Greetings, and welcome to the Genuine Parts Company Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.
Sid Jones, Senior Vice President, Investor Relations for Genuine Parts Company. Thank you. You may begin.
Good morning and thank you for joining us today for the Genuine Parts Company Q3 2019 conference call to discuss our earnings results and outlook for 2019. I'm here with Paul Donahue, our Chairman and Chief Executive Officer and Carol Yancey, our Executive Vice President and Chief Financial Officer. Before we begin this morning, please be advised that this call may include certain non GAAP financial measures, which may be referred to during today's discussion of our results as reported under Generally Accepted Accounting Principles. A reconciliation of these measures is provided in the earnings press release issued this morning, which is also posted in the Investors section of our website. Today's call may also involve forward looking statements regarding the company and its businesses.
The company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest SEC filings, including this morning's press release. The company assumes no obligation to update any forward looking statements made during this call. Now, I'll turn the call over to Paul for his remarks.
Thank you, Sid, and let me add my welcome to our Q3 2019 conference call. We appreciate you taking the time to be with us this morning. Earlier today, we released our Q3 2019 results. I'll make a few remarks on our overall performance and then cover the highlights across our businesses. Carol Yancey will provide an update on our financial results and our current outlook for the full year.
After that, we will open the call to your questions. So to recap our Q3 performance across our global platform, we are pleased to set a quarterly sales record, achieving the $5,000,000,000 quarterly sales mark for the first time in our company's history. This represents a 6.2% sales increase from Q3 of 2018 and follows a 2.3% total sales increase last quarter with the improvement driven by a 1.2% comp sales increase and a 6.7% benefit from strategic acquisitions. These items were partially offset by a 1.7% headwind from foreign currency translation and the decline in sales related to the Auto To do divestment earlier in the year. Net income in the Q3 was $227,000,000 and earnings per share were $1.56 Excluding the impact of transaction and other costs and income related acquisitions and divestments, adjusted net income was $219,000,000 or $1.50 per share.
This compares to 1.48 reported in the Q3 of last year. Our teams were active this quarter executing our strategy to further optimize our portfolio. This included actions to complete the Anenco Industrial acquisition in Australasia, the sale of EIS and the investment in SparesBox, Australia's leading online automotive and accessories business. We made significant progress in several areas this quarter, and we are excited for the growth opportunities we see ahead. We'll cover each of these areas as we review our business segments.
Our global automotive sales, which represented 56% of our total revenues, were up 5.3% from last year and improved from 1.4% in Q2. Comparable sales were up 1.8%, which was improved from the 1.3% in Q2, and acquisitions added another 6.5% to sales. This growth was partially offset by an approximately 2% unfavorable foreign currency translation and a 1% impact from the sale of the Auto To do business in Mexico. In our North American operations, U. S.
Automotive sales were up 2.5% on a comp basis, and our Canadian automotive business posted 3.8% sales comps. We remain confident in the ongoing strength of the North American automotive aftermarket and expect these markets to gain positive momentum over the balance of the year and well into 2020. For the 2nd consecutive quarter, we had positive sales growth with both our commercial and retail customers, with sales to the DIFM segment performing very well and outpacing our DIY sales. Among our DIFM customer segments, sales to our NAPA Auto Care Center customers continue to outperform our overall commercial sales growth. This customer group represents approximately 18,000 independent repair shops in the U.
S. And another 2,000 in Canada. So obviously, a very key segment to us. We were also pleased to see stronger growth with our major account customers with sales increases in each of our categories, including our fleet and government customers, National Tire Centers, regional accounts and OE dealers. Now turning to our retail segment.
While our team generated a positive revenue increase in the quarter, we have experienced a few headwinds in this segment of our business. We believe this reflects a combination of lapping strong comps associated with our impact store rollout in 2018, the continued slowing of our transaction counts, which we have seen across the industry and finally, timing related to major promotional events. Our team has launched a series of initiatives, which we expect to improve this trend in the quarters ahead. While Carol will provide more financial details later, it's worth adding that both our U. S.
And Canadian businesses delivered improved profitability and strong margins in the quarter. So a solid quarter for our North American automotive operations, and we expect to continue to build on this positive momentum. In Europe, we continue to operate in a challenging sales environment, although we are pleased to report an improvement in our core sales performance relative to the Q2. Overall, our sales comps were down mid single digits, an improvement from the high single digit decline in Q2. Across our geographical regions, we saw a significant improvement in our largest market, France, which posted a slight increase in the quarter.
Germany was down slightly, while the UK was our most challenged region as it continues to feel the effect of Brexit, along with tough comps fueled by a series of one time events in 2018. The U. K. Labor market remains strong despite a decline in employment in Q3, while domestic growth is showing signs of slowing and overall business sentiment is flumping. That said, the news coming out of the U.
K. This past week is somewhat encouraging, and we remain hopeful the UK and European Union can reach an agreement sooner rather than later. The AAG team has made progress in executing on their sales and cost savings plans, and we believe we are beginning to see the impact on our business, both on the revenue and cost side of the ledger. Specifically related to sales, one key initiative to highlight would be the Q3, Q4 rollout of the NAPA brand across several product categories. We believe the introduction of a quality private label offering will further distinguish our European business from the competition and provide incremental growth opportunities for us.
