Good morning. My name is Brooke, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Genuine Parts Company First 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 session.
As a reminder, this conference will be recorded. Thank you. I will now turn the conference over to Sid Jones, Vice President, Investor Relations. Mr. Jones, you may begin your conference.
Thank you. Good morning and thank you for joining us today for the Genuine Parts Q1 conference call to discuss our earnings results and outlook for 2013. 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. Now earlier this morning, we released our Q1 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 $3,199,000,000 which was up 0.6%. Net income was $144,400,000 which was down 1% and earnings per share were $0.93 this year, which is even with the $0.93 reported for the Q1 last year. As we covered in our year end conference call, we felt that the Q1 of this year would be our most challenging, partially due to the fact that Q1 of 2012 was our strongest of the year when sales were up 7% and earnings per share were up 16%, and then partly due to the slowing revenue trend that we saw develop over the second half of last year.
Additionally, we had one less sales day in Q1 of this year, which equates to about 1.6% of revenue growth. And it's interesting to look at our average daily sales performance over the quarter. We got off to a decent start with January February average daily sales being up mid single digit, but then the March average daily sales was relatively flat, consistent with the moderation in overall retail sales, and we ended the quarter with an average daily sales increase of just over 2%. In looking at the sales results by segment, our strongest performance came from automotive at +3.4%, and Paul will cover this in more detail in a moment. Industrial, electrical and office products each had modest sales decreases in the quarter, with industrial ending the quarter down 2%, office products down 1% and electrical down 5%.
And we'll make a few comments about the non automotive businesses, starting with industrial. The Q1 of 2012 was Motion Industry's strongest quarter of the year by far when they were up 12%. So they were going up against a challenging comparison. However, the 2% decrease in the quarter this year continues a deceleration our industrial growth rates that we saw develop over the second half of last year. Among our top 10 customer segments, 6 had increases in the quarter with automotive, pulp and paper and lumber and wood products showing the strongest results, but then 4 of our top 10 customer segments were down in the quarter with equipment and machinery showing the biggest decline followed by coal, aggregate and cement.
Among our top 10 product categories, 4 are showing year to date increases, 1 is even and 5 are running behind through the Q1. So from both a customer and a product standpoint, we're seeing some inconsistency and choppiness in our results, somewhat indicative of the uncertainty and cautiousness that we see among a number of our customers. With that said, however, we remain encouraged by the current levels of both industrial production and capacity utilization indices. Despite the modest drop in March, these have remained relatively constant over the past several months, and they have proven to be a fairly reliable 6 to 9 month leading demand indicator for us, and our expectation is for a gradual improvement in demand for our industrial business over the remainder of the year. Moving on to EIS, our electrical electronic company.
They had a challenging quarter with sales down 5%. The electronics side of the business actually had a very good Q1 with sales up low double digits. Unfortunately, this is the smallest segment of EIS' business and their solid results were pulled down by a mid single digit decrease in electrical and a double digit decrease in the wire and cable segment. The biggest factor in the electrical segment was a drop off in demand in the alternative energy sector, and the biggest factor contributing to the wire and cable decrease was a slowdown in the defense contractor business, which we attribute to the near term impact of sequestration. However, we do see some early signs of improvement in this side of the business and this combined with our internal growth initiatives still give us an expectation for positive growth for the full year from the Electrical Electronics segment.
And finally, a few comments about office products. After the 3% sales increase in the Q4 of 2012, we were a bit encouraged and we saw low single digit average daily sales increases in January February. However, we experienced a drop off in March and we ended the quarter down 1%. Our independent resellers business was down modestly, and our mega or national account business was flat. From a product perspective, technology and core office supplies had small decreases in the quarter.
Furniture was flat and cleaning and break room grew nicely. So from an overall perspective, the office products industry remains quite challenging, and we don't anticipate any material change in the near term. However, at this point, we continue to expect that our office products team will deliver a modest sales increase for the full year. So that's a brief overview of our industrial, electrical and office products businesses. And at this point, we'll ask Paul to give you an update on the automotive operations.
Paul? Thank you, Tom. I'd like to add my welcome to each of you this morning. I'm pleased to join Carol and Tom and have the opportunity to provide an update on the Q1 performance of our North American automotive business. Automotive continues to be the company's largest business segment.
We ended the Q1 with a 3% increase with one less day in the month. On a per day basis, it puts us up approximately 5%. Given that the Q1 of 2012 was our strongest sales quarter of the year, and then you add in the fact that the Easter holiday fell in the month of March this year, we were not surprised by our results. The 3% revenue growth in the Q1 includes flat comp store sales and continued positive sales contribution from our acquisition of Quaker City Motorparts. Sales to our commercial accounts, the dominant segment of our business, continue to outpace our retail sales.
