純正零件 (GPC) 2003 Q3 法說會逐字稿

Good morning. My name is Amy. I will be your conference facilitator. At this time I would like to welcome everyone to the Genuine Parts Company Third 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 "1" on your telephone keypad. If you would like to withdraw your question, please star then "2". Thank you. I will now turn the conference over to Miss. Carol Yancey, Vice President and Corporate Secretary. Madam, you may proceed.

Thank you. Good morning and thank you for joining us today for the Genuine Parts Third Quarter Conference Call to discuss earnings results and the 2003 outlook. Before we begin today, please 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 it's management, statements of future economic performance and assumptions underlying the statements regarding the company and its businesses.

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 forward-looking statements made during this call. We will begin this morning with brief remarks from Larry Prince, our Chairman and CEO. Larry?

Thank you, Carol. Good morning. We thank each of you for joining us today. We're pleased to have you with us for this third quarter conference call. Jerry Nix, our Chief Financial Officer and Tom Gallagher, President and Chief Operating Officer are with me today on the call. We will take a few minutes in review of the results of our quarter just completed, and we will also give you our thoughts on the remainder of 2003. After our remarks, we will be pleased to try and answer any questions that you may have or discuss any topics that you may have an interest in.

As we normally do, I will begin with an overview of our overall performance for the quarter totally and by business segment. In the course of the automotive comments, I will ask Tom Gallagher to give you some of his thoughts on our plans and progress for the automotive group.

As you know, Tom took over the direct responsibility for running the automotive parts group about three months ago, and we felt his comments at this point would be of interest to you. Following our remarks, Jerry will go on to more detail on the financials and then we will open for questions and discussion.

We released our third quarter results earlier this morning and I'm sure most of you have had an opportunity to take a look at them.

The quarter was consistent with our results in the first half of the year with sales and earnings results pretty much what we anticipated when we reported to you at mid-year. Total sales were $2.2 billion for an increase of 2%. This is a slight improvement over our 1% sales increase in the second quarter.

Net earnings were $88 million, down 6% compared to the third period last year and earnings per share were 51 cent versus 54 cent last year. Before moving into our remarks on the different segments, I do want to say that, while our earnings were in the expected range, we really aren't satisfied with these results. Any time our sales are up as much as 2% or 3%, we should manage to have earnings at least even to slightly up. This is our history and we will find a way to improve this.

We will have additional comments as we cover specific segments and Jerry will also cover margins as he covers the financial.

A significant part of the difference in earnings growth compared to sales growth can be attributed to our gross profit margins. While we still have opportunities to improve on SG&A, the numbers show that we're not dealing badly on this and we're actually down a little in SG&A for the quarter and for the 9 months. This is a pretty good outcome when we consider our significant increases in pension and health care related costs. But gross profit margins are more the issue and there are several aspects of this challenge.

One of the most significant is the reduction of volume rebates and incentives earned from vendors. This affects each of our three major groups to some extent, automotive industrial and office products. With industrial being impacted most, in the industrial group, our revenues have softened in the two most recent quarters, and, rather than continuing to purchase inventory to meet certain purchase targets, we have chosen to accept rebate levels that are substantially below the previous year.

We just believe this is the right choice. But in the short-term, it does make a difference. Other than this major issue, we just simply need to find a way to improve our ongoing gross profit margins. All our markets are extremely competitive and for the time being, broad-based improvement in pricing just isn't happening.

Our solutions must come more from favorable product and customer mix, improving some of our terms with vendors and, in some selective cases, we can benefit from smarter and more disciplined pricing at the store level, particularly in automotive and industrial.

To conclude these quick remarks on profits, let me just say that we do have ample opportunity to do better and this is a situation that we do have some control over with better management. It is getting our attention. Now we would like to make a few comments about the performance of our different business segments for the quarter and our outlook for the remainder 2003.

Automotive sales were up 3.2% for the quarter, a slight improvement from several quarters of growth in the 1% to 2% range. These results were actually better than we expected, heading into the period. And sales for the first nine months of this year are now up 2.4%.