As it relates to cost savings, our efforts thus far are having a positive impact on our European operating profits, and we expect to generate additional expense reductions in the periods ahead. In addition, we also made progress with our European M and A strategy during the quarter. We continue to integrate the PartsPoint acquisition, which closed on June 1 with our overall European business, and this group performed according to plan. Likewise, we closed on the Todd acquisition in France on October 1. This strategic acquisition positions us as the market leader in the heavy duty segment across the French market.
As a reminder, PartsPoint and Todd are expected to add $330,000,000 $85,000,000 in annual revenues. So despite current market conditions, we see many good things taking shape in our European business and we remain committed to our growth and integration plans for this important segment of our automotive operations. Now turning to Australia and New Zealand. Our team continues to outperform the market with solid comp sales growth of 4.2% for the quarter. This represents our strongest core sales growth in 2019 despite more challenging economic conditions across the region.
We were also pleased to complete our first full quarter with our 87% investment in SparesBox, which closed on July 1. As a reminder, SparesBox is Australia's leading online automotive parts and accessories business. And while not material to our financial results, this partnership served to enhance our understanding of the digital marketplace and grow our digital sales capabilities in Australasia and potentially across all of our global operations. So that's a review of our global automotive business. And now we will turn to our industrial business.
Our Global Industrial Parts Group continues to push further with their portfolio optimization initiatives with the closing of the Anenco acquisition on July 1 and the sale of EIS on September 30. We will address both transactions shortly, but overall this group had a solid quarter with sales of 1,700,000,000 dollars up 9.9 percent, including an approximately 1% comp sales increase and a 9% benefit from acquisitions. This group also improved their operating margin by 30 basis points for the 2nd consecutive quarter and 50 basis points if we exclude EIS. So we are pleased with the continued progress in our industrial business. The softness we have seen in our top line growth is not unexpected given the overall slowdown we have seen in the industrial economy.
This has translated to mixed results across our product and industry sector sales with 8 of our 14 product categories and 7 of 12 industries positive in the 3rd quarter. With the slowing U. S. Manufacturing trends, the Motion team continues to look for strategic tuck in acquisitions as part of its overall growth strategy, and effective October 1, acquired the Fluid Powerhouse headquartered in Ontario, Canada. FPH is a full service fluid powered distributor with 4 locations and projected annual sales of $20,000,000 Our industrial business in Canada has been growing at a high single digit pace or better for 11 consecutive quarters, and we are excited to bolster their position in the Fluid Power segment.
We have also further diversified our industrial footprint with the entry into Australasia. We were pleased to close on the Anenco acquisition in Australasia on July 1, and they have hit the ground running. Anenco is the leading industrial distributor in this region with operations in Australia, New Zealand and Indonesia, and this business performed very well in the quarter, providing accretive sales and profitability. We continue to believe that Inenco is an excellent strategic fit with Motion in North America and presents tremendous opportunities for global industrial growth. Finally, during the Q3, we announced a definitive agreement to sell the Electrical Specialty Group of Motion Industries, and this transaction ultimately closed on September 30, 2019.
As background, we had determined that this was in the best interest
of the
company given its lower growth and lower margin profile relative to our core industrial operations. We were very pleased to complete the sale of this business and take another step forward in our strategy to optimize our portfolio and best position CTC for sustainable long term growth. So now let's discuss S. P. Richards, our business products group.
For the Q3, comp sales for this business were down approximately 1%. This sales decrease primarily reflects the slower sales in our core office supplies and technology categories, as well as slower sales with our National Accounts Group. In contrast, our Facilities and Safety Supplies business delivered another quarter of solid results, and we expect continued growth from this category in the quarters ahead. Despite the softness in the top line, the BPG team has stabilized its operations with improved profitability and a 40 basis point year over year improvement in operating margin for the quarter. This is significant progress and especially impressive given a devastating fire that occurred at our Atlanta DC and head office in mid July.
First, we want to say how pleased we are to report that no one was injured during this unfortunate event. 2nd, our team was well prepared with an effective business continuity plan, enabling them to get back up and operational in a matter of days. We are proud of our team for their attention to safety and servicing our customers under very difficult circumstances. So that's a recap of our consolidated and business segment results in the Q3 of 2019. But before turning it over to Carol for her remarks, we wanted to update you on our action plans and progress in accelerating our ongoing cost savings plans and developing aggressive expense reduction initiatives.
These efforts are designed to more effectively address our cost structure, drive meaningful savings and deliver incremental value. So today, we are pleased to announce that we have plans in place to generate annualized savings of $100,000,000 by the end of 2020. And as Carol will discuss later, these are meaningful cost reductions that will help drive operating margin expansion in the years to come. Our team is committed to this mission and excited to work together to achieve these savings. So with that, I'll hand it over to Carol.
