純正零件 (GPC) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Amy and I will be your conference facilitator. At this time, I would like to welcome everyone to the Genuine Parts Company fourth quarter and year-end teleconference. 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, press star and the number 2.

Thank you. Now it's my pleasure to turn the call over to Ms. Carol Yancey, Vice President and Corporate Secretary. Ma'am, you may proceed.

Thank you. Good morning and thank you for joining us today for the Genuine Parts Company fourth quarter and year-end conference call to discuss our earnings results and the 2004 outlook.

Before we begin today, please be advised this call may involve forward-looking statements such as projections of revenue, earnings, capital structure and other financial items, statements on the plans and objectives of the company or its management, statement of future economic performance and assumptions underlying the statements regarding the company and its 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, and then we'll proceed with other remarks and then open the call up for questions.

Larry?

Thank you, Carol.

Good morning to each of you joining us today, We thank you for taking time to be with us this morning. Jerry Nix, our CFO, and Tom Gallagher, President and Chief Operating Officer are with me today on the call. We would like to take a few minutes to update you on the fourth quarter and the year 2003, and then give you our best thinking on the current picture and the outlook for 2004. I'll take just a few minutes here in the beginning and give you an overview of our total performance and also comment specifically on our four business groups.

As we cover automotive comments, I'll ask Tom Gallagher to give you his thoughts on our plans and progress for the automotive group. Following our remarks, Jerry Nix will give more detail on the financials. Then we'll open the call for questions and discussion of any issues you may have an interest in.

We will comment first on the full year of 2003 and the fourth quarter results. Then afterward, move to the current picture and the balance of 2004.

Some of you may have had an opportunity to see our press release earlier today and get a preliminary look at our results. We're pleased to say that the numbers were slightly better than we expected them to be when we had our third quarter call back in October . Total sales were 8.45 billion for the year, which was up 2%, an increase of about $190 million, compared to the previous year.

Our 2003 sales reached a new record level for us exceeding our previous high set in the year 2000. Net earnings before cumulative effect adjustments in 2003 and 2002 were 353.6 million, down 4% compared to last year. And earnings per share were 203 versus 210 in 2002.

We have said in our last two quarterly remarks that we felt full-year earnings would be in the range of $2 to 2.05 with a bias toward the lower side of the estimate. So we felt pretty good with this final number.

Now we'll make a few comments about our fourth quarter results. Total sales for the quarter were 2.09 billion, up 5%. We were encouraged by our stronger sales results in the final period, and our earnings per share were 50 cents compared to 52 cents in 2002. As I said earlier, this performance was slightly better than we expected when we reported in October .

In our third quarter conference call, we indicated that our sales picture had started to show a bit of improvement toward the end of the quarter, and that we expected a continued improvement into the fourth quarter. This certainly proved to be the case with sales improving by 5%, the strongest sales quarter we have reported since the second quarter of the year 2000.

All four business groups showed improvement. And we will comment specifically on each one in just a moment.

While earnings were below the previous year at 50 cents versus 52 cents, this was not unexpected. And as we mentioned earlier, was in line with or actually a little better than we anticipated. We knew that in the final quarter we would continue to feel the impact of lower discounts and volume incentives, along with the additional pension expense that we explained in earlier reports to you. The impact of these two issues for the quarter was over $14 million or about 5 cents per share.

Jerry Nix will comment more specifically on our numbers later, but it is interesting to note that for the year, our SG&A was slightly down and we're doing a pretty fair job of controlling expenses. Our challenge is primarily the gross profit margin, which has been greatly impacted by the purchase incentives mentioned earlier and other issues including some price deflation in 2003 in our automotive parts group. We are working diligently on the margin issue, and there are a number of ways to improve this part of our business. I can assure you that this is a top priority for us in 2004.

Now we would like to comment briefly on the performance of our four business segments for the quarter and our outlook for 2004. I will begin by quickly touching on each non-automotive segment, and then as we mentioned earlier, Tom Gallagher will cover our automotive comments. We will begin with industrial, which is our largest non-automotive group.

Sales at Motion Industries were up 2% for the quarter, which was good to see after a 1% decline in the second quarter and a 3% decrease in the third quarter. We had estimated that revenues would be even to slightly down for the period ,so actually we're seeing some upside movement at Motion that we haven't seen for sometime. Modest but positive results that seem to be carrying forward into the first quarter this year.

Motion serves a large and diverse market, and they continue to broaden their customer and market base. With conditions in the manufacturing sector showing some improvement, we feel that Motion's revenue growth in the first quarter and for the year will improve in the 2 to 3% range as we look ahead.

