領先汽車配件 (AAP) 2002 Q1 法說會逐字稿

Hello, welcome to the advanced auto parts first quarter 2002 conference call. Before we begin, Eric Margolin, the company's senior vice president and general counsel will make a previous statements concerning forward looking statements that will be made on this call.

Good morning, certain statements that will be made on this conference call will contain forward looking statements that incorporate assumptions currently available to the company. These statements discuss, among other things, expected growth, store development and expansion strategy. Business strategies, future revenues and future performance. These forward looking statements are subject to risks, uncertainties and assumptions, including but not limited to competitive pressures, demand for the company's products, the market for auto parts, the economy in general, inflation, consumer debt levels, the weather, and other risk factors listed from time to time in the company's filings with the securities and exchange commission.

Due to changing conditions, should any one or more of these risk factors materialize or any of the underlying assumptions prove incorrect, the actual results may materially differ from anticipated results described in these forward looking statements. I will now turn the call over to Larry Castellani, advanced auto parts chief executive officer

Good morning and welcome to our first quarter 2002 conference call and thank you for joining us. With me this morning is Jim Wade, our president and chief financial officer, David Reid, our executive vice president and chief operating officer, and Jeff Gray, our senior vice president and controller.

during the first quarter of 2002, our team members produced very strong results. Same store sales rose 7.8 percent and E.P.S. before one time items grew 293 percent to 55 cents, from 14 cents last year. After one time items, E.P.S. rose 143 percent to 34 cents. As we move forward, we continue to focus on achieving the three goals we set at the beginning of the year, and they are one, to continue to improve our operating margins at our advanced auto parts stores. Two, to successfully integrate the discount auto parts store and three, to use our precash flow to prepay debt. Before I elaborate, I'd like to hand the call over to Jim Wade, who will review our first quarter results. Jim

ADE !!! Good morning. We certainly are very proud of what our team members about accomplish in this first quarter. For the first quarter, total sales rose 37.7 percent to 1 billion 4 million, compared to last year, as a result of both strong same store sales and inclusion of discount auto parts results for the fourth quarter. We experienced strong growth in our retail segment where sales grew 40.47 to 963.3 million compared to last year. The retail segment includes the D.I.Y. and commercial sales. As anticipated, the sales from our western auto wholesale dealer auto network declined 9.4 percent to 36.8 million.

Total same store sales growth was 7.8 percent for our advanced auto parts store for the quarter, on top of 5.7 percent in the same quarter last year. An increase in customer account generated approximately three-fourths of the growth in same store sales with the remainder coming from an increase in average ticket. We think this shows our new merchandising and marking initiatives are positively impacting additional traffic into our stories. Our D.I.Y. same stores sales growth was in excess of 8 percent for the quarter and our commercial comps were up approximately 5 percent. We believe our merchandising, marketing staffing and our initiatives that Larry will talk about, as well as the overall strong industry dynamics were key factors in the sales growth. As planned, we added no net new commercial plans in the quarter, approximate think 1370 of our stores have the commercial program and as we've said, our focus is on increasing sales and profits in these existing stores.

Sales at our discount auto parts stores were also solid during the quarter, resulting in a same stores sale gain resulting in growth of 1.5 percent, compared to 2.7 percent in the same quarter of 2001 and we believe these improved results certainly reflect the significant sales opportunity that exists as we complete our integration plan.

Let me remind your the discount auto parts stalls same store gains are report reported in the company's comp, since they've been owned for less than a year, we will be reporting them separately each quarter, so you'll have this information as we go through 2002.

During the first quarter, we began integrating the discount auto parts store. As part of the integration, we closed 119 stores. The 119 closings included 94 discount auto parts stores and 25 advanced auto parts stores. Both the advanced and discount same store sales increases I talked about earlier were increased by significantly less than 1 percent from the closing of these overlap stores and the transfer of sales volume.

However, it is important to point out that the advanced stores benefiting from the overlap closing achieved same stores sales growth in excess of 20 percent for the quarter. David Reid, who heads up the discount auto parts integration, will be giving you a more complete update in a few moments on the integration. During the first quarter, opened 17 new stores and closed three stores, outside of the discount market, rutting in an ending store count of 2,379. We still plan to open about 100 to 125 stores this year in our existing market. We're also very pleased with the accelerating sales results we're experiencing in our new stores as a result of our discipline new store development program that you've heard us talk about before.

