Good morning. My name is Jasmine and I will be your conference operator today. At this time, I would like to welcome everyone to the Genuine Parts Company Second Quarter 2013 Earnings 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 Thank you.
I will now turn the conference over to Sid Jones, Vice President of Investor Relations. You may begin.
Thank you. Good morning and thank you for joining us today for the Genuine Parts Q2 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 like to 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 along with Carol Yancey, our Executive Vice President and Chief Financial Officer and I will each handle a portion of today's call. And once we've concluded her individual remarks, we will look forward to addressing any specific questions that you may have. Now earlier morning, we released our Q2 2013 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 $3,676,000,000 which was up 10% over the prior year. Net income was $216,400,000 which was up 28% and earnings per share were $1.39 this year compared to $1.08 last year and the EPS increase was up 29%. Now I do want to point out that these results include the contributions from our Australia and New Zealand acquisition that was completed on April 1. You will recall that as of April 1, we purchased the remaining 70% of the shares that we did not own and both Carol and Paul will give you a bit more detail on how this impacted the numbers during their comments. But I would just say that we are really pleased to have this team as part of the GPC family, and they will be strong contributors to our results in the quarters ahead.
A review of the results by business segment shows quite a contrast between our automotive and non automotive operations. Automotive revenues were up 22% in the quarter, including the contributions from the Australia and New Zealand acquisition, and they were up 6 without this contribution. And if we back out the 1 month of incremental volume we had with Quaker City, our ongoing operations were up 4%, and this shows good sequential improvement from Q1 to Q2. The non automotive operations were down just over 1% in the quarter, with all 3 of the business segments experiencing modest decreases. The Industrial segment, which is our largest non automotive business, was down 0.6% in the second quarter.
This is a slight improvement from the 2% decrease reported in the Q1, but down all the same. Our biggest challenges in the quarter were with customers in the original equipment manufacturing segment. Many of these customers have a fair amount of their sales volume tied to the export market, and they're being adversely impacted by the strengthening of the U. S. Dollar and by the overall slowdown in the global economy.
Conversely, customers in the automotive, lumber and wood product segments are examples of segments that are showing solid growth for us. And we think it's indicative of the stronger new car sales that we are seeing in the U. S. As well as the recovery that we are seeing in the housing segment of the economy. And in going a bit deeper into the numbers, it's interesting to note that customers in our top 10 industry segments, exclusive of the original equipment manufacturing, were actually up mid single digits with us in the 2nd quarter and they're running low single digit increases year to date, all of which probably ties with the gradual but uneven overall economic recovery that we're all reading about.
Fortunately, the most recent industrial production and capacity utilization indices both remain at historically healthy levels, which should turn out to be a positive for us in the quarters ahead. However, at this point, our sense is that customer demand patterns will remain a bit uneven and choppy over the remainder of the year. Or stated another way, although we do expect modest sales improvement in the second half, we feel that the end market demand will be somewhat sluggish and a bit unpredictable for a few quarters yet. Moving on to the Electrical Electronics segment. Sales for this group were down 4% and many of the same comments made about our industrial business are applicable to the Electrical Electronics business as well.
Sales to the original equipment manufacturers are showing the steepest declines year over year. And then specific to the Electrical segment, sales to defense contractors been negatively affected by the impact of sequestration. As with Motion Industries, we do anticipate some sales improvement over the second half of the year, but our sense is that it will be modest until we see further improvement in the overall economy. We'll wrap up a review of the non automotive operations with a few comments about office products, which ended the quarter down 3%. After a 3% increase in the Q4 of last year and a relatively flat Q1 of this year, we're actually expecting a little stronger performance from this segment in Q2.
Our business with the mega channel actually improved in the 2nd quarter ending up mid single digits, but then our business with the independent office products resellers was down mid single digits. From a product category perspective, we continue to see positive results in furniture as well as in cleaning and break room supplies, but these are being offset by decreases in technology products and core office supplies. These latter 2, technology products and office supplies, are our 2 largest product categories and they both softened a bit further in Q2 from Q1. Overall demand in the office products industry is being affected by the movement to tablet style devices as well as the ongoing digitization of the office environment. Additionally, demand is currently being impacted by sequestration and the general reduction in governmental budgets at the local, state and federal levels, and the expectation is that all of these will remain headwinds for the office products industry until we see stronger economic recovery.
In the meantime, our office products team remains focused on the key growth initiatives aimed at driving incremental revenue and market share gains. So that's a quick overview of the non automotive businesses. And at this point, we'll ask Paul to cover the automotive operations. Paul?
Thank you, Tom, and good morning, everyone. As Tom mentioned, we are including in our automotive recap the results from our newly acquired business in Australasia, formerly known as Exigo and now known as GPC Asia Pacific. Our 4 34 stores now operating in Australia and New Zealand were consolidated into our results on April 1, and this business performed as expected throughout the Q2. We have an outstanding management team on the ground, and we are pleased with the progress we see in their growth strategy. Our expectation is continued growth in this business over the balance of 2013.
Turning to our North American automotive business. Our team delivered a 6% sales increase in the Q2. This 6% growth includes approximately a 2% benefit from 1 month of Quaker City Motorparts revenues. As many of you will recall, we acquired this business back on May 1, 2012. Our total automotive business, including the acquisition of GPC Asia Pacific, grew 22 percent.
Our North American 6% revenue growth in the 2nd quarter includes comp store sales growth of 4.5%, which is an improvement from relatively flat sales comps posted in the Q1. These favorable results were driven by our commercial business. However, our team also made solid strides with our retail business in the quarter. Within our U. S.