Office products, our S.P. Richards organization, continued their consistent performance with the sales increase of 4% for the quarter, which was in line with our expectations. This follows an increase of 5% in the third quarter, and for the year they grew their sales in a tough market by over 4%. We're pleased with S.P. Richards, and believe they will continue to grow their sales in the 4 to 5% range in 2004.

EIS, our electrical group, continued their gradual improvement and posted a small sales increase in the fourth quarter. Their first comparative increase in a very long time. For the year, sales at EIS were down 6%, but a much improved picture over the last two years. We believe their sales picture has made a definite turn and anticipate moderate growth in 2004, maybe in the 2 to 3%range.

Now we will move to the automotive group. And as mentioned earlier, Tom Gallagher will cover this for us.

Thank you, Larry.

I'm pleased to have the opportunity to make a few comments this morning about our automotive operations. My remarks will be brief in an effort to have ample time to answer any specific questions that you might have, and we will take these questions after Jerry's had a chance to make his remarks.

Sales for the automotive operations were up 6% in the fourth quarter, and this put us up 3% for the year. The 6% increase in the quarter was the best increase that we have had from the automotive group in quite some time, and it continues a trend of a gradually improving performance that we have seen over the second half of the year. And all segments of the automotive group contributed to improved results.

It is interesting to review our progress by quarter for 2003. In the first quarter, we were up 2%, and then up 2% again in the second quarter. We improved to a 3% increase in the third quarter, and then plus 6% in the final quarter.

As a result, over the second half of the year, we were able to improve our year-to-date increase from 2% at the end of June to a 3% increase at year end. Not a strong as we would like, but at least moving in the right direction and the trend is a bit encouraging. We do want to point out that these are all unit increases because we did not have the benefit of any price increases. In fact, we actually had a slight decrease in prices for the year.

In our last call, we outlined the elements of our growth strategy, and you may recall that our seven key areas of focus are new distribution, Napa auto care, major accounts, the niche markets of heavy duty, tools and equipment and paint, outside sales activity at the store level, the plan agraming and remerchandising of Napa stores, and electronic connectivity with the repair trade.

We launched this initiative early in the fourth quarter of 2003, and while time won't permit a report on these activities individually, we do want to say that we made progress in each of these areas. Some more than others. And as a result, we feel that these initiatives had a positive impact on our improved results in the fourth quarter. Additionally, we made good progress on each of these initiatives in January, and as a result, we feel that we are on track to generate the additional 200 to $225 million in increased sales volume from these initiatives that we outlined in our last conference call.

Now since that call, we've named a new President of our U.S. automotive parts group. Many of you probably saw the press release on January 22nd, announcing that Larry Samuelson will be taking on these responsibilities. Larry is a 29-year veteran with GPC and held a number of sales, operating and management positions of increasing responsibility within the U.S. automotive parts group. In February of 2000, Larry joined UAP in Canada as Executive Vice President, was promoted to President and Chief Operating Officer in October of that same year and was elected Chief Executive Officer in April of 2001.

Over the past four years, Larry has provided outstanding leadership to UAP, and he has built a strong management team there. UAP will continue to report to Larry, and over the past few weeks, he has been transitioning between UAP and the U.S. automotive parts group, and he will be in Atlanta on a full-time basis in March.

In the months ahead, Larry and the parts management team will be focused on driving increased revenue growth through the implementation of the seven key initiatives; improving the gross profit and operating profit margins within the parts operations and enhancing our working capital efficiency. We are encouraged by the early activities in each of these areas, and as a result, we're looking for a year of improved performance from our automotive parts operations.

At this point, I'd like to turn it back to Larry for a few additional comments.

Thank you, Tom.

Well that pretty much recaps the sales performance and the outlook for our business segment, so I will close with a few remarks on our overall thinking for the total company in the first quarter and the year 2004.

When you consider the complete picture, we're looking for growth and revenues this year in the 4 to 5% range. Right now at mid-February, this is about how the first quarter is shaping up. With 4 to 5% top line growth, we would expect to grow our earnings in about the same range as sales or slightly better. With this in mind, our first quarter earnings per share would fall into the 52 to 54 cent range, compared to 51 cents in the first quarter last year. For the year, this type of growth would put us in the range of 210 to 220 per share.

Now we'd like to ask Jerry for his comments, and we'll follow that with questions and discussion.

Jerry?

Thank you, Larry. Good morning. We appreciate your joining us this morning.

We'll first review the income statement and the individual segment information. We'll then touch on a couple of key balance sheet items, and we'll try to be brief and open the call up to your questions at that point.

A review of the income statement shows that total sales up 5% at 2.09 billion in the fourth quarter. This was our strongest quarter of growth in 2003, and sales for the year were 8.45 billion, and that's up 2% compared to '02. Gross profit in the quarter was 32.66% compared, to 32.92 last year, down 26 basis points. For the year, gross profit was 31.04, compared to 30.93, and that up 11basis points from '02. These margins after the cumulative effect adjustment recorded January 1 of 2003.

