純正零件 (GPC) 2003 Q1 法說會逐字稿

Good morning. My name is Derrick and I will be your conference facilitator. At this I would like to welcome everyone to the Genuine Parts Company first quarter 2003 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time simply press star then the number one on your telephone keypad. If you would like to withdraw your question press star then the number two on your telephone keypad. Thank you. Ms. Yancey, you may begin your conference.

Thank you. Good morning and thank you for joining us today for the Genuine Parts first quarter conference call to discuss earnings results and the 2003 outlook. If you haven't received the copy of the press release you can visit our website at www.genpt.com or contact Jenic Kirby (ph) at 770-612-2047. Before we began we be advise 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 in future economic performance and assumptions underlying the statements regarding the company and it's 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 fillings. The company assumes no obligation to update any forward-looking statements made during this call. We will begin this morning with brief remark from Larry Prince, our CEO and then will end the call with questions. Larry.

Thank you Carol and good morning to each of you joining us today. We appreciate your taking time to do this. Here with me today in addition to Carol is Jerry Nix, Chief Financial Officer, and Tom Gallagher President and Chief Operating Officer for Genuine Parts Company. We will take a few minutes this morning to comment on the fist quarter results and then a bit on how we see things right now and comment on the rest of the year. As we normally do I will take just a few minutes to comment on the overall picture as well as our four business groups. My remarks will deal more with sales and operating issues and then Jerry will take time to cover the financials with you. We will be brief and afterward we will be pleased to have some discussion and we will try to answer any questions that you may have for us. We released our results earlier this morning. I am sure some of you have had the opportunity to take a look. We were very much inline with where we expected to be when we reported to you back in February, and we were pleased to report continued improvement in both sales and earnings for the quarter.

Total sales were $2b for the quarter, an increase of 2% compared to the previous year. This continues to the pattern we've seen for some time now with increases in the same range for four consecutive quarters. We've been very consistent. Our net earnings for the quarter were 88.4m, also up 2% compared to the last year. Earnings per share were $0.51 compared to $0.50 for the same period last year. These numbers are before the cumulative effect of accounting changes in both the first quarter of 2002 and the first quarter of 2003. As you will recall last year in the first quarter we adopted FASB No.142 relative to accounting for goodwill. This year in the first quarter we were required to adopt the financial accounting standard boards EITF 02-16 dealing with accounting for cash consideration received from vendors. Jerry Nix will go into more detail on these changes in his remarks. As you know these are non-cash charges with no impact on our ongoing operating results (ph) . Overall, we feel okay about our quarter; we feel our people are continuing to operate with a lot of discipline. Converting profits pretty consistently with very modest top line growth.

Now we would like make just a few quick comments about the performance of our different business segments for the quarter and how we see the months ahead of us in 2003. The automotive group improved revenues by 2% for the quarter, this was the seventh consecutive quarter of sales growth for our automotive parts operations both motion industries, our industrial group and SP Richards, our office products company, were up 3% for the quarter showing steady improvement. EIS, our electrical group, was down 8% and in line with our expectations as they continue to make progress. We are also pleased with this operation had another profitable quarter and Jerry will comment on this later. We really see no significant changes in the markets we serve since reporting to you back in February. All of our markets remain extremely competitive and the soft economy seems to remain unchanged really no better or no worse.

Relative to automotive one reliable source of market information just recently reported that the product sales of the total after market last year grew by a just under 1%. With all the positive fundamentals in place for after market growth, we don't believe this level of growth will persists and stronger market growth will come. In the case of automotive we continued to target top line growth in the range of 3% to 4% this year. We aren’t quite there but we are very close and we do believe the initiatives we have in place. We will make it possible to do this as the year progresses. We've talked about some of our plans in earlier reports and I won't go into the great deal of detail today, but we are pressing hard on several fronts. At the top of our list is our NAPA Auto Care center initiative. We plan to increase the number of NAPA Auto Care centers from 11,700 to 12,600, a gain of about 900. And we plan to grow our sales per day penetration and that number is now over 70%. These repair centers are independently owned and typically leaders in their markets. This program allows man to leverage the NAPA brand and reputation right into their local markets. We feel this initiative will add 50m to 60m in sales for us this year. This group of customers represents about 600m in sales for NAPA stores. Major accounts and integrated supply operations continue to grow substantially for NAPA. This segment represents over 500m in sales and will grow in the 8% to 10% range for us this year. Major accounts like AAA, CarMax and tire companies are important customers. And when we actually have an own side store we categorize this as integrated supply. Our integrated system operations are applicable to accounts like CarMax at their re-conditioning centers at large fleets and industrial accounts as well as municipalities like to city of Chicago, which is our largest integrated supply customer. We plan to add 50 to 100 new stores to our current group of 5700 NAPA stores this year. We added 32 stores last year and we believe we can do a bit better then that this year.

