challenges are primarily concentrated in the electrical portion of the business. Looking ahead, our team is executing on its initiatives to drive meaningful sales growth over the long term. And finally, a few comments on the office products business, which reported a 1% increase in sales for the Q2, which was driven by a 5% contribution from acquisitions. Sales for the Safety Zone acquired on June 1 represents the majority of our acquisition revenues for the office business, and we are pleased to report that the integration of this business is progressing very well. By customer group, our mid single digit growth in the mega channel was partially offset by a mid single digit decline with our independent resellers.
On the product side, the Facilities and Break Room Supplies category or FPS performed very well in the quarter, while the office product segment category was down low single digits. Furniture was down mid single digits and technology products were down low double digits. We continue to make solid progress with our acquisition strategy and the overall diversification of this business with a heavy emphasis on the growing FPS category. As previously announced, we acquired certain janitorial and sanitation business from Rochester Midland Corporation effective July 1. We expect this business to further enhance our FES product offering and contribute approximately $20,000,000 in annual revenues.
Our office team will continue to look for these types of strategic bolt on acquisitions as well as execute on our ongoing share of wallet and market share initiatives to grow this business, despite the challenging end market conditions that persist in this industry. We are confident in our growth strategy and look forward to showing more progress over the balance of the year. So that is an overview of our Performance Fund business, and we want to thank our teams across all of our business and for their efforts day in and day out. We appreciate all that they do to make GPC the great company that it is. So at this point, I'd also want to come back to my earlier comment that reinvigorating our sales growth is our number one priority.
During this call, we talked a great deal about our sales environment and the execution of our initiatives to drive sales growth. And I thought it might be helpful to pull it all together and outline a few of the key action steps we are taking to achieve this goal. The 4 building blocks of our growth strategy are comprised of the following: the execution of fundamental initiatives to drive a greater share of wallet with our existing customer base an aggressive and disciplined acquisition strategy focused We are confident
that our intense focus
in these four key areas will We are confident that our intense focus in these 4 key areas will positively impact our sales and support the steady and consistent growth we strive to achieve at Genuine Parts Company. Now, I'll hand it over to Carol, who will provide a financial update and a full year guidance. Carol?
Thank you, Paul, and congratulations on your promotion to CEO. It is certainly well deserved, and we look forward to the execution of your key sales strategies. And Tom, I would also like to thank you for your tremendous leadership of the company and on a more personal level, your guidance and counsel over the years. We will begin this morning with a review of our financials and look at the 2nd quarter income statement and segment information, and then we'll finish up with a review of a few key balance sheet items. Our total revenues of $3,900,000,000 for the 2nd quarter were down 1%.
Our gross profit for the 2nd quarter was 29.9%, which was equal to the prior year. Our management teams are focused on the effective execution of our gross margin initiatives and we remain committed to an enhanced gross margin for the long term. The pricing environment across our businesses remains relatively steady with very little supplier inflation, if any. Our cumulative supplier price changes through 6 months in 2016 were automotive down 0.7 percent, industrial up 0.2 percent, office up 0.2% and electrical down 1.3%. Turning to our SG and A, our total expenses for the Q2 were $865,000,000 or 22.2 percent of sales, which is up slightly from last year, primarily due to the lower sales levels for the quarter.
This was partially offset by our tight cost control measures, which continue to positively impact our results and drive our progress towards greater operational efficiencies. Now if we look at the results by segment, our automotive revenue for the Q2 of $2,100,000,000 was down 1% from the prior year and 53% of total sales. Our operating profit of $204,000,000 is down 2% and the operating margin for this group is 9.7% compared to 9.9% in the Q2 last year. Our industrial sales of $1,200,000,000 in the quarter were a decrease of 1.7% and 30% of our total revenues. Our operating profit of $88,000,000 is down 0.7 percent and our operating margin is up 10 basis points to 7.6%, which is driven by nice gross margin improvement and ongoing cost reductions.
Office products revenues were $482,000,000 in the 2nd quarter, up 1% 12% of our total revenues. Our operating profit of $33,000,000 is down 5% and our operating margin is 6.8% compared to 7 0.2% last year. For the Electrical Group, our sales were $185,000,000 in the quarter, down 5% from the prior year and also 5% of our total revenue. Operating profit of $16,000,000 is down 14% and the margin for this group is 8.7% compared to 9.5% last year or down 80 basis points. So for the second quarter, our total operating profit margin was 8.7% compared to 8.9% in the Q2 last year.