Company owned store group, the commercial side of our business ended the quarter up 6%. This represents our strongest performance since Q1 of 2012. Diving deeper into the results, our non fleet related business turned in a strong quarter generating an 8% increase. This segment was supported by high single digit growth from our approximately 15,000 NAPA Auto Care Centers, which we are proud to announce is at an all time high record number. Our major account group also grew high single digits and was a major contributor to our overall commercial growth.
Our fleet business grew 3% and reversed the trend we had seen of declining sales in recent quarters. Our wholesale average ticket value increased low single digit and our average number of tickets was up mid single digits in this segment of our business. We are very encouraged by both of these sales trends. Now let's turn to our retail business. We saw a significant improvement over our recent quarterly performance.
After reporting a mid single digit sales decrease in the Q1, we are pleased to report our team drove positive sales growth in the Q2. Our average retail dollar invoice was up low single digits for the quarter, while our average number of invoices was flat, which again has improved from recent quarters. As mentioned in our last call, our team has a number of initiatives in the works to drive our retail sales efforts. And while it's still early in the process, it appears our team is on the right track. From a product category standpoint, we continue to see strong sales in our electrical category, primarily driven by our battery business.
We like to take this opportunity to give a quick plug for our Get Back, Give Back battery promo currently running in the month of July in support of the Intrepid Fallen Heroes Fund. Our corporate wide goal is to raise money and awareness in support of our returning military veterans. So in addition to our strong battery business, we are seeing solid growth from our heavy duty product category as well as our tool and equipment offering. An additional positive product trend is our improved sales in our all important brake business. This is significant as we experienced slowing in this critical category in 2012 and only began to see a modest recovery in the Q1 of 2013.
It would appear that our team's efforts to get this business back on track have taken hold. Now a few comments regarding the overall state of the automotive aftermarket. We continue to believe the fundamentals of the aftermarket remain positive. This theory was tested during the prior 4 quarters, but as expected, the overall stable vehicle population combined with the growing number of older vehicles bodes well for ongoing and increased demand in the aftermarket. Our automotive business is well positioned to capture our fair share of this increased demand.
So in summary, both our North American and our Australian and New Zealand automotive operations turned in solid results in the Q2 and more importantly provide us ample growth opportunity through the remainder of 2013. We remain positive about the core fundamentals of our industry and our management team remains focused on driving positive growth for the balance of the year. We are encouraged by the renewed strength in our commercial segment and the growth we experienced in our retail businesses this past quarter. We'd like to personally thank all of our NAPA associates throughout North America for their strong efforts in the Q2, and we'd like to give a special welcome to our new associates in Australia and New Zealand. So that completes our overview of the automotive business in the Q2.
And at this time, I'll hand it over to Carol to get us started with our review of the financial results. Carol?
Thank you, Paul. We'll get started with a review of our 2nd quarter 6 month income statement and the segment information, and we'll also review a few key balance sheet and other financial items. Tom will come back to wrap it up, and then we'll open the call up to your questions. To start off with, please note that any reference to our June 30 Q2 and year to date consolidated results include GPC Asia Pacific, which we acquired on April 1 this year. In association with the acquisition of the remaining 70% in GPC Asia Pacific, we were required to revalue our original 30% investment.
This remeasurement, net of certain onetime purchase accounting costs, amounted to a positive pretax adjustment of approximately $36,000,000 reported in the second quarter. In accounting for this adjustment, approximately $18,000,000 in costs were reported to cost of goods sold and a $54,000,000 gain net of expenses was recorded to selling, administrative and other expenses on our income statement. Additionally, the $36,000,000 net adjustment is included in the other net line on our segment information sheet. The $36,000,000 net adjustment combined with a lower tax rate for the remeasurement favorably impacted diluted earnings per share by $0.22 Now turning to our income statement. Total sales were a record high of $3,700,000,000 for the 2nd quarter, an increase of 10% from last year, as Tom mentioned.
For the 6 months, total sales of $6,900,000,000 were up 5 percent from 2012. And overall, we remain optimistic in our outlook for future sales growth. Our gross profit for the 2nd quarter was 30.1 percent of sales, up from the 29.1 sales last year. And for the 6 months, gross margin of 29.5% is up from the 29.0% for the same period last year. Our improvement in gross margin is primarily due to the favorable impact of higher gross margins in our Australasian business, which owns 100 percent of its stores.
Additionally, our core gross margin was up slightly from the Q2 last year, which we were very pleased to see. These increases were partially offset by the $18,000,000 one time purchase accounting adjustment as we referenced earlier, which relates to the Australasian inventory valuation. Gross margin for the Q2 would have been 30.6% before the impact of these one time costs. And looking ahead, we would currently expect our gross margin to trend toward the 30% range. As an additional point of interest, we continue to see very little inflation in our businesses.
Our year to date 2013 cumulative pricing is down 0.3% in automotive, up 0.6% in industrial, up 0.5% in office and up 1% for electrical. Turning to our SG and A. Our total expenses were $790,000,000 in the 2nd quarter, which is up 12% from 2012 and at 21.5 percent of sales. For the 6 months, our total SG and A expenses were $1,500,000,000 up 7% and at 21.7 percent of sales. Our SG and A expenses as a percent of sales are up 40 30 basis points for the quarter 6 months, respectively.