Our cash business, which is mostly retail in our 900 company-owned stores, continues to grow nicely, up 8% in 2002 compared to the total growth in our company owned stores of 6%. In this group of stores this same pattern continued in our first quarter this year with total company-owned store sales are up just over 6% and cash again being up 8%. Cash sales are close to 40% of our sales in this group of 900 stores. We will continue to push this in 2003. There are two additional sales drivers for automotive this year that I may not have mentioned for a while that will be helping us to build business. First I would like to mention heavy duty, which relates to parts and supplies for large trucks and trailers. This is a major category for us. Sales for this group will grow nicely this year and reach about $395m. Heavy-duty parts and supplies are embedded right into our NAPA program and this is a business that fits us nicely. It is more technical and almost a 100% for the commercial market.

And then finally, our Canadian automotive company is UAP, a leading independent parts distributor in Canada, which we acquired in December of 1998. They are in the process of converting to NAPA store graphics as well as many of NAPA's programs across Canada. Early indications are very positive and we expect them to be a sales leader for us in 2003. They started with a strong first quarter. Their sales in 2002 in US Dollars were about $480m. So, significant growth from this group will be very helpful to us.

That's enough said, we have good things working in automotive for 2003 and we continue to look for sales improvement for the year in the 3% to 4% range. The outlook for our other businesses remains in the range we discussed in February. Our Industrial Group Motion Industries continues to do a solid job. They have shown improvement now for three consecutive quarters and seem pretty steady in the area of 3% to 4% growth. The manufacturing sector in general is still a fragile situation, but not doing terribly. The size of the market available to us is still huge and service to that market remains very fragmented. Growth opportunities are there for us and we just feel good about Motion's ongoing performance.

The same can be said about SP Richards, our office products company. We believe they will also grow in the 3% to 4% range this year and they were right on target in the first quarter. The good things we said about them in February remain appropriate today. They have added new products to their offering, broadened their customer base, and they are giving excellent service to their customers. They have a good year going.

EIS still has a fine on their hands, but we will start to move closer to the breakeven point on their top line as we move through the year and will remain profitable for us. When you put it all together, we again come back to growth of 3% to 4% for the year. If we do this, I believe we will be outperforming the markets in each of our businesses. The current quarter, quarter number two should show growth of 2% to 3% in revenues with earnings pretty much in line with sales. Last year, we earned $0.55 in the quarter and the current consensus is $0.57. We feel $0.56 to $0.57 is about right. We said in February that our range for the year should be $2.15 to $2.20 per share compared to $2.10 last year. We continued to feel this is an appropriate number for now.

Now, we will ask Jerry for his comments on the financials.

Thank you Larry. Good morning. We appreciate you joining us. We will first review the income statement and individual segment information. I'll then touch on a couple of key balance sheet items. We will attempt to brief and open up the call up to your questions at that time.

We fairly had a pretty good quarter operating-wise, considering the challenging business environment that will contain or find ourselves in. To some degree, our first quarter moves along similar to our third and fourth quarters in 2002. Effective January 1st, 2003 we were required, as Larry mentioned in his remarks, to adopt the Financial Accounting Standard Board EITF number 02-16. GPC has historically classified certain vendor monies received, primarily advertising and other cash report arrangements as a component of SG&A, a proved method and in compliance with Generally Accepted Accounting Principle. Under the new EITF, these vendor monies must now be classified as cost of goods sold. A portion of the mass must be capitalized into year-ending inventory. The effect of the change was $20m after-tax, represented a cumulative effect of the change on accounting principles.