This basically reflects the lack of leverage as mentioned earlier. With that said, we are intensely focused on showing progress in this area in the periods ahead. We had net interest expense of $4,700,000 in the quarter and for the full year we currently expect net interest expense of $20,000,000 to $21,000,000 Our total amortization expense of $9,200,000 for the 2nd quarter and we would expect our total amortization expense for the full year to be $36,000,000 to $38,000,000 Our depreciation expense was $26,700,000 for the quarter, and for the full year, we project total depreciation to approximate $110,000,000 to $120,000,000 So our combined depreciation and amortization was $36,000,000 for the 2nd quarter, and we would expect the combined number to be in the range of $145,000,000 to 100 and $60,000,000 for the full year. The other line, which primarily reflects our corporate expense, was $26,500,000 for the quarter compared to $24,800,000 last year. For the full year, we still expect corporate expense to be in the $110,000,000 to $120,000,000 range.
Our tax rate for the 2nd quarter was approximately 36.2% compared to 37% in the Q2 last year. The reduction in the rate is due to a higher mix of foreign earnings as well as a favorable non taxable retirement plan valuation adjustment compared to last year. We expect this rate to show a slight increase in the last half of the year, but we are projecting our full year rate to be 36.3% to 36.8%. Our net income for the quarter, as Paul mentioned, was $191,400,000 compared to $195,400,000 last year and our EPS of $1.28 was equal to last year. Now turning to the balance sheet.
We continue to further strengthen our balance sheet with effective working capital management and strong cash flows. Our cash at June 30 was $234,000,000 up slightly from June of last year. Our cash position continues to support the growth initiatives across all of our businesses. Accounts receivable of $2,000,000,000 at June 30 was up 1% from the prior year and we continue to closely manage our receivables and remain satisfied with their quality at this time. Our inventory at the end of the quarter was $3,100,000,000 which is actually down 3% when you exclude the impact of our acquisitions in the last 12 months.
Our team continues to effectively manage our inventory levels and we'll continue to maintain this key investment at the appropriate levels as we move forward. Our accounts payable at June 30 was $3,100,000,000 up 12% from last year due to improved payment terms and other payables initiatives established with our vendors. We're encouraged by the positive impact of accounts payable on our working capital and also our days in payables and we would add that our AP to inventory ratio at June 30 reached 100% for the first time. Our working capital of $1,500,000,000 at June 30 continues to show steady improvement from quarter to quarter and is down nicely from the prior year. Effectively managing our working capital and in particular key items such as accounts receivable, inventory and accounts payable remain a high priority for our company.
Our total debt of $775,000,000 at June 30 compares to $850,000,000 in total debt last year, and this includes $250,000,000 term notes as well as another $275,000,000 in borrowings under our revolving line of credit. We would also add that one of our term notes is due November 30 this year, and we currently intend to renew it upon the due date. Our total debt to capitalization is approximately 19%, and we're comfortable with our capital structure at this time. We believe it provides the company with both the flexibility and financial capacity necessary to take advantage of the growth opportunities that we may want to pursue. So in summary, our balance sheet is in excellent condition and remains a key strength of our company.
We continue to generate strong cash flows and following a record year in 2015, we remain well positioned for another solid year in 2016. We continue to expect cash from operations to be in the $900,000,000 to $1,000,000,000 range for the full year and our free cash flow, which deducts capital expenditures and dividends to be in the $400,000,000 to $450,000,000 range. We remain committed to several ongoing priorities for the use of our cash, which we believe serve to maximize shareholder value. Our priorities for cash include strategic acquisitions, share repurchases, reinvestment in our businesses and the dividend. Our strategic acquisitions remain an ongoing and important use of cash for us and they're integral to our growth plans.
Through July one this year, we've added a number of new businesses across our automotive, industrial and office operations. These are excellent strategic bids for us and collectively we expect these acquisitions to generate approximately $450,000,000 in annual revenues. Looking forward, we will continue to seek additional acquisition opportunities across all of our distribution businesses to further enhance our prospects for future growth. We'll continue to target those bolt on acquisitions of companies with annual revenues in the $25,000,000 to $150,000,000 range, but we're also open minded to new complementary distribution businesses of all sizes, large or small, assuming the appropriate returns on investment. Turning to share repurchases, we purchased 765,000 shares in the Q2 and 1,300,000 shares for the 6 months.