Coming into the fourth quarter, we feel some encouragement that sales may continue to be a little better, more in the 3% to 4% range. Early sales in October plus input from our people in the field indicate this is the trend and we are certainly hopeful. This might be the appropriate spot to ask Tom Gallagher to comment further on automotive.

So, Tom, would you make your comments, please?

Larry, thank you. As Larry mentioned earlier I have been actively involved in the day-to-day activities within our automotive operations for about three months now. And we have spent the past 90 days analyzing our recent performance, realigning some areas of responsibility to give us a bit more emphasis and focus in several important areas.

And formulating a strategy to help us improve our automotive growth rates going forward. The strategy consists of seven key initiatives, which would include new distribution, the opening of new NAPA stores, NAPA Auto Care, major accounts, the niche markets of heavy duty, tool and equipment and paint, outside sales activity at the store level, the plannergraming (ph) and re merchandising of NAPA stores and electro connectivity with the repair trade.

Now time won't permit an explanation of each this points, but just to give you an idea of some of the things that we are emphasizing, I will comment on just a couple of them.

In the area of new distribution, we clearly have not done an adequate job of opening new NAPA stores, other company I want to owned independently owned. We have not grown the number of stores for several years now and yet we have had a stated goal of opening 100 new stores per year.

Going forward we have a very specific new distribution target by market and although we won't meet the 100 new stores in 2003, with the increased emphasis in accountability that is now being placed on new distribution, we will have an increase in the number of NAPA stores in the fourth quarter of this year, reversing the small declines that we have experienced over the past several quarters and we will be positioned to hit that 100-store commitment in 2004. This will have a very positive impact on our sales growth next year.

We have mentioned NAPA Auto Care in past conference calls and this is a big important part of our business. Yet in analyzing this business we see some significant opportunities for growth both with our existing auto care customers through increased account penetration as well as by adding 1,000 new NAPA Auto Care Customers in 2004.

We have specific initiatives to help us reach our objectives in the NAPA Auto Care area and we should generate an additional $40 million to $50 million in revenue from NAPA Auto Care next year.

Major accounts is another important segment of our business and as with NAPA Auto Care we see good growth opportunities within our existing customer base. By working more closely with them and meeting more of their specific needs as well as with the addition of several new major account customers we have plans in place to grow this segment of the business by over $40 million next year.

In the area of heavy duty, our plan is so to enhance the product offering and further improve our heavy-duty program while at the same time increasing the number of NAPA stores that are actively participating in the heavy-duty market.

We are taking a very similar approach in the tool and equipment and paint markets as well and while we currently do significant volume in all three of these segments, we feel that we have an opportunity to grow these businesses by $25 million to $30 million in 2004.

In all seven areas we are taking a very specific and detailed approach. And as a result, we are planning to add an additional $200 million to $225 million in annual sales volume, which will put us in a position as to generate more respectable sales increases in 2004.

We formally launched this initiative this past weekend and we had our 300 top automotive managers in Atlanta, and we will together we discussed each of the seven points mentioned earlier in detail and we laid out this specific initiatives to drive the growth in each area. Our team left this meeting with a clear understanding of our direction and the role that they will each play and each left committed to driving this key initiatives in the respective marketing places.

We look forward to seeing the positive results of these efforts in the months ahead.

At this point I would like to turn it back to Larry.

Thank you, Tom. Now I will move quickly through the other groups with a few comments, beginning with industrial. Industrial sales at motion industries were down 2.5% following a 1.2% decrease in the second quarter. Before that motion had reported three consecutive quarters of increases ranging from 3% to 5% ahead. We don't feel that we have our market share issue -- motion industries.

We actually believe we're doing an effective job as far as market share is concerned. Their sales do track manufacturing activity, and this remains pretty soft with no significant change that we can see. At least we see no worsening of the situation and motion continues to look for opportunities with new product and a broadening of their customer base.

Early in October, their sales are about even, and we expect the fourth quarter to be even or perhaps slightly down.

Office products, our S. P. Richards Organization, once again posted our strongest sales gain, up 4.5% for the quarter. They have been our most consistent group in 2003 with increases of almost 6% in the second quarter and over 3% in the first quarter.