As you may recall, we adopted FAS for VITF 02-16 related to the county treatment for cash consideration receipt from vendors. These vendor moneys are now classified in reduction of cost of goods sold instead of as a component of SG&A as in prior years. Because accounting rules do not allow for restatement, we think it'd be helpful and more meaningful to compare our gross margins and SG&A before the impact of VITF 02-16.

Before this adjustment, our gross profit in the quarter was 31.17%, compared to 32.92 last year, and that's down 175 basis points. For the year, growth profit was 29.83, compared to 30.93 in '02, down 110 basis points.

So as you can see, we continue to struggle with our gross margin in the fourth quarter and we had expected at our last conference call. Although we have initiatives in place to address the gross margin issues, mainly shifts in product and customer mix, with the overall pricing pressures and lower volume of vendor volume incentives, we knew it'd take some time to recognize the benefits of these initiatives. Right now we hope to see an improvement in the gross margin trend beginning with the first quarter of the year.

SG&A at a percent to sale before the ETIF adjustment was down from 25.39 to 24.77 in the quarter. That's an improvement of 62 basis points. For the year, SG&A decreased from 23.59 to 23.06. an improvement of 53 basis points in '03.

Now, controlling our costs is an ongoing initiative for us, and we feel good about our overall improved expense rates, despite increases in pension, insurance and legal and professional costs for the year. Net income for the quarter was $86.7 million, down 4%, and earnings per share was 50 cents, compared to 52 for the fourth quarter of '02. For the year, net income was 353.6 million, also down 4% with earnings per share $2.03, compared to $2.10.

We should mention the lower tax rate for the year here. We were at 38.1, compared to 39.3 for the prior year. This decreases due to foreign tax credits, a note that we had written off for financial statement purposes earlier, and wrote it off for tax purposes in '03 and some additional state planning. You should use in your models in '04 going forward a tax rate of 38.4. And that changes just due to the one-time nature of the note that we wrote off.

Now let's discuss the results by segment. Automotive revenues for the year were 4 billion 477.5 million, and that represents 53% of the total. And that's an increase of 3%. Operating profits were down 5%, so we did have some margin deterioration there. We'll talk about the operating margins as we discuss the fourth quarter.

Industrial had revenues of 2 billion 253.9 million, representing 27% of the total. They were up 3/10ths of 1%. Operating margin down 15 -- operating profit down 15%. So further deterioration in their operating margin.

Office products, we had revenues of 1 billion 457.1 million, representing 17% of the total, up 4%. And they were up 2% in operating profits. So the operating margins remain outstanding at 9.8%.

The electrical/electronic group had revenues of 297.6 million, representing 3% of the total. They were down 6% for the year, but they did show an operating profit of 7.1 million, compared to 2.7 million in '02. So their margins are improved and we still have work to do in that segment.

Others category was 36.9 million. And that gives us a total revenue for the year of 8 billion 449.3 million, up 2% with operating profit down 5.

As we look at the quarterly segment information, automotive had revenue of 1 billion 094.6 million. They were up 6% as time [inaudible] an outstanding quarter for the automotive group, operating profits were down 10. And their operating margins are down to just 6.6 in the quarter. And that's due to a couple things. We had some year-end inventory adjustments that were not as positive for us this year as they have been this the past. We also operated in a price deflation environment that Tom mentioned earlier, and we do have some things in place there to adjust that going forward.

Industrial group, we had 561.4 million of revenue in the quarter. They were up 2%, down 22% in operating profit. And that margin's down for the year. And that's based on the decisions that we made earlier in the year to not take advantage of some special opportunity buying and vendor incentives that came along with that. We just decided to maintain our discipline until we could see some evidence of top line growth coming back. Even though that was good incentive to cut inventory, we just didn't want to continue to build that inventory until we saw some evidence that we could start to move it.

In the office product side, we had 362.0 million in the quarter. That was up 4%. Operating profit up 1. Again, outstanding margin of 11.1% in the quarter.

The electrical/electronic group had the revenue of 74.5 million. That's up 1%. And operating profits were up 1/10th of 1%. So their margins -- so there again, we have some continued work to do, but they have showed progress.

The other category was 7.3 million, and then we had a total of 2 billion 085.3 million in revenue, up 5% in the quarter and down 11% in operating profit. We did have interest expense in the quarter of $11.5 million and 51.5 million for the year, down 14% from 59.5 million last year. And this reflects the reduction of our debt over the full year. The other category was 10 our debt over the full year.

The other category was $10 million for the quarter, 41.2 million for the year. Up 8% from 38.1 million in '02.