To date, we have 4,900,000 shares authorized and available for repurchase. While we have no set pattern for these repurchases, we expect to remain active in the program in the periods ahead and we continue to believe that our stock is an attractive investment and combined with the dividend provides the best return to our shareholders. Our investment in capital expenditures was $38,000,000 in the second quarter and is $50,000,000 through June. For the year, we're currently planning for capital expenditures to be in the range of $120,000,000 to $140,000,000 so we expect CapEx to increase slightly over the balance of the year due to the timing of several large projects. Turning to our dividend, our 2016 dividend is $2.63 per share or a 7% increase from the prior year dividend of $2.46 2016 also marked our 60th consecutive annual increase in the dividend.
So that concludes our financial update for the Q2 of 2016. And in summary, our non automotive businesses continue to operate in a challenging sales environment. And in the Q2, our U. S. Automotive sales will also impact were impacted by rather weak conditions.
Fortunately, we see these as transitory issues and we look forward to improving conditions as we move ahead. Additionally, we continue to benefit from strong performances in our international automotive operations. For the quarter, we offset some of the market headwinds with key sales initiatives, steady gross margins and tight expense cost controls. In addition, we further improved the strength of our balance sheet and cash flows with effective working capital management. As we execute on our growth plans, progress in these fundamental areas supports our ongoing investment and opportunities such as acquisitions as well as the return of capital to our shareholders through the dividend and share repurchases.
Now turning to our guidance for the full year. On the revenue side, we are maintaining our guidance for total sales to be at +1 percent to+2 percent for the full year. Among our business segments, we are maintaining our automotive sales guidance at plus 2% to plus 3% for the full year, and we're increasing our office guidance for sales to be plus 2% to plus 3% from the original amount of down 1% to up 1%. We are lowering our industrial sales to flat to up 1% from a previous plus 1% to plus 2%, and we're reducing the electrical sales outlook to down 2% to down 3% from a previous up 1% to up 2%. This sales outlook includes all acquisitions that have closed through July 1, as well as the OpCo Industrial acquisition that Paul mentioned earlier.
On the earnings side, we are updating our earnings guidance to be $4.70 to $4.75 from the previous range of $4.70 to $4.80 for the full year. So this completes our prepared remarks, and we would just close by saying thank you to all of our GPC associates for their continued hard work and commitment to the excess of GPC. Paul, I'll turn it back over to you.
Thank you, Carol. A good update on the quarter. So without a doubt, we are experiencing a challenging quarter. And frankly, it has been a challenging 6 months. But as you can tell from our guidance, we are planning for an improved second half to the year, and our teams are energized to execute on the action steps we outlined earlier.
We look forward to updating you on our progress in the quarters ahead. So now, we'll turn it back to the operator, and Carol and I will take your questions.
Thank you. We'll take our first question from Matthew Fassa with Goldman Sachs.
Thanks a lot. Good morning and Tom. All the best to you as you continue to move forward. I have two sets of questions. The first relates to the automotive business.
It was interesting that you talked about June being flat compared to April, up slightly even as some of the weather sensitive businesses really popped with some of the heat that we saw in parts of the country. So can you talk about what's transpiring with other categories and how weather related softness away from areas like batteries might be, just sort of how we got to flat rather than an increase with some of the weather businesses surging late in the quarter?
And are you referencing specifically the
month of June, Matt? I believe so. I'm talking about the cadence that you spelled out where I think April was up low singles, May down low to mid singles and June flat. I believe that related to your same store sales number, though I'm not sure.
Yes. So product related movement we're seeing is certainly batteries were soft in the quarter. Ride control was soft in the quarter. We saw a slowing in our brake business in the quarter, which we attribute some of that we believe to some of our brake business probably moved into the Q1 given the warmer temps. On the plus side, we're continuing to see nice growth out of our import lines.
We're seeing nice growth out of our tool and equipment categories. But unfortunately, they weren't enough to offset some of the softness we saw in the other category.
And as we're 20 or so days into the new quarter, any sense of how the current run rate compares to what you saw in June?
Yes. It's I would have to tell you, July, Matt, even though we're only a couple of weeks in and is looking a lot like June, it's choppy, is the best way I think I could describe it. The hot weather has to be a benefit to us, and we believe with the continuing warm temps we're seeing across the country will be a benefit to us. And related to that, we are seeing those products that are related to the hot temps, products like batteries, products like rotating electrical and our AC is picking up. So that's why we're cautiously optimistic about the second half of the year.