Prior periods have not been restated. It's important to know it again that the substance of the accounting change has no impact on our operating results and no cash implications for us. A review of the income statement shows that total sales were up 2%, which is consistent with our growth and sales in our last half of '02. All the accounting adjustments reclassify first quarter vendor monies from SG&A to cost of goods sold. We showed a slight decline in the gross profit area. Gross profit percent going front increases 30.54% in '02 to 29. 93% this year. After the adjustment, our reported gross profit percent was 31.57%, up just over 100 basis points. SG&A as a percent to sales before the EITF adjustment decreased to approximately 0.5%; 23.31% to 22.75%.

We are pleased to report improvement in this area, especially in a period of moderate sales increases. After the EITF adjustment our reported SG&A as a percent to sales is 24.39%, which is consistent and the change in the growth profit because of the EITF. While the cumulative effect of accounting changes in '03 and '02, net income was up 2% with earnings per share at $0.51 compared to $0.50 last year. After the cumulative effect adjustment, earnings per share were $0.39 in '03.

Now, let's look at the operating result results by segment. Automotive had revenue of $1.22b, representing 51% of our total. Net sales were up 2.4%. Operating profit was down seven-tenths of a percent. So, they had some margin deterioration from 8.4% to 8.2%.

Industrial group had revenue of $569.6m, that was up 3.3%, operating profit of $43.2 m, and that was up 1.3%, again a slight margin pressure there from 7.7% in the prior year to 7.6% in '03. Office products had revenue $363.8m, 18% of our total and they were up 3.1% and their operating profit was up seven-tenths of a percent at $41.6m. Operating margins were still outstanding at 11.4%, but down from the 11.7% in the prior year. Electrical and electronic group had revenue $75.4m. They were down 7.6% in the quarter and they did show an operating profit this year of $1.6m versus a loss of first quarter last year of $700,000, so actually improvement their to get their margins to 2.1%.

We did have interest expense in the quarter of $13.7m, which is down 17% from the prior year; it's the lower interest rates that we are operating in today. Another category of $10.9m was up 38% and is made up of corporate expenses, amortization of intangibles, and minority interest. The increase is due to the primarily the higher legal, and professional cost as well as increases in our insurance expenses.

So it’s base now on a couple key balance sheet items. Cash at $25m is down $31m from the same period last year and is in line with our $20m balance at the end of '02. We continue to improve our cash management process in providing better utilization of the cash and lower cash balances on hand. Accounts receivable was up 2% on a 2% sales increase, so receivables continued to move in line with sales. We believe we are doing a good job in this area and feel good about the quality of our receivables at this time. Inventory was up 10% from the prior year, but I should point out it was down $87 million, a 4% from 12-31-02. Before the accounting change that we referenced earlier, inventory was down $54 million from year-end. So, we've made excellent progress in reducing the inventory and continue to target a $100 million reduction in inventory for calendar year 2003 and add exclusive effect of the accounting change. Working capital was $2.3 billion at quarter end as compared to $2.2 billion for the same period last year. So, we continue to focus on improving our working capital efficiency. Our current ratio of 3.3:1 versus 3.4:1 for the prior year, so you can see the balance sheet remained in sound financial condition.

Our total debt of $847 million was 28% of our total capitalization, which was flat with the same quarter last year. Our first priority for excess cash at the current time continues to be the reduction of the debt in 2003 and this is after increasing the dividend and any opportunistic share repurchases action that we can have. Capital expenditure was higher than average for the quarter at $25.7 million and that's mainly due to the IT projects that were placed in service in our automotive operation. Given the early push that we have seen in capital spending, we would project our capital expenditures for the year to be in the range of $75 million to $85 million, and that is up $65 million up from $65 million in 2002. Depreciation and amortization was $17 million for the quarter, but we'd also expect this to be approximately $75 million for the year. While we are pleased with the quarter, we are not necessarily happy about it. We do believe we had a good quarter considering today's economic climate. Looking ahead, we'll continue to work towards improved sales and earnings growth, focus on asset management and tight expense control. We expect the remainder of the year to be a sales challenge, that's why we must continue to remain vigilant and keeping a tight control on all of our expenses. We'll take your questions at this time. Derek (ph) I'll turn it back to you.

At this time I would like to remind everyone if you would like to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from John Casesa with Merrill Lynch.

Thanks. Good morning gentlemen.

Morning John.