These increases reflect the impact of higher SG and A expenses at GPC Asia Pacific, again due to their 100% owned store model as well as a decrease in leverage associated with our nonautomotive businesses. These increases were partially offset by the onetime net gain reported to SG and A as we previously discussed. Excluding this positive adjustment, SG and A as a percentage of sales was 23.0 percent for the 2nd quarter and 22.5% for the 6 months. We will continue to work to control our costs through several measures, including ongoing investments in technology, which have positively impacted our operating efficiencies in our distribution centers and stores as well as supply chain initiatives in areas such as freight and logistics. Now let's discuss the segment results.
Our automotive revenue for the 2nd quarter was 2.01 $1,000,000,000 and represents 54 percent of total sales and is up 22.3%. Our operating profit of $186,400,000 is up 21.8%, and their margin is even with last year at 9.3%. For the 6 months, our automotive sales of $3,560,000,000 which represents 52% of the total, is up 13%. Our operating profit of $307,400,000 is up 15%, so the margin is up 10 basis points to 8.6 points to 8.6% from the 8.5%, which we're very pleased to report. Our Industrial Group had sales of $1,130,000,000 in the quarter.
This represents 31% of our revenue and a decrease of 0.6 percent. Our operating profit of $88,900,000 is down 6.5%, so we saw the industrial margin decrease from 7.9 or down to 7.9 from 8.3 percent. Through June, our industrial sales of $2,230,000,000 were down 1% and our operating profit of $167,800,000 was down 6.5 percent. So their margin was down 40 basis points to 7.5 basis points to 7.5% from 7.9%, primarily due to the sales decrease. Our office products had revenues of $402,300,000 which is 11% of our total sales, down 2.7% for the quarter.
Our operating profit of $29,800,000 is also down 3%. So their margin held steady at 7.4%, which is very good operating. Year to date, office sales of $822,400,000 representing 12% of our revenues, are down 2%. And their operating profit of $63,000,000 which is down 7.6 percent with margins going to 7 point 7% versus 8.1% last year, which is down 40 basis points, again, due to the sales decline. The Electrical Group had sales in the quarter of $143,000,000 and that's 4% of the total revenue and down 4 point percent.
Their operating profit of $12,200,000 was down 5.5 percent, so their margin came down slightly to 8.5%. For the year, electrical sales were $282,000,000 representing 4% of our revenue and down 5%. Their operating profit of $22,700,000 is down 9%, and again, their margin is down 40 basis points to 8.0 from the 8.4 percent due to the sales decline. So our total operating profit was up approximately 9% in the 2nd quarter, and our operating margin decreased slightly to 8.6%. This follows a similar decrease in the Q1.
And for the 6 months, our total operating margin of 8.2% is down from the 8.3% for the same period in the prior year. The slight decline in our operating margins thus far in 2013 continues to reflect the impact of our weak sales conditions in our nonautomotive businesses. The operating margins at GPC Asia Pacific were in line with our core automotive business as expected. We remain committed to expanding our operating over the balance of the year through our ongoing initiatives. We had net interest expense of $7,900,000 in the 2nd quarter.
Year to date, our interest expense was 11,200,000 dollars Our interest for the quarter was up from 2012 due to the increase in our total debt. Based on our current projections, we expect net interest expense of approximately $26,000,000 to $28,000,000 for 20.13. This is slightly improved from our prior guidance of $30,000,000 for the year. Our total amortization expense was approximately $9,000,000 for the 2nd quarter and it's $12,800,000 for the 6 months. This is up from last year due to the Quaker acquisition last May and April's acquisition of GPC Asia Pacific.
We expect our amortization to trend in line with the 2nd quarter amount over the balance of the year. The other line, which reflects corporate expense, was $14,300,000 in income for the 2nd quarter and is essentially flat for the 6 months. As we discussed earlier, this line reflects the net favorable purchase accounting adjustment of $36,000,000 Including this line item, we would project our corporate expense to be in the $25,000,000 to $35,000,000 expense range for the full year. For the quarter, our tax rate was approximately 31.3%, which has improved from the 36.9% last year. For the 6 months, our 32.8% rate compares to the 36.5% for the same period the prior year.
The improved rate for the quarter the year primarily reflects the favorable tax rate on our gain generated by the remeasurement of our 30% investment in GPC Asia Pacific. In addition, our current tax rate reflects the favorable impact of the lower Australian and New Zealand tax rates applied to their earnings. For the 3rd and 4th quarters, we expect our tax rate to approximate 36%, which would give us an annual rate of 34.5% to 35% for 2013. Our net income for the quarter was $216,400,000 or up 28%, and our EPS of $1.39 compared to $1.08 was up 29 percent. For the year through June, our net income of $360,700,000 is up 15% and our EPS of $2.31 compared to $2.01 is also up 15%.
Without the onetime adjustments recorded in the Q2, our EPS of $1.17 was up 8% and a new record for us. And for the year, the EPS is 2.09 dollars without the adjustment or up 4%. Now let's discuss some of the balance sheet items starting with cash. Cash at June 30 was $197,000,000 which is up slightly from last June, although down from year end and also down from Q1. This is due to the April 1 payment for GPC Asia Pacific.
We will continue to generate strong cash flows and as a result of the increase in our earnings, effective working capital and asset management and cost containment measures. Our accounts receivable of $1,800,000,000 at June 30 increased 10% from the same period in 2012 on a 10% sales increase for the quarter. Excluding the receivables at GPC Asia Pacific, our accounts receivables were up 4%. Our goal is to grow receivables at a rate less than the revenue growth, so we have a little work to do in this area, but we remain focused on meeting this goal in the periods ahead. We're very satisfied with the quality of our receivables at this time.