Once again, in the Q1, our results varied by region of the country with the traditional cold weather regions lagging the other regions in the U. S. These cold weather regions did narrow the gap in the Q1 they continue to gain positive momentum as we move through the Q2. We are approaching our 1 year anniversary of the acquisition of Quaker City Motorparts. Their 1st quarter sales contributions were in line with our expectations, and we continue to be excited with the growth opportunities the Quaker City team will provide to us in the future.
As we mentioned earlier, our commercial business continued to outperform our retail business in the Q1. Within our company owned store group, the commercial side of our business ended the quarter up 1%, consistent with our growth in this segment in the previous 3 quarters. Non fleet related business performed reasonably well, generating a 3% increase and it was led by solid growth from our 14,000 plus NAPA Auto Care Centers and our major account business. Our fleet business was off slightly, continuing a trend we have seen in recent quarters. Both our average ticket value and our average number of tickets were relatively flat in this segment of our business for the quarter.
Turning to our retail business. The sales environment continues to be challenging. We were down mid single digit in the quarter, which was comparable to our 4th quarter numbers. Our average retail dollar invoice was up slightly for the quarter, while our average number of invoices was down, which again is consistent with prior quarters. And while we're certainly not pleased with these results, we believe they are consistent with retail sales trends both in the aftermarket and retail in general.
Our team has a number of initiatives in the works to address our retail sales and reverse the downward trend we've seen in recent quarters. So as we look ahead to the balance of 2013, we expect to see increased demand in the aftermarket. We are pleased to note that consistent with the positive momentum in the northern half of the U. S, we are also seeing a pickup in sales with some of our winter related product categories, such as batteries, rotating electrical and our wiper business. And while our brake business continues to be under pressure, we are encouraged with the improved trends we are beginning to see in this product category as well.
We have said throughout this recent trend of sluggish sales, which dates back to the Q2 of last year, that the lack of winter weather in 2012 would remain a headwind throughout the Q1. This proved to be the case. We also said that we continue to believe the fundamentals of the aftermarket to be positive, and this has not changed. So first, let's take a look at fuel prices, a key driver for our business. While prices reached a record average highs in February, prices came down considerably in the month of March.
For the quarter, the average price for a gallon of gasoline came in slightly below Q1 of 2012. Next, the aging vehicle population now reported to be 11.1 years old, the continued growth in the number of older vehicles and the outlook for miles driven, which saw a 0.5% increase in January after a very challenging December, bodes well for all of us in the aftermarket. And we continue to feel that NAPA is very well positioned to capture its share of this increase in demand generated by these trends. So in summary, we believe the North American automotive aftermarket provides us ample growth opportunities for 2013. We remain positive about the core fundamentals of our industry and our NAPA team remains focused on driving positive growth in the final three quarters of the year.
So that completes our overview of the automotive business in the Q1. 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 start this morning with a review of the Q1 income statement and the segment information, and then we'll review some balance sheet items and other financial items. Tom will come back up to wrap it up, and then open the call up to your questions. As we review the income statement, as Tom mentioned, total sales were $3,200,000,000 for the Q1, an increase of 0.6% from last year. The sales environment remained challenging for us throughout the quarter.
And that said, we remain confident in our growth initiatives and expect to see improving market conditions as the year progresses, which will support stronger sales for us over the balance of the year. Gross profit for the Q1 was 28.8 percent of sales, down slightly from the Q1 last year and primarily attributable to the competitive sales environment across all of our businesses. In addition, we're not seeing much of an impact from inflation. Cumulative pricing for the Q1 of 2013 was down 0.4 percent for automotive, up 0.5 percent of 1% for industrial, up 0.4 percent of 1% for office products and up 1.2% for electrical. We recognize the need to improve our gross margins over the balance of the year and we're committed to this effort.
Our ongoing initiatives to effectively manage supply chain costs, increase distribution efficiencies and maximize our pricing potential offer us opportunities to make the progress that we need to see here. This is a high priority for our management team across all of our businesses. Turning to SG and A. Total expenses were $700,000,000 in the Q1, up 1% from 2,002 and 21.9 percent of sales. Our operating expenses as a percentage of sales are up about 15 basis points from the Q1 last year as we lost some leverage on our expenses for the quarter.
However, we continue to control our costs through several measures, including ongoing investments in technology, which has positively impacted the operating efficiencies in our distribution centers and stores, as well as supply chain initiative in areas such as freight and logistics. Overall, our businesses are managing their expenses very well, and we're in a position to show improvement in this area over the balance of the year. Now we'll review the results by segment. Automotive revenue was $1,540,000,000 and represents 48 percent of sales. It's up 3.4 percent, as Paul mentioned.