Now, the other category includes corporate expense of 37 million, amortization expense of 1.5, and minority interest of 2.6 million, with most of this increase was in corporate expense, and that's created by the pension expense swing of about $17 million for the year that we referred to earlier.

Let's touch base on a couple of key balance sheet items. Cash at $15 million has been relatively consistent from quarter to quarter and is comparable to the $20 million cash balance last year. We continue to improve our utilization of cash and hold minimum cash balances on hand.

Accounts receivable increased 4% from last year, which was up slightly ahead of our overall increase in sales for the year of 2%, but was less than our sales increase in December . Our receivables continue to move in line with sales, and we feel good about the quality.

Inventory slightly down compared to last year. Our industrial inventory, our primary focus due in 2003 decreased by 5% during the year, and we'll continue to work these down further in '04. Our current ratio at the end of the year was 3.4 to 1 versus 3.0 to 1 the prior year. And tend to manage this ratio further during the course of 2004, but would emphasize that our balance sheet remains quite strong.

We have been and continue to be an excellent cash generator, and we feel good about how we've invested our cash for our shareholders. We generate approximately $402 million of cash flow from operations in '03. And this cash was used primarily in four key areas: We paid dividends of $205 million. Continue to believe dividends is important and our board has authorized an increase in the dividends to $1.20 cents per share in '04 from $1.18 per share last year. This 2% increase represents our 48 consecutive year of dividend increases. We paid a dividend every year since going public in 1948, and we've increased it every year since 1955. As all of you know, this record continues to distinguish Genuine Parts Company from most other companies.

Capital expenditures for 2003 were 10.3 million for the end of the fourth quarter, and 73.9 million for the year, up 64.8 million -- up from 60.8 million in '02. Mainly our expenditures were related to on-going projects in our three largest business segments.

Related depreciation and amortization was 16.9 million in the quarter and 69 million for the year. Capital expenditures should remain in the 65 to $75 million range for '04, and we'd expect that depreciation amortization to be 70 to $75 million.

The continued reduction of debt has been a high priority for us, and we reduced our total debt by $114 million in '03. Closing the year with total debt of 678 million, compared to 792 million last year. This marks the second consecutive year of significant debt reduction for us, and our total debt to total capitalization ratio is now 22.7%, compared to 27.1% at the end of '02. Our first priority for excess cash in '04, after our dividend and opportunistic share repurchase will be continued reduction of our debt.

As part of the share repurchase program, we did purchase approximately 600,000 shares in '03. We have 6.6 million shares left in the current authorization. We'll continue to remain active in our share repurchase plan for 2004. Total shares outstanding did decrease by about the 600,000 shares that was reflected by our share repurchase plan. We believe the use of cash in these areas serves to maximize a total return to our shareholders.

In 2004, we'll continue to generate strong cash flows as we focus on growth opportunities and maintaining a strong balance sheet.

I'm going to turn it back to Amy now and we'll take any questions any of you have.

Amy?

Yes sir.

Ladies and gentlemen, at this time, if you do have any questions, please press star then the number 1 on your telephone keypad. Again, that's star then the number 1. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Darren Kimball with Lehman Brothers.

Thanks. Good morning.

Good morning.

Good morning.

Good morning, Darren.

Let me just start on the last point you made. The cash flow in 2004, you think that that is better than the cash flow in 2003?

Yes. We would expect it to be better, simply from a standpoint of we're going to be working for longer terms with our vendors, and we also expect our operating results to be better.

Okay. That's good.

The fourth quarter really got hit hard, obviously, in automotive. And my expectation was that the issue around volume discounts was gonna be more noticeable in the industrial segment. So I was wondering if you could elaborate a little bit on your comment about year-end inventory adjustments not being as positive, and I guess, also on the price deflation that hit, I guess, in the fourth quarter.

Darren those incentives affect all three of our large business segments. It just affected the industrial group to a greater extent. We do have some of that in the automotive and we also decided not to take advantage of some opportunities there. But we did have 2/10ths of a percent price deflation in the automotive for the year. And we also -- some of our inventory results were not as good as they have been in the past. So it's combination of a lot of factors there.

We believe we have the solution there and some of it's going to depend upon what kind of pricing environment we see in '04. But it did effect the automotive. Some of that was incentive driven as well.

Okay. What was the automotive pricing through nine months?

Hold on just a moment.

Or to say it differently, what happened in the fourth quarter?

I don't have the answer to that, Darren. We had some further deterioration, maybe it was a half of a percent, you know, I think we probably -- a negative 1 1/2 at the nine months and a negative 2 for the year.

I'm sorry, negative 2? I thought you said negative 2/10ths.

I'm sorry. That's correct.