Got it. And then my second question relates to industrial and specifically to the margin trends within that business. Historically, the grosses within industrial, I believe, were largely volume driven and tied closely to volume rebates. You had a quarter where I think the volumes were not quite up to your expectations. The margins were quite good.
And Carol, on the call, you cited gross margins within that business. So any sense of the margin dynamics beneath the surface in industrial, please?
Yes. And you're exactly right. We certainly have headwinds on the volume incentives in that business. What we've been pleased to see is for the 1st 6 months of the year, Industrial's core gross margin has improved. And that's due to a lot of things that they put in place over the last 18 months or so and it's both on the buy side and the sell side.
And those things have been put in place and have helped their gross profit. We had for the 6 months a slight decrease in their volume incentive, but they were flat in the quarter. And additionally, on the SG and A side, they've adjusted their cost structure to be more in line with the revenues. So it's a combination of those things. So I would say that we're really pleased to see what they did in Q2, and we are expecting a slightly better second half for the industrial business on the top line.
So hopefully, we can maintain that slight margin improvement as we finish out the year.
Got it. And understood. Thank you so much, guys. Thanks, Matt.
Thank you.
We'll take our next question from Seth Basham with Wedbush Securities.
Thanks a lot and good morning and best of luck, Tom.
Good morning, Seth.
First question is just on the difference regionally between within the auto parts business. If you provide some color as to how the region performed through the quarters, the delta between the central and eastern as well as the rest of the business, say, from April, May relative to June?
Yes. It's a bit like we saw in a previous quarter, Seth. The cold weather, the Northern division, so I called out the specifically the Central and the Northeast, the delta between those businesses and our some of our Southern businesses are Southeastern, even down into Florida, Atlantic, even out west, with a significant gap. We're talking close to 400 basis points or 500 basis points gap between the those that are performing well and those that are continuing to be challenged.
Got it. So that 400 to 500 basis point gap, was that for the full quarter? Did you see that gap narrow as you moved into June with the weather improvement?
No, that was the full quarter.
Got it. And did the gap narrow in June?
Not much. We were pretty consistent throughout the quarter on in both the Northern divisions as well as those warmer weather divisions.
Okay, great. And then
the second
question is just on major accounts, a slowdown there in major accounts. Can you provide any color on that, maybe like you have done for the industrial large customers, how many up or down or what's driving the slowdown in major accounts? Do you lose customers? Any other color would be helpful there.
Yes. We stay close to our major customers, as you would imagine, Seth, and have a lot of conversations. Not all of them are down, but I would tell you that we have seen a drop in their business. We discuss with them often how their business is trending. Their tire sales have been challenged in those big tire guys that we do business with.
So again, I don't think well, I can tell you we haven't lost any of our big major customers and I don't believe we're losing share in any of our major customers. I would tell you that I think our business is a reflection of their business. And I would also share, Seth, that as we look at the automotive aftermarket in general, we have had many top to top meetings with many of our big suppliers here in recent weeks months. We do have constant dialogue with our major accounts and our NAPA Auto Care Centers. And again, that sluggishness that we experienced in our numbers, what we hear is all of those parties that we're discussing with it are seeing similar results.
Thank you. We'll take our next question from Greg Melich, Evercore ISI. Thanks. I want to follow-up
a little bit on the industrial business and then SG and A. Paul, you mentioned some signs of stability in the industrial business, although if you think about the number of categories that were up or down being the same as last quarter, and industrial production seems to be a little bit better than your actual sales growth or organic. What are those specific signs of stability that you're pointing to? And then I wanted to follow-up with Carol.
Yes. So if I look at the numbers, Greg, that we've seen quarter to quarter since back in early 2015, where our sales were declining dramatically from 1 quarter to the next, culminating in an 8% drop in Q4. We rebounded, if you want to call it that, to a low single digit increase in Q1 and we've seen that again in Q2. So when I say stabilizing, it has stabilized from the really the drops that we were seeing and significant drops that we were seeing in 20 15. In talking to our team, our motion business in Canada has seemed to stabilize and even is showing some slight improvement.
