O'Reilly Automotive, Inc.

Welcome to the O'Reilly Automotive Incorporated fourth quarter and full year 2018 earnings conference call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in the listen-only mode. Later, we will conduct a 30-minute question-and-answer session. During the question-and-answer session, if you have a question, please press star then 1 on your touch-tone phone. Please note that this conference is being recorded. And I will now turn the call over to your host, Tom McFaul. Mr. McFaul, you may begin.

Thank you, Vanessa. Good morning, everyone, and thank you for joining us. During today's conference call, we'll discuss our fourth quarter 2018 results and our outlook for the first quarter and full year of 2019. After our prepared comments, we'll host a question and answer period. Before we begin this morning, I'd like to remind everyone that our comments today contain forward-looking statements, and we intend to be covered by, and we claim the protection under, the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as estimate, may, could, will, believe, expect, would, consider, should, anticipate, project, plan, intend, or similar words. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest annual report on Form 10-K for the year ended December 31, 2017, and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time, I'd like to introduce Craig Johnson.

Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly Auto Parts fourth quarter conference call. Participating on the call with me this morning are Jeff Shaw, our chief operating officer and co-president, and Tom McFall, our chief financial officer. David O'Reilly, our executive chairman, and Greg Hensley, our executive vice chairman, are also present. To begin today's call, I would like to recognize the hard work and commitment of all of our team members throughout 2018. Your commitment to our dual market strategy and the O'Reilly culture values drove a 3.8% comparable store sales growth, which was at the top end of our annual guidance range of 2% to 4%, which we said at the beginning of the year. Your dedication to exceptional customer service and expense control yielded a total sales increase of 6.2% over the prior year at an operating profit of 19%, which was also at the top end of our annual guidance range. For the year, we generated our 26th consecutive year of comparable sales growth, record revenue, and operating income, every year since becoming a public company in 1993. And I would like to thank Team O'Reilly for your many contributions to support our growth and success in 2018. Now we will cover our fourth quarter results and key expectations supporting our 2019 guidance. Our comparable sales for the fourth quarter grew 3.3%. which is in line with our expectations. From a comp store sales progression standpoint, October and November were strong, with December being weaker and slightly negative. The December results fell short of our expectations due in part to seasonal business that was pulled forward into November as we experienced cold weather earlier in the quarter in 2018 than the prior year, coupled with a lack of harsh weather in December which we were facing difficult compares from the past two Decembers. We also faced stronger than expected headwinds from Christmas and New Year's Eve falling on Monday as opposed to Sunday in 2017. For the quarter, both DIY and professional were contributors to our comparable store sales growth, with professional continuing to outperform DIY. Average ticket value drove comparable store sales growth due to increasing parts complexity, same-skew inflation of approximately 2%, and a higher mix of hard parts on the DIY side as customers attempt to defer non-critical repairs and maintenance as pricing increases across the economy put pressure on many of our DIY customers' wallets. For the full year 2019, we are establishing our comparable store sales guidance at 3% to 5%. We anticipate that the demand drivers for the automotive aftermarket industry will remain solid as miles driven grows at a modest pace supported by continued record high levels of employment with gas prices remaining in a reasonably positive range. We expect a continuation of the trend we have seen for several years where average ticket growth is driven by increasing complexity of parts on year-to-model-year vehicles and also expect additional top-line growth from same-skew inflation, similar to what we saw in the fourth quarter. This level of inflation is based on known input cost pressures and does not take into account additional tariffs or other unknown factors. We expect DIY ticket counts to continue to be under pressure as our more economically constrained customers fill the pinch of rising prices across the economy and react by attempting to defer repairs and maintenance when possible. We expect continued solid growth on the professional customer ticket counts as we continue to consolidate the market and these end-user consumers tend to be better able to cope with increasing prices. As normal, we expect pricing in the industry to be rational and weather patterns to be average. For the first quarter, we're establishing a comparable store sales guidance range of 3% to 5%, which is in line with our expectation for the full year. We remain extremely confident in our team's ability to provide industry-leading customer service and gain market share, and are pleased with the solid starts 2019 we have seen thus far in the first quarter. For the fourth quarter and the full year, gross margin as a percent of sales was 53.3% and 52.8% respectively. The fourth quarter gross margin is higher than the full year due to normal seasonality and sales mix related to winter weather. Full year gross margin was in line with our guidance throughout the year. For 2019, we're sitting our guidance range for gross margin at 52.7 to 53.2% of sales which is a 20 basis point increase from the 2018 guidance range. Assumed in our guidance are continued incremental improvements in supplier agreements, our continued ability to pass along acquisition cost increases to the end consumer, and leverage on our fixed distribution cost at higher sales volumes. These gains will be partially offset by continued pressure from distribution wages and freight costs. Tom will provide more additional gross margin details in his comments. Fourth quarter operating profit as a percent of sales came in at 18.5%, and the full year was 19%. Both are at the top end of our expectations. On a year-over-year comparison, operating profit declined by 19 basis points as we directed approximately 30% of our tax savings from the tax cuts and job tax of 2017 back into the business with a focus on our in-store and omnichannel efforts. For 2019, we anticipate our operating profit will be in the range of 18.7% to 19.2% of sales. Jeff will discuss our SG&A expectations in more detail. However, we expect to see leverage on our fixed cost on higher sales offset by a more inflationary cost environment and continued focus on strengthening our in-store customer service and omnichannel experience. For the fourth quarter, earnings per share of $3.72 represented an increase of 5.7%, and for the full year 2018, earnings per share of $16.10 was an increase of 27.1%. Excluding the impact of the excess tax benefit from stock options on our tax rate and the revaluation of our deferred tax liability in the fourth quarter of 2017, Our quarterly and annual earnings per share increased 34.5 and 35.8% respectively. Tom will provide more information on our tax rate and his prepared comments. For the first quarter of 2019, we were establishing our earnings per share guidance at a range of $3.92 to $4.02. And for the year, our guidance is $17.37 to $17.47. Our quarterly and full-year guidance includes an estimate for the excess tax benefit from stock options and the impact of shares repurchased through this call, but does not include any additional share repurchases. Before I turn the call over to Jeff, I would like to again acknowledge the outstanding contributions of our entire team. Our track record of 26 consecutive years of record comparable store sales growth, record revenue and operating income, is the direct result of your hard work and commitment, and I have every confidence we will extend that streak in 2019. I'll now turn the call over to Jeff Shaw.