Operating profit of $121,000,000 is up 5.7%, so their margin grew 10 basis points to 7.7 percent from 7.6%. We feel good about this increase on a 3% sales growth. The Industrial Group had revenue of $1,100,000,000 and this is 35% of our total sales and a decrease of 1.7%. Operating profit of $78,900,000 is down 6.4%. So we saw this group's margin decrease to 7.2% from 7.5% for the quarter.
This is primarily related to the decrease in sales. Office products had revenues of $420,100,000 which is 13% of our total sales and down 1.4%. Operating profit of $33,200,000 is down 11.5%, and net margin deteriorated to 7.9% from 8.8%. The Electrical Group had revenue of $139,200,000 and that's 4% of our total sales and down 5.4%. Operating profit of $10,500,000 is down 12.7%, so some margin degradation to 7.5% from 8.1% for the Electrical Group, primarily due to the sales decrease.
So our total operating profit was down 2% in the Q1, and our operating profit margin declined by 20 basis points to 7.6%. This follows solid margin improvement in each of the last 3 years, and again, the decrease in the quarter directly correlates to the slower rate of sales growth. The stronger sales that we expect to see over the balance of the year will support the expansion of our operating margins. We had net interest expense of $3,400,000 in the Q1, which is down from 2,002 due mainly to the interest income earned on the increase in cash for the period. Much of this cash was used for the Exego acquisition that we completed earlier this month and after combining our debt with Exego, we expect net interest expense of approximately $30,000,000 for 2013.
Total amortization expense was approximately $3,800,000 for the Q1, which is consistent with the Q4 of 2012, but up from last year due to the Quaker City acquisition. Likewise, our amortization costs will also increase beginning in the Q2 due to the Exigo acquisition. The other line, which represents corporate expense, was $14,300,000 expense for the quarter, and that's up from the $13,400,000 in the Q1 of last year. We currently project our corporate expense to remain relatively in line with 2012 over the balance of 2013. For the quarter, our tax rate was approximately 35%, which has improved from the 35.9% last year.
We expect our full year tax rate for 2013 to remain at approximately 35% due to the favorable impact of the lower Australian tax rate. Net income for the quarter was $144,400,000 down 1%, and EPS of $0.93 was flat with the Q1 of 2012. Now we'll discuss a few key balance sheet items. Our cash at March 31 was strong at $842,000,000 which is up significantly from last year. About half of our March 31 cash balance relates to the incremental borrowings necessary to cover the April 1 acquisition of Exigo.
Without these funds, our cash on hand was relatively consistent with both March December of last year, and we would expect to return to these more normal levels of cash in the quarters ahead. Accounts receivable of $1,600,000,000 at March 31 increased 1% from the same period in 2012 on a 0.6% sales increase for the quarter. Our goal is to grow receivables at a rate less than the revenue growth, so we're relatively pleased with this level of receivables. We will remain focused on this area throughout the year, and we're very satisfied with the quality of our receivables at this time. Our inventory at March 31 was $2,600,000,000 That's down approximately $42,000,000 or 2% from twelvethirty one, and it's up approximately 5% compared to March 31.
The increase from last March relates to the impact of our acquisitions in 2012, and our inventory was basically flat when you break that out. Our team is doing a very good job of managing our inventory levels, and we remain focused on maintaining this key investment appropriate levels as we moved into 2013. Our accounts payable balance at March 31 was $1,800,000,000 That's up 15% from March 31 last year. The significant increase in trade payables again this year reflects the ongoing and positive impact of our extended payment terms and other payable initiatives negotiated with our vendors. We're very encouraged with the improvement in this area and its positive impact on our working capital and days payables.
Working capital of $2,300,000,000 at March 31 is down approximately 12% from March 2012 as reported and is down 3% on a comparative basis after adding back the current debt. 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 cash flow. Our balance sheet remains in excellent condition at March 31. Our debt at March 31, 2013 includes the $500,000,000 in term debt, which we've carried for some time now as well as another $415,000,000 in borrowings under our new multicurrency syndicated credit facility. As stated earlier, the new borrowings relate to the cash transfer this month for the closing of Exego, and that brings our total debt to approximately $915,000,000 at the end of the quarter.
This translates to total debt, total capitalization of 23% at the end of the quarter, which is up from 15% at March 31 last year. Looking ahead, we expect our debt to increase by approximately $200,000,000 in the second quarter upon the consolidation with Exego. This will bring our total debt to capitalization to around 25%. We would add that although we're comfortable with this level of debt in the near term, we will likely use our strong cash flows to reduce our incremental borrowings over time, although we have no exact timetable to do this. In the Q1 of 2013, our cash from operations reached over $116,000,000 And for the full year, we currently project cash from operations to reach approximately $100,000,000 to $850,000,000 We expect free cash flow, which deducts capital expenditures and dividends, to be in the $400,000,000 to the $425,000,000 range.