Our inventory at quarter end was $2,800,000,000 which is up 11% from June 30 last year and primarily due to the GPC Asia Pacific inventory added at the beginning of the quarter. Excluding the impact of Australasia, our inventory is up just 1% from last year. So our team is doing a very good job of managing our inventory levels, and we remain focused on maintaining this key investment at the appropriate levels as we move through the balance of 2013. Our accounts payable balance at June 30 was $2,100,000,000 up 29% from June 30 last year. Excluding the impact of GPC Asia Pacific, our payables were up 21%.
Our ongoing growth in trade payables reflects the positive impact of our extended payment terms and other payables initiatives established with our vendors. We're very encouraged with our improvement in this area and its positive impact on our working capital and days in payables. Our working capital of $1,800,000,000 at June 30 is down approximately 26% from June of 2012. This is primarily due to the increase in our current debt in 2013. Excluding our current debt, our working capital is up less than 1% from last year.
Effectively managing accounts receivable, inventory and accounts payable is a very high priority for our company, and our ongoing efforts with these key accounts have resulted in tremendous improvement in our working capital position and our cash flow. Our balance sheet remains in excellent condition at June 30, 2013. Our total debt of $900,000,000 at June 30, 2013 includes $250,000,000 term notes, which we've carried for some time now as well as another $400,000,000 in borrowings that are under our multicurrency syndicated credit facility agreement and also borrowings at GPC Asia Pacific. This adds to total debt to total capitalization of approximately 23% at June 30, which is consistent with March 31 and up from the 15% at June 30 last year. We're comfortable with our capital structure at this time, and we currently expect to maintain this level of debt over the balance of the year.
It's worth adding here that we do intend to renew the $250,000,000 term note that is due November 30, 2013. While not finalized, we expect to extend this debt for 10 years at a 2.9 9% fixed interest rate, thus replacing the 4.67 percent interest rate on the current note with more favorable terms. We expect the renewal to become effective on November 30, 2013. As we stated earlier, we continue to generate solid cash flows, and we expect another very strong year in 2013. For the 6 months through June, our cash from operations was approximately 467,000,000 dollars For the full year, we would currently project cash from operations to exceed $900,000,000 Likewise, we expect free cash flow, which deducts capital expenditures and dividends to be in the $500,000,000 range.
The continued strength of our cash flows is encouraging, and we remain committed to several ongoing priorities for the use of our cash, which we believe serve to maximize shareholder value. Our first priority for the cash is the dividend, which we paid every year since going public in 1948 and have now raised for 57 consecutive years. This is a record that continues to distinguish genuine parts from other companies. Our annual dividend of 2 point $5 a share for 2013 represents a 9% increase from the $1.98 paid in 2012 and is approximately 52% of our 20.12 earnings per share, which is well within our goal of a 50% to 55 percent 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 $37,900,000 for the 2nd quarter, up from 34.5 $1,000,000 in the prior year. For the 6 months, capital spending totaled $50,800,000 which is relatively in line with the 6 months in 2012. We expect our capital expenditures for the full year to be in the range of $140,000,000 to $150,000,000 which is an increase from the $102,000,000 in the prior year due to the addition of GPC Asia Pacific as well as some anticipated expenditures in our North American businesses. The vast majority of our investments will continue to be weighted towards productivity enhancing projects, primarily in technology.
Our depreciation and amortization was $36,900,000 in the quarter, up from $24,700,000 for the Q2 in 2012 due to the impact of GPC Asia Pacific. For the year, depreciation and amortization is $62,900,000 compared to $47,700,000 for the same period in the prior year. We currently anticipate depreciation and amortization to be approximately $135,000,000 to $145,000,000 for the full year. Strategic acquisitions continue to be an ongoing and important use of our cash for us, and they're integral to the growth plans for our company. We remain excited about the growth opportunities we see about at GPC Asia Pacific, and we continue to seek new acquisitions for our businesses to further enhance our prospects for future growth.
Generally, we would expect to target those bolt on types of strategic acquisitions with annual revenues in the $25,000,000 to $125,000,000 range. Finally, we have been active in the company's share repurchase program since 1994. And thus far in 2013, we've purchased approximately 350,000 shares, and we have another 11,800,000 shares authorized and available for repurchase today. While we have no set pattern for these repurchases, we would expect to be active in the program in the quarters ahead as we continue to believe that our stock is an attractive investment and combined with the dividend provides the best return to our shareholders. In closing, we want to thank all of our GPC associates for their hard work and dedication to their jobs and the success of Genuine Parts Company.
We've seen the same tremendous effort from the team at GPC Asia Pacific, and we welcome them to the family. We also want to thank them for such a great job during this transitionary period. The progress we achieved in the quarter was due to the collective efforts of the entire GPC team, and it's much appreciated. Looking ahead, the company is well positioned to generate continued sales and earnings growth over the balance of the year. And as always, we will support our growth with strong cash flow, a healthy balance sheet and further maximizing our return to shareholders.
That concludes our financial review, and I'll now turn it back over to Tom.
Well, thank you, Paul and Carol, for your updates. Well done in each case as usual. So that's a recap on our 2nd quarter results. And as we look back over the quarter, we feel that our folks made good progress in a number of key areas. Our sales and earnings set new quarterly records with and without the impact of acquisitions.