Okay. And just as far as maybe pricing into 2004 on the automotive side of the equation, you said you had some plans. I mean, is deflation now a reality in this business, or what are your expectations?

I can't answer that. I don't know if deflation is a reality or not. I think you're aware of our position over the years, as we would not have resisted any price increases coming from suppliers provided it was pushed through to the entire industry. So that's not something we control.

Sure. Okay. Thanks.

Okay. Thank you.

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

Hi. Good morning.

Good morning.

Can you talk, as well, maybe in the same light as automotive, what happened to the margins in office and industrial, given that the, you know, top line was maybe a little better than you had thought.

Darren, we made the decision -- I mean, I'm sorry, David, we made the decision in the industrial side back early in the year. We didn't expect our revenues to grow at the rate they had been, and we had seen them slowing some in '02, and we just made the decision to not, even though there was center cut inventory, we just made the decision not to continue to build our inventory to maintain our discipline. And so that had a major impact in the industrial group. And we talked about that throughout the conference calls in '03. And so and that just continued into '04.

Jerry , could I just interject something?

I think in industrial, if you strip out the impact of these rebates, I think we'll find in industrial's operating margins day-to-day are holding very well. And certainly, their expense reductions have been dramatic.

So I think we're in pretty good shape in industrial as we look ahead. We made a conscious decision to tackle that incentive issue and get control of our inventories, and that's a gradual process. We had some of it each quarter. But I am feeling pretty encouraged by what I see from Motion when we step by that incentive issue. And we've just about worked our way through that. So I think we're in good shape there.

In automotive, we were -- we got a fight on our hands every day to improve our margins in automotive. It's a very competitive environment with no pricing increases. And in some cases, I think as we took our physical inventories, some of our results were disappointing, and that can happen when you have deflation in the value of your inventories is naturally not going up. But I think we, in addition to that, we had some lack of discipline in some of our operations. We've got some work, I think, to do, which we know how to do. And I think to some extent, the disappointment in the inventory results is a controllable issue on our part if we just do our job.

I'll ramble on a little bit about gross profit margins in the parts business because I know this is an opportunity for us. We think that we can improve gross profit margins very gradually through smarter pricing in our own company-owned stores. We've got 900 stores and I think we can be -- I think we can be more disciplined in how we do our pricing. We're working on that seriously to gradually improve that. We've got several projects working.

We've got a focus on higher gross profit margin product lines in our distribution centers. It's interesting to break it down by product line and see some of the good opportunities we have by improving sales on higher gross profit margin lines. We haven't been watching that kind of thing the way that we should have.

So, you know, there's a long list of ways to tackle this issue. And all I can tell you is that we're working on every one of them. And then I think, too, our total margin issue, not just gross profit margin, but operating profit overall is going to be helped by this improving sales picture that we seem to be having.

Sure.

So that's sort of the story. It's quite more than you asked for, but I thought you might be interested.

That was helpful. It sounds like industrial, you know, the rebates was the story, but the underlying business was clearly holding up.

Yeah. I think just one additional comment. We really have to step back and look at the total impact of this incentive issue, along with the pension issue. If you look at just those two items for the 12 months for the year, they had a $46 million impact for the year. That's somewhere between 15 and 16 cents a share. If you look at just the fourth quarter on those two issues, had an impact of about 14 million, which is about 5 cents a share.

So those two things alone, along with this slippage in the automotive, which we think we understand and we're working on, that's a dramatic difference, and those are things we're going do a better job on in 2004.

David, your question on the office products and their margins. You know, we've been talking about office products margins for a long time being outstanding, and they were 10.1 in '02 and they ended '03 at 9.8. We're very pleased with that, even though that's down a little bit. But that's more a product mix and a customer mix issue than anything else. And, you know, we'll just have to continue to wrestle with that going forward.

But if they can maintain a 9.8% operating margin, I believe we can be pleased with that.

Okay. Then two quickies.

Jerry, incremental pension and post-retirement in '04 over '03.

And maybe,Tom, could you give how the automotive sales are up 6%. Could you maybe break that out between, maybe, same stores or Canada or cash versus credit. However you look at it.

David, let me answer that pension question you have first. In '02, we had pension income of $3 million. In '03 we had pension expense of about 15 million. So that's an $18 million swing. And in '04, we're projecting a pension expense of about 18 to $21 million.

Okay.

So that's the impact of that.

David, the same store sales are actually as good as the overall sales results. You know, we had a decrease running through mid-year in the number of Napa stores. We were able to bring that almost even in the quarter. We were down three stores in the quarter, but we dramatically slowed the decrease and, in fact, we had a net positive in the month of January. So I think we're on track with the same store for the new distribution.

So the same store results would be comparable to the overall sales results.

