Good morning. My name is Holly, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Genuine Parts Company First Quarter 2014 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
I'd now like to turn today's conference over to Sid Jones, Vice President, Investor Relations. Please go ahead, sir.
Good morning and thank you for joining us today for the Genuine Parts Company Q1 2014 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 Tom Gallagher, our Chairman and CEO.
Tom? Thank you, Sid. And I would add my welcome to each of you on the call today and to say that we appreciate you taking the time to be with us this morning. Paul Donahue, our President and Carol Yancey, our Executive Vice President and Chief Financial Officer are both on the call as well. And each of us has a few prepared remarks and once completed we'll look forward to answering any specific questions that you may have.
Now earlier this morning we released our Q1 2014 results and hopefully you've had an opportunity to review them. But for those who may not have seen the numbers as yet, a quick recap shows that sales for the quarter were $3,625,000,000 which was up 13%. Net income was $157,500,000 which was up 9% and earnings per share were $1.02 this year compared to $0.93 in the Q1 last year and the EPS increase was 10%. We're pleased with our overall results in the Q1 and we feel that the GPC team is off to a solid start to 2014. The combined 13.3% sales increase was our strongest performance in a few quarters and certainly acquisitions helped boost the overall results.
But we were pleased as well with the performance of the underlying businesses, especially in light of the number of weather related closures that we experienced across each of the businesses during the quarter. And we were also pleased that our increase in sales on a per day basis improved sequentially in each of the businesses as we worked our way through the quarter, which is encouraging. And looking at the sales results by segment, our Electrical and Automotive operations had very strong quarters with Electrical being up 30% and Automotive up 23%. Industrial was plus 4% and Office Products was down 0.5% of 1%. Paul will cover the automotive details in a few minutes, but first I'll make a few comments about the non automotive operations starting with Motion Industries, our industrial distribution company.
You'll recall that this segment had a challenging year in 2013, ending the year down 0.5 percent of 1%. We saw a bit of a pickup in the 4th quarter when we were up 3% and this was followed by their 4% increase in the Q1, so a bit encouraging. Also encouraging is the fact that 9 of our top 10 customer segments are generating positive results for the Q1, with automotive and iron and steel categories leading the way, along with customers in the lumber and wood products and coal aggregate and cement product categories growing nicely as well. These latter 2 are important parts of our overall business and it's nice to see them showing solid growth, perhaps indicative of improvement in the housing and construction sectors. It's also interesting to note that after several quarters of decreases, the original equipment manufacturing segment was up modestly in the quarter and hopefully a sign that demand from this important segment is starting to improve for us.
Our general sense is that demand in the overall Industrial segment is firming up a bit, still a bit uneven across certain customer and product categories. And in talking with our customers, we still hear a bit of cautiousness, but not as pronounced as it was 6 months ago. And importantly, 2 important leading demand indicators for us, the industrial production and capacity utilization indices continue to be at historically healthy levels. As a result of all of this, we continue to anticipate a respectable year from industrial operations. Moving on to EIS, our Electrical Electronic company.
They had a terrific quarter with revenues increasing 30%. Certainly recently completed acquisitions were a big part of their increase, but we do see signs that the underlying conditions are improving somewhat. As with Motion, there is a bit of unevenness in the recovery, but encouraging signs all the same. This combined with the ongoing contributions that we will get from their recent acquisitions as well as the continued firmness in the ISM Purchasing Managers Index, a key demand indicator for us. All of this will enable us to look forward to strong double digit growth for EIS over the remainder of the year.
And finally, a few comments on Office Products. Although down slightly for the quarter, we were a bit encouraged by a few of the trends that we saw develop in the 1st 3 months. Our business with the independent office products resellers was down 1% in the quarter, but this part of our business actually improved as the quarter progressed and was nicely positive in March. And somewhat similar comments on the Mega segment of our business. This group was up mid single digits in the quarter with March being the strongest month.
On the product side, Furniture was up mid single digits, while Technology Products, Core Office Supplies and Cleaning and Break Room were each down a bit. But encouragingly, all 4 product categories showed nice positive growth in the month of March. And it's been a while since we have seen all 4 of the major product categories show positive results in the same month. Certainly, the biggest news for our Office Products segment is the recent announcement that S. P.
Richards has been named the 1st call wholesaler for the combined Office Depot OfficeMax business. We're honored and we're proud to have been selected. And this enhanced relationship will add over $100,000,000 in annual volume to S. P. Richards starting in the second half of the year, so an incremental $50,000,000 or so over the second half and this will be a nice boost to the overall S.
P. Richards sales results in 2014. So that's a quick overview of the non automotive businesses. And at this
point, I'll turn it over
to Paul to cover the Automotive segment. Paul?
Thank you, Tom. Good morning, everyone, and welcome to our conference call. I'm pleased to join you today and to have an opportunity to provide you an update on the Q1 performance of our Automotive business. As was mentioned in our previous conference calls, we now include in our automotive recap the results from GPC Asia Pacific, which was consolidated into our results on April 1, 2013. As Tom mentioned in his opening remarks, our automotive business grew top line revenues by 23% in the Q1.
