純正零件 (GPC) 2002 Q2 法說會逐字稿

Good morning 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 anyone should require assistance during the call please press the * key followed by the zero on your touchtone phone. As a reminder ladies and gentlemen this conference is being recorded.

I would like to introduce you to Carol Yancey Vice President and Corporate Secretary. Ms Yancey, please go ahead.

Good Morning and thank you for joining us today for the Genuine Parts second quarter conference call to discuss earnings results and the 2002 outlook. If you haven't received a copy of this press release please call Janet Kirby 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 for 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 of forward looking statements made during this call. We will begin this morning with brief remarks from Larry Prince our CEO and then remarks from Jerry and we will have the call-up for questions. Larry!

Thank you Carol and Good Morning to each of you joining us today, we are pleased to have you with us for this call. We want to take a few minutes and review the results of our second quarter just completed and we will give you our best feel for what we see ahead in the next quarter and for the balance of 2002. Jerry Nix our Chief Financial Officer and Tom Gallagher President and Chief Operating Officer are with me today on the call and after a few prepared remarks we will be happy to try and answer any questions you may have or discuss in more detail any issues you may have more interest in. I will begin with just a quick overview of our overall performance for the quarter totally and about business segment, then Jerry will follow with more details on the financials, this will take just a few minutes and then Jerry, Tom and I will be pleased to take your questions.

We released our second quarter results earlier this morning and we where pleased to announce that sales and earning figures that where very much in line with expectations and again with no surprises.

Total sales where $2.1 billion, for an increase of one percent, net earnings where $96 million, up one percent over the second period last year and where 55 cents which equals last year's numbers and the consensus for the quarter. Actually we where pleased to report these numbers for a couple of reasons, first we said back in our April conference call that we felt this quarter would be flat to slightly up and in this case we where on the upper side of our comments. Secondly, it just feels goods to report a positive quarter, we've been down a little for five consecutive quarters and it's good to move back to the plus side.

Our results by segment where also very much in line with our expectations when we gave you our thinking back in April. Automotive sales where up 2.4 percent which is about that range for five quarters now following several quarters with being down slightly. Industrial sales where ahead just a bit for the quarter which was good to see, not quite enough to register up one percent but still on the plus side after five quarters of being down, we actually said in April that we expected the industrial trend to improve but still be down two or three percent for the quarter, so this one turned out a little better than expected. We will comment later on this in our remarks.

EIS, our electrical electronics group, was a little better but still off 17 percent for the quarter. And finally office products, our S.P. Richards Organization was up one percent, we had felt that they would be even to slightly down so this is just a bit stronger than we thought, as you remain recall this file is 3/4 of small declines for office products, so this is encouraged.

At this point I would like to comment quickly on the outlook for each segment and for the company as we look ahead. We'll look first at our automotive business. Our growth in this business has been in the two to four percent range for several quarters now and we believe our third quarter will be at the high end of this range, perhaps up four to five percent. Business overall is still very tough and competitive but I believe our plans for this group are sound for the balance of the year and things just feel a little better.

We said earlier that we plan to selectively add several company owned stores this year as well as independently owned NAPA stores. Our target for the year is 50 stores in each category, for a total of 100 stores. We're making progress with this and this far we have added 31 company owned stores and three independently owned stores. I believe we will hit our target for the year and we will establish a similar target for the following year.

We're seeing a number of opportunities for store acquisitions and competitive store changes to NAPA as industry consolidation continues to take place. Our NAPA auto care center growth continues to take place and this is the category showing double digits sales growth for us. This is a group of almost 11,000 installer customers who now as a total purchase over 75 percent of there parts requirements from the NAPA store.

This is up from just over 50 percent when we initially started to track this about four years ago. We continue to develop our integrated supply locations and we now have 95 of these in place. We've added 11 this year and this is another area of our business showing strong growth.

As I mentioned earlier, we believe our automotive growth in the third quarter will be in the four to five percent range.

