純正零件 (GPC) 2002 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Genuine Parts conference call.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time. If you should require assistance during today's conference, please press the star followed by the zero on your touch-tone telephone. As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce to you, Ms. , Vice President and Corporate Secretary. Ms. , please go ahead.

Thank you. Good afternoon, and thank you for joining us today for the Genuine Parts first quarter 2002 conference call to discuss earnings results. If you haven't received a copy of the press release, please call at 770-612-2047.

Before we begin, be advised that this call may involve forward-looking statements such as projections of revenue, earnings, capital structure, and other financial items, statements on the plans and objectives of the company or its management, statement of future economic performance and assumptions underlying the statements regarding the company and its business. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings. The company assumes no obligation to update any information, forward-looking statements during this call.

We will begin this afternoon with brief remarks from Larry Prince, CEO, and then Jerry Nix, CFO, and then we'll open the call up for questions -- Larry.

Thank you, Carol, and good afternoon to all of you joining us today. We thank you for taking time to be with us. Following our normal pattern today, we'll take a few minutes to review the results of our first quarter, and we'll give you our best look at what we see for the second quarter and for the balance of 2002.

With me on the call today are Jerry Nix and Tom Gallagher. As most of you know, Jerry is Executive Vice President and CFO of GPC. Tom Gallagher is President and COO.

I will do a quick overview from a sales and operating standpoint and then Jerry will pick up and review the financials. We'll keep our comments brief today, and have time for your questions and a discussion period following our remarks.

We released our first quarter results earlier today, and our sales and earnings figures were very much in line with where we felt they would be, with no surprises. Total sales were $1.978 billion, for a decrease of four percent. Net income was $87 million, down 2.5 percent, and earnings per share were 50 cents compared to 52 cents last year, and in line with the consensus number.

These numbers are before the cumulative effect of the FAS-142 accounting change relative to goodwill, which Jerry will cover later in our remarks.

I should point out that our sales on a per-day basis would actually be a little better than reported, since we were short one sales day in the quarter. This has an impact of somewhere between 1.5 to two percent.

Our performance by segment was also pretty much in line with expectations, and where we felt they would be when we reported to you in February in our previous conference call. Automotive sales were up two percent, which means on a per-day basis they were up in the three-percent to four-percent range, which is where they've been now for several quarters. Industrial sales were down six percent, office products down five, and EIS was off 35 percent. Here, again, if we adjust for the lost day, these numbers are pretty close to their performance in recent quarters and in line with our expectations.

I'll make just a few observations about our different business segments and how we see them, looking ahead. Perhaps I should first make just a comment on price changes. Currently, the cumulative impact of price changes made over the past several months on our sales is about 1.5 percent. Price changes in the first quarter this year are negligible, but that's not unusual. We always seem to see more of this later in the year. Our position on this is the same as it has been. We're not against some changes upward, as long as we remain competitive and increases are across the industry.

Now let's take a quick look at the automotive business. As we said earlier, automotive continues to show improvement and has increased now for four consecutive quarters in the range of three to four percent. We believe our second quarter will follow this same pattern and perhaps be on the higher side of this range. Our operations are doing fine, and will be right in line, overall, with the three to four percent number. They have good plans to maintain and perhaps even improve this rate a bit. Mexico and Canada continue to look better and Johnson Industries is getting us double-digit growth.

Earlier in February we said we thought automotive could grow five to six percent this year, and right now we will continue to support this number, looking ahead.

I will make just a few brief remarks about the outlook for our other three business groups. As you know, our largest non-automotive segment is Motion Industries. The soft economy has been felt most severely in the manufacturing sector, and Motion Industries has certainly felt it. We believe it all bottomed out in the third and fourth quarters when Motion's revenues were off seven percent. Actually, they showed a slight improvement in the first quarter and were off six percent, or really five percent, on a daily basis -- nothing dramatic, but supporting our feeling that things have bottomed and should start to improve.

Our best estimate is that the recovery will be a gradual but steady one, and the second quarter will be slightly better -- still down but more in the two percent to three percent range and then moving on the plus side in the last half.

EIS is continuing to fight a tough battle, but here again there are signals that a little improvement is in sight, particularly in their electrical group. They were down 40 percent in the fourth quarter and down 35 percent in the first quarter just completed. Actually, they really started their fall in the second quarter a year ago, so comparables become a bit easier, plus we are feeling a slight pickup. We expect them to be off in the 12 percent to 15 percent range for the second quarter and continuing to improve as the year progresses.

S.P. Richards, our office product group, felt the recession later than our other business groups. They actually were up 10 percent in quarter number one last year, and this was a record for them. They were then up four percent in the second quarter. We knew the comparables would be difficult for them in the first quarter, and they were off five percent, as we reported earlier. Actually, we believe they will do a little better than this in the second quarter, perhaps even to slightly down. Here again, they expect to be up in the second half and up for the year.

That pretty much summarizes our outlook for the four business groups. What we've given you is pretty much a confirmation of our comments in our previous conference call in February. We remain on track with our earlier comments. Right now we believe second quarter revenues in total will be flat to slightly up, and we're OK with the consensus earning number of 55 cents, which is even with last year. I believe the consensus for the year is $2.18, and we see no reason to disagree with this at the present time.