We had anticipated a 3% to 5% increase for the quarter, so it's encouraging to see them come in at the higher end of that range and move the year-to-date increase to 4.4%. We believe they will maintain their growth rate for the fourth quarter with a 4 to 5% increase for the period.

EIS, our electrical group, continues to report gradual improvement. They were down 6% for the quarter after decreases of 9% in the second quarter and 8% in the first quarter. Their sales comparison for the fourth quarter will probably remain in this range with a 5% to 6% decline.

We were pleased to again see good profit improvement in the quarter from this group as a result of their expense control and margin efforts. Well, that pretty much recaps the performance of our four business groups.

Now I would like to close my comments with a few remarks about our outline for the final quarter of 2003. Through nine months, sales are up about 2% and our feeling is at this time is that sales will grow in the 2% to 3% range in the final period of the year, perhaps just a little better than in previous quarters.

As expressed earlier, we believe this will come about due too an automotive picture that is starting to show some improvement, with office products continuing in their 4% to 5% improvement range and motion industries holding their own with sales about even or perhaps slightly down.

Our comparable net income through nine months is $267 million, down 3.7% from last year. Earnings on a per share comparable basis are $1.53 compared to $1.58 at this time. We have said during our earlier quarterly calls that we felt our earnings would likely be in the $2 to $2.05 range with the bias stored below our end at $2 number.

We continue to feel this is a realistic number as we move into the fourth quarter. While sales may actually be better as mentioned earlier, we will continue in the follow quarter to feel the impact of lower rebates and incentives related to purchases and additional expense pressures attributable to pension and health care. We can and will overcome some of this with tight expense control and gross profit margin efforts.

But continuing through the final quarter, this will be an issue. Now we will ask Jerry for his comments on the financials and then we will take time for questions and discussions. Go ahead, Jerry.

Thank you, Larry. Good morning. We appreciate you joining us. We will continue with our review of the income statement and a discussion of segment information and then we will touch on a couple of key balance sheet items.

To be brief and then we can open the call up to your questions. A review of the income statements shows that total sales were up 2% bringing to us $2.2 billion for the quarter. For the nine months ended September 30, sales totaled $6.4 billion, as also up 2% compared to the same period in 2002. Gross profit reported for the quarter was down 35 basis points with gross profit percent to sales of $29.78 compared to 30.13 from 2002. Though September, reported gross profits still up compared to last year at 30.51 compared to 30.29 and increase of 22 basis points.

That said, I should remind you, in the first quarter of 2003 we adopted [FAS] EITF 02-16 related to the accounting treatment for cash consideration received from vendors. These vendor moneys are now classified as reduction cost of goods sold instead of as a component of SG&A as in prior years. Accounting rules do not allow for restatement but we believe it is more meaningful to compare growth margin and SG&A excluding the impact of the EITF 02-16.

We will discuss our earnings before the cumulative effect of account change because we also believe these figures more accurately reflect our on going operational results. Before the EITF adjustment we showed gross profit for third quarter of 2003 at 29.04, a decrease of just over 100 basis points from the third quarter of last year, and through September, gross profit was 29.39, down just less than 1% or 90 basis points from last year.

So as Larry mentioned, we struggled with our gross profit margin this year and the challenge will continue into the fourth quarter. But to regenerate his message, we feel much of the gross profit decline as due to (inaudible) and product mix, customer mix and rebates earned.

So we do have initiatives within place to address each of these factors. SG&A as a percent to sales before the EITF adjustment was down about 50 basis points, improving from 22.93 to 22.42 in the quarter. And for the nine-month period were 22.5, also down about 50 basis points. We're pleased to see that our focus on controlling operating costs and ongoing initiative has produced improved result in this area. Especially in consideration of arriving insurance benefit cost, which on today as Larry remarked earlier.

After the EITF adjustment, our report SG&A as a percent of sales is 23.15 for the quarter and 23.62 for year to date. Net income for the quarter was down 6% with EPF of 51cents compared to 54cents for the prior year.