Just a really three quick ones. First of all, on your overall expense structure, if sales for some reason continue to grow at the rate that they are growing at, which is, seems not strong enough to give you expense leverage. What would you do, I mean you think you'd have to go back and take a fresh look at the company's expense structure and then really what could you do? Because it seems to me that you've been working on the expense line for some time now.

John, as you know in this distribution business, many of the costs are fixed. And so for us the -- our expense reduction just it comes down to adjusting headcount normally and we continue to focus on that. If our sales were to grow in at 2% to 3% range, we can probably hold our margins flat. If we see top line growth a little better than that then we can show some margin improvement and the leverage really becomes when you get your sales up in the 7% to 8% range and then that bottom line can grow faster than that. But you are right, we've continued to focus on expense controls, until we get top line growth back but, at this point that's going to be an ongoing project.

Larry, if you've thought for some reason in the next six to eight quarters or whatever would be like the quarter you just had been through, would you have to change your plan, I mean, what would you -- would you have more headcount reductions or would you outsource things? What kind of thing would you do?

John, I think you are exactly right to ask this question and I would simply tell that we think, there is a good bit more that we can do on expenses and it's something we are taking seriously. Obviously, our expenses for the quarter did come down. Our absolute expenses were less at in the same quarter last year, which shows we can do it. The small deterioration we had in operating margin came right back to a slippage in gross profit margin. So, I think, when you look at our situation we've got two -- obviously, two things we can do. Number one is, continue to trim on those expenses, which showed results in the first quarter. We can also go back and look at our margin situation and take whatever steps we need to take to improve those margins just a little bit. Those two things are what we have to do if we don't, obviously get the improvement in the top line that we hope to get.

Okay. And then just, just two I think, quicker ones. Jerry, can you repeat why corporate expense was up as much, I think at that?

It was the legal and professional cost as well as insurance, all our insurance coverages were renewed in January 1, and in today's climate all of them were up significantly.

Oh, I see. Okay. And just finally, can you give us a sense of what April is looking like in the three businesses; are there any changes in the trends?

Well, John, it's looking a little bit better. But we had that same situation when we reported to you in the first quarter

I hear you

and it makes me a little nervous to talk much about it, because we looked stronger in the beginning of the first quarter than we did towards the end of the quarter, or all up in the latter part of February and frankly, what happened to us in February and to some extent in March, we had such poorly (ph) weather hit, you even talk about the weather. But, we had a few places where we were just absolutely closed for a day or two. So, it ticked us a little bit. But I would say, yes, the early part of this month looks a little bit better than what we reported to you for the quarter.

Okay, then just a -- I meant finally, but on EIS, Jerry, you've showed an improvement in earnings, even the sales line hasn't been so great. Does that relate to any write-downs that you've taken at the business over time?

No, not at all. That's expense reductions. They've done an outstanding job over there with the fall off in sales that they've had in bringing their expenses and inventory in line.

Okay, great. Thanks very much gentlemen.

Thank you.

Your next question comes from Darren Kimball with Lehman Brothers.

Hello Darren.

Hey guys, how your doing?

Good

I wonder, if you could expand a bit on your comment in office products about the next -- broadening the customer base?

Well, I think, I'd like to ask Tom Gallagher to answer that question. He's been working closely with office products.

Morning Darren.

Morning.

What we've done is put on a fairly significant effort to attract additional customers to do business with SP Richards, and they've had reasonable success in that. Larry also referenced that we've broadened some product line, which gives us an opportunity to do a better job at certain product categories, things like the break room and janitorial supplies, school supplies would be two that come to mind. And then we've done a better job perhaps with some of our marketing material and helping the customers that we do business with to perhaps a little better job in their respective marketplaces.

Any big names there as far as new customers or it's more penetrating your existing customers more?

I think, it is better penetration of existing customers and no significant conversions and just a number of good solid office products dealers that want it to do business with SP Richards.

Okay and on the -- do me a favor and just repeat those numbers on gross margin and SG&A. I kind of miss them in terms of EITF affect?

wellwe didn't give any effort -- other than just a general effect, and then I will give that to you. If you look at the gross margin impact that we have before the EITF, we showed a slight declining gross margin where about 50 basis points. After the EITF, our gross margin is at 31.57 and that's up in 29.93 the prior year. Again the prior year period was not restated for these numbers. In the SG&A side, before the EITF, our margins in SG&A improved 22.75 to 23.31. I'm sorry, they decreased there. And then after the EITF, the SG&A as percent of sales is 24.39So You can see that the impact of that EITF on our margin is about 100 basis points.