Thank you, Paul. We will begin with a review of our key financial information and then provide you with our updated Q3 total sales of $5,000,000,000 representing a 6.2% increase, our gross margin for the quarter was 32.4% compared to 31.4% in 2018, with the improvement in margin relating to several factors. These include more flexible and sophisticated pricing strategies, favorable product mix and the benefit of higher supplier incentives. In addition, the PartsPoint and Inenco businesses have higher gross margin profiles. These factors drove improved gross margins in all three of our business segments, and we continue to expect our 2019 gross margin rate to remain relatively in line with our current run rate.
The pricing environment across all three of our segments has been relatively inflationary thus far in 2019. In automotive, the price increases primarily relate to the impact of tariffs, while industrial and business products have seen increases associated with general inflation in areas such as raw material pricing, commodities and supplier freight. Thus far, we have been successful in passing on the price increases to our customers to protect our gross margin, so we continue to believe that the current levels of inflation have been a net positive to our results, and we expect this to continue through the balance of 2019. Specific to tariffs, their impact in the 3rd quarter primarily reflects the 25% tariff on List 1 through 3 items, although business product was also impacted by the 15% tariff on the List 4A items, which was effective September 1. With this in mind, the impact of tariffs on our Q3 sales was approximately S.
Automotive, immaterial for industrial and approximately 1% for business products. We would add that the tariffs have had no impact on our gross margins. Turning to our SG and A, these expenses were $1,300,000,000 in the 3rd quarter, up 13.5 percent from last year and 25.3 percent of sales. Our SG and A expenses continue to by the effect of rising costs in areas such as payroll, freight and delivery, IT and cybersecurity, as well as ongoing investments to improve our efficiencies and productivity. The PartsPoint and Anenco Businesses also have a higher SG and A profile, and this was a factor in the increase.
In addition, we are seeing the deleveraging of expenses due to slower comparable sales growth in certain operations. As Paul mentioned earlier, we've been enhancing our initiatives and intensifying our efforts to reduce our costs and more effectively leverage our expenses. While these efforts are still in the early stages of implementation, we've made significant progress and we expect to generate meaningful savings as we move forward. By the end of 2020, we expect to generate annualized savings of $100,000,000 and we will continue to evaluate opportunities for additional cost we're focused on a variety of cost saving initiatives. We intend to reorganize and streamline several functional areas across our operations, including numerous back office responsibilities.
In addition, we expect to consolidate and ultimately reduce our total number of distribution facilities and to enhance the automation utilized in distribution and back office functions. These actions will require organizational changes, and we're currently working on a number of workforce initiatives to successfully drive this process, while also maintaining excellent customer service. We look forward to providing more details on these plans and initiatives as they are finalized and launched and executed in the coming quarters. So now let's discuss the results by segment. Our automotive revenue for the 3rd quarter was $2,800,000,000 up 5% from the prior year, and our operating profit of $222,000,000 was down 2% with an operating margin of 8.0 percent compared to 8.6% margin in the Q3 of 2018.
This quarter, the 60 basis point decline in margin directly relates to the challenges we are facing in Europe, And as mentioned, we expect to see improvement in Europe as well as all of our automotive operations through the saving plans that we'll be implementing through the next 12 months. Our industrial sales were $1,700,000,000 in the quarter, a strong 10% increase from Q3 of 2018. Our operating profit of $138,000,000 was up 15.4 percent and their operating margin improved to 7.9 percent last year, with a 30 basis point increase due to gross margin expansion and the leveraging of expenses. The Industrial business continues to operate well with 11 consecutive quarters of solid sales and operating results. Our business products revenues were $492,000,000 down 1% from the prior year.
Their operating profit of $21,600,000 is up 9% and their operating margin improved to 4.4% from 4.0% last year, so it's nice to see the margin expansion and continued steady results for this business. Our total company operating profit in the 3rd quarter was $381,000,000 up 4% on a 6% sales increase and our operating profit margin was 7 point 6% compared to 7.7% last year. We had net interest expense of $25,000,000 in the 3rd quarter, which is up slightly from the Q2 and up from the $22,000,000 in the Q3 last year. Looking ahead, we are currently expecting net interest to be in the $92,000,000 to $93,000,000 range for the full year, which is down from our previous Our total amortization expense was 26,000,000 Our total amortization expense was $26,000,000 for the Q3, and we continue to expect full year amortization to be approximately $100,000,000 Our depreciation expense was $42,000,000 in the 3rd quarter and we are narrowing the range for our full year depreciation expense to $170,000,000 to $175,000,000 for the year. On a combined basis, we expect depreciation and amortization to be in the range of $270,000,000 to $275,000,000 for 20 19.
Continuing with the segment information presented in our press release, the other line, which primarily represents our corporate expense, was $26,000,000 in the 3rd quarter, including an approximate $12,000,000 benefit associated with the transaction costs and other income related primarily to the Anenco acquisition and the sale of EIS. The acquisition of the final 65 percent interest in Inenco resulted in a $39,000,000 gain on the revaluation of our original 30 5% investment. This was partially offset by transaction costs and the $6,000,000 net loss related to the sale of EIS. Excluding these items, our corporate expense was $38,000,000 or a $6,000,000 increase from last year and primarily relates to payroll pressures, increased legal and professional fees, ongoing investments in IT, cybersecurity, digital and overall omnichannel initiatives. For 2019, we are narrowing our expected range for corporate expense to $130,000,000 to $135,000,000 Our tax rate for the 3rd quarter was 25.3%, an increase from the 24.5% rate in the prior year, primarily due to transaction and other associated costs.