Well, that quickly summarizes how it looks to us currently. We will ask Jerry for his comments, and then we'll have questions and discussions. Jerry?

Thank you, Larry. Good afternoon. We appreciate you joining us for our first quarter 2002 earnings release call today. We will first review the income statement and the individual segment information. We'll then touch on a couple of key balance sheet items. We'll also review FAS-142 implementation and its impact on Genuine Parts Company. We'll be brief and then open the call up to your questions.

We feel we had a pretty good quarter operating-wise, considering a sluggish sales environment that we continue to find ourselves in. A review of the income statement shows total sales down four percent. Just as a reminder, as Larry indicated, we were short a day in the quarter, which cost us approximately 1.5 percent for each segment and in total. We showed progress in the gross profit area, a gross profit percentage going from 30.32 in 2001 to 30.54 this year. This is due primarily to product mix. The automotive group had sales increases and carried a higher gross margin than the other segments.

SG&A, as a percent of sales, increased from 23.08 to 23.31. We continue to have our work cut out for us in this area. As you know, it's difficult to show improvement here without real sales progress. In the distribution business, so much of SG&A is fixed, but we know what we have to do and have shown in the past an ability to adjust. We believe you'll see progress in this area over the remainder of the year.

Net income was down 2.5 percent, earnings per share were down four percent from 52 cents last year to 50 cents this quarter. We've completed the impairment testing for goodwill in conjunction with the new statement of financial accounting standards 142. As a result a non-cash charge of $395 million was recorded as of January 1, 2002, representing a cumulative effect of a change in accounting. We've taken what we consider to be the right approach.

We had a total of $450 million of goodwill and based on the new criteria for testing goodwill, we've arrived at a $395-million level for the write-off. We believe the goodwill remaining on our books will pass the impairment test in the future and will not require a write-off. The amount of the write-off of goodwill a segment is as follows: automotive, $213 million; industrial, $19.5 million; office products, $6.6 million; electrical and electronic, $156 million for a total of $395.1 million. Our outlook on the development of these operations, going forward, remains positive.

Now let's discuss the operating results by segment. The automotive had sales of $999 million, representing 50 percent of the total, and that was up two percent, and operating profit was up 2.5. So they showed some margin improvement, which, with that low sales increase is very good operating. They went from 8.3 to 8.4.

The industrial group with sales of $551 million in the quarter, representing 28 percent of the total -- that was down six percent, and they were down six percent in operating profit. Again, an outstanding job in controlling their expenses there, and their operating margin stayed at 7.7 from last year and the current quarter.

Office products, at $358 million, represents 18 percent of the total. They were down 5 percent in the quarter after having a strong first quarter last year, being up 10 percent, and their operating profit was down five percent, and their operating margin stayed fairly stable again, going from 11.8 the prior year to 11.7. Those are outstanding margins any way you measure them, but, as you know, the first quarter is always the strongest, and the margins are highest at that point.

Electrical/electronic -- they had $82 million in sales, representing four percent of the company, down 35 percent, and they had a loss of $680,000.

We have interest expense in the quarter, $16.4 million, which is up five percent from the prior year, and that's due to recent long-term refinancing at slightly higher rates in the variable rates that we had at this current time last year.

The other category of $7.9 million was down 32 percent, and is made up of corporate expense, $6.7 million; amortization of intangibles, $600,000; minority interest of $600,000.

Let's touch base on a few key balance sheet items. Cash at $56.3 million is up $7 million from the same period last year, but it's down from $86 million at 12/31. We continue to work toward better utilization of our cash.

Receivables down one percent on a four percent sales decrease, so a better job could have been done in this area, but our operations continue to focus on this. We feel good about the quality of our receivables at the current time.

Inventory was flat with the prior year and down one percent from year-end due to some special year-end buys. We have our work to do in this area and would expect to see progress introducing inventory over the remainder of the year. Working capital was $2.2 billion at quarter-end and was up 2.7 percent compared to 3/31/01. We will continue to focus on improving our working capital efficiency.

Current ratio, 3.4-to-one, versus 3.2-to-one for the prior year, and you can see the balance sheet remains sound. Total debt of $786 million versus $989 million at 3/31/01 represents a reduction of $203 million, or 20 percent. Total debt was $893 million at 12/21, thus we reduced our debt by $107 million since year-end, and our current priority for any excess cash flow will be further reduction of that debt. Total debt-to-total-cap was 28 percent versus 30 percent same quarter last year.

Capital expenditures for the quarter were $11.4 million, and we still expect the year to come in at $45 million to $50 million range, which would be in line with the cap ex for last year. Depreciation and amortization was $18.4 million for the quarter, and we expect this to be approximately $75 million for the full year.

In summary, we think we had a good quarter, considering today's economic climate. We also believe our results are very good relative to what we see others reporting. The remainder of the year will be a challenge, but we believe it will bring our expenses in line with our sales. Each business unit has specific plans in place to do this as the year progresses.

We'll take your questions at this time, so, Matt, I'll turn it back over to you.