We're watching our we watch very closely the our project work. And our project work, while the projects are smaller than we would like, they're steady. And the number of projects that we see out there are steady. So, we're hopeful and we're starting to see it play out in the numbers a bit that our industrial business, which also impacts our electrical, has bottomed out And hopefully, we'll see a better second half.
Great. And Carol, what was the thing helping you to actually take down SG and A dollars? I mean, you did in the Q1, happened in the Q2. Can we assume that SG and A dollars are down in the back half as well?
Yes. I guess, there's a lot of activities going on across all of our businesses. We've said that each business, a lot of our investments are in technology and productivity. So as we can put in some of these efficiencies, we would be improving our volume per employee. So certainly looking at efficiencies and distribution centers.
Also, you're just adjusting your cost structure to a different level of revenue. So on the industrial side and looking at some of their facilities and looking at their operations and making adjustments to say where we're not going to have business in certain areas and possibly we need to go from 3 branches to 2 branches. And so I think it's a number of projects going on. Our automotive folks have done a very good job on SG and A. And even with a little softer Q2, they still have some SG and A improvement.
So we would expect this to continue. We need to have a little bit better second half, which we're forecasting on the revenue, but we would expect these things to stay in place, yes.
We'll take our next question from Chris Bottiglieri with Wolfe Research.
I have a couple of questions on Industrial. A few of your competitors seem to reference furloughs and plant shutdowns. Have you seen anything similar or any reason why your customer mix might not be feeling the same headwinds?
We have, Chris. We're seeing certainly some of the same things I think our competitors and other folks in the industrial world are seeing. If we look at specifically some of the big oil and gas producers, which has a big impact on not just our industrial business, but our automotive as well, the thought is that and it appears that some of the large oil producers are set to weather the storm. But many of those small oil producers are going under. And I don't know that that's going to change much going forward.
Got you. And then taking all the context, I mean, 3% organic decline really isn't that bad. Do you think relative to your performance to peers, like what do you think is driving that right now? Is it your maintenance mix versus new equipment? Are there any current growth drivers that you've added that are allowing you to take share right now?
Like what are you seeing in that business?
Well, certainly, Chris, some of the new focus product categories that we have gotten into in recent years, products like industrial supplies, safety supplies, material handling equipment, those products and product lines are performing well and actually are generating increases year over year. Where we're seeing some of the pressure is on the traditional industrial products, hydraulic bearings, power transmission. But I think that much like our strategy in our office products business, as we segue into new categories, growth categories, that's certainly helping our numbers.
Got you.
And then actually one last follow-up related to that. In terms of office, I mean, obviously, you've done a nice job of diversifying into Janssen and some of the growth categories. But what are your core like technology office products? How are those performing right now? And is there a point in time where you see that business becomes less of a headwind to your consolidated office number?
Yes. Our tech products our tech categories were down in the quarter, Chris. And our team is certainly focused on getting that back in the plus column. But for now, that is a our tech business is a bit of a headwind. Our strategy is, I think we've articulated in the past, is continuing to drive our overall office products business more into the facilities, break room, safety product categories.
You're seeing that with most of the acquisitions that we've completed of late, certainly the most recent being the Safety Zone and the division of Rochester Midland. So we believe that, that tech headwind will become less and less of a factor as we move forward.
You. We'll take our next question from Elizabeth Suzuki from Bank of America Merrill Lynch.
Hi, guys. If we look at organic revenue growth backing out the FX impact and positive contribution from acquisitions, every business segment was down year over year. And for auto, it sounds like you attribute that to weather specifically. Is there any way to quantify what that growth would have been if weather had been consistent year over year? And is mid single digit growth for the second half
of the
year achievable for that business?
I'm sorry, Elizabeth, are you referring specifically to automotive or across all four? To auto specifically. Okay. So auto in the first half of the year, our core automotive business was actually up 1%. And our expectation is that in the second half of the year that we are going to generate lowtomidsingledigit growth in our core automotive business.
And that is that does not include the potential assistance we'll get from acquisitions. And Elizabeth, if you were to ask me as a follow-up, so how do you intend to do that? I would tell you that we're still very focused on our core initiatives in automotive. While the quarter was certainly not up to our expectations, by no means are we in a panic mode and going to shift our focus. We have terrific opportunities to continue to grow our retail sales.
We are rolling out our top store initiative, which will, as mentioned in my comments, will total 150 stores in 2016. We'll reinvigorate our business in our NAPA Auto Care Center. And then new distribution will be a factor as well. So we're confident we'll drive the kind of numbers that we talked about in the second half.