For the full year, we continue to expect our 2019 tax rate to be approximately 25%. Now let's turn to our balance sheet, which remains strong and in excellent condition. Accounts receivable of $2,700,000,000 is up 3% from the prior year. This compares to our 6% total sales increase and represents a 2.5% increase excluding acquisitions, foreign currency and the impact of EIS. So we did a good job of managing this account and we remain pleased with the quality last year.
Excluding acquisitions, foreign currency and EIS, our inventory was up less than 1% and we're very pleased with the progress our teams are making in maintaining this key investment at the appropriate levels. Our accounts payable of $4,200,000,000 is up 4% due mainly to the in purchasing volume and to a lesser degree the benefit of improved payment terms with key global partners. At September 30, our AP to inventory ratio was 113%. Our total debt of $3,400,000,000 at September 30 is down from the $3,900,000,000 at June 30, due primarily to the repayment of debt as a result of our strong cash from operations in the 3rd quarter. At September 30, our average interest rate on our total outstanding debt stands at 2.23%, which has improved from the 2 point 6 3% at September 30 last year.
We remain comfortable with our current debt structure and we have a strong balance sheet capacity to support our future growth initiatives and our ongoing priorities for effective capital allocation. As mentioned, we had strong cash flows in the 3rd quarter, and we've generated $745,000,000 in cash from operations thus far in 2019. For the full year, we continue to expect approximately $1,000,000,000 in cash from operations and free cash flow, which excludes capital expenditures and the dividend to be in the $300,000,000 to $350,000,000 range. So we expect our cash flows to continue to support our ongoing priorities for the use of cash, which we believe serves to maximize shareholder value. Our key priorities for cash remain the reinvestment in our businesses, strategic acquisitions, the dividend and share repurchases.
We have invested $183,000,000 in capital expenditures thus far in 2019, up $91,000,000 from 2018. This reflects our growing global platform and the planned increase in our investments in areas such as technology and productivity in our facilities. For the year, we're updating our capital expenditures to the range of $250,000,000 to $300,000,000 Regarding the dividend, 2019 represents our 63rd consecutive year of increased dividends paid to our shareholders. Our 2019 annual dividend of $3.05 represents a 6% increase from 2018, and it's approximately 54% of our 2018 adjusted earnings, which is in line with our targeted payout ratio. Turning to our share repurchase program.
We have purchased approximately 800 1,000 shares of our common stock thus far in 2019, and today we have 15,600,000 shares authorized for repurchase. We expect to be active in the program over the long term and continue to believe that our stock is an attractive investment and combined with the dividend provides the best return to our shareholders. So now let's discuss our current outlook for 2019. We are updating our full year 2019 sales and earnings guidance in consideration of several factors. These factors include our results through the 9 months of the year, our current growth plans and initiatives, the market conditions we see for the foreseeable future across all of our operations, the September 30 sale of EIS and the ongoing impact of a strong U.
S. Dollar. With these items in mind, we expect our full year sales to increase approximately 3.5 percent. This updated sales outlook represents a change from our previous guidance for a +4.5 percent to+5 percent sales increase, and it accounts for the sale of EIS as well as the incremental impact of foreign currency translation relative to our previous guidance. As is customary, this guidance excludes the benefit of any future acquisitions.
By business, we are guiding sales to be up 3.5% to 4% for the automotive segment, which has changed from our previous guidance of +4 percent to+5 percent and primarily due to the impact of foreign currency and a challenging sales environment, which we continue to face in Europe. Plus 4% to plus 4.5% for the Industrial segment, which is down from the plus 7% to plus 8% previously, primarily related to the sale of EIS, and down approximately 1% for the Business Products segment. On the earnings side, we expect diluted earnings per share to be in the range of $5.44 to $5.52 which accounts for the transaction and other costs and income incurred through the 9 months in 2019. And we are updating our outlook for adjusted earnings per share to $5.60 to $5.68 from the previous $5.65 to $5.75 This represents a $0.05 to $0.07 change in earnings, primarily due to the sale of EIS. As a reminder, adjusted diluted earnings per share excludes any 9 months and future transaction and other costs.
That completes our financial update and our outlook for 2019, and I will now turn it back over to Paul.
Thank you, Carol. We were pleased to perform in line with our expectations for the Q3 and would highlight several accomplishments. We had record quarterly sales, surpassing $5,000,000,000 in sales for the first time in our company's history. We achieved another quarter of positive comp sales growth in our U. S, Canadian and Australasian Automotive businesses as well as our Industrial business.
We further improved our gross margin with 105 basis point year over year gain. Our Industrial business continued to perform well, generating a 30 basis point margin improvement. The Business Products Group further stabilized, posting a 40 basis point margin improvement. We improved our working capital position and generated strong cash flows. And finally, we expanded our global footprint via several diversified acquisitions, both by segment and geography, including Anenco and SparesBox on July 1 and the Fluid Powerhouse and Todd on October 1.