Now let's discuss the results by segment. The automotive group had sales of $1,000,000,192.6 million, that represents 54% of the total and that was up 3.2%, operating profit of $103.0 million is down 4%. So a little margin deterioration there. Thus the (inaudible) group had revenue of $557.0 million representing 26% of the total, again down 2% operating profit of $34.2 million and as down 12%. So there operating margin, went from 6.8 to 6.1 so we have got work to do in that segment.

The Office Products group, revenue $372.9 million, 17% of our total, they were up 5% in revenue and had operating profit of $30.3 million and up 1% there. So slight margin pressures in the Office Products group.

The Electrical Electronic group, we had revenue of $74.5 million, representing 3% of the total. That's down 6% and their operating profit was $1.9 million, up significantly from a $1.1 million for the quarter last year. So good margin improvement in that segment. In total, our revenues at the ends come to $2,billion, $189.4 million up to 2% with operating profit of 169.4, which is down 5%.

Just looking quickly at the nine months for the segments, the automotive group had $3 billion, $328.9 million in revenue, up 2% with operating profits down 3. The industrial group had revenue of $1 billion, $692.5 million, 27% of the total, and they are basically flat and down 12% and operating profit of $110.6 million. Office products had $1,billion, 095.1 million up 4% for the nine months and operating profits up to $103.2 million.

The EIS had sales of $223.2 million, down 8% for the nine months, with operating profit showing significant improvement from $1 million up to $5.4 million. And then the total revenue earn was $6,000,000, 364.0 million, up 2% with operating profits down 4. We did have interest expense in the quarter of $13.4 million, which is down 12% for the same period last year.

The increase is mainly due lower borrowing rates. Other category, a $11.4 million which is made up of corporate expense about $11 million amortization expense of about 100,000 and minority interest of about 600,000. That other category was up 6%.

The increase primarily relates to our swing and pitch in income last year to an expense this year. This has had an effect of about $4 million to $4.5 million each quarter, $17 million or $18 million for the full year.

Now let's touch based on a few key balance sheet items. The cash at $31 million is relatively consistent with our cash on hand for the past several quarters, as our cash manual processes have provided better utilization of cash and lower cash balance requirements relative to the prior periods.

Accounts receivable is up 4%, basically in line with our September sales increase. Our receivables continue to be in line with sales and we feel good about the quality of the receivables and don't expect so see any significant bad debt expense at this time.

Inventory levels increased 6% from the prior year but are down $62 million from year-end of which $33 million of that reduction is due to the (inaudible) effect of the accounting change that we discussed earlier. Due to our recent sluggish sales volume mainly at Industrial Parts Group, we will also lose ground in the quarter but continue to expect decrease in the inventory levels for the year.

Our current ratio of 3.4 to 1 as versus 3.3 to 1 for the prior year is comparable with our ratio of 6-30 as at 03. We have been very steady with this and our balance sheet is in sound financial condition. We continue generates strong cash flows, feel good about how we are using these funds to build advances and create value for our shareholders.

Cash flow from operation was very strong in the third quarter. Free cash flows are. Slightly more than $100 million through September and should be about $150 million for the year. CAPEX was $26.4 million for the quarter and $63.6 million year to date.

As expected, our expenditures were higher than the averages period and that is similar to the first quarter where we had some I.T. projects placed in the service and the automotive parts group. Currently expect the fourth quarter to normalize and capital expenditures for the year to be in the $75 million, $85 million range as reported to you at mid-year.

Depreciation and amortization was $16.3 million for the quarter, $52.1 million through September and we had expect this to be in the range $70 million to $75 million for the full year. After our dividend and offer in industry share, we purchases our first priority, free excess cash has been the continued reduction of our debt.

Total debt of $702 million was down $17 million from 9-30-02 and is down $90 million from 12-30-102 and it represents 24% of our total capitalization compared to 26% last year. We expect to close the year with a net decrease of $50 million to $60 million in our total debt for the full year. Shares outstanding for the nine months ending in September, decreasing nearly 700,000 shares from last year, and again mainly due to share repurchases.