Okay. And do you think without the weather impact, the 2nd quarter might have seen that kind of low single digit growth in core for auto?
One can only assume, Elizabeth, if you look at our Q1, certainly, we were there. If you look at our previous number of quarters, certainly, we were there. So Q2, we believe, is an outlier. And again, I think that the key initiatives that our team is focused on will get our business back on track in the second half of the year.
Okay. Thanks very much.
Thanks for your question. Thank you. We'll now move on to Christopher Horvers with JPMorgan.
Thanks. Good morning and congrats Tom and all your success as a CEO over the year. And Paul congrats to you and good fortune to you as you move forward to CEO as well.
Thank you, Chris. A couple of
follow-up questions at this point. So you talked
about June flat, July choppy, like June flattish.
What's still soft if you're seeing some of the weather sensitive business pop? What are the what categories continue to be a drag in performance?
Yes. It's as we saw in the second quarter, Chris, it's still some of those same core lines. It's volume control. It's brake business. Our brake business, we have been on a tremendous run over the last 6, 8 quarters in our brake business, and we're seeing that tail off just a bit.
Again, there is nothing that we have fundamentally changed. We haven't raised prices. We haven't changed product categories. So those big categories, ride control, brakes, that's where we're seeing some of the softness, which we're certainly trying to outrun with the growth that we're seeing in tool and equipment, imports and in our temp related businesses.
And so as you I guess, do we have to wait around for because it sounds like some of that's like it's corrosion from the winter that didn't happen, it's potholes that didn't happen. And so do we have to wait around for the winter to see improvements? Like forget your initiatives, but maybe just the industry growth rate. Do you have to wait around for the winter to see improvements in those categories? Or is it does 2012 suggest that, well, the further you get away that drag mitigates and you can start to see growth and maybe later in Q3 in
those businesses? I think you're spot on, Chris, with that comment. I referenced in my prepared remarks what we saw back in 2012. And I do believe that will be the case. But I can assure you, our team is not sitting on the sideline.
They have a tremendous sense of urgency, no panic, but a tremendous sense of urgency working with our good customers out in the field, certainly working closely with our auto care centers to understand where they need our support, how we can help them grow their business. So we are intensely focused on getting our growth curve back going in the right direction in Q3, Q4. And as we have projected in our numbers, we do believe that that will be the case.
Just to clarify, you mean that as the further you get away from the winter, you can start to see growth as you proceed through the year. You don't have to wait for winter weather to reinvigorate those businesses. That's correct. That's correct. Okay.
And then on July, someone asked about the regional differences in June. Is the July acceleration in some of those weather sensitive categories more focused in the northern tier of the country?
I think it's maybe just a bit early to go there, Chris, where you had the 4th July holiday where we lost essentially a week. I think it might be a bit early to go there. But I will tell you that the hot temps that we're seeing, heck, I heard St. Louis is supposed to be 100 plus degrees, That goes across the Northeast. That's going to drive business and it's going to drive certainly those temp related products.
There's just no two ways about it. We've seen it in the past and I don't think 2016
will be any different. And then one last clarifying question to your response. When you say is there when you say sort of July looks like June, that there's no negative calendar impact in there. You're sort of saying on a days adjusted basis, the business looks similar, right?
Correct. Yes, sir. Okay.
Thanks very much, guys.
All right. Thanks, Chris.
Thank you. We'll now take our next question from Tony Cristiano with BB and T Capital Markets.
Thank you. Congrats, Tom, and Paul, welcome and look forward to working with you as we move forward.
Thank you, Tony.
I wanted to talk a little bit more about the initiatives you have in place to sort of drive the sales growth, and you laid out some of those related to auto. But if you look across your 4 segments and then identify the 4 sort of buckets that you attempt, whether it's wallet or acquisition or digital or expansion of footprint, Could you sort of tell maybe give some more color of how you would align each one and where the most opportunity along those four buckets would be for each one?
Well, certainly, we're looking at strategic acquisitions, Tony, in every single one of our businesses. And I think that in 2016, we've had impactful acquisitions in 3 of our 4 businesses. We have activity going in, in all 4, but we have closed on deals in industrial office and, of course, automotive. As it relates to specifically expanding footprint, both domestically and internationally, that's really targeted at our automotive businesses. And as you know, we have new distribution initiatives in place both in the U.