The continued strength of our cash flows 8 and we've now raised for 57 consecutive years. Our first priority is the dividend, which we have paid every year since going public in 1940 8 and we've now raised for 57 consecutive years, a record that continues to distinguish genuine parts from other companies. Our annual dividend of 2 point represents a 9% increase from the $1.98 per share paid in 2012, and it's approximately 52% of our 20 12 earnings per share, which is well within our goal of 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 CapEx was $13,000,000 for the Q1, down from $17,000,000 in 2012. For the full year, we expect our CapEx to be in the range of $140,000,000 to $160,000,000 which is an increase from the prior year amount of $102,000,000 Much of this increase relates to the planned expenditures for Exego over the balance of the year, although we did have an increase in our ongoing operations as well. We would add that the vast majority of our investments will continue to be weighted towards productivity enhancing projects, primarily in technology. Depreciation and amortization was 26,000,000 dollars for the quarter, which is consistent with the Q4, but up from the Q1 last year, primarily due to the amortization costs. We anticipate depreciation and amortization to be approximately $145,000,000 to $155,000,000 for the full year, which also includes the addition of Exego.
Strategic acquisitions continue to be an ongoing and important use of our cash and are integral to the growth plans for the company. We're excited about the growth opportunities we see at Exego, and we will remain active in seeking new acquisitions for our businesses over the remainder of 2013. Generally, we would expect to target those bolt on types of strategic acquisitions with annual revenues in the $25,000,000 to 100 and $25,000,000 range. Finally, we have been active in our in the company's share repurchase program since 1994. And although we bought minimal shares in the Q1, we did purchase 1,400,000 shares in 2012, and we have another 12,000,000 shares authorized and available for repurchase today.
We have no set pattern for these repurchases, but would expect to be active in the program over the balance of 20 13. 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 DPC associates for their hard work and dedication to their jobs and the success of Genuine Parts Company. The Q1 presented its challenges, but the GPC team worked harder than ever. We're confident the hard work will pay off.
The company is well positioned to generate stronger sales and earnings growth over the balance of the year. And as always, we will support our growth with strong cash flow and a healthy balance sheet, further maximizing our return to shareholders. That concludes our financial review today, and I'll now turn it over to Tom.
Thank you, Carol and Paul, for your updates. So that's a recap of our Q1 performance. As mentioned earlier, going back to the beginning of the year, felt that the Q1 was going to be a challenge for us and that certainly proved to be the case. However, with that said, we continue to feel good about our prospects over the remainder of the year. And in fact, we'd like to reaffirm the guidance that was provided on our March 11 call and our expectation for the full year is revenue increase in the 10% to 12% range and earnings per share to be in the $4.45 to $4.60 range.
As a reminder, these figures include the recent completion of our Exego acquisition, and achieving these results would be a solid performance from the GPC team in our opinion, and we look forward to updating these figures as the year progresses. At this point, we'd like to address your questions and we'll turn the call back over to Brooke.
Your first question comes from John Murphy with Bank of America Merrill Lynch.
Good morning guys. Can you hear me?
We can hear you John. Good morning to you. Good morning.
Good morning. I was just curious, when we look at the CapEx for the Q1 was relatively low versus the run rate you were looking at for the full year. And $140,000,000 $160,000,000 might be a little bit higher than we were modeling. And I'm just curious, is that a step up that could step down in the coming years? I'm just trying to understand where that might be in out years.
Well, we do as with our business, we do look at stepping that number down if we need to. And we were going to have an increase even without Exego this year because we do have several technology projects that are helping our distribution centers and our stores be more productive. So originally, we had set that number up from about $100,000,000 to $115,000,000 to $130,000,000 And then with Exego, we set that up just a little bit more. So that's probably a pretty good run rate. But again, we can adjust that number as need be, but we will continue to reinvest in our businesses with technology.
Okay. And then a second question. I mean, it looks like autos is doing is performing pretty well. But if we look at the other three segments, I know we're looking at some tough comps. But as we progress through the year, you clearly have some sort of comfort
and confidence that things are going to improve. I'm just curious if
there's anything you're seeing improve. I'm just curious if there's anything you're seeing in the market right now or what you saw in January February that made March an aberration that makes you comfortable sticking with your current guidance of some small improvement through the course of the year? John, we do in fact improvement through the course of the year?
John, we do in fact see some improvement. It's early in April yet, but the mid month figures are more in line on a per day basis with what we saw in January February. And as I said, it is early, but we're hoping that what we saw in March truly was an aberration. And with that said, also each of our management teams has got some very specific and focused initiatives to try to continue to drive revenue improvements.