Okay.

But again, by the time you get to bottom line, there is no impact.

All right. And did you say, how many shares you bought back in the quarter?

No. We didn't say, we purchased it about 600,000 shares.

Okay. So, I mean you continued to view your stocks under 30, as you know the further it is under 30, the more you are buying. I mean, what about at this level?

We view that the stock is attractive at the current level. Obviously, the further it drops, the more attractive it becomes to us from a purchase standpoint, but we're not necessarily just out of it at the current level. We take opportunities to buy on the clients.

Okay, that's all from me. Thank you.

Okay, thank you.

Your next question comes from David Siino with Gabelli & Company.

Hi, good morning.

Hello David.

Jerry, could go through the price for the quarter?

Yeah, the Automotive operations had 0.2%, the Industrial Group had 0.4%, and these are cumulative numbers from the beginning of the year

Sure

and the office products had 0.4% with nothing in Electrical/Electronic Group.

Okay and the -- I guess the commercial -- the non-cash business at the company-owned stores is at 60%. You said how the cash business did. How that the -- can you ballpark the remaining business?

I don't have that in front of me, but it is a -- if you look at it mathematically, it's up, I don't know exactly what it would be up, but probably up 3% or 4%.

Okay, thank you.

Your next question comes from Saul Rubin with UBS Warburg.

Good morning.

Good morning, Saul.

Now, you gave a -- great run down on where on you see growth in the auto divisions over the coming year and all the opportunities. Given the growth that we are actually seeing, so that that's the question of what is not doing so well? I suppose anything you missed out was whole commercial franchise business and I suppose Johnson, could you just talk a little about that?

Well, if you look at in general at the categories, we had a real good result that I mentioned in UAP in actually in low double digits. So, we had NAPA - the NAPA group was up about 2%, which is how exactly in line with our overall number. We had in Mexico, mainly due to currency weakness, Mexico was down some. Actually in local currency I think they were up a little bit and in the case of JI (Johnson Industries), they were down about 5%. So they have got still adjustments to make in terms of the new territorial arrangements but they are coming along pretty well. That is much, that's much less of a decline than we really anticipated with this change. So, when I look at the groups I don't see any monster problems in any of them and obviously our greatest opportunity is in their biggest segment in NAPA, which is probably 80% of the total. But they are up right on the average. Whatever they are up pretty much sets the tone for the whole automotive group.

Okay. Now you are looking through the close of the year you are looking for 3% to 4% growth. But the first quarter was 2%, second 2% to 3%. You must be reckoning on something in the 4% to 5% range in the second half.

Well, you know that's right. I think if you look it at total auto in the segment information in terms of change, I think total auto was up 2.4%. Well actually you know we are getting at that level, you are awfully close to the bottom range of what we are talking about in the 3% or 4% range. So, it is not as if we are that far away. We just got to continue to put that little extra press in that we are talking about with these programs we have. It's very much doable but obviously we are going to have to pick up the pace just a little bit to get it done.

Do you assume that can be done on the back of recovery in end-markets or on the back of the internal programs you have?

Saul, we got to think about it in terms of the internal market. I hope, like everyone else, that we get some break in the total market as we see it. But right now we just have to plan that things are going to be pretty much like they are and that we can generate this bit of extra that we need through execution of these programs that we have.

Also Saul, as we open some of these stores moving forward that should start to contribute as well.

Right, Okay. And those new stores, is it still going to be pretty much 50:50 between owned and franchise?

They certainly are project, you know, both of those are separate, totally separate projects. We have bit more control over the company-owned and we do the independence ad but we are pushing just as hard on one side as we are on the other.

Okay and then finally the reasons for the cost of good sold margin going up or gross margin going down slightly. Is that just that the pricing you are gaining that is insufficient to maintain that?

No actually, it's all in the game (ph) . If you look at our margins before the ICF (ph) our gross margins were actually down same period last year.

That’s what I meant

And so, the reason for as you move in money's that are received from the vendors, you are moving those moneys out of SGA up into the cost goods sold. And that's why the reason, if you look in our SGA category dropped down because we were moving it up in a cost good sold and that stays in the inventory, that's the reason for the gross margin improvement.