In addition to these accomplishments, we have made strong progress on our ongoing business transformation. We continue to take steps to optimize our portfolio of businesses as demonstrated by the sale of EIS on September 30. Finally, we strengthened our focus on sustainable, value creating initiatives to drive meaningful enduring efficiency, including the cost reduction actions we discussed today. We will also continue to execute on our aggressive initiatives to improve top line performance. We plan to achieve this by incrementally growing revenue through new business generation, executing our digital strategy and finally, securing strategic bolt on acquisitions.
We are focused on creating significant long term value for our shareholders, and we will continue to update the investment community as we make progress towards this important objective. We thank you for listening. And with that, we'll turn it back to the operator, and Carol and I will take your questions.
Thank you. At this time, we'll be conducting a question and answer first question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question.
Thanks. Good morning, everybody.
Good morning.
So first a cleanup question. Did both NAPA and Motion have one less Sunday in the quarter? And what was the approximate comp benefit to that?
Yes. So, we really while we did have arguably an extra day in the Q3 and we were short a day in Q1, it varies depending on the business and the geography and the segment. So we would say it was more of a minimal impact.
Minimal. And so I guess maybe historically you said 50 basis points or something less than that?
Something less than that, that's correct.
And Motion did have one less?
They did, yes.
Okay, got it. And then could you maybe 1st on the motion side, can you talk about those core motion comps ex that extra day noise? Did it turn negative in September? And how are you thinking about the outlook over the coming quarters given the fact that the PMI has been, I think, negative in back to back months?
Yes. So Chris, thanks for the question. Look, our Motion business, despite the decline 2 months in a row in PMI. And if you go back further, Chris, PMI has been declined for 6 consecutive months and 10 out of 13. So not a new phenomenon by any stretch.
Our Motion business, we're pleased the way the guys delivered in the quarter. Much like our overall business, their strongest month of the quarter was August, They had a good month in August. July September were both slightly weaker than August. But again, we're very, very pleased with the way the team delivered in what is clearly a slowing industrial environment. But as we have seen in this cyclical business in the past, Chris, they've done the right things in terms of cost takeout.
And fortunately, we're able to deliver nice operating margin improvement in the quarter.
Got it. And then just I haven't been able to run
through the numbers, but I guess you
think about what's the sort of implied motion comp for the 4th quarter?
Chris, that would be similar to what it was in Q3, so around a 1% comp. And one other just item to note, we're really pleased to have our expansion in a different geography in the industrial business going into Q4 and beyond with Enco in Australasia. They're not quite as susceptible to some of the things that we're seeing in North America. So as we look ahead, still strong reported total sales, but a similar comp for Q4.
Got it. And then just lastly, the similar discussion around the U. S. Naphtha business, How did you see the monthly trends ex that the extra day noise? And then how what's the implied U.
S. NAPA comp here for the Q4?
So I'll take the first part of the question, Chris. The cadence of the quarter, again, very similar to what I described in industrial. Good August, very good August for the team here in the U. S. September, not a surprise.
We were up against our strongest comp of the year in September. And then July, what I'd say about July, we got off to a better start in July, and I think I might have even commented on it during the last call. We saw that slow in the second half of the month of July, But all in all, very similar to the cadence that we outlined for industrial. And as far as guidance looking forward, I'll let Carol tackle that one.
Yes, sure Chris. As we look as we just ended the 9 months with U. S. Automotive comping around 3%, we would expect to be similar in Q4 with around 0.5% to 3% comp.
Thank you. Our next question comes from the line of Scot Ciccarelli with RBC Capital Markets. Please proceed with your question.
Hi, good morning. This is actually Gustavo Gonzalez on for Scott today. Thank you for taking our questions. Just on sort of strategic M and A, and in particular, automotive and sort of industrial, and acknowledging there are a lot of sort of puts and takes market by market. Can you sort of update us on how the M and A environment or opportunities out there looks like right now versus say 2 or 3 years ago?
And maybe even sort of directionally touch on what kind of multiples you're seeing in the market today versus prior years?
Sure. I'll touch on that. From our vantage point, from an M and A standpoint, we will embark upon our classic strategy at GPC to always be on the lookout for strategic bolt on acquisitions across our different business segments and geographies. A classic couple for us this past quarter were the Todd acquisition in France, which bolsters our heavy duty footprint and positions us at number 1 in that market. The Fluid PowerHouse acquisition for our Motion business, which strengthens our Fluid Power business in Canada.
So those are our classic approach to M and A and certainly we will continue to look at bolt on acquisitions. And our strategy is generally to look for 1% to 2% per year in bolt on acquisitions. In terms of the larger more strategic acquisitions like AAG, we're going to be more focused on integrating those more strategic acquisitions in 2020 beyond. And then in terms of valuations, the valuations that we look at in our bolt on acquisitions, that really has not changed in previous years. Those most of those type acquisitions, we know the players, they know us.
We're not getting into a bidding war, and it's a very sane environment if you would.