To further explain our growth, the numbers break out as follows: Acquisitions, primarily GPT Asia Pac, contributed 17% of the 23 percent. Our core business grew 7% and currency had a negative impact of 1 plus percent. I'd like to take this opportunity to walk you through our North American numbers and provide you an overview of our Q1 performance. As we reflect on this past quarter's results, it will be apparent that numbers are very similar to our Q4 performance. A combination of colder weather, solid industry fundamentals and a shift in the Easter holiday, but most importantly improved execution in the field enabled us to report another good quarter.
All of these factors played a part in our team generating a 7% top line increase. When evaluating our quarterly performance, we are encouraged to see that all regions of the U. S. Are positively contributing to our sales growth. As was the case in the Q4, the top performers in the Q1 were once again those that were most impacted by the colder winter temperatures.
Our division stretching from the plains across the Great Lakes to the Northeast continue to lead the way for the company. In addition, these colder temperatures provided positive momentum for a number of our key product categories, which I'll touch on later. But as Tom commented in his opening, the extreme weather we encountered during the month of January and even into February in some southern states as well as up and down the Eastern seaboard forced numerous store and customer closures and had a negative impact on our business. However, we continue to believe the overall benefits to the Parts business as a result of these extreme cold temps outweigh any of the
negatives. Now turning
to our U. S. Company owned store group.
Comparable same store sales growth in the Q1 came in at +8%. This strong performance follows a 7% same store sales growth in Q4. Our sales growth in the Q1 was driven by a healthy 8% increase in our commercial and our wholesale business. Diving deeper into our commercial results. Our non fleet related business turned in another strong quarter generating an 8 percent increase.
For the 2nd consecutive quarter, both our major account customers as well as our 15,000 plus NAPA Auto Care Centers generated double digit increases. We're pleased with progress our team continues to make in these all important segments of our commercial wholesale business. We also can report an increase in both our average wholesale ticket value and our average number of tickets for the quarter and we're encouraged by both of these trends. Wrapping up our discussion on the Commercial segment. We generated strong results in our fleet business generating 8% growth in the Q1.
And these are the best results out of this segment of our business in a number of quarters. Turning now to our retail business. We can report this important segment outpaced our wholesale business in the quarter by posting a 9% overall increase. It's been a number of years since we reported this significant of an increase from our retail business. As we saw with our wholesale business, both our average ticket value and our average number of tickets increased in the quarter.
We are pleased with our team's efforts in our stores and the energy behind our many retail initiatives. Now let's take a look at a few of the product categories driving our growth. Much like the 4th quarter, our naphtha batteries and battery related accessories continue to post strong results. These categories grew mid double digits in the quarter. Not surprisingly, the cold winter temperatures throughout much of the country also drove double digit increases in both our starter and our alternator business.
Other big growth categories for us in the quarter were our wiper and our chemical business as well as our chassis business. Key product categories such as brakes, filters, belts and hoses all grew mid single digits in the quarter. As we head into spring and with the arrival of warmer temperatures, we expect to see sales in these core product categories ramp up. So in summary, we remain encouraged as both our North American and our Australasian automotive operations report another quarter of improved results. We remain positive about the core fundamentals of the automotive aftermarket and the growth opportunities available to us in both the retail and the commercial sectors.
We have a new ad agency in place, a new 18 year old NASCAR driver named Chase Elliott, who has posted back to back victories in recent weeks and a new retail customer loyalty program that is currently being piloted in a select number of operations. To date, we are pleased with the results. We plan to roll out additional locations later in the year. Many of the key aftermarket industry metrics remain positive. However, we are seeing a couple of trends that we will continue to monitor.
Let's start first with the positive. The average age of vehicles on the road remains in excess of 11 years and deferred maintenance remains at historically high numbers. A couple of key metrics we will keep an eye on is the price of gasoline and miles driven. Fuel prices have steadily increased over the past 30 days and we have and have seen an increase of $0.05 in just the last 2 weeks. And as for miles driven, after posting positive growth numbers in 2013.
They have now trended down slightly for 2 consecutive months. Harsh winter conditions could be impacting these results and we had hoped to see these numbers normalizing as we head into the summer months. So in closing, we are pleased with our Q1 results and encouraged by the strong start to the year. We're proud of our management team and know they remain committed to driving profitable growth throughout 2014. While we have much work ahead of us, we remain optimistic that the initiatives we have put into play are having positive impacts on our results.
We'd like to personally thank all of our NAPA associates both at both in North America and GPT Asia Pacific and Australia and New Zealand for their efforts in the Q1. So that completes our overview of the automotive business. And at this time, I'll hand the call over to Carol to get us started with a review of our financial results. Carol?
Thank you, Paul. We'll get started with a review of our Q1 income statement and the segment information and then we'll review a few key balance sheet items. Tom will come back up and wrap it up and then we'll open the call up to your questions. Total revenues were $3,600,000,000 for the Q1, an increase of 13% from last year, consisting of a 10% contribution from acquisitions, 4% underlying growth and this was offset by a 1% headwind from currency. Gross profit for the Q1 was 29.9 percent of sales, up 110 basis points from the 28.8% last year.