Okay. And then lastly, as we look at pricing and your ability to pass through price increases and pricing sort of in the end market, I'm just wondering if you could comment on that in the Q1 and what you're expecting through the remainder of the year?
Well, we saw as Carol mentioned, we saw some deflation in the automotive side of the business in the Q1. We saw a very modest inflation in both office products and in industrial, and we saw just over 1% in the electrical side. As far as our ability to pass them on, you may recall that in automotive, when we get a price increase, we implement a price increase. In the case of industrial, we do have some contractual arrangements where we have pricing windows where we can implement those price increases. But I think as a general statement, it would be fair to say that we're comfortable with the fact that we can pass any price increase along as long as we adhere to those pricing windows that are contractually negotiated.
As far as the remainder of the year, our outlook right now would be for very modest price increases over the remainder of the year. We don't see any indication at this point that there's going to be a significant push for price increases from our vendor community across each of the businesses. And certainly, we're not going to take one if we don't feel we can maintain our marketplace.
Okay. And then truly just the last question, Carol. I mean as we look at the balance sheet, I mean 25% debt to cap as you indicated you'd be once Exego is fully closed and consolidated really does not appear that aggressive at all and still fairly conservative. But it sounds like you still kind of want to step back on that debt to cap number over time. I mean is your philosophy going to be as a CFO and Tom obviously as a CEO your way in on this too is of course, but that you could potentially run with a little bit more debt than you have historically?
Or do you want to get back to sort of that mid teens debt to cap number? Is that sort of your target? I'm just trying to understand sort of your thought process on the debt that you're taking on here.
Well, John, I'll take the first stab at that and then Carol can help me out. But I would say that keep in mind that at one point we were in the low to mid-30s with debt to total cap. And while we were not uncomfortable at that level, we found that it made more sense for us to pay that down and to use the cash to remove that debt. As we go forward, we'll pay the debt down unless we find a higher and better use of the money for shareholder value creation. So we're not adverse to carrying more debt than we have the last few years.
But at the same time, we think it has to make good long term sense for the shareholders of Genuine Parts Company.
And I guess we're going to continue as we continue to support our priorities for cash, as we talked about, our cash flows have been just really strong lately, and we still see some improvement there. So if we can continue to support our dividend, share repurchases, strategic bolt on acquisitions and our CapEx and then still be able to work on paying down that debt, then that's what we plan to do.
So it's a very high class issue to figure out. Thank you very much, guys.
Thank you, John. Thank you, John.
Your next question comes from Chris Horvers with JPMorgan.
Thanks. Good morning. Good morning, Chris. Focus on the auto side of the house. Can you just clarify how you think about ex the day shift, what the trend looked in January, February March?
You mentioned that April is better. Do you think within northern regions and some of the cold weather categories, I mean, do you think that could simply be an anniversary of easier compares? Or do you think that some of the fundamentals are improving as well?
Chris, I'll take a shot at it. This is Paul. The and I'll start with your last question first. When you talk about the our Northern divisions, which for us is comprised pretty much of the Eastern, the Central and the Midwestern, we have seen improvement in the Q1 of about 300 basis points from where they were tracking in Q3 and Q4. So we are pleased to see some progress with those groups, and we're seeing it even hold as we go into April as well.
So we're feeling better about that group. And then you asked, Chris, about the average daily sales or one less day. Certainly, that had an impact in the Q1, as did how the Easter holiday fell coming into March this year versus April of a year ago. And as we look forward, Chris, we certainly, it's early yet in April, but we are seeing a bit of a lift. We're hoping for a bit of normalization of weather at some point, which we all talk a good bit about.
But certainly, hoping for a bit of normalization on the weather side, and the comps do get easier, no doubt. But there's an awful lot of still an awful lot of deferred maintenance that's sitting out there that at some point has to come into the market.
And so when you say it's better in April, that's average daily sales, right, because you would have had an Easter shift being, I guess, a positive in April? That's correct. Okay. And so if the northern areas or the cold weather regions improved 300 basis points sequentially in the quarter, Given that the comp stayed flat, does that suggest that the other areas of the country actually slowed down?
No, it doesn't. I think what Paul is talking about is the delta between the Northern operations and the rest of the operations. So the Northern operations are still trailing the performance of the remaining operations, but the degree of change has narrowed in the Q1, if that helps explain that.
I think it does. I guess if so if the North improves sequentially on a relative basis, but the comp but if the comps remain flat, doesn't I guess, doesn't that mean that the total remained flat, doesn't mean that the other areas had actually slowed down?
No, they haven't. What's happened is, if we go back to the 3rd and 4th quarters of last year, the relative difference between the Northern operations and the Southern operations and the remaining operations, the difference in performance would have been 500 to 600 basis points. In the Q1, the difference in performance was closer to 300 basis points. Okay. So I guess the point we're trying to make is that we see the Northern operations narrowing the gap with the remaining operations.