Gross margin was 43.5 percent for the first quarter, improving 80 basis points over last year's 42.7 percent. Retail gross margin, which excludes our wholesale dealer network, was 44.6 percent, compared to 44.5 percent last year. The 44.5 percent last year did include a gain of 8.3 million, or about 120 basis points as a result of a settlement reached with a vendor. The comparable increase of about 120 basis points in retail gross margin, excluding the 8.3 million last year, resulted primarily from the purchasing synergies due to the discount auto parts acquisition, our supply chain initiatives and the benefits we're seeing from category management. Just as a reminder, during the fourth quarter of 2001, with you did change our method of accounting, of cooperative funds received from vendors. We're now reflecting these funds in net product costs, which results in a lower cost of goods for the product sold, rather than our previous method of using these funds as a reduction in advertising expense. This change was applied in our 2001 financial statements, as if the change occurred at the beginning of our 2001 fiscal year, and was recognized as a cumulative effect of the change in accounting principle.

Additionally, we reflected this change at each of our three previously reported quarters, of 2001 in our financial statement.

SG and A, spends before integration expenses declined 160 basis points for the quarter to 37.6 percent of total sales from 39.2 percent last year. After the 10.6 million in integration expenses, SG and A percent to sales declined 50 basis points. We're within our budget for integration expenses relating to discount auto parts and remain comfortable with our previous guidance of about $40 million for the entire year of 2002. During the first quarter, we leveraged our fixed costs, our store payroll and our advertising expenses. We're also benefiting from discount auto parts owning approximately 75 percent of their stores and we continue with our effort to decrease our operating expenses.

Operating margins rose 230 basis points to 5.9 percent for the quarter, due to the solid same store sales growth, increasing grows margins, and leveraging of our SG and A expenses. This clearly reflects our team's ability to generate operating margin improvements as Larry discussed. For our bankers and bond holders on the call, EBITDA as adjusted rose 79.3 percent, before integration expense in the first quarter to 86.7 million. After integration expenses, EBITDA rose 57.5 percent to 76.1 million, compared to the first quarter last year.

We anticipate that 2002 EBITDA will rise to approximately 325 to 330 million, before the 40 million integration expenses. Depreciation and amortization in 2002 are anticipated to be approximately 100 million.

Interest expense rose to 27.6 million from the quarter from 19.6 million in the quarter last year as a result of the discount auto parts acquisition, offset partially by a loafer average debt level than anticipated. The tax rate for the quarter was 38.8 percent and we anticipate this approximate time of tax rate for the remainder of the year. During the quarter, we recorded an extraordinary loss from the extinguishment of debt of 774,000, this resulted from the writeoff of deferred financing fees from the early retainment of bank debt. We were able to reduce our debt, which I'll elaborate further in a moment, due to the stock offering, which generate approximatelialist 9 million in proceeds. We'll continue to use our excess cash to prepay debt. As we do this, we'll have additional write office of deferred finance costs an as extraordinary item.

Net income before integration expense and the extraordinary item rose approximately 400 percent to 19.3 million for the quarter.

After the one time items, net income rose 212 percent to 12.1 million.

Our earnings per diluted share before integration expenses and the extraordinary item rose 292.3 percent to 55 cents, compared to 14 cents per diluted share last year. After integration expenses and the extraordinary items, earnings per diluted share rose 142.9 percent to 34 cents.

I'll review the key components of our balance sheet. Our cash position increased to 65.3 million, from 18.1 million at the end of last year. The increase in cash was a result of higher than anticipated profits, an increase in the accounts payable to inventory ratio and enhanced he inventory management. Our total cap X for the quarter, 26.4 million, including 6.8 million of integration cap X. We remained comfortable with our previous guidance of 115 million for the year, of which approximately 40 million relates to the integration of discount auto parts.

Our accounts payable for inventory ratio at the end of the first quarter, 50.9 percent compared to 43.7% at the end of 2001. And 45.3 percent for the comparable quarter last year.

for the quarter, net inventory or inventory less payables, declined approximately 54-point Pfeiffer million from the end of the fourth quarter. On a year over year basis, net inventory increased 16.5 percent, compared to a sales increase of 37.7 percent.

the improved accounts payable to inventory ratio was a as a result of increased inventory turns, attributable to our supply chain initiatives, and enhanced payment terms from our suppliers. We anticipate that the accounts payable to inventory ratio will be approximately 48% at year end, compared to 43.7 percent at the end of 2001. Our total debt decreased 72.9 million from year end to 88 - 882.9 million at the end of the quarter. Net debt was 817.6 million, down 154.8 million from year end. We generated 70 million in free cash flow during the quarter from our solid operating results as well as the focus on increasing our return on invested capital.