Primarily, the increase reflects the favorable impact of higher gross margins in our Australasian business, which owns 100 percent of its stores. Excluding the impact of GPC Asia Pacific, which we will annualize in the second quarter, our underlying gross margin was down slightly from last year's Q1, and this is due mainly to customer and product mix shifts across all of our businesses. We'll continue to seek opportunities for margin expansion. And for the year, we would expect gross margin to be in the 30% range. As an additional point of interest, we are seeing some slight inflation in our non automotive businesses to date, but not seeing that in the automotive sector and we don't expect this to change much over the balance of the year.
Our pricing year to date through the Q1 is flat for automotive, 0.8% for industrial, 0.7% for office products and 0.8% for electrical. Turning to our SG and A. Our total expenses were $841,000,000 in the Q1, representing 23.2 percent of sales. Our SG and A expenses as a percent of sales are up 130 basis points for the quarter. And much like the change in gross margin, this primarily reflects the impact of higher SG and A costs at GPC Asia Pacific, again due to their 100% store model.
Before GPC Asia Pacific, our expenses are slightly improved from last year as a percent of sales and primarily reflect the cost savings associated with the freeze of our pension plan that was effective January 1, 2014. Although these savings were partially offset by increases in other retirement related benefits, the pension freeze will continue to favorably impact our overall retirement related costs in the periods ahead. In addition, we continue to focus on effectively managing the cost in every area of our business. We're seeing progress in areas such as supply chain efficiency and labor productivity and we see room for further improvement in future periods. The Q1 savings from our cost initiatives were offset by increases in items such as health care and incentive based expenditures.
And we remain challenged by the lack of leverage associated with only slight underlying sales growth in our non automotive businesses. That said, in consideration of the GPC Asia Pacific store model and ongoing savings associated with our cost initiatives and the expectation of the gradually improving sales environment in our non automotive segment, we expect total SG and A to improve in the quarters ahead and to be approximately 23% of sales for the full year. Now let's discuss the results by segment. Our automotive revenue for the Q1 was $1,900,000,000 and represents 52% of sales and up 23%. The operating profit of 150,000,000 dollars is up 24%, so their margin improved 10 basis points to 7.9% from 7.8% last year.
Our industrial sales were $1,140,000,000 in the first quarter, which is 32% of total revenue and up 3.7 percent from 2013. Our operating profit of $83,000,000 is up 5.3 percent and the operating margin of 7.3% is up 10 basis points from the 7.2% in the prior year. We're pleased to see this improvement in motion and continued top line growth in this business will help us further. Our office products revenues were $418,100,000 in the quarter or 11% of our total revenues and down just 0.5%. Our operating profit of $33,900,000 is up 2.3 percent, so their operating margin was up 20 basis points to 8.1% from the 7.9% last year.
The Electrical Electronics Group had sales in the Q1 of 180 point $1,000,000 which is 5 percent of total revenue and up 29.6%. Their operating profit of $15,500,000 is up 48.6% and their margins showed a strong jump to 8.6% from the 7.5% in 2013. So our total operating profit was up 16% in the Q1 and our operating profit margin was up 20 basis points to 7.8. We're encouraged by this improvement and especially pleased that each of our businesses contributed to the overall increase. We are focused on consistently growing our margins in the periods ahead and expect to show a 10 to 20 basis point improvement for the full year.
We had net interest expense of $6,200,000 in the Q1, which is up from last year due to the incremental interest income earned in the Q1 of 2013 that was in association with our large cash balance held for that period. This cash was used to purchase GPC Asia Pacific on April 1, 2013. And we expect interest expense over the next three quarters to be slightly favorable to the prior year and to be in the range of $22,000,000 to $24,000,000 for the full year. Our total amortization expense was $8,900,000 for the Q1, which is up from 2013 due primarily to the GPC Asia Pacific acquisition as well as the industrial, electrical and office acquisitions that were completed more recently. Currently, we expect amortization expense to be in the $35,000,000 to $37,000,000 range for 2014.
The other line, which reflects corporate expense, was $23,600,000 expense for the quarter, which is up from the $14,300,000 in the Q1 last year. This increase reflects higher expenses for a variety of items, including insurance and incentive related costs. In addition, we had a more favorable retirement plan valuation adjustment in the Q1 last year. We expect this line to be in the $75,000,000 to $80,000,000 expense range for 2014, which compares to $67,000,000 in 2013 before the $33,000,000 one time gain on the GPC Asia Pacific acquisition that was reported in the Q2 of 2013. For the quarter, our tax rate was approximately 35.5%, which compares to 35% last year.
The lower Australian tax rate on GPC Asia Pacific's pretax earnings continues to benefit our overall rate, which is typically lower in the Q1 relative to our full year rate. Last year, we had a more favorable retirement plan valuation adjustment, which is nontaxable. We continue to expect our full year tax rate to be in the 36% to 36.5% range for 2014. Net income for the quarter was $157,500,000 and EPS was $1.02 compared to the $0.93 last year and up 10%. Now let's move on to the balance sheet.
Our cash at March 31 was $103,000,000 which is down from the approximate $842,000,000 in March of 2013 and the $197,000,000 at year end. The decrease in cash relates to the cash used in the Q1 for acquisitions, a pension contribution and share repurchases. Additionally, our cash position was especially high at this time last year as about half that balance related to the cash we held for the April 1, 2013 acquisition of GPC Asia Pacific. With these items in mind, we're comfortable with our current cash position at March 31. Accounts receivable of $1,800,000,000 at March 31 increased 13% from the same period in 2013, which is in line with our 13% sales increase for the quarter.