The majority of our repurchases were made in the fourth quarter of 2002 and first quarter of this year, 6.6 million shares remain in the authorization for repurchase. In conclusion, it does appear it's going to be a challenging fourth quarter for us and we will remain focused on growth opportunities, tight expense controls, quality balance sheet and strong cash flows.

We expect to operate in a difficult economy for at least the balance of the year but feel certain that our employees are committed to the many initiatives in place to grow the company, in spite of the weak markets in which we operate. We are now take your questions. Amy, we turn it back to you.

At this time, I would like to remind everyone, if would you like to ask a question, please press star then the number "1" on your telephone keypad. We will pause for just a moment to compile the Q and A roster. First question comes from David Siino with Gabelli & Company, Inc.

Hello, good morning. I have a couple of questions first to Jerry, the price in the quarter?

In the automotive parts group David, we had 2 (inaudible) 1%, don't expect to see change between now and at end of the year. The Industrial Parts Group is 6(inaudible) 1%. Office Products also .6 (inaudible) 1%, with nothing in the Electrical Electronic Group.

In there any way to quantify how much the rebates or write off cost during the quarter?

Yes, there is, David, but it's difficult for us to get into that at the current time. Summaries (inaudible) last quarter, the P&L, what happens in fourth quarter, if our sales pick up or not and what kind of incentive that the suppliers come to us and offer. It has an impact of probably $30 million to $40 million.

David, I think one interesting way to look at that, in the quarter that we just finished, the impact of the combined pension costs and rebate compared to last year for the quarter, it actually cost us about 6 cents a share. That's as close as we can figure it.

So our net -- our earnings per share were down about 3 cents and actually pension and rebate had cost us about 6 cents. So frankly, without that impact, we would have had a pretty decent quarter.

Sure. So the $30 million or $40 million, area that was for full year.

Yes, an annual number and it's also primarily in the Industrial Group.

OK, and then two quick questions for Tom. Just that the net new stores in the third quarter as well as what you expect for the fourth? When you talk about NAPA Auto Care, the 1,000 new locations next year will be off of what kind of base by year end?

David, first of all on the new distribution, we had a net decrease in the third quarter of eight stores, which follows decreases in the first and second quarter. We will have an increase in net new stores in the fourth quarter. As far as the NAPA Auto Care Centers, we will be coming off the base of just over 12,000 and we will add a thousand new to that base in 2004.

OK, Thank you very much.

The next question comes from Tim Color (ph) with Barrow Handily (ph)

Hello, can you hear me? I am sorry. Good morning. Just take quick question. Jerry, can you tell me, with regard to the margin pressure, caused by the lower rebates, if I remember correctly, that's been a phenomenon that's going to crept in here in the last couple of quarters to a pretty pronounced degree.

Is it safe to say that in about two quarters more you are kind of get through an anniversary, the effect of this, and then secondly, with regard to the margin pressure coming from customer mix and product mix and the initiatives that you got in place to address that, maybe you could give us little more color on what exactly is causing the margin pressure from customer and product mix and what are those incentives? Thanks.

OK, Tim, your first question, you're right about the rebates situation. If we were to try to run our inventories up, and we made the decision not to do that and then the sales fell off, and that's the reason that they have an impact that they are, had our sales in the industrial group continued to be strong, we would have been able to offset the impact of that. But,

Yes, we will anniverse (ph) of that sometime in the first part of next year, we should start to see an improvement in the impact of those rebates have on our margins. As far as the customer's mix and product mix, Larry touched base with on what we are trying to do, the as far as analyzing each customer and the profitability to us.

Well, I don't -- I think once you back out this extraordinary cost that we have with regard to the decline in rebates, that we don't find our margins are not terribly -- in terribly bad shape. But as a matter of fact, with increased pension expense and health care costs, some of the other expenses we see drifting upward, we just feel for sure that we have to to have more gross profit margins.

We are doing a pretty thorough job of analyzing all of our customer's categories particularly at motion industries and in the automotive to try to focus more on those that we actually have an opportunity to improve margins with. It's a very methodical process that we have got going.