As a result, our return on invested capital increased 10 percent on L.T.M. basis this quarter, compared to last year's comparable period. We are raising our earlier guidance of 40 to 50 million in free cash flow for the 2002 fiscal year to 90 to 100 million. As we previously stated. This free cash flow will be used to prepay debt. Since the end of the first quarter, we prepaid an additional 30 million in bank debt.

We're currently evaluating exactly when and how we will repave additional debt from the cash currently on hand.

the first quarter was a very solid start to the 2002 year. Strong same store sales growth leveraged our operating income and our earnings per share. Focus on return on invested capital resulted in substantial free cash flow. Going forward for the remainder of 2002, we remain comfortable with mid single digit growth and same store sales at our advanced stores and low single digit gains for our discount stores during the integration. I will add that during the first four weeks. Second quarter, flat same store sales in our advanced store compared to a 10 percent same stores sales increase in the same period last year.

We believe this is attributable to the unseasonably cool and wet weather we've experienceped a and does not reflect any fundamental change in very solid business trend. By contrast, discount auto stores, same store sales during the same four week period were in the mid single digit range and ahead of plan and the weather was more normal in Florida during that period. We remain comfortable with concensus estimates with the second quarter earnings per share. We remain comfortable with the analysts range of estimates of $2.39 to $2.50 before integrations expense and the extraordinary items for the remainder of the year. As we said before, we can achieve a 25 percent increase in earnings per share in 2003. Now I would like to turn the floor over to David Reid, our chief operating officer, who will further update you on the integration of auto parts and how it's progressing

As our strong same store sales increases demonstrates, the discount auto parts integration is progressing on plan. Our team members are making it happen and they generated above anticipated results for the quarter.

We converted 54 stores in the first quarter in Louisiana, Georgia, and South Carolina. During the second quarter, we anticipate converting another 54 stores.

the results for our converted stores are exceeding our plan. Our nonflorida market stores should be converted by the end of the year. These markets include Louisiana, Mississippi, Alabama, Georgia, South Carolina, and the panhandle of Florida.

In Florida, we have begun the process of updating the discount stores by refreshing the exterior and interiors of our stores, including painting, lighting, landscaping, and repair of the parking lots. Merchandise alignment is well underway and will be substantially completed by the end of the second quarter. The store system conversion in Florida will begin at that time.

the conversion of the Florida discount stores to the advanced format is planned to begin in the fourth quarter of this year.

We have successfully completed the conversion of the discount auto parts Mississippi distribution center for the advanced warehouse management system and it will begin servicing advanced and converted discount stores in the second quarter. This will substantially increase the utilization of that facility. The conversion of corporate systems continues on schedule as well. Most of the corporate systems not including the store systems will be converted by the end of the second quarter.

the most important achievement coming from the integration is the high level of team member retention we are achieving. This is truly our team members and they are making this integration the success it is.

Now let me turn the call back over to Larry Castellani.

Thanks, David. I would like to add one thing to what David said. In the last couple of months that I've been in Florida with our team members, I've seen firsthand their level of dedication in making the integration a success and it truly is remarkable and we definitely thank them for it.

the after market continues to benefit from strong industry trends, including more miles driven and S.U.V.'s coming into our sweet spot. With these positive industry dynamics, as well as our various initiatives, that will allow us to focus on our customers better, we believe we are well positioned for the future. Our sales and profit improvement plans include new merchandising and marketing initiatives, M.P.T. and EPAL and I would like to elaborate on each of these.

New merchandising and marketing initiatives. Our biggest initiative is category management or enhanced line reviews. Which in effect means we're reorient at a timing our merchandising and marketing planning to better focus on the customer. Using consumer data, we're making sure that we're getting the most from each product or S.K.U. we sell by pricing more appropriately. Merchandising it more effectively, promoting it more appropriately, and measuring and monitoring its sales more definitively. Along with our merchandising and marketing initiatives, we have many system initiatives underway, including M.P.T. and APAL. MPT, management planning and training, is the company's new labor management system which helps us more effective Mav for the appropriate traffic levels, as well as to make sure we complete the tasks that need to be done in order for our stores to maintain their gold standard. Grand opening loft daily.