And if that continues, we would think that that will continue to enhance the overall performance of the automotive operations.
Okay. And so is there any way to think about how much maybe the spring pull forward? I mean, I would assume on the DIY side of the business that the pull forward last year because of the weather, how much that impacted comps maybe to the positive in 1Q last year and to the detriment in the second quarter?
No, that's a hard number to get to, and we wouldn't hazard a guess on that. We do know it was a positive influence in the Q1 results last year, and we saw evidence that as we get into the Q2. And perhaps that's a possible contributor to the fact that we're seeing the comps improve in April back to more what they were in January February.
Okay. And then last one just on that sort of sequential improvement is that on the DIY side of the business as well?
Improving, but the DIY is still the weakest part of our business.
Understood. Thanks very much.
Okay. Thank you.
Your next question comes from Matthew Fassler with Goldman Sachs.
Thanks a lot. Good morning.
Good morning, Matthew.
First question and just want to understand I the sales growth in automotive slowed from, I believe, 4.9 percent to 3.4%. That's in the context of same store sales growth that were at the same level. And presumably, the acquisition contribution from Q4 to Q1 is pretty consistent. Is that 1.4 percentage point slowdown related to the calendar? Or are there any other moving pieces to understand?
I think it would be more related to the fact that we were short the day.
Yes. So the one day loss. Yes. Understood. And then I do want to address the question that Chris asked again, because I'm having a hard time understanding it.
Presumably, if the gap between two segments of your business starts to narrow and the aggregate trend is unchanged, then presumably one got better and the other softened up a bit. So is there another way to get to that outcome?
Well, I'll tell you rather than get hung up on it here, we'll have Sid do some work on it and he can follow-up directly with you or you can follow-up and anybody on the call can follow-up Sid. Got it. Thank you. And we'll try to give you a clearer understanding of it. Understood.
And then one other question please. So you indicated that
it sounds like there was this soft patch in March. And I think you were talking about the industrial business in particular, but perhaps you saw it elsewhere as well. And I'm wondering if you think about and you gave us great segment information for the quarter overall. What are the parts of the economy or the kinds of customers that you saw participate in that slowdown towards the end of the quarter? To the extent that April looks a lot more like January February, is it those same segments that recover?
Just interested in some of the moving pieces that are driving that movement.
Matt, I can't parse it in such a way that I can tell you specifically which customer segments in the month of March. I can tell you for the quarter that we saw comparative weakness in what we call equipment and machinery, which is a big category for us, and they would be largely OEM type manufacturers. And then we continued to see some softness in the mining and aggregate and coal segments, And that was offset some by strength in automotive, and we were encouraged by the fact that lumber and wood products continue to show some improving trends, I guess, following what we're all reading about the housing sector. And then pulp and paper held up well for us in the quarter. So but I can't address March specifically.
Got it. Okay. That's still very helpful color. Thank you, Tom. I appreciate it.
Thank you.
Your next question comes from Keith Hughes with SunTrust.
Thank you. My question is on automotive in the commercial space. Your more retail focused competitors continue to talk about moving in that space. I know we've seen this for some time. Can you give us kind of a strategic landscape where you think you are right now in terms of share versus the others?
And what it's going to look like several years from now?
I'll take the first stab at that Keith and maybe Paul can help out. I would suggest that based upon the results we've seen with our 2 primary commercial initiatives, which will be NAPA Auto Care and Major Account and the fact that we continue to grow those businesses. And those businesses experienced, I think, pretty good growth for us in the quarter. And I think based upon what we can gather anecdotally, our growth in the commercial side of the business might have exceeded the growth of the overall commercial market through the quarter. I think it would suggest to us that at a minimum, we've held our own on share and perhaps we even gained some.
And that's a continuation of a trend that we've seen for several years now. Sometimes we get asked who is the share gainer, who is the share donor, and we can't answer that categorically. We can only base our comment on what we see that's publicly disclosed. And I think it would suggest that the publicly traded companies perhaps are gaining share, and maybe it's coming from some non publicly traded companies. As far as what happens going forward, it's going to continue to be a very, very competitive marketplace.
There's no doubt in our minds about that. And it's going to be a matter of who executes most consistently and most crisply going forward. And I think the trends in the industry would favor some of the larger players just because of the demands that are out there in terms of the overall investments in inventory, the service levels, the training you give people, the technology, all of the things that are important to a commercial account. So I think they play to the favor of those who have the balance sheet and the logistical capabilities to meet those demands.