On the balance sheet, accounts receivable and inventory were managed well and accounts payable continued to trend in the right direction. Cash from operations improved nicely and working capital efficiency improved as well. On the revenue side, it's clear that our automotive segment is the bright spot for us right now. The automotive operations showed good sequential improvement from Q1 to Q2 both with and without the acquisition impact. We are pleased with the progress being made in this segment and we feel that the prior full year revenue guidance of +5 percent to+7 percent without acquisition volume and +18 percent to 20 percent with the GPC Asia Pacific volume remains appropriate at this time, and we think that this would represent a solid performance from our automotive team.
Our challenges right now are more concentrated in our non automotive operations. End market conditions in each of these segments remain challenging, and while we do expect to see second half revenues to improve somewhat compared to first half, we think that it's appropriate to trim our prior full year revenue guidance for each of these businesses. In our prior guidance for Industrial, we said that revenues for the year will be up 4% to 6%, and currently we think it's more appropriate to say they're going to be up 1% to 3%. Prior, we had guided for electrical electronic to be up 4% to 6% as well and now we'd say even to up 2% and prior guidance for office products was up 1% to up 3%, and currently we would say it's down 1% to plus 1%. And putting all of this together, we give GPC a full year sales increase of plus 9% to plus 10 percent.
On the earnings side, our prior guidance was for an EPS range of $4.45 to $4.60 And at this point, we think it appropriate to raise the bottom end of the guidance to $4.50 This would give us a new range of $4.50 to $4.60 with a bit of a bias toward the mid to lower end of the range until we see how the overall economy performs in the second half of the year. And this would give us an EPS increase of 9% to 11% for the year. And we want to remind you that we did have a pension curtailment gain in the Q4 of last year that was $0.09 per share. And if we back this out, the gain the increase for the EPS would be up 11% to 14% without that one time gain that last year. So with all of that said, at this time, we'd like to take your questions and we'll turn the call back over to Jasmine.
And your first question comes from the line of David Gober from Morgan Stanley.
Good morning, guys. Thanks for taking the questions. Paul, just a quick one for you on the automotive business. Just curious if you could talk at all about either the monthly cadence within the quarter. I know you'd said at the last quarter that you're starting to see some green shoots.
Just curious if that scale throughout the quarter, if it was relatively even. And then I guess a follow on to that also if you're seeing any what you're seeing in terms of regionality. I know obviously there was for the better part of last year, you had some significant differences across regions. Trending throughout the quarter. The quarter actually
strengthened as we move through the quarter. So May was a bit better than April and on a per day basis, June was a bit better than May. So we do remain encouraged by what we're seeing in automotive, and we're encouraged by the trend that we're seeing. In terms of regionality, David, we did see if you recall in our previous calls, we were challenges, I think many were in the Midwest, Eastern, Central parts of the country. We have seen that area of the country.
Certainly, the East and the Midwest have come back strong. The Southwest has been a good performer for us for the last couple of years. They continue to do well. And the rest of the country is pretty much performing as we expected.
Got you. That's helpful. And Tom or I guess for just on the overall EPS guidance, I just wanted to confirm that that includes the $0.22 benefit from the recast on the Exco deal. And just curious if that also is kind of contemplated in the prior guidance?
Yes, it does include that. And yes, it was contemplated in the prior guidance.
Got
you. That's helpful. Thanks.
Thanks. Your next question comes from the line of Scot Ciccarelli from RBC Capital Markets.
Hey, guys. Scot Ciccarelli.
Good morning,
Scot. Just one more clarification on the EPS. Does that include the gain as well or just kind of the run rate of Exodal?
No. It includes the gain and the $4.50 to $4.60 is an all in number.
Okay. But you didn't previously anticipate the $0.22 gain when we got the original $4.45 to 4.60 dollars correct?
We anticipated
that it would be
a gain. And it might be instructive just to say that you're probably familiar with the accounting on this. And we had a high range and a low range on the anticipated gain. And it's a very complicated process, and you can't narrow it down until you get to the very last moment. And we tried to take an and we tried to take an
appropriate look at it when we gave you
that prior guidance. And as it turns out, we were reasonably close with what it actually turned out to be.
Okay. Got it. And then regarding the comments about kind of gross margin, SG and A run rates, I guess, is there anything that's impacting maybe that little bit of a shift that we've seen to higher gross margin and higher SG and A other than the Asia Pacific business? Or is that it really center on that?
Well, so we gave you the one time amounts that are in both of those numbers. So taking those into account, what we would say that our gross margins our core gross margins were up slightly, excluding the impact of GPC Asia Pacific and the onetime adjustments. And SG and A, because of the decline in sales in the nonautomotive businesses, our SG and A really, we didn't have the improvement there, and that's the loss of leverage. And you see that in the operating margins. So what we're saying on a go forward basis is you are going to see just a slight shift there if you will that's due to GBC Asia Pacific.
But we're going to continue to focus on our normal improvements in both of those lines.
Got it. Okay. That's all for me. Thank you. Thanks, Scott.
Thanks, Scott.
Your next question comes from the line of Matthew Sadler from Goldman Sachs.
Thanks a lot and good morning to everybody. Good morning. One question on the Office Products business. If you could comment on the divergence between the megas and the independents and sort of the nature of the business you do
with those two channels and what
you think might be leading to that? Is that a function of their end markets? Is it a function of your role with the respective channels? Any color you could give there would be terrific.