As of the end of February, 2002, M.P.T. was rolled out to all of the advanced auto parts stores. We will roll this out to the discount stores in Florida as we convert these stores to the advanced format.

We believe that we are now receiving initial benefit of the system, which include increased sale per labor hour, a decrease in payroll as a percent of sales, and an increase averaged rate of pay. The average rate of pay is up slightly due to staffing our stores with team members that have stronger experience and knowledge, which has more than paid off due to enhanced productivity.

Over time, this system will continue to be refined, helping us to manage our labor to make sure we give great customer service and great looking stores and have the product productively merchandised for our customers.

We believe that this system has help us leverage our payroll, increase our sales and profits. We know that this will positively impact our gross profit margin, as we staff our stores with more skilled parts pros, who can more readily sell a total solution, versus just a single part. We believe we will continue to reap benefits from MPT over a very long period of time.

Let's move on to another systems update, appal or advanced parts and accessories lookup, is our proprietary windows based catalog. APAL is currently in about 400 stores, or approximately 20 percent of the advanced auto parts stores, including is it 4 discount auto parts stores outside of the Florida market, that have been converted to the advanced format. The roll out of APAL will accelerate in the second quarter, when we will begin to convert the discount auto parts Florida stores. By the end of the year, we expect to have most of the discount stores convert and and by mid 2003, we plan to have all the remaining advanced auto parts stores converted.

We are pleased with the results we are seeing so far from APAL and believe that this proprietary electronic catalog will be the platform from which we will increase sales for many years to come by enabling our team members to sell more add-on parts, thereby increasing our average ticket and and enhancing margins.

to summarize, as we move forward, the advanced team is focused on expanding our operating margins, increasing our return on invested capital, and successfully integrating discount auto parts. Everything we do going forward will be measured on how it enhances operating margins and return on invested capital.

Thank you for participating on the call this morning. We look forward to speaking with you in about three months about our second quarter results and now we'd be pleased to take questions, operator

Very good. At this time, if you would like to ask a question, please press the 1 on your touch tone phone. You may withdraw your question at any time by pressing the pound key. Again, to register your site for your question, please press the 1 on your touch tone phone at this time. We'll take our first question from the site of Ron Schwartz with J.L. advicery. Please go ahead

Congratulations on a great quarter, guys. I just wanted to ask if there's any, you know, initially people expected that a lot of discount suppliers were shipped over to advance suppliers, but it seems like you guys are able to negotiate and achieve additional leverage there. Can you discuss some gains you're making there. And then additionally, regarding the free cash flow, is it safe to assume that all additional free cash flow this year will go to pay down debt and can you discuss the effect on the bottom line there

I'll take the last one. Jim will answer the second. The issue with the suppliers with discount auto parts, with the increased volume, we're able to bring to the table, or, in the event of suppliers that were supplying discount and not advanced, we were able to very successfully sit down with a broad range of suppliers and negotiate better terms that really benefited both the co-advanced auto parts store as well as discount. Jim gave me the numbers on that. We're very pleased with the results. The full benefit of that of course, will be literally rolled out in 2003 as some of the contracts that were in place didn't lapse until throughout 2003. So we look to the run rates in 2002 and continued benefits there after

Should we expect to see some additional deals like the transfer deal that happened earlier this quarter?

I believe the answer to that would be yes. I think that in time, we have to work it through this year. There's going to be no immediate pop up in the next quarter, but it will be enhanced as we work through later this year and the full run rate through 2003. As we do have a number of contracts that were certainly in place prior to the discount acquisition.

Ron, in regard to free cash flow, the question you asked, we are going to be using our free cash flow to pay down debt as we go through the year on top of the additional stores that we're opening and everything else that we talked about in the call. This will have some positive effect on interest expense as we go through 2002 as we pay down additional debt, but certainly, again, we'll see the full run rate of that as we go into 2003.

Thank you.

We'll take our next question from the site of Gary halter with Credit Suites, First Boston.

Thank you. First of all, congratulations on a great first quarter, second quarter as an official public company. Two things, one is because everybody is so short-term oriented as opposed to see all the upside, the one thing people will remember is flat comps after four weeks. Our model says six to eight per the quarter last year. You mentioned the model is against a 10, so things sound like they get easier as you progress and obviously with the weather, things should be easier. Is that a fair way of looking at it?