I think you could -- excuse me. I think the one thing that could come into the picture that someone might ask about Napa Hawaii, they helped a little bit in the quarter, but it was less than 1%. It would be something like 3 or 4/10ths of a percent that would have been added by Napa Hawaii.

Okay.

As far as the cash versus charge, we saw a good growth in both in the quarter, and we continue to feel good about the growth of both through January.

And did the company-owned out perform the independents?

Yes. In the quarter, but just by a bit. They really are pretty close in performance.

Okay. Thank you very much.

Thank you.

Your next question comes from Saul Rubin with UBS.

Good morning.

Good morning.

Good morning.

Good morning.

I suppose just to go over some of the ground you have already covered, I'm afraid. But you talked about in the industrial segment the rebate issue being sort of behind you. Is that true also in the automotive segment? Or do you have more to go.

Saul, let me address that. I don't think the volume incentives in the industrial group is necessarily behind us. If their sales revenue picks up, then yes, we can continue to work for it and we're negotiating with our vendors trying to get additional incentives and so forth, but that one is not necessarily behind us. It depends on what we want to do with our inventory levels there.

Jerry, let me kick in here. I think if we just project looking into 2004, the issue might not be totally behind us, but it's much less of an issue than it was in the year we just finished. And we may have yet some slippage in terms of the amount of incentives that we have this year, but the swing will not be nearly as dramatic.

And I think while we've looked ahead, and I don't know exactly the number that we're projecting, but we're projecting rebates or incentives will be down a certain amount. Jerry, what would you --

Yeah. We're probably looking at another 14 to $15 million reduction in those incentives in '04. But again, if the revenue grows faster, then we can -- we'll be buying more product and earning more incentives.

I think there's one other thing to add to that. If it's -- if it drops by the amount you have just mentioned, Jerry, that's a much less dramatic issue for us to have to deal with it. And I think Motion feels that they have gotten their expenses under control to the extent that we can overcome that kind of loss, and actually wind up improving our operating margins at Motion Industries in spite of that.

Now that's our projection as we look at it today, and that's based on sales growing in that 2 to 3% range that we talked about earlier. We think we can handle the reduction and incentives, lower the inventory a little bit more, and with the expense controls we have in place, that our operating margins will indeed continue to show improvement at Motion Industries.

Okay. Fine.

What about in automotive? You talked about a very gradual improvement in margin. What do you mean by that, exactly? And in Q4, as you mentioned, it was a 6.6 percentage point margin. I mean, that's a very low number. Normal in the last few years has been 8 to 9%. Previously, it was even about 10%. Are you talking from the 6.6 in Q4, and long-term, are we talking about just a structurally lower margin business going forward?

Let me try to answer that, Saul. And then Larry and Tom can pitch in.

You know, we're not talking about our margin being down in that 6% range going forward. Our margin in automotive for the year were 8.1. And we're talking about building off of that level. We're not talking about building off a 6.6% level.

Okay.

Saul, I would just add -- this is Tom -- I would add that we're focused on several things in the automotive business. The gross profit improvement, and we're looking at three components on the gross profit improvement. One is, obviously, more intelligent pricing and improving that way. And Larry referenced that. We're looking at the mix and accelerating the growth of some of the better gross profit lines, which will have a positive influence, and we're look at the buy side. And our mandate to our folks is that we're going to show improvement in all three areas.

You said that some of your initiatives are showing signs of success now. But how long does it actually take before -- I mean, should we expect a gradual improvement through the course of the year?

I would say expect a gradual improvement quarter-by-quarter as we work our way through the year. Additionally, as far as the operating margin, we're working on a number of things there to keep our costs in line and to improve our working capital efficiency. And I think you'll see evidence of that as we work our way through the course of the year.

Okay. This is the last question. It wasn't clear in your comments before, are you actually assuming deflation continues in the automotive business in your estimates for 2004? Or are you assuming sort of flat.

No. In our estimates, we assume no pricing, but no decreases as well.

Okay. Thank you.

Okay.

Your next question comes comes from Jerry Marks with Raymond James.

Good morning.

Good morning, Jerry.

Jerry, just a question in terms of the industrial part segment. Was that 14 to 15 million that you guys were talking about of getting less rebates all in the industrial parts side of the business?

Yes it is.

Okay. You guys grew revenues about 2% in the first quarter. I suspect if you have a positive sales growth, then your inventories would start to build. I am just kind of a little confused how you still can lose some of those rebates and what percentage growth you need in the industrial parts segment for that, you know, for you not to lose that 14 or 15 million.

Well, it just depends. I can't answer that, Jerry. A lot of it's going to depend on that 2 to 3% that we're going have months with us more than that when they're still trying to negotiate whether with the vendors for additional percentage on lower volumes and so forth. I don't know the answer to that.