And looking out in the future is consolidation in your opinion going to play a big role here given that we probably have too many retail auto parts stores in the card stores in the United States
right now? Well, I think the industry overall will probably experience some consolidation. And I think the market dynamics and circumstances will force some of that over time. It's not a new phenomenon. We've seen quite a bit of that going on over the past several years.
So our sense is that that will continue. Okay. Thank you. Thank you.
Your next question comes from Bret Jordan with BB and T Capital Markets.
Yes. A quick question. I guess
sort of following up on
the last question. And you commented that non fleet commercial was up while fleet commercial was down somewhat. Is there anything going on in the competitive landscape on fleet commercial? No. I don't think there's anything necessarily competitive.
I think it more directly ties to what we see happening with freight movement. If you look at the TSI, the Transportation Services Index, it actually was down. I think it was down 1.2% or 1.8% in Q4. We don't have Q1 numbers as yet, but my guess is it was probably somewhere in that range. So I think there's just been some modest slowdown in the amount of freight that's being moved.
Okay. And then a follow-up question on DIY. You commented it being the weakest category. Are you seeing any correlation to improving weather to improving DIY? Does that seem to be a catalyst?
Or is DIY just generally soft across the board? No. We are seeing some evidence of it in those parts of the country where we are having more normal weather. If you go up into the Midwest, we've got the issue with flooding that's going on there. We just had another snowstorm that moved through there.
So that's an impediment to the DIY business there. But if we come into the warmer climate states, we do see DIY business a little bit better than what it has been. But I would also say that we think the DIY business overall is probably off a bit from where we'd all like to see it, just general economic circumstances.
Okay.
Thank you. Thank you, Brad.
Your next question comes from Dave Gober with Morgan Stanley.
Hey, guys. This is Sean Konik on for Dave. Hi, Sean. Sorry to stick to the automotive side again. But some of your peers have called out the impact of the delay in tax refunds and the increase in payroll taxes on the DIY business.
Are you seeing those factors impacting the business in Q1? And if so, that's
in that the delay in payroll tax refunds could have an impact. And certainly, the higher payroll tax could have an impact. If you think of a household that has a $75,000 household income, let's say, and they have to get by on $1500 less in take home pay, they're going to have to adjust disposable income and spending patterns. And I think, yes, that would be a contributor for sure. The payroll tax refunds will normalize here, but the impact of the increased payroll tax is something we're going to have to work our way through over an extended period.
Okay. Just one follow-up on a bigger picture view on the auto business. The store base has been fluctuating over the last few years, but 2012 does see a pickup there. Can we expect store growth over the next couple of years to continue? And in what markets do you really see the most opportunity?
Well, we would suggest that you will see store growth at least on from the Napa side of the business. And we've got some specific plans. I don't think we'd want to necessarily disclose where we think the best opportunities are. But I think you can look for us going forward to expand our store footprint something between 1% 2% per year.
All right, great. Thank you. Thank you.
Your next question comes from Greg Melich with ISI.
Hi, thanks. I have two questions. First, I just want to make sure on the guidance that I got it right. You said that it's unchanged and that I thought I heard you say that the sales was unchanged as well as part of that. So could you just update us to whether those ranges by category that you gave earlier in the year?
I think it was 5% to 7% in auto and one of the biggest
Yes. What we had when we gave segment guidance, I think what we said Greg was automotive 5% to 7%, industrial and the electrical 4% to 6% and office products, 1 to 3. And then when we came out on March 11, we included the contribution that we anticipated from Exego, and that's when we raised it to the 10% to 12% overall. I would say that the guidance we gave by segment, the industrial and the electrical, we would have a bias toward the low end of the ranges that we gave only because of what we saw through the Q1. We still think that office products can get into their range and again a bias toward the low end of it.
And I think we're comfortable with our automotive guidance that we gave, if that answers
your question. That does. That's perfect. And then a second on the inflation deflation front. I guess it ties into gross margin a bit.
Auto deflation if I remember last year was down a little bit maybe 0.3 something like that? That's correct. What's driving the continued deflation in auto either by category? And then does that mean that in your gross margin which actually looked decent in the quarter all things considered, is it fair to say that auto gross margins would have been up and the others may have been down some? Or how should
we think about that? We don't break out gross margin by segment. The what's driving deflation right now, I think, in automotive are competitive circumstances. And I think manufacturers are having to meet the competitive situations, and it's resulting in deflation, modest deflation, but deflation all the same in our automotive business.
So that could influence your top line negatively. But does it is it fair to say that that means you can get continued sourcing cost savings to help gross margin in the auto business? I guess that's what I'm trying to figure out. Not give us the numbers, but just directionally speaking, is it fair to say?