[Inaudible]

I think, Saullet me comment just a second on that. I thought it was interesting when we looked it to breakdown, to see that before this EITF business, yes our gross profit margin was down about 6.61% and our SGA was down 0.56%. So, the two were very close but the SGA did come down quite as much as the gross profit. So, that resulted in that 0.05% drop in operating margin. I think we just have to come back to the issue that we continue to put the pressure on keeping that SGA moving in that direction, which I think we can do. And we come back to the that gross profit margin, I believe without going back and seeing the numbers, I think most of that came at Motion and SP Richards rather than Automotive. And so, I think it's at those two places that the margins are little bit more under pressure in the current time rather than the Automotive. So, we just have to give attention to particularly to those two businesses.

I am sorry, why is it not the case?

Well I think it's just a matter of without going back and absolutely taken at a part. I think it has to be the product mix, it has to be may be some aggressiveness in getting the business, it has to be the competitive nature of the marketplace; all those things would come in. And, it's not a huge slip, which we are talking about. It's a pretty small number. And you know, SP we've said pretty often that when you get an operation like SP and their business with the margin of 10% or more, and I think that is still about where they are. It is actually even more than that for the quarter. So, there might be a little slippage there and if we see that we are giving up a little to keep our growth going, and we just have to trim a little bit more on the expense side. It is a matter of balancing those two things.

Great. Thank you very much.

Your next question comes from Jonathan Steinmetz with Morgan Stanley.

Good morning everybody.

Good morning John.

Few quick ones here. On the Automotive side, can you talk about which categories were stronger or weaker in the quarter?

You mean product categories?

Yes.

I don't know that we have that information, but I am certain it would be 'must have type stuff,' whether it would be batteries and brakes and those things, it has to be repaired as they fail. Those have been and continued to be our strongest growth in the product area, but in that -- I don't think that has changed, nor do we expect a change.

Okay, so, some of the more discretionary stuff may have been a little weaker then?

I think, that is right, the economy kind of drives that.

Okay, on the cost side, if you were to see sales up in the range of 3% on a net basis, what would you expect from headcount?

I don't -- I am not sure. We don't equate headcount to sales increase. If you ask me what our margins, in fact, would be on a 3% sales increase, it would probably be flat or slightly up.

Okay and finally, you mentioned some CAPEX up due to higher spending for some IT-related projects on the Auto side. Can you give a little bit of color, was that more replacement or are you adding something there?

No. These have been ongoing projects and when the project gets ready to rollout then we set it up and start depreciating (ph) it at that point, and these have been ongoing projects, infrastructure projects, computer systems for the stores, items such as that.

Great. Thank you.

Okay. Thanks.

Your next question comes from Hashish Pans (ph) with Neralon (ph) Capital Management.

Hi Jerry, hi Larry. How are you guys?

Hello Hashih.

How are you doing? Just a couple of clarifications, the first one was, on the Automotive side, could you talk a bit about the stores that you opened last year, the 32 stores, how were they split between independent and own stores, were they still a 50/50 mix?

No. As a matter of fact, last year, I don't have that number in front of me, but I can come probably pretty close. We had a -- we actually were down in terms of the independent count and we were up in the company-owned store count. And I am going to say, we probably opened 65 or 70 company-owned stores and we netted 32. So, the balance of that would give you the number of fewer independent stores that could have been, we bought some of those independent stores in the process, but the net gain was 32 stores, and really all of the gain was in the company owned store side.

Got you. Could you talk a bit about Larry your targets of 3% to 4% for the year, Automotive? Could you give us a sense of any sort of -- what is the price versus volume target, if you were to break that number out? Or is that primarily - it seems like the first quarter is primarily volume. Is that going to be the trend?

I think that will be the trend. You know Jerry mentioned a little bit of price increase a moment ago, but it was two-tenths of 1% or some smaller number. So, that's not enough to impact us very much. And I think if we gain 3% to 4% in Automotive, we got to count on it being primarily units.

If we look at sort of the way your revenues are split between independents and company owned stores, it appears and you gave us some guidance on company-owned stores being up 6%. It appears like the independents are kind of flat. Does that mean the store closures that you are seeing on the independent side have abated at this stage like last year, there were net sort of reductions or closures in independents. This year, what is the trend you've seen in first quarter?