Right now, we're assuming that we're going to give up that 14 million with sales revenue growth of about 2 to 3%. And some of it would also depend on product. I mean, it's not in all -- the incentives are not in all product. So depends on what the product mix of those sales are.

So there's a lot of pieces of that puzzle. Right now we're just assuming that, you know, going into this and in our projections of that $14 million shortfall.

And that's based on the 2 to 3% then.

That's correct.

Okay. Then I heard you guys mention that you had a net decline of three stores, but a positive in January. What's the total company store count right now.

Bear with us for just one minute, Jerry.

The total number of stores as of the end of the year is 938. Now that number changes at all times. It changes today. But that was the total count at the end of the year.

Company-owned.

Company-owned, that's correct.

Company-owned. And then what, about like 4 or 5,000 total.

Well, that gets us ta 5683 in total.

5683. Okay. Great. That's all I had. Thanks.

Thank you.

Your next question comes from Brian Anep with FTN Midwest Research.

Good morning, guys.

Good morning.

Good morning.

Most of mine have been answered already. Could we talk about, though, the discounts incentives in freight. Seems like you had a positive variance in that of about 5 million in the fourth quarter. 12 million taken out of growth sales in the fourth quarter last year, and 7 million of this year. Why the improvement there? Could you guys talk to that?

And also, could you just remind me what you said about CapEx guidance for this year.

CapEx for '04 is still in about the 70 to $75 million range.

Your question on the what we've moved in that category is sales incentive discounts and freight impact. If you look at the sheets that we had in the fourth quarter in that other category, that amount was $7.3 million.

Right. And it was 12 million negative last year. So, you know, it seems like it was an improvement versus last year?

I don't know the answer to your question. Only one affected by three things, that was incentive, the sales or the freight. And I don't know which one affected it the most. I can't answer that question.

All right. Thank you.

Okay. Thanks.

Your next question comes from [Ashish Pant] [inaudible] Capital Management.

Hey guys. How are you doing?

Good.

Good. How are you doing?

Just a couple of things, you know, on the auto side, Jerry, Larry, Tom. Is the pricing -- because when you talk to the competitors, it doesn't, you know, they're not seeing price increases either, but they're not seeing any kind of deflation. I understand you've only seen about .2% deflation. Is the deflation primarily coming from independent stores, you know, whereby to be able to match pricing with increasing, you know, store counts from O'Reilly, Auto Zone, et cetera, these people, you're having to readjust your pricing? One of the plans I remember when we spoke a long time back was that in the sort of the more common products where, you know, these people are providing a competing product, you could bring down the price and then perhaps readjust pricing on products that they don't carry. Because, of course, we carry a lot greater inventory at our stores than anybody else.

So when you do that pricing readjustment across the store's inventory, is this kind of a net effect of that? Or are you in the process of doing that?

Well, Ashish, your assumption is right in that we do adjust prices, we do competitive analysis and keep our prices in line with what the market prices are. When we make adjustments for competitive reasons, it's more normally on some of the faster moving items, and the items that we may have an opportunity to move up, are not quite as -- don't have quite the same velocity. So the impact of that takes a little longer to work its way through.

Right. Because one of the things that, you know, when you think about these rebates, and I was trying think how to sort of take that into account. If we look at the gross profit margin, you know, even without adjusting it for the EIDF changes, and look at that as a yield in inventory. You know, that number hasn't improved. I mean, it's kind of stayed similar. So why you have lost some of the incentives for not taking inventory, which probably is a good idea, you know, it hasn't benefited you in terms of being able to lower inventory enough.

Do you see what I am saying? The tradeoff is gross profit versus inventory. And from a cash basis, what you are hoping is that it comes out to be better. But it's not helping right now. So seems like there's some concern that there is degradation in the overall business and it could be in auto or industrials.

I'm trying to understand if that's indeed happening or it's just this -- because of the change in inventory policy that we are seeing the impact of it working out.

I think, Ashish, this is an issue of balance on the balance sheet with the income statement. Had we wanted to move our inventories down further, we could have, but we would have given up even more in the incentive side because they're based upon the volume of purchases. It is more impacted by the top line, the lack of top line growth than anything else. So that's what's affected us.

And as we see those sales come back, then we'll be able to buy more inventory without building our inventory levels because we'll be moving it and therefore we'll earn more incentives. I don't think there's any degregation in the business.

All right. Okay. Last question. On the automotive side.

Tom, how are your prices now? You know, when you compare to say O'Reilly and Auto Zone, at least on the products, you know, these cues that both of you -- you, along with them might be carrying. I mean, how do the prices compare, both at, sort of -- in general, at company-owned stores as well as at independent stores? Are you competitive?