We remain focused on our goal of growing receivables at a rate less than revenue growth in the periods ahead and we're very satisfied with the quality of our receivables at at this time. Our inventory at quarter end
was $3,000,000,000 which is up 1%
from December 31 and up 16% from March 31 last year. Before the impact of acquisition, our inventory is down 1% from December 31 and up 1% from March of last year. So our team continues to do a very good job of managing our inventory levels. We will remain focused on maintaining this key investment at the appropriate levels as we move forward through the year. Our accounts payable balance at March 31 was $2,300,000,000 which is up 30% from March of the prior year due to the positive impact of our extended payment terms and other payables initiatives established with our vendors as well as the impact of acquisitions.
Our continued improvement in this area and its positive impact on our working capital and days in payables is encouraging and we expect this trend to continue in the periods ahead. Our working capital of $1,900,000,000 at March 31 compares to $2,300,000,000 at March 31, 2013. Effectively managing accounts receivable, inventory and accounts payable is a high priority for our company and our ongoing efforts with these key accounts have resulted in solid improvement in our working capital position and cash flow. Our balance sheet remains in excellent condition at March 31, 2014. Our total debt of $900,000,000 at March 31 represents approximately 21% of total capitalization.
It includes $250,000,000 term notes as well as another $400,000,000 in borrowings under our multi currency syndicated credit facility. We're comfortable with our capital structure at this time, although we may choose to pay down some of our current debt outstanding under the syndicated credit facility during 2014, depending on the investment opportunities that could arise. In the Q1, our cash from operations was approximately $60,000,000 And for the full year, we would expect cash from operations to be in the $900,000,000 to $1,000,000,000 range. And we would expect free cash flow, which deducts capital expenditures and dividends to be in the $500,000,000 range. We're pleased with the continued strength of our cash flows and remain committed to several ongoing priorities for the use of our cash, which we believe serve to maximize shareholder value.
Our first priority for cash is the dividend, which we have paid every year since going public in 1940 8 and have now raised for 58 consecutive years, which is a record that continues to distinguish genuine parts from other companies. Our annual dividend of $2.30 per share in 2014 represents a 7% increase from the $2.15 per share paid in 2013 and it's approximately 52% of our 20.13 earnings per share, which is well within our goal of the 50% to 55% payout ratio. Our goal would be to maintain this level of payout ratio going forward. Our other priorities for cash include the ongoing reinvestment in each of our 4 businesses, strategic acquisitions where appropriate and share repurchases. Our investment in capital expenditures was $18,400,000 for the Q1, which is up from the $12,900,000 in 20.13.
We expect our capital expenditures to pick up over the balance of the year and look for CapEx spending to be in the range of $140,000,000 to $150,000,000 which compares to the $124,000,000 last year. As usual, the vast majority of our investments will be weighted towards productivity enhancing projects primarily in technology. Depreciation and amortization was 36,900,000
dollars for the quarter, which is consistent with the Q4, but up from the
$26,000,000 in the Q1 last year. The increase on this line reflects the impact of Asia Pacific as well as our more recent acquisitions. And we would anticipate depreciation and amortization to be approximately $145,000,000 to $155,000,000 for the full year. Strategic acquisitions continue to be an ongoing and important use of cash for us and they're integral to the growth plans for the company. Thus far in 2014, we've added 3 acquisitions including 1 each for industrial, electrical and office businesses with estimated annual revenues totaling $235,000,000 These businesses as well as those acquired over the last several periods are performing well and in line with our expectations and we're encouraged by the growth opportunities we see for each of them.
We will continue to seek new acquisitions across all of our businesses to further enhance our prospects for future growth, generally targeting those bolt on types of acquisitions with annual revenues in the $25,000,000 to $125,000,000 range. Finally, in the Q1, we used our cash to purchase approximately 300,000 shares of our common stock under the company's share repurchase program. This follows 1,500,000 shares purchased in 2013. And today, we have another 10,400,000 shares authorized and available for repurchase. While we have no set pattern for these repurchases, we expect to remain active in the program over the balance of the year as we continue to believe that our stock is an attractive investment and combined with our dividend provides the best return to our a team effort here and everyone a team effort here and everyone's hard work is truly appreciated.
The company is well positioned for continued growth and we look forward to updating you on our future progress when we report again. I'll now turn it back over to Tom. Tom?
Thank you, Carol and Paul for your updates. So that will wrap up our prepared comments. And in summary, we would say that we feel that we came through the quarter in pretty good shape and about where we had planned to be. As we look out over the remainder of the year, we continue to feel positive about our prospects in all four of our business segments. In automotive, we anniversaried the GPC Asia Pacific acquisition as of the 1st April, which will moderate our overall automotive growth rates over the remainder of the year, but we continue to feel good about the underlying fundamentals in the automotive aftermarket as Paul has covered and we feel good as well with the results that we are seeing from our various initiatives.