Well in the first quarter, I would say, we are still down a little bit in the account for independent stores, but I don't expect to have the kind of net loss this year that we had last year. And I don't think that will happen. I do believe that we will wind up with a net gain in independents for this year.

And first quarter, it's been a slight decline, but much lower than failure?

That's right.

The next question I had based on office product. If you can sort of update us any. What's competitive activity, lying on particularly for national accounts? And if you can sort of talk about more national accounts, putting things up both rebates etc and trying to lower their own costs, what are you seeing out there in the field?

I don't think we have seen any significant difference through the first quarter of this year from what we've experienced all of last year and the year prior and that is that the marketplace is very very competitive and that continues. All accounts are whether they be major accounts or whether they be the others, are looking at their cost structure and all of them are looking for ways to trim their costs as well. So, we just continued to experience, when we have experience and do the best job we can and working our way through with each of the accounts.

Any significant competitive wins that you might have seen in first quarter that might start playing through over the rest of the year? Tom?

No, I think that we've had a fairly consistent performance in the office products group now for several quarters and I think we feel that they are going to continue to perform at this level or maybe just slightly better as we work our way through the year.

Okay. Thanks a lot.

Okay Thank you.

Your next question comes from Dex Belaxis with Gates Capital Management

Yes. I was just trying to understand the margins, you said that on apples-to-apples basis the gross margin would've been down, basically 61 basis points and SG&A would've been down 56 basis points on an apples-to-apples?

: That's correct.

Okay, and what was the - where did you get the benefit in SG&A?

Just normal, folks you know, in each expense category, that is not enough of a change to say that there was any one category that you can look at. We just continue to look at every expense category we can and cut back wherever we can.

I would say, we do have fear of people. We're continuing to try to wish and as we can in terms of payroll. Payroll related costs are about 60% of our total SG&A number - would be payroll related. So, to get your expenses down, obviously, you got to be working on that part of it and eliminating overtime where you can and those kinds of issues. So, a good bit of it would've had to be payroll related.

Right and then, if I look at your operating working capital, basically the way that I would define that is inventories and receivables, and other current assets minus accounts payable and other current liabilities. What sort of increase are you anticipating from the working capital perspective for the full year?

I would obviously like to see a decrease in it, but we are considered and we are going to bring our inventories and that's largest piece. We are going to bring our inventory down and we have an ongoing project to push our days payables out further. So, we would hope that we wouldn't see anything worse than a flat working capital environment. But we would strive to see a decrease in it.

Okay, and where would the benefits of that be throughout this year? Are you going to see some next quarter because, I guess, you had it billed in the first quarter?

Well, we will see some. The reason we had to bill that is, as we mentioned, we did reduce our inventory in the first quarter. But our payables were not up. They were down because we had to make the payments for some inventory buys that we made in the fourth quarter last year. You will start to see some improvement in the second quarter, but the majority of the improvement will come in the third and the fourth quarters.

Okay, Great, thanks.

Okay. Thank you.

Your next question comes from Wayne Cooperman with Cobalt Capital.

Hi, I just wonder if you could talk about what you are seeing from AutoZone that may get a huge push in that business? Are they going after the same customers as you guys, are they being price competitive?

I think, on the commercial side of the business, yes. They are making an effort to build commercial sales and that's not new. That's been going on for some time. And I think, we recognize that they are strong competitors for us, not just recently, but always. For any business, whether it's cash, retail, or commercial, we're just as interested in all of it as they are. But, I don't know other than just to fight it day-by-day, I think, we grew up in the commercial side of the business. We understand it very well and now we've basically built our company and we are not going to take our focus off that part of the business. They've just announced, for example, the Midas situation with National Accounts. National Accounts major accounts is a big opportunity for all of us. There is a lot of business there. I'm sure; we are going to be competing with them for business in that area. And, you know, we're fully prepared to do that. I think we can be competitive certainly from a service and a price standpoint, and perhaps, we think we've got some positives even above those guys. But it's competition, that's what it is, and I don't see having any great disadvantage when we compete with those guys. Hopefully, we will have some advantages with National Accounts. The Midas, I would say that we do $8-10m a year with Midas, that's been about that type account with us. and it's been on a local basis, local pickup business, and we will continue to fight for that business. I think with the Midas deal, I believe the stock orders and the ongoing support from the warehouse level will be AutoZone's business, but the pickup business, I think, they will have to fight for that locally just the way all of us do. So, I don't see any real impact in that particular account for us.