That's very appropriate, Gary. We've seen this many times before. During the course of a quarter, we've had - I don't think we have to tell anybody on the call what the weather was really like and I think everybody knows the vast majority of our customers don't have garages, we have that kind of inclement weather, but we've seen this many times before and over the course of the weather, we'll earn it back and be on target. Your remarks relative to the second two periods in the quarter, yes, do give us easier compares son

You mentioned the APAL and then I may have missed it. Did you talk about the impact, what it does to comps once that started to roll out?

It's positively affecting our comps, Gary, as well as the margin, because the additional add-on parts that our people are able to access and also display on the screen, and hopefully we'll have the opportunity at some point to demonstrate this to you firsthand and everybody else that's on the call. It's something we're awfully proud of and the most meaningful things we can do is demonstrate it to you

I saw that happen in Roanoke where you didn't have the part for the 792 Volvo. Competitively, it looks, you're doing great, auto zone is doing well, the others are doing well. It sounds like the pricing environment also is quite calm at this time. Is that what you're seeing, any evidence of either pricing, getting more aggressive or going up or anything changing in that regard

Gary, I think it's safe to say there's a lot more rationalization in this business and all areas, from real estate to pricing. Clearly we've raised prices in some areas. Where it was justified and very low term merchandise and when you look at our activity based costing, you'll see that there is a need to get a higher margin on very slow turn merchandise, that has a very high cost, and supply chain attributed to it, and at the same time we've been able to get much more competitive and I would like to tell you, Gary, we've done that in getting more competitive against all classes of trade as well, in particular, - it's something that - some things we've gone up on, some things we've gone down on, but it gives us the Richer mix and it's very important with our new marketing plan that we continue with the value orientation that we have in place and we're pleased with the result. It's going to take us some time to finish all the category reviews, the line enhancement reviews, the new product mix we're add to go our stores. This is both on the front room and the parts department. It's not something we're going to do overnight, but over a protracted period of time. We look forward to continual uplift in both sales and margins as a result of the initiative.

Thank you very much.

We'll go next to the site of Alan Rafkin [phonetic] with Lehman brothers.

I will certainly add my congratulations as well on an outstanding quarter. With respect to the integration of the discount stores, Larry, could you maybe comment on the performance post conversion with respect to traffic and average ticket, an then secondly, can you maybe provide some color on the efficiency of the process of the conversion process? You know, are you getting, you know, more effective at it, an then my second question, is while the gross margin improvement of about 80 basis points is certainly strong, would I be direct in assuming that given your inventory turns, the Q1 gross margin increase does not reflect the full - magnitude in synergies going forward

On discount, relative to plan, I think Jim said it and David reit's rated it in the call, we are running ahead of plan. The discount stores have been converted, the sales are running ahead of plan. Our team is pretty damn good at it. mergers. I think that we've said it many times before, we not only clock daily and weekly the customer accounts and sales growth, but we also retain, put an awful lot of emphasis on the retention rates of the personnel that really are fundamental to this, so the plan is working well. The team is very good at it. They're getting better at it all the time. The thing that's really making it work is the terrific contributions on the part of the discount auto parts team members. I I.

Alan, led me add to the gross margin question and elaborate a little bit. You're correct in saying we had an 80 basis point increase last year net in gross margin, but as I mentioned in my remarks, last year included a one time $8.3 million settlement from a vendor, which was about 120 basis points on our total gross margin last year, so when you add those together, the increase in the first quarter was more significant than just the 80 basis points obviously and then going beyond the first quarter, we will continue to see some additional increases in gross margin as we get the full run rates, both on the advanced and discount side from the synergy.

Okay. Thank you both very much.

We'll go next to the site of Anthony rose with J.P. Morgan. Go ahead.

Good morning. Just two quick questions. First in terms of your better working capital management, can you point to any one or few initiatives, such as category management that had the biggest impact?

Sure. I'll take that. It comes from a number of areas and the key point I would make again is we have throughout the company, a focus on a return on invested capital at a greater level than we've probably ever had before and that's translating into improved results in a number of areas. Certainly some of the key ones I mentioned, in the inventory area, we're seeing benefits from the category management program, we're seeing benefits from the supply chain initiatives, where we closed a distribution center last year and we're able to increase our sales and service more stores from the facilities that we're operating from. In the accounts payable ratio area, we did, as I mentioned, have a significant improvement in our ratio there. And that's, I think, an indication of the support we're getting from our suppliers and our ability to increase our sales, but increase our inventory at a lower level, which is also driving up our - our numbers for the first quarter in that regard.