Well, just as a reminder, Matt, the independent channel was down mid single digit and the mega channel was up mid single digit. And we've seen variations in this over time. And we can go back a year or 2 and see that the independents may have been growing at a little faster rate with us than the mega channel. So it does undulate a bit up and down just depending upon the circumstance. At this point, I would say that the independents as a general statement, the independents that seem to be doing reasonably well right now have embraced some of the newer things that SP Richards has been introducing.
So as a for instance, the independents that have embraced in a big way the cleaning and break room category are enjoying pretty good revenue growth with that. And of course, we benefit from that. And the same thing could be said for the megas as well. As you know, they've embraced some of the new growth opportunities also. Those independents that have a strong presence on the Internet, I think as a general statement, we'll be doing a little bit better than those independents that don't have a strong presence on the Internet.
So it varies depending upon the particular circumstance of the independent channel. I was just at a meeting where SP Richards had a number of their independent customers in attendance. And I'd have to say that I was encouraged by the determination that I heard from the number that I got to talk with. And while they're not happy with where they find themselves as a general statement through mid year, many of them have a little bit of optimism for the second half of the year, and they're determined to embrace some of these things that they know can enhance their revenue growth in the quarters ahead.
Thank you for that. I have 2 quick ones on automotive. 1 is operational and one is financial. The operational one I'll address to Paul. So you're showing very nice transaction growth particularly in commercial.
And interested in what your sense of the source of that is? Is that market growth? Because clearly the market has improved to some degree? Or in your view, is that market share growth for the NAPA franchise?
I would think a little bit of both, Matt. As I mentioned in my comments, our 2 key initiatives for us certainly is our Auto Care business. And as I mentioned, we hit a record number of Auto Cares in the past quarter. And our major account business has bounced back nicely. So those two areas have grown nicely and I think we'll continue to do so.
So that certainly is driving our overall commercial business.
And are the major accounts typically large jobber chains and such as fleet customers who typically is the population in that group?
So when we talk about major accounts, Matt, our key partners in that world are folks like Firestone, Goodyear, Tyre Kingdom, Midas, okay, AAA certainly.
Got it. That's great. And then finally, just to think about the $0.22 of the accounting adjustment. And then what I think is separate, which is the accretion associated with the Exego deal that you discussed at the outset of the year? And correct me if I'm wrong, I think there was a $0.15 to $0.20 number just to make sure that those are 2 different numbers, the accretion from Exego is exclusive of that $0.22 number?
No, it's inclusive of that number, Matt. We tried to bake that in when we gave you some guidance at the time of the transaction.
So the assumption then that the if you sort of exclude the accounting adjustment that if you think about the if you think about it on an operating basis if you will, it's more of a breakeven kind of transaction with, I guess, potential to get more creative over time?
No. One thing to keep in mind is when we did our original guidance, when we assumed we were going to have a 30% investment for the full year, we had given an EPS guidance and then we came in and said we're going to do the 70%. And we put in an incremental amount, but there was already some amount in the beginning number, if you will. But the 15% to 20% was a range of the incremental amount adding in the 70% and knowing we already had something in there for the 30%. But it's not a breakeven.
In fact, it's the 15% to 20% range for the 9 months which is what their operating numbers are, is pretty close to what it is.
And the remeasurement, if you will, and it might be too detailed for this call, but I think we're all getting some questions on this. Is this a reassessment of the value of the original investment? Kind of what drives that remeasurement process? I understand you have to do it, but what's the nature of the assessment?
So the 30% investment, there's purchase accounting rules and we're happy to have Sid go into more of this with you later. But the purchase accounting rules cause you to have a fair value valuation done by a third party independent valuation firm. And they look at a lot of market metrics and they look at the results of the company and they look at a lot of different variables and it's a very in-depth process. So it's a fair value valuation of that original 30%. It was $166,000,000 and you revalue it to the April 1 date.
Understood. Thank you so much.
Thanks, Matt.
Your next question comes from the line of Michael Montani from ISI Group.
Yes. Hey, good morning, guys. I wanted to ask in automotive two questions. The first one is, was there any impact from holiday shift either good or bad this quarter? I mentioned I know that you mentioned it was a headwind last quarter.
So was that actually a tailwind or neutral? And then secondly on the margins within automotive, they were down slightly, but if you were to exclude Exego from that, would the core North American margins actually have been up?
Let me take the first one first, Michael. The certainly Easter having a shift into the Q1, the Easter holiday that negatively impacted our numbers in Q1. So I think you could then surmise that it was a tailwind for our Q2 numbers. And the second question regarding our margin performance, I'm going to have Carol address that because I'm not sure I understood what your question was.
So if you recall, the Q1 our automotive margins were 10 basis points. And then this quarter, we're showing a really strong 9.3%, and they were flat. And for the 6 months, we're still able to show 10 basis point improvement. And what we would say is, just for the quarter, our core business probably was up slightly. But we're saying on a full year comparative basis, the margins for GPC Asia Pacific are very similar to our normal business, our core business.
You could have some differences quarter to quarter because if you were you may or may not know, but their quarters are completely opposite of ours. So our second and third quarters, here in the U. S. Are our strongest throughput quarters. And these are pretty high operating margins for 2nd and third quarters.
But for Australia, it's the reverse on their quarters. So their stronger quarters are 1st and 4th.
They're in the Southern Hemisphere and have the flip in terms of the seasonality.
Sure, sure. So seasonality has an impact. That's helpful. And maybe the last one was just for Tom, which is the industrial guidance of up 1% to 3% sort of versus the year to date trend seems to imply an assumption that the business could be up maybe in a 3% to 4% range in the next two quarters. Is there anything in particular that's driving that outlook, whether it be different initiatives that you have or a thought that inflation might pick up a bit?