The one unknown for us right now is the strength of the headwind that we'll encounter over the remainder of the year due to currency exchange. As mentioned earlier, it was over 1% in the Q1. With all of that said, however, we feel that we should raise the bottom end of our full year automotive guidance from +5 percent to +6 percent and for now leave the top end at +7 percent. As mentioned during our comments, we are a bit encouraged by some of the signs that we are seeing in both the Industrial and Electrical markets and we would reaffirm the previously provided full year revenue guidance of 5% to 7% for Industrial and 25% to 30% for Electrical. And in Office Products, now having a bit of clarity around the Office Depot business, we need to raise the guidance from the previously provided plus 1% to plus 3% to plus 3% to plus 4%.
Putting all of this together would give us a full year increase of 6% to 8%, which is up from our previously provided 5% to 7%. On the earnings side, our prior expectation was to be in the range of $4.47 to $4.57 And at this point, we would say that a range of $4.49 to $4.59 is probably more appropriate. Now although we don't provide quarterly guidance as a point of information, there will be a bit of choppiness on a quarterly basis due to some of the one time purchase accounting adjustments related to the GPC Asia Pacific acquisition in quarters 2 3 last year. And as you're updating your models Sid will be available to talk with you on this. But we are comfortable with the current annual guidance of $4.49 to $4.59 that was just provided and we'll look forward to refining this a bit further as the year progresses.
With that said, we would like to address your questions and we'll turn the call back over to Holli. Holli?
Thank you. Your first question will come from the line of Scot Ciccarelli with RBC.
Hey, guys. Scot Ciccarelli.
Good morning, Scot Ciccarelli.
Good morning, Scot.
How are you? Good.
Paul went through I guess I'm getting slower as I get older here, but Paul went through a couple of the different growth rates on the auto side. Can you just re summarize those quickly and number 1? Number 2, you guys had some nice improvement on the payment terms or accounts payable to inventory. Is that coming from across the different segments? Or is that more leverage towards auto where obviously some of your competitors have very favorable AP to inventory ratios?
Thanks.
I would say that on the accounts payable that's primarily coming from auto and that would be the majority of what we've seen recently and what we expect to see. But I would also say all of our businesses have initiatives focused on it and it's something that all of our businesses are looking towards doing and have some improvement there. But I would say the majority of the increase is certainly coming from automotive.
Got you. Thank you.
And Scott specifically what were you looking for me to repeat on the automotive numbers?
Well, I guess, I think you had
said both commercial and wholesale were up 8%. That's correct.
That's correct. Yes. Commercial and wholesale were up 8%. Our same store sales were up 8 percent and our retail business was up 9%.
I get it. Okay. And then the so we wound up getting 7% because of the currency
for the whole organics?
Yes. I got it. Okay. Yes, that cleared up. All right.
Thanks guys.
You're welcome. Scott, one
other thing I would just add is one of the things that we really find pleasing about the quarter in the automotive business is the consistency of the performance across all of the segments. I think our team did a terrific job of touching all the bases in this quarter.
Got you. Thanks Tom.
Thank you.
And your next question will come from the line of Greg Melich, ISI Group.
Hi, thanks. Paul, you mentioned Marsh had a nice improvement over the weather disruption in January February. Could you help us give an idea of the magnitude and whether there was an Easter shift that impacted that and how April is looking to look more like March or more like the whole Q1?
I take that Greg and I'll comment on all of the businesses. Automotive showed consistency throughout the quarter. We saw some pickup in March. And then if we look at the other three businesses, one of the things that was a bit encouraging is that in each of those businesses, we actually saw sequential improvement as the quarter progressed. And those businesses are more prone to be hurt by the impact of weather.
But March was a good month for us in all four of the businesses.
And does April look more like March or like the Q1?
April looks more in line with March.
Right. And then second, could you give us an update on how the Australian business is doing organically? I think you lost a little bit in that 7% number, but anything in terms of traffic and comp trends there?
No. As you know, we don't break out that business separately. I think we would just leave it that we continue to be very pleased with the job that that team is doing and we think they've got a very bright future.
All right. Great. I'll leave it at that. Thanks.
All right.
Thank you.
Thanks, Craig.
And your next question will come from the line of Matthew Fassler with Goldman Sachs.
Thanks a lot. Good morning.
Good morning.
My primary questions relate to office supply and really a 2 parter. The first just relates to how much of the wholesale business associated with the Depot MAX deal that you didn't previously do you think you'll capture? And I'm particularly asking with regard to your geographic coverage and do you feel like you have the coverage to get all of their markets? And the second question is related to that. As you think about the price that you may have paid to get that business, is there any margin pressure you would expect on the legacy business as a result of whatever it is you took to win that bid?
Thank you so much.
I'll try to answer that. In terms of how much of the business will we capture with the name first call, as you know, so that gives us the opportunity to fulfill all of their needs across the entire enterprise. And how much of what we get, we're pretty optimistic that we're going to get a very high percentage of it. We do have the geographic coverage to support it. We've got the ability to handle all of that business and our intentions are to handle all of that business.
Great.
And then in terms of any pressures on the legacy business, we would not anticipate that. I think it may be important to point out that I don't believe that this was 1st and foremost a price decision on the part of Office Depot. I think price certainly was an element. But I think it's important to remember that we've had the Office Depot business for 20 years. And part of the reason I suspect that we might have gotten a nod is that we've done I think a pretty commendable job of handling that business from day 1.