If you look at automotive for example, one obvious category is the improvement in our cash or retail business. In doing activity based costing and looking at our profitability on retail type customers in our parts stores, it's pretty obvious that it's to our advantage to attract more cash business: We are pretty successful right now, I think, in doing that. We can monitor it closely in our company-owned stores, the 900 or so company-owned stores.

Our sales in those company-owned stores are up about 4% this year. The cash component is up 5%. And this is a higher margin business. So they're just -- there are many facets to this whole project but we think that we can -- we think we can improve our margins just by focusing both on the customer mix and the product mix. If we look at our product, for example, in automotive, it's pretty clear we have some product that carries a hire gross profit margin than others.

I think our people haven't been as aware as they should be on which of these products do carry higher margins and being sure that we get good penetration and an extra effort on those products that do carry the higher margins. That's sort of the methodology that we have here. And I don't know, Tom, if you have any additional comments to make on that or not.

Well, I think you've pretty much described it, Larry.

OK, thanks a lot.

Your next question comes from Daic Closses (ph) with Gates Capital Management (ph).

Hi, I was just wondering, you talked about, in the past about, improving your margins, yet quarter after quarter we keep seeing declines from EBITDA margin perspective. I was just wondering at what point do we come to a base here and start to improve from that level?

I really think, Daic, as we go in for the first part of the next year, you're not going to see an improvement in the fourth quarter of 2003, I don't think. We're still taking some costs out of it. Any time you do that and you got severance runoff, I think you will start to see improvement in each of them in the first quarter of next year, that's were the exception of the Office Products Group.

We're pleased with their margin, they can just maintain it. We're not looking for real improvement in the Office Products margin. We would be happy if they could maintain theirs. But you will start to see some improvement in the first quarter and second quarter of 2004.

OK, and if I was looking at -- if I was looking at the year-over-year decline, it looks like to me on an EBITDA basis that it was about 70 basis points. Can you kind of break out what the -- can you break that down into what the major causes of the 70 basis points decline was?

No, I can't at this time. I could try to do that with you off line. I have to tell you, we don't look at EBITDA. We look at net income. That's kind of the way that we monitor things but so I will try to work with you off line and figure out the 70 percent. Or 70 basis points you're talking about.

OK, my last question was with respect to AutoZone, can you talk about the competitive environment with respect to AutoZone and any other competitors? You talked about parity in grass, I was just wondering being a competitor's market place, who you were seeing the most competition from out there?

I will make a comment. Tom can also comment if he wishes. The AutoZone is a successful competitor. Obviously their company is doing a good job. We saw in the last quarter they reported 3% same store sales which is about what we're reporting. I think our challenge in reporting overall revenue numbers, growth, in the range that they're reporting comes back to this issue that Tom was talking about, and that's new distribution, both through additional stores, and I think through expanding our base with NAPA Auto Care Centers and the commercial side of the business.

We consider them a tough competitor. But we feel very confident in our future as far as the commercial side of the business is concerned. We are going to intensify our efforts but our -- on the retail side, the cash side, we think we can improve there. Coming back to Tom's seven initiatives, one of them is going to be the update and the installation of a new planograms and merchandising efforts in these stores.

We have been complacent on that. It's one of the seven initiatives. I think we're in a good competitive position with anyone out there. AutoZone is certainly a good competitor and there are several others that we have respect for in terms of seeing them as serious competition. But I think NAPA is in a position to hold their own and continue to grow share a little bit as we go along. That's sort of how we see the competitive landscape. I won't get easier. But I think we're prepared to deal with it.

OK, thanks.

Your next question comes from Ryan Schafer with Faralon Capital.

Can you hear me? Great, good morning, this is Ashish Hunt (ph). How you doing Jerry, Larry. Just a couple of questions. The first was on the automotive side. I just wanted to get a sense of -- you know, can you talk a bit about the economics of buying out the franchisees, as and when, you know, they want to get out of the business? You know, what are the kind of pricing that you end a paint to these guys and you know, what's the sort of cash flow characteristics of these transactions?