Beyond that, in the cap X area, we have a tremendous focus on cap X, and certainly we're making the investments in the business we need to make in every area, but at the same time we're expecting a return on those investments and if it's not there, we don't spend the money. So as a result, that's driving additional efficiencies in that area as well.

So it's a number of things, as I said, I think the key thing is in every area of the company we're focused on increasing our return on invested capital, which is generating free cash flow, which is going to repay debt.

Just one last question. In terms of improving accounts performance of the newly acquired discount stores, was there any notable difference between Florida and non-Florida stores?

As far as comps are concerned?

Yes

Not really. The only thing I would mention there is you remember in David's remarks, the stores we're converting from discount to advance are all out of state and as we're converting those stores, 54 in the first quarter, we're seeing some very solid increases in sales in those stores as they're converted to advanced. Having said that, 54 out of the entire chain is not enough to move the entire number greatly, so on an overall basis, we're seeing good solid comps in both areas

Thanks a lot.

We'll go next to the site of Alex Pune [Phonetic] with Morgan Stanley.

It's Vijnay [phonetic} A couple of questions. On the commercial business, can you just talk about, and I got disconnected for a minute, just the growth rates you saw on the discount side as well as on the advanced side and just the strategy going forward, particularly on the discount side. Second, can you talk about any specific markets where you think you might be gaining or losing market share. Third, can you talk about if there's any way to quantify some of the positive impact you've had on advanced comp store sales from some of the closing of discount stores. Thanks.

Yeah, I think that Alex, the closing impact Jim covered in his remarks verbatim. Jim, do you want to hit that one line again

Sure. In the first quarter, the increase in comps for both advanced and discount as it regards the overlap pickup was significantly less than 1 percent, in other words, it was very immaterial to the entire comp increase we saw in both the advanced and discount stores

On your second question there, Alex, regarding the special discount auto parts, bear in mind discount has an entirely different model than advanced does with the call center as opposed to handling everything at store level. Also, bear in mind that as we've demonstrated before, discount auto parts does about half the sales in their commercial programs in the stores that have it or in the system or as a percentage of sales that advance auto parts does. It's a significant upside opportunity for us, and we have yet to, as David mentioned in his remarks, we've yet to complete the product rollout or the systems rollout that would be the enabler for us to convert to the advanced auto parts model. That's going to take some time but it's happening immediately in the out of state stores where we're doing the discount conversions in the five out of state stores on the run rate that David told you.

There's no question that that is a big upside opportunity for us and leveraging commercial business with the acquisition.

Does that answer your question?

Yes. Again, it's Vijnay. I was wondering on the growth rates for the commercial side?

Sure. In the first quarter, the commercial comp in the advanced stores increased about 5 percent and the D.I.Y. business increased a little over 8 percent, and, again, in the commercial business, the approach that the focus we have on the commercial this year is not to continue at programs, because we have the majority of the markets that we cover, covered by the programs we have in place, we're focusing on quality of sales in those stores from the commercial business, and the profitability of the commercial business in those stores and we're seeing good results there in both cases.

Great. Thanks.

We'll go next to the site of Brent Jordan with AdVest. Go ahead

Good morning. A couple quick questions. You were talking about 90 to 100 million in free cash for your year estimate, and as it sounded, that was up from a year dr - your prior expectation of 40 to 50. Is that a result of some windfall you found in the working capital or was the prior estimate just lacking in visibility given the early stage of the discount auto parts acquisition? And also, a question on operating of expenses leverage, I guess given the autos owe ridely leverage in the low '30s versus yourself in the mid to high 30's, is there a number you can get to on a two to three-year basis on a percentage of sales at the operating SG and A leverage side?