S, Mexico, Canada, Australia and New Zealand. I mentioned earlier, we've had terrific success in our PTC Asia Pac business, and that's a business we'll continue to grow. As we look at our then, of course And then, of course, Greater Sierra Wallach, which really that underpins all of our efforts. Again, that growth goes across all four businesses and really is that what we need to drive our core growth. And
especially on the distribution side, are you as you continue to cross sell and leverage across each of the segments, some of the SG and A savings, is that perhaps coming from your ability to be more effective across your distribution at all your locations?
We believe so, Tony. Certainly, as we look at some of the recent acquisitions, the bolt on acquisitions that we've done, the Safety Zone would fit that category, Rochester Midland, that Janssen acquisition, we believe we have opportunities to cross sell and take full advantage of the structure and the infrastructure we have in place. And I would say the same as it relates to acquisitions that we've done in the automotive space, whether it be on our import business or our heavy duty business. We are leveraging that structure that we've had in place for many, many years across all of our businesses.
And I think one thing I may add Tony, one thing I may add and you said on just SG and A, we also see opportunities that come on the cost of goods sold side as well. So on these acquisitions and we look at the product categories, we're able to take that and leverage across the organization our total spend. So we'll see that coming from the gross margin side and the SG and A side.
So it's just the 2016 ability to see savings. This continue for some period of time beyond as a result of integration and efficiency gain? Correct. Okay. And then last one question.
I just want to clarify. What was your revised guidance on the industrial? Did you say down to flat? Is that correct on the Yes.
Our industrial is going to be flat to up 1 for our new guidance. Flat to up 1.
Okay, perfect.
Flat to up 1.
All right. Thanks, Tony.
We will now take our next question from Scot Ciccarelli with RBC Capital Markets.
Hey, guys. How are you? Hey, Scot. Hey, Scot. Hi.
Specifically asking about auto at this point, any change in the competitive environment worth noting? There's obviously been a lot of changes in the industry over the last, let's call it, 12 months or so. I think we also kind of generally get the weather impact given the industry's experience in 2012. But there was also a period in 'eight and 'nine where your auto business started to significantly lag the performance of a bunch of your peers. And if I remember right, it was a function of uncompetitive pricing in a couple of categories.
In fact, it may have even been ride control now that I think about it. So any change overall in the competitive environment? And then also specifically on your pricing relative to the market? Thanks.
Yes. So I would say this, Scott, on the first question as it relates to our competition. We have not seen any major shift in the competitive landscape. I think pricing remains sane across all of our competitors. Look, everybody is scratching a clawing for market share in a challenging environment, but we've not seen any major shift across our key competitors.
As it relates to our pricing by product or pricing by product category, I recall quite well your reference to 'eight and 'nine and that did occur and we did adjust and I think we certainly benefited from it. We don't see anywhere at this point where we're an outlier in a particular product category. Our guys do price jobs on a very regular basis. We get input from the field on a daily, weekly basis, both from our stores as well as our independent owners. And there is always the occasional tweak we make here and there based on a competitive landscape.
But no, I would say generally we are not seeing any significant change in the competitive landscape.
And Paul, can you remind us how you did wind up in the pricing quandary that you did back in 'eight, 'nine? Because I thought you guys were doing kind of a price scans and competitive pricing channel check, if you will, back then as well. I'm just wondering how it wound up getting so SKU relative to the market?
Yes. So I joined the Automotive Parts Group, Scott, in 2,000 and 2,009. And if I recall, the shift that occurred and maybe we were a bit slow on the trigger was our competitors dropped their prices. And certainly, our retail competitors dropped their prices specifically. We ultimately regrouped, reacted, and the business bounced right back.
But we when I joined in 'nine, we were on our way out of that.
Got you. Okay, very helpful guys. Thanks a lot.
All right. Thank you.
Thanks, Scott.
And we'll take our next question from Bret Jordan with Jefferies.
Hey, good morning guys. Congratulations to Tom and Paul also. You called out the energy market as another region that had some softness. And is that specifically Texas and Oklahoma? Does it spread any further around that range?
And then maybe could you compare you said maybe 400 or 500 basis point spread between the North and the Central and the Northeastern markets versus a strong market comp. Could you tell us sort of maybe how the energy market comp compared to the average also?