All right. I guess I was curious if in the heightened level of competition from them lately are really the same as.

No. I think, it's about the same. You know it's a store-by-store situation. And we just have to look at it that way, but they are working hard throughout their business to grow sales just as we are.

Okay. Thanks.

Sure.

Once again I would like to remind everyone, if you would like to ask ask a question press star then the number one on your telephone keypad.

Derrick, if you don't have any question, we want Fred (ph) to call out, I would just say that we appreciate everyone joining us today. We appreciated continued interest in genuine and your support office. If any of you have any questions or concerns, you feel free to call us at any time and assuming that we can answer, we will but again, thanks for joining us today. Derrick Do you have any other questions?

Yes Sir, at this time you do have question from Chip Roovie with Cramer Rosenthal.

Okay.

Well thank you. Just one follow up. Most of mine have been answered. On the cash flow statement, the use of 62m and other -- what were the components of that?

Primarily, in our prepaid expenses and pension adjustments that are in there at this point. Nothing of any major category.

Okay, Good quarter guys.

Thank you.

Does that conclude the call Derrick?

You do have a question from Ameri Shikad with Cobalt.

I have a question for you and both industrial and in office decisions. I am curious, the competitive landscape is difficult, your competitors are not doing so well. You continue to do well. Can you comment can you help us understand better the competitive landscape?

Well, you pretty much said, it is competitive, we don't see the end markets changing that much, but they both big markets and they are still very pragmatic and we have opportunities to grow with new products, the customer base and all those things and we talked little bit about office products. In the case of industrial, we have added a good bit of new product and I think, they're just going out there aggressively looking for bigger piece of the business. So, it's just a fight in that regard. But it is a big market, and in both cases, there is room to grow through market share. It's -- I can't answer the question in terms of how the people are doing, but I just think, our guys are doing a great job right now, and they are optimistic that they can continue to do what they are currently doing. These are big markets, healthy markets in some way, is in terms of the total size. So, we are just approaching it in that way.

What is required to sustain 3% to 4% revenue growth in both these business divisions?

Well, I think, just more of what they are currently doing, they've been doing it for several quarters and in the case of SP Richards and throughout of the whole downturn we've had, they've had growth in every single quarter. I don't think they -- I don't believe they might have had one quarter when they were flat or something like that. But, they've found a way to do it -- that just about every quarter. So, I don't know that I have a lot of revise form other than they can continue to do -- to do what they are doing right now, and just work hard for the business.

And assuming no further deterioration in the economy.

Okay, thank you.

Derrick, you have any others?

Yes, sir. Your last question is a follow-up question from Saul Rubin with UBS Warburg.

Yeah, hello again

Yes.

Just on the inventory, I just wanted to check, adjusting to the accounting change, inventory was down about $50m through the quarter, is that right?

They were down $54m excluding their accounting change in the quarter, we were down $88m if we include the accounting change.

Okay, is that -- I would imagine a sort of normal seasonal as soon as I think, So, last - in February, you said, you hope to bring that down about $100m at least over the course of the year, is that a target you are still maintaining?

Yes. That's still our goal. We still think it's a reasonable goal.

Okay and then finally, you talked about this was a hit in February, when do we get (ph) just outline exactly, you said that 2% overall through the quarter, I mean, how bad was in February, and how much better did it improve in March? Just an aggregate or I see, at the Automotive division?

It's Automotive, but to some extent, it's other products of the company as well. So I really don't know how to hack (ph) it. We didn't try to go back and say that cost us 1% or half of 1%, but solid you have the same situations with some Motion locations, SP Richards locations, and automotive parts locations, when you are absolutely shut down. And then the question always becomes if you close for a day or two, how much of that business do you get -- do you recover, and you do recover some of that, which you don't recover at all. So, I don't think we can quantify by saying that that cost us 1% or half of 1%, I don't know the number. But I do know it cost us some.

Yeah it's fine. Thank you very much.

Derrick, do you have any additional questions.

At this time, sir, there are no further questions.

Okay, thanks for joining us.

This concludes today's conference call. You may now disconnect.