I will touch briefly on the outlook for our other three business group, beginning with , the industrial segment. As I mentioned earlier, their sales were just slightly ahead for the quarter and a little better than we expected.

As a point of reference, Motion sales for the past five quarters had been down. This goes back to the first quarter of the year 2001 when sales were off 2 percent. Then the pattern was, in the second quarter 2001, they were down three percent, the third quarter, down seven, the fourth quarter down seven, the first quarter of this year, down six. So coming back to a plus for this year was a nice move for them.

Industrial production activity is gradually improved, but still has a way to go. And I would say it remains a bit fragile, along with the economy.

Some of Motion's improvement can be attributed to a bit of share gain. The industrial market is highly fragmented and this is an ongoing opportunity. Motion's improvement is helpful to us, since they are a big part of our company with 27 percent of our total revenues. Jerry will touch on this in more detail, but they are operating well and with just a slight sales improvement, they were able to improve profits a bit more and show a little margin improvement.

Our best feel is that industrial will continual a gradual improvement and have growth of two to three percent in the third quarter.

As you know, EIS, our electrical electronics company has been in a deep hole now since the beginning of 2001. Their revenues last year were down 31percent with their customer base suffering badly in the downturn and this continues in the first quarter this year and they were down 34 percent.

It's still a pretty rough picture from an industry standpoint, but we are seeing a little improvement. EIS was down 17 percent in the quarter. Their trend is improving partly because of conditions being a little better and partly because of easier comps from last year. We expect this to continue gradually with the third quarter off perhaps 14 to 15 percent . At this level they are in a breakeven mode from an operating standpoint, making just a little profit. Jerry will comment specifically on this in his comments.

Back in April, we said we felt would do a little better in the second quarter, perhaps be even to slightly down. Actually they a little better and were up one percent following a five percent decline in the first quarter. We are pleased with this progress in a difficult market. The office products business naturally reacts to job cuts and cost reduction efforts made by businesses of all types across the country. Under the circumstances, we feel is doing pretty well. And we believe they will be up in the 3 to 5 percent range in the third quarter.

Well that gives you a quick picture of our four business groups. When you put it all together, we were about where we expected to be in the second quarter, perhaps a little better in office products and industrial.

Looking at the third quarter we believe total revenues will be up in the three to four percent range as we continue to show improvement. The consensus earnings for the quarter is 55 cents compared with 51 cents last year. This is an 80 percent increase, but given the revenue ranges we just discussed, we feel OK with this number. The consensus for the year is 217 and we see no reason to disagree with this number at the present time.

With that background, we'll now ask for his comments and we'll follow that with your questions and with discussion. Thank you.

Thank you Larry. Good morning.

We appreciate you joining us for our second quarter conference call. We'll have a review of the income statements and a discussion of segment information, then we'll touch on a couple of key balance sheet items.

We'll be brief and then open the call up for your questions. We're cautiously optimistic in our second half and to make conservative assumptions regarding economy as we plan for the next couple of quarters. Overall, from an operating standpoint, we continue to control expenses and maintain our focus toward increasing top line growth.

A review of the income statement shows, total sales were up one percent, bringing us to $2.1 billion for the quarter. For the six months ending June 30, sales totaled 4.1 billion, which was down slightly compared to the same period in 2001.

Goal to profit for the quarter was down slightly with gross profit percent to sales of 30.23 compared to 30.34 the prior year. We see improvement for the six months ending June 30 with gross profit percent of 30.38 as compared to 30.33 last year.

SG&A as a percent of sale was down from 22.90 to 22.83. We're continuing our efforts to cut expenses, but we still have some work to do in this area. We're pleased to see this number continue to fall.

Net income was up 1.4 percent with earnings per share equal to last year at 55 cents. Now discuss results by segment.

The automotive group had sales 1.145 billion and that represented 53 percent of our total sales. They were up 2.4% in revenue and they were down one percent in operating profit. So we had some slight margins deterioration there going from 9.8 to 9.5 for the quarter.