And just on, you know, the plans that Tom laid out, what, what do you see as the size of the franchisees that you see going forward in the next 12 months, given what you've seen of your network right now? What do you think will be the number of stores that you to sort of acquire strategically?

And lastly, adding a hundred stores, is it a challenge considering that in the areas that you already have franchisees and you definitely have the most widespread network, you know, are there many opportunities left to add stores and which areas of the country might those be in? Thank you.

Well, let me first go back to Tom's comment that we're going to add a hundred stores and say that we planned to add 50 company-owned as well as grow our independent account 50. So it's 50 on both sides. We fully intend to continue to grow the number of independent NAPA stores as well as the company-owned stores.

As we look, as we look at vehicle registrations and where we have stores and where we can potentially put stores, we have over 2,000 potential locations for stores that we, that we know about today, where there's no NAPA store at all. Some of these will be, will be filled with company-owned stores. Some will make more sense for an independent owner in the smaller and mid sized markets.

We will continue to focus the company-owned store openings in major metropolitan markets where we need large groups of stores to serve those markets. So, our strategy there is to develop both through independent and through company-owned, and we have no shortage of potential sites to locate new stores.

Could you talk about the economics of acquiring -

Yes, there are times when we acquire an independent owner, and it happens for a number of reasons. If it's in an area where we really would prefer to have an independent owner but an owner decides to sell and retire for whatever reason, we don't have an immediate buyer for that business, if it's a significant market, we will acquire that NAPA store with the idea that later we will find an appropriate owner for it, independent owner, and we will resell that store.

If the store is in a market that's contiguous to one of our metropolitan markets where we operate company-owned stores and it makes sense if an independent owner has been there and the metropolitan market has grown out to that market, then that's one that we probably would like to own at the time the independent owner would choose to sell. And we would be a willing buyer.

Today, we think most parts businesses, if they're a viable business with good inventory and assets that are up to date in terms of equipment and what not, essentially, they're selling for about book value. That's whether we buy it or others buy it. So there's no big premium out there for buying or selling to parts stores today. Typically it's a book value deal.

In terms of pricing, Larry, you know, you said auto pricing was up point 2. Can you, is it possible to break out what pricing was in cash business or retail business versus commercial just to get a general sense?

I don't think there's any difference. Our price increases are prices that come to us and in general, we pass those through. So it would affect both pieces of those businesses.

Great. Thank you.

All right, thank you.

Your next question is a follow-up question from David Siino with Gabelli & Company.

Just a followup on the new, on the store, I guess, refurbishing or updating, whatever you want call it. How does that work in terms of, I guess question one will be, what sort of incremental CAPEX would you see next year? Then in the independently owned stores, does the store owner fit the bill for that or does Genuine Parts pay for that?

David, this is Tom. I'll take that. In terms of CAPEX, each store is a bit different. It depends upon whether or not we need new fixturing or whether it's a matter of implementing the new planograms and new merchandising sets. In the majority of our stores, it will be the merchandising sets, we've already got the fixturing and so, it, we don't anticipate a major CAPEX expenditure. As far as independent ownership, they take the expense of doing it.

We will help them get it done. We do the actual planograms and we will help them with getting the new products, properly lined on the shelves and what not but they would bare the cost of any new fixturing or anything they may have to do in their store.

Presumably they're on board to, with this initiative. OK, thank you.

Your next question comes from Josh Beckett with (inaudible).

How are you. I just had two more macro questions maybe you could help me One is, invoice we always looked at Genuine Parts with the automotive side with the thesis that you really playing on the gray of the automotive segment in the U.S and as these incentives keep, or stabilize at these higher levels and we see, more importantly, that the redesign of automobiles is moving from a five year period of time in between one cycle to more of a three-year period of time going out to 2006, 2007, I wondered, if that has an impact on the grand thesis.

And secondly, we saw made does in the last couple of months out source a majority of their intern program to a competitor. I wonder, did you have a chance to bid on the program and sit something interested to you from the commercial side? Is it part of the business that we as investors have not thought about as a catalyst of growth.