Yes. So when we look at our energy related markets, Brett, certainly, in the 1st place, everybody goes to Texas, Oklahoma, and I get that. And certainly, that is that has been impacted, no doubt, and continues to be. And that's not just in automotive. We see that in industrial as well.
But we also see it in the fracking region. So we see it in portions of the Mountain division. We see it in Montana, Dakotas a bit. We see it in Pennsylvania, where fracking was going and blowing and going here a couple of years ago. And in addition, we also see it up in the oil sands in Canada.
Certainly, Alberta has been a headwind for both our automotive business in Canada as well as our industrial business. So yes, it's not just Oklahoma and Texas. I wish it was. And then I'm sorry, Brett, your second question related to the Northern division gap between their numbers and our warmer weather? I was just going to ask you
to compare your energy weakness to the rest of the market. You said that the Northern and Northeastern was 400 basis points or 500 basis points spread. I was wondering if you
could sort of give us a
feeling for how bad the energy market was relative to the average also.
It's actually if we focus in on your opening comment there, Texas, Oklahoma, very similar, it's that 400 basis points or 500 basis point gap. We've I mentioned Mountain is one of our better performing divisions. So, we're able to overcome some of the shortfall in the Dakotas with some strong performance in the Denver area, for instance, that have made up for that.
Okay.
And then a final question. You've talked a couple of times about air conditioning or temperature related products being up double digits. Are in stock levels fine there? Is demand exceeding supply or is everything okay in the inventory?
Yes. I will tell you, Brett, on the inventory comment, we are looking at our inventories across our entire business. We have a new predictive modeling engine that we put into place and we're looking at our inventories and especially in some of the categories where we're challenged and we are pumping up our inventories in some of those categories. Our AC products, we have not had an issue at least that I'm aware of at this point. I think we're well positioned as we race headlong into the back half of the summer.
Okay, great. Thank you.
All right. Thanks, Brett. Thank you. We'll now take our final question from Brian Spenheimer with Gabelli.
Hi, Tom. Hi, Paul. Congratulations to you both.
Thank you, Brian.
Thank you, Brian.
My two real quick ones. Carol, another great job on working capital. Was any portion of that attributable to changes in currency?
No. Well, our there was our currency neutral numbers were smaller this quarter than they have been in the past. But the bulk of that working capital improvement is just coming from accounts payable. And it's broadly all of the segments quite honestly. So it's and then really where we saw a nice improvement this quarter was inventory.
We had about $85,000,000 source of cash from our inventories this quarter and that was a lot of that came from automotive. So we were pleased to see additional improvement coming out of inventory, and we feel like we'll have some more in the back half.
Okay. That's great and encouraging. And then just so I'm getting my numbers right, for the NAPA comps, company owned stores were down 2% in the U. S. And what were they down international?
They were actually up international. We had said they were up. So I think Canada was low single digits and Australia, New Zealand was mid single digits.
And Brian, just to clarify one point, you mentioned our company owned stores. Our company owned stores, same store sales were flat in the quarter. Overall, our automotive was down 2%, U. S. Automotive.
That's why
I asked.
Okay, great. Well, thank you very much and good luck in the coming months.
Thanks so much, Brian.
Thanks, Brian.
And we'll now take our follow-up question from Matthew Fason with Goldman Sachs.
Hi. Sorry to prolong the call, but I just had felt the need to follow-up on Brian's last question. If we think about that delta between the flat comp in the U. S. And the total down 2, is that lower sell in to the franchise stores or to the network or some other factor driving that decline?
No, you got it. That's exactly it, Matt. Any
sense of their sell through relative to that decline? Or was it that tough? Did they pull back an inventory? Because that's a bit of a different pace of business from what you're seeing at the company owned stores?
It is. Our independent owners are competing just fine in the marketplace. I don't think there's anything specific to our big independent owners. They did do a little bit of an inventory build toward the end of Q1, which may have had an impact. But no, we don't see we certainly don't see anything different happening on the independent side as we from our company owned stores.
Understood. Thank you so much. Thank you, Matt.
And that concludes the question and answer session. I would now like to turn the call back over to management for additional or closing remarks.
Well, we would like to thank everyone for participating in today's call, and we look forward to reporting out with our Q3 results. And once again, we'd like to thank Tom Gallagher for all of his leadership over the last 46 years and wish Paul all the best. So thank you for joining us.
Thank you. That does conclude today's conference. Thank you for your participation.