The industrial group, 572.6 million in sales, that represents 27 percent of the total. And as Larry said, their slightly up in sales and operating profit improvement of one percent. So an outstanding job done by this group in moving those margins up from 7.7 to 7.8 percent.

Office products had revenue of 336.6 million. Again, representing 16 percent of the total. That was up one percent and they were down one percent in operating profit, so a slight deterioration in there margins, went from a 9.0 to a 8.9.

Electro-electronic group had 80.6 million in revenue representing four percent of the total. They were down 17 percent in sales, down 63 percent in operating profit, but they did show a slight profit in the quarter. So we have work to do with that group and their operating margins 7/10 of one percent versus 1.7 percent in the prior year. We did have in the other category, 7.4 million due to some EITF accounting changes there.

Looking at the six months the automotive revenue was two billion, 147.2 million they're up two percent for the six months in revenue, and up one percent in operating profit.

The industrial group sales for the six months one billion, 123.8 million that's down 2.8 percent in sales, and down 2.5 in operating profit, so again continuing a good operating results there.

Office products group at 689.4 million in revenue for the six months. That's down two percent with operating profits down four percent.

Electro-electronic group had 162.2 million in revenue for the six months up 26 percent, and they had a slight loss of $80,000 for the six-month period.

We had interest expense in the quarter of 16.4 million, which is up 8.7 percent for the same period last year. The increase stemmed from by long term debt being moved into longer term higher fixed interest rates, and mark to market adjustments related to our interest rates arrangements.

The other category of 9.5 million, which is made up of corporate expense of 8.3 million, amortization expense of $600,000, and minority interest of $600,000 was down 25 percent. It would have still been down two percent if you had excluded their accounting change for the goodwill amortizations.

Now let's touch base on a few key balance sheet items. A balance sheet and pre cash flow remain very solid. Cash of $25 million is down 21 million from the same period last year, and this is due primarily to a reduction in debt, which will be discussed in more detail in just a moment.

Our accounts receivable were down two percent with a slight sales increase, so a good job is being done in this area.

Inventory up seven percent, and that's due to planned inventory buys in industrial group, in new stores for the automotive parts group. Larry touched on the number of new stores and plans for additional stores in his comment.

Working capital was 2.2 billion at quarter end. That's up six percent compared to 630.01.

Operations continue to make excellent progress in our working capital front, and we would expect to see a reduction in working capital for the full year. Our current ratio of 3.3 to one is up form 3.1 to one for the prior year, so the balance sheet remains very sound.

Cash flow from operations remains very good, and is reflecting in the next few balance sheet comments.

A total debt of $720 million was down 21 percent from the total debt of 908 million at June 30th '01. This represents a total reduction of $188 million. The total debt at year-end was 893 million, so you can see we have reduced the debt by 173 million since year-end. Total debt to total capitalization at 630 is 26 percent versus 28 percent for the same period last year.

Capital expenditure for the quarter was 14.5 million, and 25.9 million for the six months. However we still expect the year to be approximately $65 million, which will be an increase of my 42 million last year. This is due to some ongoing projects in our automotive, and office products segments.

Appreciation, amortization was 17.9 million for the quarter, 36.3 million for the six months end of June 30th. In addition we would expect this to approximately 75 million for the year. This is down from the prior year due to the accounting change that was related to the goodwill amortization. The impact of this accounting change is approximately $3 million per quarter.

Shares outstanding increased by 2 million a one percent from June 30th '01 due to stock option exercises. These stock option exercises. These stock option exercises generated approximately $50 million in cash over the prior year. Those of you who followed up for some time know that we have always tried to be conservative in our accounting practices and we certainly see no reason to change that today. We will continue to strive to maintain a quality balance sheet and report quality earnings. In summary we begin the second half of 2002 we will continue to persevere in a difficult marketplace we operate in and remain focused on our determination to complete the year with increased sales and earnings. Now we will take your questions. , we are turning back to you at this point.

Thank you. At this time if you would like to ask a question press the star and the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from with .

Good morning, with

Good morning David. How you doing?