I will take that question. This is Tom, taking the mightiest question first. Yes, it is an opportunity that we had an opportunity to talk about and take a look at and felt at the end of the day we made the best offer that we could make to do that, and it -- it wasn't to be. We do in fact have a number of programs like that going and in fact, just yesterday the postal service announced that we will be a primary vendor to them for their parts purchases going forward in a similar fashion to what you just described.

So we're pleased with that and it's an area that we do see some growth opportunities for. As far as the vehicle mix going forward, we actually have seen some of the demographics working somewhat contrary to growth from an after-market perspective for a couple of years.

Unfortunately they turned positive this year in going forward. The number of vehicles are ageing. The segment that is of most interest would be five years plus. And that's projected to continue to grow at a rate in excess of the overall growth rate for the next several years.

And also for the mix itself we see more of the SUV's coming into the primary placement years, and they historically have a higher per annum consume shun of parts so that is also a positive for the after market, we think, for the next several years.

Tom, do you think that the incentives are on their way down and that will be a positive indicator for you for people to keep their cars? You know, at this point, the thought of keeping your car five or six years is -- I mean, as you see in the Atlanta market, it's almost impossible. Their are making it so easy to turn the cars back in. They're also speeding up this cycle time which is something that we have seen lately with J. D. Power talking about it as the companies are putting more and more new product out there. What is the impact and what are you looking for as a positive indicator that it's moving in your favor?

Well, we certainly couldn't address the question do we see incentives continuing. That's something that the vehicle manufacturers have absolute control over. What we do look at is we look at the composition of the fleet that is out on the road today and we look at how that fleet is aging.

And we see at least for the next several years, a favorable trend with more and more vehicles moving in to the five-plus year category which is a positive for us. We also see from a trend line standpoint, we see good re-sellers of vehicles, companies like Car Max and Auto Nation who are doing a fine job in servicing customer needs.

We see comes like that continuing to grow, and they are good customers and present good opportunities for companies like ours to service as some of their parts needs going forward.

Josh, I would also point out regardless of which category you look at, there are more older cars on the road today than there has ever been with, with the new improved quality of the automobiles being sold, there's no reason that statement won't be true for a number of years to come.

One last thing and I promise I will leave you alone. The Mexican and Canadian markets, have you seen any improvement there given the number of older cars?

I would say the question about improvement, we're -- we're seeing nice improvement in Canada. We're having a strong year in Canada as a matter of fact.

And I think it's for number of reasons. Mexico, our revenues are up in Mexico this year in local currency.

We're being deemed a little bit by the currency situation but I think we recognize both of those markets as being opportunities to continue to have good growth and demographics, as far as I know, are working favorably still in both of those countries.

Thank you very much.

Once again in order to ask a question, please press star then the number "1" on your telephone keypad.

Your next question comes from Ryan Schafer of Faralon Capital.

Hello, it's Ashish Hunt again. Larry and Tom, you know, you talked a bit about the might does paying and you know, just in terms of the sort of the competition that you're seeing out there in for national business, how has that shaped up and what is happening? I know you were doing close to about if I recollect over $400 million in revenues, not a major part but significant with your national accounts. How is the growth there been?

Our growth in the major accounts or national account business continues to be good. As I mentioned earlier, we anticipate a strong year in the major account arena next year. As far as competition, it's like most everything else, the competition is strong and it's from good companies and we just have to continue to go in and sell the things that we do best.

Larry just reminded me, we continue to grow our business, for instance with the city of Chicago and as a result of the success that we have there, the contract was just renewed for three more years based upon our performance. And also as a result of job, our team there has been able to do, the state of Illinois has now given us an opportunity to start handling some of their needs so, again, the competition is as strong there as in any other part of the business. We just have to focus on what our strengths are and the things that we bring to the relationship.

Thank you.

At this time there are no further questions. Do you have any closing remarks?

Amy, thank you. We appreciate all of you joining us and we appreciate your ongoing support and continued interest in Genuine Parts Company.

We will do the best we can to enhance shareholder value going forward and we look forward to talking to you at our next conference call. Thank you for joining us.

This concludes today's Genuine Parts Company third quarter 2003 conference call. You may now disconnect.