Or how are you guys looking at that outlook?
I think we start with making the point that you may recall that at the end of the 1st two quarters last year, our Industrial business was up 10%, and we ended the year up 7%. So we saw some deceleration in the second half of twenty twelve. So the comps get a little easier. And then I think, as I mentioned in my comments, some of the challenges that we have in the original equipment manufacturer segment, we're going to anniversary some of that. And here again, the comps get, I think, a little easier for us.
And then we've got specific initiatives that are underway that we think could generate some incremental volume in the second half of the year. So it's a combination of factors.
Okay, great. Thanks and good luck.
Thank you. Thank you. Your next question comes from the line of Chris Horvers from JPMorgan.
Thanks. Good morning. Good morning, Chris. Following up on a couple of questions. So first on the auto business, on the DIY side, you mentioned the business was up low single digits in the quarter.
Is that a comp number or does that include maybe 100 basis points for the extra shift. Is that the right way to think about it? And then as you think about it going forward, how do you think about the growth in this business? Clearly, spring got pulled forward last year out of the Q2. You would think you would get a lift here in the Q2 of it just going back.
Do you think sort of plus low single digits is the right trend for the back half of the year in DIY?
Well, so Chris, your first question was around the impact of Easter and was that a comp number or did Easter have an impact on our retail number? The way I'm looking at our retail business, Chris, we had a nice bounce back in Q2. And whether that's because Easter was in Q1, it's hard to determine. But I do know this, our retail business rebounded nicely in Q2. And we have a number of initiatives in the works that I do believe are beginning to take hold.
And there's no reason to believe that we shouldn't continue that retail growth in Q3 and Q4. Again, we have a number of initiatives in the works, and I'm excited with what the team is doing, and we're pleased with what we're seeing.
Paul, if I could add to it. Chris, if we look at our retail business, both ticket count and basket size across the 3 months in the quarter, there was a pretty consistent performance on a per day basis across the 3 months in the quarter. So I think that would suggest that maybe we did get the benefit in April from the Easter transition year over year. But the May June numbers, I think, would validate a bit of what Paul is saying. And that is the retail business is better.
It's not booming by any stretch, but it's better than what it was and we're encouraged by what our team has accomplished on a monthly basis over the course of the quarter.
Perfect. And then on the brake side, does it can you maybe put some frame out how much is brakes in the NAPA business? What was it down? And did it flip to positive in the Q2 and grow as you talked about the momentum in the business improving throughout the quarter?
I might take the first stab at that, Chris. We don't break out the volumes or percentage of the total volume on any of the product categories. I would suggest we just leave it that it's a significant product category for anybody that's in the automotive aftermarket. And in terms of the relative performance, I think the industry was probably down in the brake category this year. And our numbers, if they're indicative of what's happening in the industry, is probably positive through the first half of this year.
Certainly, we are.
Okay. And then jumping back to a prior question. So on the motion side, the compares do get a lot easier as you look at the into the Q4. And getting back to positive, is that something that's more weighted to later in the year, more the Q4 versus the Q3 as you think about your annual guidance?
Yes. I think we would expect the Q4 to be a bit heavier, a bit better than the Q3, at least the way we see it right now.
Okay, perfect. Thanks very much. Thank you.
Thank you. Your next question comes from the line of John Lovallo from Bank of America.
Hey, guys. Thanks for taking the call.
Good morning, John.
First question would be, I guess, kind of a housekeeping, if you will. The other revenue line, maybe kind of the offset line for discounts and incentives seem to be running quite a bit higher than it has over the past several quarters. What's really driving that?
The increase in that is GPC Asia Pacific. So the sales discounts that we have to show by putting in their revenue, we had to show the offset on that line. So it's entirely related to GPC Asia Pacific.
Okay. That's very helpful.
So the run rate that you see for this quarter will probably be the way that it is for the rest of the year.
Great. Thank you. That's helpful. And then on the auto side, are there other assets distribution assets globally that may make sense for you guys? I mean, are there potential acquisitions that are coming to the market or in the market right now?
It very well may. And we're always open to having any discussion. At the end of the day, it's going to really come down to does it make sense for the shareholders of Genuine Parts Company. But yes, we'd be open to continue to have discussions with folks.
Great. Helpful. And then the final question would be on raw material prices seem to continue to kind of trend lower here. Where in the value chain does this get captured? I mean, do you guys see any benefit from kind of lower input costs?
Well, the input costs would affect our supply base more than they would us. If, in fact, we see sustained lower input costs that should theoretically translate into reduced purchase prices and enable us to pass on lower prices to our customers as well.
Okay. Thanks very much guys.
Thank you.
Thanks, John. Your next question comes from the line of Keith Hughes from SunTrust.
Thank you. I'm still a little confused on this on the guidance. The previous range, did it include the full 0 point 22 dollars of the issue we're talking about here in the Q2?
We could
not quantify precisely what the gain was going to be. We knew there would be a gain. And as I mentioned, we had a range. And when we gave the guidance at the time, we tried to pick what we thought would most closely approximate what actually turned out to be the gain. And we came pretty close in the final analysis.
So yes, it includes it. And then as Carol said, you need to back out from that the 30% equity stake that we had when we set up the guidance for the full year.
And EPS number is that?
I don't have that here, but I
We didn't give that out. So that was just in our number.
I think if you want really a lot more of the detail what might make the most sense is if you'll call Sid after this call, he'll be happy to try to walk you through it.