So I think price is always a factor, but the value add and the level of service and the level of support that you can provide is an important element as well. And I think we've fared reasonably well in that over the past 20 years.
And then by the way
a very brief follow-up. We can't handle this after the call if you like. But to the extent that you spoke about purchase accounting dynamics for the 2nd Q3 last year, would there be any adjustments to the current year's numbers? Or is it just simply a function of understanding the charges that you might have incurred a year ago?
We're not anticipating any purchase accounting adjustments to speak of for 2014. It was just a reminder that we did have the large one time adjustment in the Q2 and then we had a smaller adjustment in Q3. So it's just a reminder about the choppiness due to the prior year numbers.
That is helpful. Thank you so much.
Thank you.
And your next question will come from the line of Aaron Robinson with Wolfe Research. Hi.
This is actually Chris Bottiglieri on for Aaron.
Hi, Chris.
Hoping to get your thoughts on I was hoping to get your thoughts on increased vehicle complexity. The trend appears to be solely hurting DIY and favored DIFM. But wondering as the increased complexity particularly with hybrids, Tesla and even the aluminum F-150s, If there comes a point where like the smaller bays, the 3 bay garages are no longer able to handle the work? And how should we think about this as it relates to NAFTA?
Well, I'll try to take it. Paul may have something to add. I would say one, you're right that the vehicles are going to become more complex and they're going to require a higher level of training and sophistication to do the repair work in the years ahead. On the Napa side, we have been anticipating this for several years now and we've got training programs for all of our commercial customers that if followed will enable them to do these repairs going forward. The other thing to keep in mind is that the aftermarket is a very, very large industry and you've got 251,000,000 vehicles on the road today.
And this new technology that comes in, it comes in on a gradual or revolutionary basis, not a revolutionary basis. So there's a multi year opportunity for us to be prepared, not only from the technical training point of view, but also from the supply chain point of view to handle the demands of the vehicles in the future. So we actually see it as an opportunity. I do think to your point, I do think that those on the repair side that for whatever reason don't avail themselves of the training or aren't in a position to buy some of the new diagnostic equipment and tools that will be needed. They're going to be threatened.
But at the same time, we think that good customers like our major account customers, our NAPA Auto Care customers, this is an opportunity for them to perhaps gather up some share as we evolve through the transition we're going to be going through.
Chris, the only thing I would add to that is that the overall complexity of the vehicle part today as that goes more and more towards DIFM that's a positive for NAPA and for our primary customers.
Okay. Thank you. I appreciate that color.
You're welcome.
Congrats on the quarter.
And your next question will come from the line of Chris Horvers, JPMorgan.
Thanks. Good morning, everybody. Good morning, Chris.
So I wanted to try to parse out a little bit more some of the March April commentary. I mean, you talked about an Easter shift. Is it possible to look at what average daily volume growth was like in the DIY and the commercial side of the auto parts business to try to figure out what the underlying trend is?
It would be it's a hard number to come up with, but it will be we would suggest it will be less than 1 half of 1%.
I got you. In terms of the impact, I understand. And that DIY number was just, I mean, through the roof. Is there any reason to think that, first, the Easter shift had more of an impact on that side of the business? And can you dig into some of the category performance in DIY where that acceleration was?
I mean, because I think the naive would say, well, wipers, it's cold, it's snowy, it's batteries, it's wipers and that really the surge of demand in DIY should have already passed, but actually seems like it showed up later. So can you talk about the categories that showed the acceleration and how you think about the performance in DIY and commercial both 2Q and then as you get into the balance of the year?
Yes. Chris, this is Paul. Just let me take the retail piece first. And I think I would start by telling you that overall our team is performing at a higher level, executing at a higher level.
We've done a lot of work in our stores.
We've reset our stores. Higher level. We've done a lot of work in our stores. We've reset our stores, remerchandised them, extended hours, better signage, better associate care on the floor for our customers and dedicated care on the floor. So I think all of that has had a positive impact on our retail business.
And we really saw that trend throughout the past year. You couple that with the harsh winter weather and that harsh winter weather that really drove we think some real emergency type repairs. In emergency type repairs you got stuff breaking down, right? So you've got batteries that need to be replaced, wipers that need to be replaced, scrapers that need to be bought, chemicals that need to be bought. We saw positive growth in every one of those categories throughout the quarter.
So I'd say really it's a combination. I think one our execution is better and then I think the harsh winter weather drove folks into our stores to get some emergency repairs done quickly.
But you would think in I mean to Tom's comment that April looks more like March in auto, you would think that people aren't repairing changing their batteries out because it's warmer and the cars are starting. So is it I guess is the demand starting to spread to more of the repair and maintenance categories that aren't more emergency in nature?
I think that's a fair assumption. And my comment about April was not just for automotive. That was also for our other businesses as well.
Understood. And then that's a good segue. So on the Industrial business, it did it seemed like the organic growth came in a little lighter than you were originally anticipating. So did actually the weather end up having more of an impact on that business in the middle part of the quarter that you expected? And is what you're seeing in March April more in line with how you're originally thinking about the year?