Got it. Thank you.
You're welcome.
Thank you. Our next question comes from the line of Matt McClintock with Raymond James. Please proceed with your question.
Hi, yes. Good morning, everyone. Good morning. I wanted to know if we could focus on European Automotive for a few minutes. I believe that you said that the French business returned to positive or slightly positive growth this quarter.
And I wanted to dig into that a little bit. What did you actually see in that business during the quarter that brought around that improvement? That would be the first question. And
thanks for the question, Matt. Look, what I would say first and foremost is we were very pleased to see our European business rebound in Q3. As you know, Q2 was a challenge, so the team rebounded nicely. The French team, which is our single largest market in Europe, had a solid quarter and delivering a positive sales increase after a significant decline in Q2. I think that the initiatives that they put into place will continue to drive here going forward.
But the French team did a good job. Where we saw softness in the quarter was in the U. K. And again, we believe those issues that we face in the U. K.
Are largely transitory. We were pleased to see that perhaps there may be a resolution to the Brexit issues and that will certainly help our business going forward if they're able to reach resolution.
And that is actually my follow-up is the Brexit deal that apparently was reached today if that actually does go into place. Is that something that would remove an overhang immediately in your business? Or is that something that you would think would have to play out over a period of quarters before the overhang is removed? Thanks.
Yes, that's a good question, Matt. And I wish I could give you a specific answer. It's hard to say. But I will tell you that there has been this a bit of malaise in the marketplace. Folks aren't sure with all the uncertainty around Brexit in the past number of quarters.
I think it just weighed on business in general. So if they are to reach resolution, if it makes its way through parliament and they do reach resolution. I don't know that we'll see an immediate bounce back, but I do expect there to be a bounce back for sure. And I would also add, Matt, that the initiatives that we're taking, whether it happens or not, we're getting aggressive in introducing our NAPA brand into the U. K.
We launched a couple of product categories in Q3 and intend to accelerate that in Q4 going forward. So whether they reach resolution or not, our team stands ready to improve that
business. I appreciate the color. Best of luck.
You're welcome. Thank you.
Thank you. Our next question comes from the line of Daniel Imbro with Stephens Inc. Please proceed with your question.
Yes. Hey, good morning. Thanks for taking our questions. I want
to start on North America. Automotive organic growth saw a nice acceleration in the 2 year stack basis. Can you just talk about how much you think your programs like the store remodels, loyalty or NAPA Auto Care are driving that growth versus just an industry acceleration we've seen as weather improves?
Yes, Daniel, thanks for the question. What I would tell you about our NAPA business in Q3, and it was a very similar trend as we saw in Q2, is our DIFM category, which is our largest segment by a large percentage, performed very well in the quarter. I would point out our NAPA Auto Care business as a very bright spot in the quarter. Our team, the NAPA Auto Care team continues to do a terrific job. We also saw a better lift in our major account business.
So both did quite well. We've got opportunities on the retail side. We saw our retail business soften in Q2 that carried into Q3. We've anniversaried some of the new retail initiatives that we have been driving the last few years, but we're confident our team will get that business back on track. But DIFM is the real highlight for us in Q3 as it was in Q2.
Thanks. Well, that's helpful. And then maybe following up on the last question, I think you mentioned you're rolling out the NAPA brand across some product categories in Europe. Can you help us think about how much of your business in Europe today is private label? I mean, how does that compare to existing players?
And then how has the consumer responded so far to the new brand?
Yes, it's probably a bit early, Daniel, to give you an update on how they've responded to the Napa brand. I will tell you that our team was excited. We launched it at a major show in Q3. A lot of excitement, a lot of buzz. They know the Napa brand in the U.
K. What I would say overall about private brands in Europe, it varies by market. So very little private label in Germany, a bit more in France and the U. K. Would be the strongest market for private label, which is why we chose the U.
K. To launch first. But make no mistake, our intent will be to move into France, Germany and the Netherlands with the Napa Private brand.
Got it. Thanks so much. Best of luck.
You're welcome. Thank you.
Thank you. Our next question comes from the line of Kate Meehan with Goldman Sachs. Please proceed with your question.
Hi, good morning. Thanks for taking my questions. I just wanted to go back and ask about the savings, just in terms of timing. Is there going to be any impact to 2019? And then, of the $100,000,000 you've identified, are you able to identify how much could flow through versus how much needs to be reinvested given the reorg changes you mentioned?
Yes. So, appreciate the question. And as we kind of look ahead at the $100,000,000 and your comments specifically about 2019, what we're planning for is that we would have annualized $100,000,000 by the end of 2020 and that would be a net number that would flow in, but it would be over a number of several quarters as it comes in. And in doing the things that we're talking about and we're obviously still working on our plans and still looking at a number of initiatives and areas, we could have some costs in Q4 that come out of either headcount related or facility related as we look ahead. Those would be one time type non recurring that we could have in Q4.