We think we're competitive. But that is a moving target. Prices change on a consistent and constant basis so that's something that we monitor on an on-going basis, and then we'll make the adjustments as we see we need to.

Right. Okay. Thank you very much.

Thank you.

Your next question comes from [Docs Lossis] with Gates Capital.

Yes. I was just wondering, when you originally gave your full-year guidance of operating numbers, you had mentioned that inventories were going to come down by $100 million when you originally provided the guidance for EPS. The inventories are down $4 million, and you came in in-line, but it seems that there was some more deterioration in your business than you originally anticipated.

Can you reconcile that with the original statement that you were going to take $100 million out of inventory this year?

Yes. I don't know that I can reconcile, but I can tell you we just did a poor job in that area. Our revenues were not as strong as we expected them to be and that would have helped some, but we just didn't do as good a job in reducing those inventories as we should have, and we still have a plan in place to bring those inventories down further in '04.

Okay. And then the pension you said -- I think you said for the full year pension in the purchase discounts was 46 million, and that pension on a stand-alone basis was 18 million. So that's something like 28 million.

Uh-huh.

And you're saying that that purchase discount of 28 million is going to decline to 14 million.

No. No. We don't know that. That's just for the industrial segment.

Oh, it's just for industrial.

That's correct.

Okay. Thank you.

Okay. Thank you.

Your next question comes from Chip Ruby with Kramer Rosenthal.

Hi, guys.

Good morning, Chip.

Can you give us a sense of what your average selling price on average, you know, percentage terms, what it fell fourth quarter '03 over fourth quarter '02? And, you know, is it just really the purchase discounts that impacted the fourth quarter? Is that, you know, for both auto and even industrial, is that the mainstay of what we're looking at?

And then how much of the inventory issue was all in the fourth quarter versus the previous quarters, basically, looking forward to '04, do we need to smooth it lower operating margins for automotive and industrial even if we -- to get to your full-year guidance?

I don't think you need to smooth it. We make our adjustments to inventory in the fourth quarter. Inventory gains and our losses or whatever all net down, and then we take that in the fourth quarter.

We do try to estimate only volume incentives on a quarterly basis. Those are not all held into the fourth quarter. We do try to estimate those quarterly.

But there are a number of issues that affected the fourth quarter. You know, we had other inventory issues within the automotive side, it wasn't just all incentives there. It was primarily incentives in the industrial side.

What else was it in auto?

Well, we just -- we probably had some pilfered, we probably had some paperwork issues and those are the things we can address and do something about going forward. We probably weren't as tight in that area as we should have been.

It wasn't a case of basically lowering prices to drive sales growth.

Oh, no. No. I see where you're headed with that. No. We didn't cut prices to get that 6% sales increase in the quarter. I wish we were that good. We're not that good and we can't react that quickly.

Okay. And can you repeat -- I had to jump off your commentary for a second -- the comments about tax rate and what affected the fourth quarter and what we should use for '04.

You should use 38.4 going through '04. We rolled off a note -- a pretty good size note where we wrote off for financial statement purposes back in '01, and it was court issue, and it's now in court, and we'll resolving that so we went ahead and took the deduction for taxes there. We also had some state planning things that we put into place. And we also had foreign tax credits that came into play. And that's why it was down to the 38.1 for the year and 38.4 going forward because that note writeoff was a one-time issue.

Okay. Thank you.

Okay. Thanks.

Your next question is a follow-up question from Darren Kimball with Lehman Brothers.

Hi. I was just wondering, has the outlook improved for the electrical business? Is it getting closer to the time that you might consider selling some of the bits that you're not interested in in the long run?

Darren, I think that would be a good assumption. There are parts of that business that don't necessarily fit us long run. And those -- that particular part of the business is on the electronic side. And that business is better right now. It's part of what's driving the improvement at EIS, so if we had interested buyers, yes. Now would be a better time to look at it than in the past. And I think we've said that we would consider it and I stick by what I said earlier.

So that's something we'll continue to look at and, in the meantime, it's just good to have EIS shaping up the way they are right now. They're looking very good.

Thank you.

Amy, we're going to take one more question. We're about out of time so we'll take one more question then we'll close the call.

Yes sir. Your final question is a follow-up question from David Siino with Gabelli & Company.

Hey, just one more. Can you give the month-by-month automotive as well as January, what the sales comps were.

No. I'll have to get that for you, David. We don't have that.

Okay. Thanks.

Okay. Appreciate the call.

Amy, do you have anyone else on the line?

There is no further questions at this time, sir.

Okay. We appreciate all of you joining us today. And we appreciate your continued interest in and support of Genuine Parts Company, and we look forward to talking to you after our first quarter earnings release.

This concludes today's Genuine Parts Company fourth quarter and year-end teleconference. You may now disconnect.