Well, we did have an improved quarter organic growth wise. We did have an improved quarter for the addition of some acquisition volume as well. But we did see some improvement organically and we also had the impact negative impact of currency exchange in the quarter, which was just over 1% in the Industrial business. To the second part of your question, our non automotive businesses are hurt by the kind of weather that we experienced in the Q1 because it's business closures and we don't experience increased demand because of cold temperatures. We do get the benefit of increased demand on automotive offset by whatever number of stores and customers' locations that are closed.
But it was a headwind in the quarter the weather was and that's behind us now. So we've got a degree of optimism for the remainder of the year.
Okay. And then just one final one on the margins. At what point in organic growth in the nonautomotive businesses do you start to see vendor allowances picking up year to year and then similarly getting leverage on the SG and A side? Thanks.
I would I'll try to take that and Carol can help. But I would say that we need approaching mid single digit growth in those businesses. One of the offsets potentially to any volume incentive programs is the fact that our team is doing a better job ever increasing better job on our inventory management. So I think Carol covered the inventory continuing basis. So and we run the businesses we don't use the balance sheet to prop up the income statement.
So if we can generate mid single digit growth in any of these businesses and at the same time through better visibility and better technology hold inventories even, that's what we're going to do. We're not going to boost the inventories in order to try to qualify for any additional rebates that might be earned.
And I think just one other thing on the volume incentives, there was not really an impact in the quarter. Our volume incentives were basically flat compared to the prior quarter and we're modeling flat this year for 2014. So I think there's some other things that should come into play with our gross margin initiatives that we should get the improvement from those areas rather than just the sheer volume incentives.
Thank you.
All right. Thank you.
Your next question will come from the line of John Lovallo, Bank of America.
Hey, guys. Thanks for taking the call. Good morning, John.
Good morning, John.
First question would be for you Carol. If we think about the auto business and we think about the year over year incremental margins, they've been in the low kind of 8% range over the past few quarters. I guess the question is, is this a reasonable run rate to think about? Or are there additional levers now that can be pulled given that Exego would be fully integrated and so forth?
Well, traditionally and we try not to base everything on just Q1. So Q1 tends to be a lower margin business, especially in the automotive side. And we do have a bit of seasonality, certainly with Asia Pacific and what their what our Q1 is, is their winner, if you will. And but we have some seasonality. So on a full year basis, we would point you more to looking at the full year margin numbers and say that's where we would expect to be on a full year.
And we are still looking for a 10 basis point to 20 basis point improvement on a full year basis.
Okay. That's helpful. And maybe more of just a strategic question here, thinking about the office products business. And you guys currently have 8 proprietary brands there, which I mean it would appear that there would be at least some degree of cost supporting those brands. I mean is there any business rationale to potentially consolidating the brands and going to the market with maybe a more consolidated portfolio if you will?
I don't think that's part of our thought process currently. I think we're comfortable with the way we're managing the product portfolio today.
Okay. Thanks very much guys.
Thank you.
Thank you, Gal.
Tal. And your next question comes from the line of Brian Sponheimer with Gabelli and Company.
Hi, everyone. Good morning.
Good morning, Brian. Hi, Brian.
Couple of questions
here. With auto being up 8%, how much do you think a piece of that came from market share gains? And how much do you think may have come from what will be the Advanced General Parts conglomerate when that's all integrated?
Yes. Brian, this is Paul. A couple of things. One, it's kind of difficult to tell at this point. But I would tell you that as far as your question on the advanced Carquest acquisition, no, it's pretty early yet.
We're encouraged by the things that we're seeing happening in the field, but it's very early. And I can tell you that for the Q1, there was really no material impact on our numbers in the Q1 as a result of those two businesses coming together.
Okay. Just pricing dynamics staying fairly stable so far?
Absolutely. You're talking about in the marketplace, Brian? Yes. Yes. So far everybody is it seems to be pretty rational out there.
We're not we're certainly as Carol pointed out in her comments, we're not getting any help from price increases, but it's rational.
As this year progresses and let's say things begin to get any better, do you foresee any sort of mix shift back towards the best and better products Paul? Or is that just something that you don't think is going to be a major part of the marketplace going forward?
Well, it's hard to tell Brian. We do have a good, better, best offering of products for sure in the marketplace. We promote all 3. We push all 3. We have seen a bit more of a flight to value in recent years.
And I don't know that that's going to change any to any effect going forward in 2014. All right. Thank you.
And Carol just one of your comments you said you guys may choose to pay down some debt as the year goes on. Given how cheap you're borrowing or why would that be the best use of cash as you guys
look at how to allocate capital?
So right now we're what we were saying is we're at $900,000,000 right now. We may. It's really going to depend on what opportunities may present themselves between now and the end of the year. And certainly that could come in the form of acquisitions or share repurchases. And honestly with looking at how our cash is going to be and our cash flow coming in, so it's really a balancing.
We may be at levels similar to last year. We were saying we may take it down a bit from the $900,000,000 that it is Q1. But we haven't ruled out anything, because it really we're going to look at it as things present themselves between now and the end of the year.
Okay. All right. Thank you very much. Nice quarter, Brian.
Thanks Brian.
And your next question will come from the line of Seth Bashman with Bush Securities.
Good morning. Seth Bashman here. How are you guys?
We're doing well, Seth. Good morning.
Good morning. So I have a couple of questions. First, if you could give us a better sense of what underlying gross margins were year over year for the auto business when you strip out Asia Pacific business?