But again, we are going into 2020 with the expectation that it's $100,000,000 annualized by the end of the year. And then we obviously would be continuing to look for other opportunities as we move ahead. We're certainly not going to stop with just this initial look at the first 100,000,000
dollars Okay. Thank you. And then if we could just go back to the automotive industry and what you've seen now that tariffs have been in place. Can you talk us through the impact on sales from inflation versus unit? And just what you think the impact was in the Q3 from tariffs specifically?
Yes. So as we and again, we commented that primarily we're talking about for automotive is the list 1 through 3, the 25% tariff that went up on July 1. That was in Q3 about 1.9% on our sales for U. S. Automotive.
It was about 1% first half. So we would expect a similar amount for Q4. So we'd have kind of a blended 1.5% full year basis for U. S. Automotive.
For the industrial business, it's really immaterial and for business products, it was about 1% in Q3 and we would have a similar amount for Q4. They do have list 4 B that comes in, as of now, 1215, but there could be around 1% for them also in Q4. And again, I guess I would just leave you with our teams have done a tremendous job navigating through all the puts and takes as it relates to tariffs and we have successfully become much more agile and nimble in moving prices and being able to pass those through and have seen no impact on our gross margins.
Okay. Thank you. And then my final question on automotive. You mentioned the timing of promotional events. Were certain promotional events brought forward or were they pushed into Q4?
They were pulled forward, Kate. And honestly, we think that we'll balance those out as we roll into Q4. We begin to hit some colder weather and we think we're going to be fine going forward. I'd also just comment, Kate, you asked about the U. S.
Automotive business. I think one thing that we would absolutely stress is the health of the overall aftermarket. When you look at miles driven, which we saw a nice jump in July, gas prices down considerably year over year, the average age, all the fundamentals continue to be really solid for automotive aftermarket. And when I look at our performance in the quarter, it plays to our strength, which is DIFM. And I think that plays very well for us going into Q4 2020.
Okay. Thank you.
You're welcome. Thank you.
Thank you. Our next question comes from the line of Greg Melich with Evercore ISI. Please proceed with your question.
Hi, thanks. I want to follow-up a little bit on the tariffs and inflation. Carol, in the past, you guys have talked about general inflation in your COGS. Could you us those numbers or highlight how much of the inflation is occurring is related to tariffs as opposed to just some other inflation that might be out there?
Yes, happy to do that, Greg. What we saw that the tariffs and inflation for U. S. Automotive are virtually the same. So the inflation that they've had, be it on the COGS side or passing through on the sales side, more like a 1.5% to 2% has generally been inflation.
Our industrial business is running around 2% for inflation, and theirs is more indirect to tariffs. You would talk about raw materials and supplier freight and things like that. And that's a normal level for them. And then business products, they're probably running about 3% in total for inflation with about 1% tariff related.
Got it. And then maybe as a follow-up to that, why is this quarter through the peak benefit to sales in terms of pass through? Was that just the timing of when the tariffs hit and when you flow it through? Is there something else we should be watching as to what could ebb and flow that
number going forward? I guess if you recall, the original 10% tariff that we were under, that's how we operated through the first half of the year. So the pass through on pricing was about 1%. And again, we didn't take that full 10% tariff, but what we did take about half of that we passed through and that led to about a 1% impact first half. The tariffs went out July 1 to 25%.
And again, we didn't take that full amount, but we knew our second half would be more pronounced. So that's why we've said all along second half would be around 2%, first half was 1%.
Got it. And then this is maybe a bigger picture question. We know the do it for me was stronger and you guys totally went in there and lean into that, but DIY a little softer. Do you think there's is there any evidence that the consumer is having trouble with any of this inflation or maybe deferring any decisions?
It's a great question, Greg, and one that certainly we've contemplated as well because we have seen a bit of softening on the retail front. I think it's maybe a bit early yet to make a call there, but what I will tell you is we are watching it very, very closely. When one of the key stats that we obviously always monitor closely are the number of tickets flowing through our stores and then obviously the average basket size. Basket size, both retail and wholesale, was very healthy this quarter. Our retail tickets were down more so than our wholesale tickets.
But so I would tell you we're monitoring it closely. We're monitoring our competitive stand in the marketplace and we'll react if and when necessary. But I think it's maybe just a bit early yet to make that call.
That's super helpful. Thanks a lot and good luck.
Thank you, Greg.
Thank you. Our next question comes from the line of Seth Basham with Wedbush Securities. Please proceed with your question.
Thanks a lot and good morning.
Good morning, Seth.
Good to hear that you have some plans for further cost savings. As we think about the outlook for 2020 from those savings, would it be appropriate to think that you'll be able to drive SG and A leverage assuming that normalized sales environment in line with your long term guidance?
Yes. Look, the $100,000,000 is about a 50 basis point in operating margin improvement. And we would expect to drive, again, with as you mentioned, normal comparable sales growth, we would expect to drive SG and A improvement and operating margin improvement.
Great. And then as it relates to gross margin in the quarter, you talked about supplier incentives providing some benefit. Can you give a little bit more color as to what segment that was in and the sustainability of those types of incentives?