Brent, let me take a shot at the question. As far as the increase in the operating - the free cash flow from 40 to 50 million to 90 to 100 million really is coming from two or three areas. Probably the largest is what I mentioned earlier, around the inventory management and accounts payable ratio. We believe we can go through the 2002 year with everything that we have going on with the integration and additional stores and running the existing stores and growing the business with basically no working capital effect in total. Through a combination of the accounts payable ratio being somewhat higher than we had earlier anticipated in the 40 to 50 million as well as managing inventory a little more aggressively and focusing on cap X at every level, so it's primarily falling in those categories. And certainly as we've gone now in to may, we are starting to get a much better feel for the entire year in terms of how the integration is going to flow with the inventory movement as discount and the other factors that go into that.

from the standpoint of operating expense leverage, the one thing I would have you keep in mind again is as you're looking at the SG and A expenses for advanced, is we did make the change last year moving all of our unrestricted co-op money from SG and A up to gross margin, so that has a little bit over a 200 basis point increase effect on SG and A as a result of that movement, so I don't know how each of the other companies necessarily treat that, so there is some difference there when you look that specific item

Right, I recall that, but is there a number you're working towards or anything in your internal model you care to share?

what I can tell you in that regard, what we have said, publicly a number of times over the last several months is that we plan to leverage the SG and A in 2002 and you're starting to see the results of that and then we've also said beyond 2002 that we see in the neighborhood of another couple hundred basis points that we think we can take out of SG and A as we grow the sales and leverage the expense.

Part of that is going to come, not just from sales and leveraging, but all the initiatives that we have underway right now, Bryant, including the supply chain initiative are going to positively impact that

Thank you.

We look forward to continually improving that area in the next couple of years

We'll go to the site of jack Bedlose [Phonetic] of Midwest securities

First I want to ask awe couple of questions, Jim. One is what was your inventory level in the first quarter of 2001? And what is your cap X expectation now for 2002?

Let me take the second of those first and we'll pull out a number for you on the inventory. The cap X for 2002 remains at what we have talked about in past calls, and that is about $115 million in total for the year, of which roughly about 40 million is coming from the integration of discount.

the inventory numbers for the same time last year, in total dollars, was about $783 million. And again, remember that doesn't include discount, because we didn't purchase discount until the end of November.

So does that mean, excluding the 40 million for conversion, that the underlying 75 million is a going forward rate for the company and excluding the additional money you'll spend in 2003?

The go-forward cap X number will probably be a little north of the 75 million that you mentioned, but not substantially north. We feel like I think one of the very positive parts of our story is that that we have the increasing our operating margin significantly as we go forward for 2002 and beyond and none of the initiatives that we have laid out require substantial inventory, investment, or cap X. In fact, as I think the first quarter demonstrated, we have the opportunity to increase margin while actually bringing up cash flow as well, so we'll be probably a little north of the 75 but not much

Okay. Larry, I wanted to ask you about the commercial delivery, was is up, as you said 5 percent and you also mentioned you're focusing on profitability. Does that mean that you're being selective in terms of customers or pricing? I was wondering when you might expect the 5% to get up to the level of the retail comps?

We're being very selective on the locations. As we've said in prior calls, jack, that we've con consolidated many of them, we have a model now that shows what it takes for us to get to our new hurdle rates from a return standpoint, and we believe that there's upside opportunity with commercial, but as we said many times before, the focus of this company is on the D.I.Y. segment, we'll continue to do so, and we'll continue to he reinforce our marketing plan with the emphasis on the 85 percent of our business in D.I.Y., and we will grow commercial only where it meets our profit model and we do not expect it to grow at any huge accelerated rate in the future, but we do see it ratchetting up to the total growth of D.I.Y.

so in other words you think the 5 percent might get to the same level of what the future comps are in D.I.Y. down the road?

Yes, with the exception of discount auto parts, where there's a huge upside opportunity and we see that taking place over some time as a result of the going through this year, rolling out the product, mixing the systems and everything else.

I see. One last thing and that is when it comes to category management, the negotiations with vendors, are you doing - is this an annual thing that you're working on weekly or are you also sign multi-year agreements?

This is something that a permanent way of life in the company, and as you know, jack, in category management, it's a process that starts, it never ends. You work on continual refinement. These are things that we work at in a very participative manner with the suppliers and the development of our people and also it takes some time for us to develop our people as well as our systems. When it comes to the higher return rate, we're looking for, the new models that we have, putting in a new product mix, and working with our suppliers and our people to do so. I will tell you we're plysed - pleased with our early results, the development of our people and we're very much pleased with the support we're getting from suppliers and we see this as a significant opportunity to help us close the operating margin gap that exists between us an our competitors and to the extent the company is doing it today, it's far greater than anything we've ever done in the past, and if you can't tell, we're pretty damn excited about it

Right. Just one last thing, in terms of something that occurred to me regarding commercial delivery, and that is do you foresee, relatively speaking, a better potential increase in gross margins and commercial delivery as opposed to retail?