I think directionally, you could say that let me back up. Our expectation right now is that we will see gross margin improvement for Genuine Parts Company as we work our way through the year. And in order to get that, we're going to have to get contribution from each of our businesses. But we do, in fact, think that we will show some gross profit improvement as the year progresses. We went through just as a reminder, we went through a several year period where we actually had some gross margin degradation, and we were able to offset it with some good SG and A work.
Last year, we had modest gross margin improvement, and our expectation is that we will, in fact, see some gross profit improvement again in 2013.
Okay. So that auto deflation seems to I mean, you would confirm that's a trend now. It's been around for at least 5 quarters.
Well, it's been around for a while. I don't know how many quarters, but it's not a new phenomenon.
Great. Thanks a lot.
Thank you, Greg. Your
next question comes from Brian Sponheimer with Gabelli and Company.
Hi, good morning.
Good morning, Brian.
Good morning, Brian.
So just want to talk about Exego for a couple of minutes here. As far as the strategy going forward, any plans to bring the Napa brand to the region and perhaps use it as a premium branded product within the region?
Brian, I'll take the first stab at that. At this point, no, there is not a plan to do that. And the reason why is that the business operates under the name of Repco. And Repco is a name that's been around actually 2 years longer than Genuine Parts has been around. And they are the number one brand over there.
It's an iconic brand in their home markets. So our plan would be to use our sourcing leverage, combined sourcing leverage to enable them to continue to do what they do. And they've got their own private label brand in addition to some manufacturer brands. And we're going to continue to let them operate as Repco because they are, in fact, the most highly recognized brand in that marketplace.
Okay. And just a question on the states within auto. What can you tell me about maybe this quarter versus Q4 and Q3 from a product mix standpoint? I think you mentioned that average ticket was still up, account was down. Are you seeing consumers go back at all or some of your customers go back at all to the mid grade and potentially high grade products?
Brian, this is Paul. We're seeing some shift, but not that significant. If you look at it by product category, I think I mentioned earlier, we're seeing strong growth out of our battery category, strong growth out of some of our electrical products, wipers, some of the winter type related products, which is a good thing. The brake business continues to be challenging for us as it has been and I think for many in the industry, but we are starting to show signs of some improvement in that product category as well.
And there's still a reticence by your customer base though to move up market?
Yes. I think that's a fair statement, Brian.
Okay. All right. Thank you very much. Thanks,
Brian. Your next question comes from Scot Ciccarelli with RBC Capital Markets.
Hi, guys. This is Patrick Palmer on for Scott. Thanks for taking my question. Earlier in the call, you mentioned that just a more competitive sales environment. And I was just wondering if you're seeing that environment more pronounced in one of your segments over the other.
No, I think it's probably the same across all. And look, we've been through different cycles before, and things tend to get a bit more competitive when we see end market demand slow up some. And everybody's trying to find ways to improve their relative positioning in markets like this. So I don't think it's any more pronounced than what we've seen in other cycles, but it hasn't diminished at all either.
Okay. Thank you for taking my question.
You bet. Thank you. Thanks,
Patrick. Our final question comes from Efraim Levy with S&P Capital.
Hi, guys. Last quarter, you said you thought that Q1 would be down and it was. And then there was some thoughts that possibly and this may be specifically to EIS or I'm not sure it could be broader than that that it would be weak. So firstly, has your Q2 view changed?
Well, no. We knew that actually what I think we said was that we thought the first half of the year would be more challenging than the back half of the year, with the Q1 being the most challenging. As we look toward the remainder of the year, I think that if we look at the industrial related businesses, their recovery will be a little slower than what we would expect in our automotive business. And frankly, our automotive business, I think, held up pretty well under the circumstances and considering the fact that we had all of the variables at play there. So I think automotive should fare well going forward.
I think the others will all improve their position as the year progresses, but I think it'll take maybe one extra quarter for industrial and electrical to get back to where they think they'll be.
Okay. And you have your guidance for CapEx, but I wasn't clear exactly what the reason was why it was down so sharply as a percentage in the Q1 versus last year.
It's a timing thing of projects. So usually in the beginning of the year and dependent on weather and things like that you may have fewer building projects and things like that. So it's really just a timing thing. We're usually a little lighter in the Q1. And then honestly with the slowdown in business, they may have delayed starting some things to start those in Q2 or Q3.
Okay. And just one more. In the past you sometimes differentiated the aftermarket auto versus tire trends. Is there anything to highlight in that segment?
No. I don't think we have any data that we could update you with.
All right. Thank you very much.
Okay. Thank you.
Thank you. That was our final question. I will now turn the call back to management for closing remarks.
Well, we thank you for your time and interest and your support of Genuine Parts Company and we look forward to talking to you in our Q2 release. And if you need anything else, please let us know. Thank you.
Thank you. That concludes today's Genuine Parts Company Q1 2013 earnings conference call. You may now disconnect.