OK. Jerry could you just go through price by segment in the quarter.

The pricing environment hasn't changed a great deal David in the automotive side. We had four tenths of one percent and pricing, bear with me one minute and I'll have the other section in just a minute. The industrial group was 1.0. office products is .5, and nothing in the electrical electronic group.

OK. So that the margin drop in Auto, small as it was, does that just make for some onetime extra cost in there?

No I think that there is not any one time when there is more mix and us just not doing as good a job as we should have by being in control of our expenses, I think they are doing pretty well in holding those margins where they are with no greater sales increase in there. They will continue to focus on that.

OK, and the new stores you talked about, those are existing stores I mean no one is out there building any new stores, are they?

They may or may not be existing stores David, some of them we are opening up, and in markets where we need an additional store, and some of them will be stores that we are buying and changing over to NAPA.

David most of the new company on stores you could take as part of it for a moment with 50 new stores in the markets that we serve it is a very small number and we are talking primarily in the metropolitan markets where we do own our company owned stores. A lot of those markets are growing, in the past several years we have been more concentrated in improving our stores, existing stores than trying to open a few new ones so very selectively we will open about 50 new stores a year. It could be and we will occasionally find a competitor to buy in these metropolitan markets, so they may not all be brand new locations, but by and large I would say the company owned stores could be brand new stores.

OK

Your next question comes from with Merrill Lynch

Thank you, just the two questions related to the auto business, first of all what is your sense of inventory in the channel. Your inventories are in good shape, do you have a sense that generally the channel is OK and secondly can you comment on the quality of service you are getting from your key suppliers. I mean most of the key suppliers think that the stabilizer operational issues.

I'll take that question both parts of it. Number one I think inventory in the channel is in better shape than it would have been a year or two ago. It seems to be working its way through, and our service is terrific. I'd have to give accolades to our vendors and say right now that we're not experiencing service problems of any kind that I'm aware of.

And Larry just to follow up on the inventory comment. I mean do you think it sets the basis for continued stabilization, and maybe even strengthening in prices over the next year or s, or is that too aggressive?

I think that's too aggressive. I think you know a lot of factors play into this pricing issue, and having to do with the competitive issues that are out there, and I don't see a big change in that but it's still very tough, and I think there's room for a little pricing but I don't think the inventory, I don't think the inventory in the system is going to impact it right now.

And just finally, I mean in terms pf price did you get the sense that the big retailers out there are having firmer pricing than a year ago, and that's holding up?

Well we hope so; I mean it feels that way. We don't know what there pricing policies are exactly and how they go about it but they're always tough, but I notice in some cases their margins are improving, and while, while some of that maybe product mix you can't help but think some of it might be a little more pricing, that's just an assumption on my part.

OK thanks very much.

Thank you.

At this time I would like to remind everyone if you would like to ask a question press * then the 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your next question is a follow-up question from with .

Jerry just a quick balance sheet question. The pre-paid I guess was left a little bit sequentially in year over year could you tell me what was in there?

Yeah there's some accruals over tour office product segment for some adjustments that they made last year in accounting, and that's primarily to why that's up, and there's some pre-paid pension numbers in there as well. But there's nothing in there of any concern David.

OK. Thanks a lot.

Thank you.

Your next question comes from with .

We wondered if you could just comment a bit about market share especially in the office products area. It seems to have held up surprisingly well given the environment. Do you think your gaining share or anything in that sector?

I'll take that one this is Tom Gallagher, and I would just say David that, that we put together a number of strong marketing programs for our dealer customers, and they seem to be using those programs to enable them to grow their business, so I think we are perhaps gaining a little bit of share through some strong marketing efforts.

Thank you.

At this time there are no further questions. Miss Yancey are there any closing remarks?

this is Jerry Nix. We don't have any closing remarks. We want to thank those of you for joining us on the call today, and feel free at any time if you have any questions concerning, and give us a call, and we'll do our best to get back to you and be responsive but again we appreciate you joining us.

This concludes today's conference call, you may now disconnect.