We're experiencing that now. I think the - it's important to point out and I thank you for bringing up the point that we have had a very meaningful increase in our commercial. By being more selective in what customers we support and how we go about doing it. There's a big difference in getting sales from the commercial accounts and selling lower margin product mix as opposed to hard parts. That yields us a better return and we've been very selective in that, and as a matter more of mix change than pricing. We've been able to improve that and we'll continue to do so into the future.

We'll go next to the site of Leon cooperman with Lee I don't know advisors.

the guidance that you provided for next year, your comfort factor with a 55 percent earnings increase, what level of comp store sales increase would you need in 2003 to meet guidance, that would be question one. Secondly, given the fact that you provided guidance, what is your assumption regarding free cash flow for 2003?

Third, do you have any sends in the timing of the next secondary from Sears or freeman in terms of their intentions of reducing their position?

Lee, the last question first. No, that's something that's totally freeman and probably Sears' call. They've been exceptionally fine partners to work with and certainly have worked with us in a most responsible manner and we think that whatever they do going forward is certainly going to be their call and we'll just work with them as we have in the past in supporting their goals and objectives. Nothing has been dated though. Jim

The other two questions you asked about the 25 percent earnings number increase for 2003, is based on mid single digit priced comps which is again essentially what we've based our remainder of 2002 numbers on as well. We've run historically a higher comp than that, but we build our budgets on what we believe is a very reasonable comp that forces us to also challenge our sales on the expense lines and manage the expenses effectively. As far as free cash flow is concerned, as I mentioned, 90 to $100 million in 2002 and we haven't given out any specific numbers for 2003 yet because we're still working through the specifics of inventory and where we think we'll be in the cap X, but there's a substantial opportunity for free cash flow next year and certainly equal to, if not greater, than what we have in 2002

I'm coming up with about 110 million, which I assume is in the ballpark?

That's in the ballpark

Thank you. Good luck, guys.

We'll go next to the site of Wayne cooperman with cobalt capital.

Hi, guys. If we just pro formad your data and current cost of interest, what sort of your run rate interest expense at this point? I don't know if you've gotten - as you prepay your debt, if you're getting a break on the interest expense, the rate at all.

You're talking about the average cost of debt?

Yeah.

Yeah. It's - the current number is around - when you balance our bank debt and our bonds that we have outstanding, the currents number would be around 8, 9 percent in that range.

I assume that as you pay down your debt, you think you could bring that lower?

You know, we're looking at really all of our options as we go forward on our debt structure. I don't think that rate will change significantly in 2002. It may change a little, but overall, not in total I don't think a whole lot.

All right. Great. Thanks.

Our last question comes from the site of Carla Costella [Phonetic] with J.P. Morgan.

a couple of housekeeping questions. I'm trying to calculate your credit ratios based on the pro forma EBITDA. I'm wondering if you could give a question of where pro for that EBITDA westbound on an L.T.M. basis combining discount and auto

Carla, I will need to get back to you on that. I don't have the numbers right in front of me. They're numbers that we clearly have and would be happen to share with you but I don't have them in front of me

a couple other questions. On the integration expenses of that 10 million, how much is cash versus noncash?

Virtually all of this is cash and it will be as we go through the entire year. Most of the 40 million is cash expenditures, specifically I'd identifiable items with converting the stores, the merchandise and systems and everything else involved with the integration

Can you cap X number for this quarter?

For the first quarter was 26.8 million.

Okay.

26.4 million, sorry

Lastly, it seems like your scale is benefiting you and allowing you to increase your payable terms with vendors. Do you expect that to continue through the year or would that be more of a one-time

We are slightly over 50 percent currently as far as the accounts payable ratio is concerned, and what I said, as part of the call, is that we expect to be around 48 percent at the end of the year, and the reason that we'll be at 48 percent is our year end is - at the end of December, which is although this business is not greatly seasonal, what seasonality there is at the low point occurs that point, so we think that we've achieved probably some of the improvements a little bit faster than we had hoped for. We will, I think, continue to see some improvement as we go through the remainder of the second and third quarter, but would end up around 48 percent at the end of the year compared to 43.7 I believe it was at the end of last year.

Okay. Great. That's all my question. Thank you

No further questions at this time. I'll turn the call back over to management

Okay. We thank you very much. We appreciate everybody participating in the call and look forward to talking to you three months from now. Thank you ladies and gentlemen.