Thank you, sir. Ladies and gentlemen, at this time, if you have a question, you will need to press the one on your touch-tone telephone. Your questions will be taken in the order they are received, and if you are using speaker equipment, we request that you pick up the handset before pressing the numbers. One moment, please, for our first question.

Our first question comes from . Please go ahead with your question, announcing your company name.

Good afternoon, with .

How ya doin', ?

OK. Do we get back the one or two percent in the second quarter in terms of the ...

No, we picked that extra day up in the third quarter, .

OK, and just to clarify, you did or you did not realize 1.5 percent overall price increases in the quarter? I wasn't clear on that comment.

The number I gave, the 1.5 percent, is the cumulative effect on sales of price increases that we've had over the last 12 months.

OK, trailing 12.

Are you with me?

Yeah, I gotcha.

OK.

And you're still looking for 1.5 to two percent later in the year in the automotive?

Yeah, I think what we would look for is a year about like we had last year. I would think we'll have modest price increases, hopefully, but most of those did take place in the second half of the year.

Great.

Yeah.

OK, and last question on EIS. Given the write-down, I know a couple of years ago when the business was improving, you were targeting, I guess, five percent EBID margins. Is that still the long-term goal? Where do you want to get back to in that business in terms of sales and operating profit?

That one's a hard one to read, because they have never been through a period like this in their history and, certainly, we haven't been through it with them, but I see no reason why we can't get back to the same area of operating margin that we had prior to the recession. Same business, same model, same customers are there, particularly in the electrical part of the business, which is the larger part of it. So we think we'll come back gradually, and that -- certainly, that's our plan at this time.

OK, thank you.

Thank you.

Thank you, sir. Our next question comes from . Please go ahead with your question and please announce your company name.

Hi, it's from Merrill Lynch. Good afternoon, gentlemen.

Hello, Steve.

Just a quick question for either Larry or Jerry. Can you just talk about the stores. Last quarter you talked a little bit about how your cash business was running and what the improvement was in the cash trade versus the rest of your business. Is that the same pattern we saw in the first quarter continuing into the second quarter?

Yes, it is. The cash business is still growing at a faster rate than our overall business, and that's in our company-owned stores. The 800 stores that we own -- and I would just have to assume that independent Napa stores may be having that same experience, but we monitor ours each month, and the pattern is continuing to look that way.

Has that been one of the drivers of the improvement in the automotive parts group revenue over the last four quarters that you talked about, Larry, that sort of above-average pickup in the cash business?

Well, I think that would be part of it. We're up in the other side of the business as well. It's just not up as much as the cash, but we're not underwater on the wholesale side, either.

OK, and then just talking about Motion Industries for a little bit. We know it's tied to manufacturing, and I believe -- am I right in that a fair chunk of it is actually tied to automotive plants?

Yes. Automotive is a big customer, but I'd have to say that they don't have any customer or any segment that's a compelling percentage. Now, someone here might be -- Tom, do you know what percentage the automotive would be?

I don't have the percentage, Larry, but it would be one of their larger customer categories along with steel.

The reason I'm asking, Larry, is the -- you know, we're hearing pretty good things coming out of the automotive manufacturing business lately. It seems like things are really gearing up, and so if that is the case, when would we expect to see that start to pass through? Have you sort of baked that into your view that you'll still be negative but slightly better in the second quarter and then actually turn positive in the second half of the year?

That number pretty much comes to us from our people at Motion, who really have their finger on it, and we can give you more specific information if you have time to call in with Jerry a little later. He'll tell you what the automotive segment is looking like.

That would be great. Thanks very much, guys.

Sure.

Thank you, sir. Once again, ladies and gentlemen, if you have a question, please press the one at this time. If you are using speaker equipment, we remind you to pick up the handset before pressing the number. One moment, please, for our next question.

Gentlemen, there appears to be no further questions. Please continue with any additional comments. I do apologize, it looks like just queued up one more time. One moment. Mr. , please go ahead with your follow-up question.

Just a follow-up on office products. Did your customers lose any market share in the quarter, or was it just -- why is there so much of a lagging indicator, I guess, rather than the industrial?

This is Tom Gallagher responding. Part of what drives office products is the employment levels of office workers, and that has been dropping, which would reduce the demand for office products, and that would be one of the major contributors for them. I might add that our business -- we do have some good growth categories, but as we look at the categories that are not performing as well, they would be largely tied to what's happening in the overall economy. Things like furniture would be a good example of that.

So that should be -- so the recovery will lag industrial as well. So maybe in the fourth quarter that business will be particularly strong?

Right now, we're projecting that the second half will be positive for the office products. We think they'll start generating increases as we work our way toward the middle part of the year and thereafter.

OK, thanks a lot.

Thank you, sir. Gentlemen, at this time there are no further questions. Please continue with any additional comments.

Matt, I don't think we have any additional comments at this time, and we won't ask people to just sit on there holding for additional questions. We'll conclude the call at this time, if you don't have any further ones.

Sir, there are no further questions.

All right. Thank you for joining us today, and we appreciate your continued interest and support of Genuine Parts Company, and feel free to call us at any time with any questions or concerns.

Thank you, sir. Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect.

END