So we don't break out the gross margin specifically to the segments. But what we would say is if you took out the impact of Asia Pacific for this quarter, our core gross margins were down about 10 basis points. And that was really reflected in all of our businesses. And we said that was more of a customer and product mix. And it's really representative of all of our businesses.
So we would hope we've got some things in place that we hope to see that come back a bit between now and the end of the year. And so we're kind of targeting at around 30% or just a little bit better than that by the end of the year.
Okay. So full year gross margin guidance hasn't changed versus your prior guidance, right?
No, it hasn't.
Okay, great. And then in terms of the auto business again, the gap between some of your strongest markets that you referenced, the weather affected markets in the North and Northeast versus the least strong markets. Did that gap change in this quarter relative to last quarter?
Well, it did somewhat Seth and primarily because some of the our divisions and groups down in South were impacted by the weather in a negative fashion, right? So you had some customer closure and store closures, which certainly the folks up North deal with the weather a lot better than we do down here in the South.
Got you.
So that would imply that the Northern markets actually accelerated in terms of trend in the Q4 or the Q1 versus the 4th?
Well, the Northern divisions continue to as they were in the 4th quarter, Seth, continue to be strong operators for us. Absolutely. Your assessment is correct.
Okay, great. And then can
you remind us last year what your same store sales was for the U. S. Naphtha business adjusted for any selling day differences?
Hold on. Just give us a second. I'll pull that up.
For the Q1?
Yes.
5%?
No, no. Q1 2013 our same store sales were just up modestly, basically flat. On a selling day basis? On a same day basis. Yes.
Great. Okay. And then lastly, as it relates to the office business, the incremental $100,000,000 of sales that you guys expect from the ODP win, should we expect that to come at similar margins to the segment average?
No. It will be a little bit lower than the overall average.
Okay.
Perfect. Thank you very much guys.
All right. Thank you.
And the next question will come from the line of Keith Hughes, SunTrust.
My question has been answered. Thank you.
Thanks, Keith. And your next question will come from the line of Bret Jordan, BB and T Capital Markets.
Good morning.
Good morning, Bret.
A quick question, I guess, as you look at the accounts payable to inventory and you're pushing towards 80%, and I imagine most of that is on the back of the automotive side, Where do you see that number getting to? Do you think you can get the motion and electrical suppliers to sort of drink the Kool Aid on extended terms? Or are we because most of it has come from auto, it might be hard to get it up from here?
Well, I don't think we plateaued. So I think you'll see a bit of improvement from here. As far as the first part of the question, this concept is not spread throughout the other businesses. So it's going to be more difficult and more time consuming to accomplish what we would like to accomplish in those businesses. But I think we still have a little bit of headway yet in terms of bringing it up.
When we think that your auto AP inventory is in the 90s, if your aggregate AP is in 79?
We haven't worked that number.
Okay. And then I guess the question is go back to market share. Not a lot you say has changed in the Q1, but have you picked up distributors from the Carquest transaction?
We've had some positive results there. It's a little early in the process, but there have been some movements, yes.
How many you talked about how many or
sort of
where you think you are
in that? No, no. We wouldn't want to do that.
Okay. And then one last question. I'll give you one last one then. As you talked about strong categories, I think you said that friction was getting better into the Q2. Is chassis or any other categories staying strong out of what would have been sort of real seasonal demand spike as people do post winter repairs?
I understand where batteries were hitting electrical mine have peaked in Q1, but are there other pieces of the business that are driving Q2?
Yes. No, for sure, Brett. You're right. We saw certainly in Q1 was big growth in batteries as we saw in Q4. Our expect and chassis had a good Q1 as well.
We're expecting that business to continue strong into Q2. You look at some of the potholes up in the northern part of the country, I think there's going to be an opportunity for chassis for sure. As we look at our core categories brakes and filters for example, as people now as the weather warms up people get their cars into the bays that's the business that we're expecting to see a nice ramp up here in Q2 and Q3. Okay. Great.
Thank you. You're welcome. Thank
you. And your final question is a follow-up question from the line of Greg Melich with ISI Group.
Yes. Hey, guys. This is Mike Montani on for Greg. Just wanted to follow-up on the full year guidance. It seems like the revenues were increased by about $140,000,000 but then EPS by only about $0.02 which seems to imply about $5,000,000 of net EBIT.
Is there something that I'm missing there? It seems like interest is up a little bit and maybe other amortization line items as well to offset? Or just can you just tell me to understand the flow through there?
We'll have to get back to you on that Mike.
I mean, we didn't do it in terms of the actual revenue and the EBIT. One thing we did do is raise the bottom end of the automotive guidance. So we brought that up from 5 to 6. But I think there were some other changes some other headwinds in there. And honestly currency is playing in there a bit too.
So we didn't necessarily come about it the way you did.
Okay. Great. We can follow-up offline. Thank you, guys. Okay.
That'd be fine.
Thanks, Mike. And
at this time, there are no further questions. I'll turn the conference call back over to management for closing remarks.
Well, we appreciate you attending our call today and we appreciate all the questions. And if we can be of further assistance, let us know. Otherwise, we look forward to reporting out after our Q2 numbers. Thank you for your support.
And once again, we'd like to thank you for dialing in