Yes. So actually in all three of our segments, we had gross margin improvement. The larger share of the gross margin improvement is coming from what I call just the core gross margin and that is from favorable product mix to all the initiatives we've done in the area of pricing. So significant buy side and sell side initiatives that we're doing in all of our businesses has improved our gross margin. We have had because we have better growth, we have had positive supplier incentives and those have primarily been in automotive and office products.
And then as we mentioned, we do have a little bit of an uplift in gross margin from PPG, PartsPoint and Anenco that carry a higher gross margin. But really the core is what's driving this, which is just us delivering on our buy side and sell side initiatives. And again doing it with a good bit of tariff impact and inflation.
Got it. Can you just provide a little more color on the gross margin benefit and SG and A headwind associated with the PPG and ENCO?
Yes, happy to. So, when you look at our gross margin, as Paul mentioned, it was up 105 basis points if you exclude the purchase accounting adjustments we had. About a third of that was related to the 2 new acquisitions. So 2 thirds of that was from our core business being up. And then on the SG and A side, when you look at our SG and A, and if you take out again the one time costs, our SG and A was up around 120 basis points.
We would tell you a similar 30 to 40 basis point impact for PPG and in ENCO. So our core business, again, should be improving a bit when you take out some of these things, and it's important to kind of look at the operating margin side as well.
Understood. Thank you very much.
Thanks, Ted.
Thank you. Our next question comes from the line of Chris Bottiglieri with Wolfe Research. Please proceed with your question.
Hey, guys. This is actually Jake Moser on for Chris. Thanks for taking the question. So I'm just wondering of the $100,000,000 of cost reductions, I think you guys said you still had some remaining from the $25,000,000 synergy target from the AAG acquisition. So is this all incremental to that $25,000,000
dollars Yes, it is. That 25,000,000 as it relates to AAG, which we are on track and that was all related to gross margin and global procurement. This $100,000,000 is in the area of SG and A. So it is more payroll and facility and freight related.
Okay, got you. And is it possible to quantify how much of that $25,000,000 of synergies has come through at this point?
No, we have we said we would achieve that by the end of 3 years, and we are on track to receive that. So, I mean, look, it's we would argue that we're on track. It's in our gross margin number, but it's the bulk of our improvement is coming from all the other stuff that we're doing.
Got you. Okay. And then just you said you paid down some debt in the quarter. So I think now you're around 3x debt to EBITDAR versus maybe 1.5x historically. Like have you changed how you're thinking about leverage and where do you see that shaking out?
Yes. So, what we had in the quarter is we had some really nice improvement in our working capital and we were able to take that improvement in our working capital and use that to pay down some of our debt. The proceeds from the sale of EIS had in effect been redeployed on the 2 other acquisitions that we made earlier in the quarter. So when we look at where our debt was and it had ticked up a bit at the end of Q2, and obviously we're pleased with where it is now and expect it to come down maybe just a little bit more by the end of the year. We're comfortable with where it was before.
We're comfortable with where it is now. What we really look at is having flexibility and looking at what the right opportunities are. So, again, we're still comfortable with the amount of leverage we have today and we'll certainly take it up for the right opportunity.
All right, great. Thanks for taking the questions.
Thank you. Thank you.
Thank you. Ladies and gentlemen, our final question this morning comes from the line of Bret Jordan with Jefferies. Please proceed with your question.
Hey, good morning guys.
Good morning, Bret.
Carol, we think about the forecast on inflation. Is it fair to think that 2020 might have first half inflation similar to second half of twenty nineteen and then negligible in the second half, just as we lap the second list of tariffs?
I mean, like again, assuming tariffs kind of stay where they are and I think the year over year what you've laid out makes sense. We don't really see any other inflationary things that would come in, but I would think that would be reasonable first half versus second half twenty twenty.
Okay. And then a question on private label in Europe. When you think about the margin profile of private label, what is the delta over there? And I guess to sell private label, do you need to price it more aggressively against the market that's used to branded? I mean, how do you think you could pick up margin over there with a bigger private label program?
Well, maybe I would start, Brett, by just mentioning again the initial launches in the U. K. We've launched private label batteries as well as some suspension products. They will be priced a bit more aggressively than where our core product categories are today. What we've seen in the U.
K, Brent, and you've probably seen, I know you follow it pretty closely over there, is a little bit of a flight to value given the challenges they're having in their economy. And that's why certainly we think we've got a big opportunity with the Napa Private brand.
Okay, great. And then one cleanup, regional performance in the U. S. NAPA, any particular strengths or weakness?
Yes, very similar, Brett, to Q2, which was our northern tier division. So that would include our group in the Northeast, which led the way again for us in Q3, The central part of the U. S, the mountain, Midwest, all really performed well. Southwest did just fine. Where we saw a bit of softness was out west, which we also saw in Q2 and a little bit in the Atlantic.
We think the Atlantic may have benefited a year ago from some one time sales via the hurricanes coming through. So we are up against some bigger comps. So I wouldn't read too much into that. But the northern part of the U. S.
Really, really performed well for us.
Okay, great. Thank you.
You're welcome. Thank you, Brett.
Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to management for any final comments.
We'd like to thank you for participating in our call today and we look forward to reporting out our year end numbers. So thank you for your support of Genuine Parts Company.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.