Yes, please. That would be helpful. So I think it looks like in the back half of the year you're going to be at low single digits in terms of EPS. And you gave us the guidance on the revenues by segment, which average out to be low single digits. So I assume you're assuming no margin changes despite the weaker forecast in the nonautomotive business.
Is that fair to say?
Well, what we're trying to say is that we'd like to have margin improvement, and you may see that on the automotive side. But if on the nonautomotive, we don't have the top line growth, you may not have that. So it's we would say that margins would be relatively flat to up slightly, and that's what we're trying to accomplish.
Okay. All
right. Thank you. Keith, one other comment on the EPS improvement. Just keep in mind that we did have the one time curtailment gain, the pension curtailment gain in Q4 of last year and that was $0.09 a share. So take that into consideration as you build your model.
Okay. Thank you.
Thank you.
Your next question comes from the line of Bret Jordan from BB and T Capital Markets.
Good morning. A quick question. As we look at Exego sort of in a year over year standpoint, how did it comp in the quarter just carving out that Australian business separately?
Well, we don't break out the individual units. But I think Paul mentioned that they performed right at expectation us in the quarter. So they did a good job.
Okay. And then I guess in North America, are you seeing any shift in maintenance versus failure parts demand? Are you seeing any reduction in maintenance deferral as we're getting into 2013 middle of the year?
Well, I don't know if I'd refer to it as reduction in maintenance deferral. But we do know based upon Paul's comments that our major account and our Auto Care business both enjoyed good solid growth, which would suggest perhaps that we're getting some of that repair that's been hanging out there.
And I think Brett that's indicative. Both categories I mentioned we had a very strong quarter in our battery business, so on the failure side. But we also saw a nice comeback in our brakes business.
Okay. Thanks. And then one last question, I guess not to get too granular, but you mentioned that the business improved as the quarter progressed. And regionally, the Eastern and Midwestern markets that were tough last year were showing improvement. But I guess if you look at that Atlanta to New England market in June, you certainly had a historically wet month.
Do you think you lost anything to the weather in the latter part of the quarter? Or was that really not an impact?
No. I it's interesting, Brett, because I recently read where the month of June across the country was the warmest in many years, but it was also the wet. And our business in the South and certainly the Mid Atlantic areas just got pounded with rain in the month. So again, it's difficult to quantify, but I have to believe it had an impact on business because people just aren't getting out and working on their cars and visiting the retail stores. So your comments are I think dead on.
Got
it. Okay. Thank you.
You bet.
We have time for one last question from the line of Brent Rakers from Wonderland Securities.
Hi, good morning. This is actually Angelina Voorhein from Brent today. If I could just ask a couple of questions on industrial. I think you mentioned earlier your top 10 industry segments excluding the OEM side are actually up mid single digits. I'm curious as to how they performed in Q1 if it accelerated or decelerated from Q1 levels excluding OEM?
And whether maybe some of your broad line initiatives are helping these numbers outside of your core power transmission and fluid power is your broad line initiatives ramping up here? Or maybe you could talk about that a little bit.
Sure. We'll take the first part of the question first. And we did see sequential improvement from Q1 to Q2. I think in my comments, I mentioned that we were up mid single digit in the Q2 in those industry segments, and we were up low single digit or up low single digit year to date. So we did see some sequential improvement.
As far as any specific initiatives, we would prefer not to get into those on the call. And but I would say that we do have specific initiatives trying to continue to drive revenue in all of the customer categories that we have as well as all product categories that we have. So that's a significant area of emphasis for us right now.
Okay. Did you see any difference in performance in various geographic regions such as maybe Canada or the Gulf or other parts of the country that saw some variability?
I don't think we can we could say specific differences geographically due to any geographic regions. We would see differences geographically depending upon how closely aligned they are to some of these OEM customers that I referenced in my comments.
Okay. On the office side, I think you noticed sequestration of impacting some of the business there. I don't know if you've said in the past, but what is your exposure to the government side or government exposure in your L. P. Richards business?
Well, we don't have any direct exposure because we don't sell direct. We sell only through office products resellers. But it's that customer category that would have exposure. So we would have many, many customers that do business at different levels of government. They would do local, state, federal business.
And that customer segment at all three levels is really being impacted currently.
And when you look at the I know it's a little ways out, but I think the initial Depot Max combination was approved by shareholders. How do you view the opportunity for wholesale in the interim as they consolidate their business? And maybe how do you think things will shake out after the full consolidation is completed? Any thoughts on that?
Well, what we would say is they're both good companies and they're both good customers to S. P. Richards. And I think as a general statement, if there is overcapacity in the industry, at least at the store level over the medium and longer term, this will be a good positive for the industry overall and for the companies that we're talking about specifically. As far as more direct impact, I think there are some pluses and some minuses in any combination like this.
And certainly, in the very near term, there will probably be some redundant inventories that will be burned off and that might create some headwind to revenue growth. But there will also be, I think, some opportunities for other customers to find ways to grow their business as we go through this process. And if in fact those customers are customers of SP Richards, that's a net positive for SPR.
Okay. And just to jump back to industrial for a second here. When you look at how July has progressed and what the month to month progression looked like during the quarter, Do you have any thoughts on how that's shaking out?
Well, as far as the Q2, if we look at it on a per day basis, the month was fairly even as we worked our way through the month. At this point, I think it's too early to make any comments on the July numbers.
All right. Well, thank you very much.
Thank you.
Thank you.