純正零件 (GPC) 2004 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Genuine Parts Company first quarter results conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the conference over to Ms. Carol Yancey, Vice President and Corporate Secretary. Ma'am, you may proceed.

Good morning and thank you for joining us today for the Genuine Parts first quarter conference call to discuss our earnings results and the 2004 outlook.

Before we begin, please be advised that this call may involve forward-looking statements such as projections of revenues, earnings, capital structure and other financial statement items, as well as 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 remarks from Larry Prince, our Chairman and CEO. Larry?

Good morning to each of you joining us today for our first quarter conference call. We have our usual group today with Jerry Nix, our Chief Financial Officer, and Tom Gallagher, President and Chief Operating Officer, taking part in the report to you. We will take a few minutes to update you on the first quarter of 2004 results and then give you our best thinking on the current picture and our feel for the balance of 2004. I will begin by giving you an overview of our total performance and quickly comment on our four business groups. As we've done in earlier calls, we will ask Tom Gallagher to go into more detail with our automotive operations.

We released our first quarter results earlier this morning and it was a positive quarter for us, getting us off to a good start in 2004. For the quarter both sales and earnings were at record levels and show the strongest growth we've seen in quite some time. Total sales were 2.2 billion for the quarter, which was up 9 percent compared to the first quarter in 2003. I should add that we were helped a little by an extra day in the quarter which probably added about 1.5 percent. Net income for the quarter was 100.2 million, up 13 percent compared to last year before the cumulative effect of an accounting change adopted January 1, 2003. And earnings per share were 57 cents versus 51 cents in 2003, up 12 percent before the accounting change.

Our nine percent sales gain is very encouraging and we like the fact that each of our four business segments had a successful first quarter. The automotive group reported strong results with a 10 percent increase in revenues for the quarter. Motion Industries, our industrial group, continued their trend of improvement with a 7 percent increase, and EIS, our electrical/electronics group, was a strong with a 10 percent improvement. S.P. Richards, our office products group, produced another steady performance with sales up six percent for the quarter.

We believe the stronger pace of sales is being driven by our internal efforts and initiatives across all our businesses. And we also sense that market conditions are taking a turn for the better. In the automotive group we have anticipated for some time that improved vehicle demographics and our improving economy would favorably affect the after-market. Additionally, we felt that at some point the improving manufacturing sector would start to help Motion and EIS move back to a stronger and more historic growth rate. Perhaps this marketplace improvement is what we're experiencing and nothing would please us more, but we approach this idea cautiously. Another quarter or two will certainly give us a clearer reading on the external factors that seem to currently be driving our business in such a favorable way. In the meantime we will continue to push hard with our current marketing plans and sales initiatives which seem to be working well for us.

At this point I might just quickly give a comment or two about each of our non-automotive groups before asking Tom to cover automotive.

Motion Industries, our industrial company, managed to exceed our expectations for the quarter. As you may recall, Motion started to show some improvement in the fourth quarter and was up two percent for that period after being down a little for the previous two quarters. Our sense of the situation when we reported to you in February was that they were on the move and we would see a gradual improvement of two to three percent in the first quarter. This was the picture in January, but February and March were stronger, and as we mentioned earlier their final number for the quarter was a seven percent improvement.

Motion sales improvement was very broad-based across industry groups and also geographically. There were really no unusual circumstances driving the growth, but just a general improvement in the marketplace. Before we saw the economy slow in mid-2000, Motion's typical growth rates was in the high single digit range and at times low double-digit. At some point we anticipate their growth rate to position in this range again, but we're going to be somewhat cautious in our planning and expectations and look towards growth more in the four to six percent range for the second quarter and for the year. In summary, Motion will have a good year, but the recovery is just too early to judge how good.

EIS, our electrical/electronics company, is showing somewhat the same pattern, but even more pronounced. Their sales for the quarter were up 10 percent, which is their largest gain since their 10 percent improvement in the first quarter of 2000. Here again we could sense some recovery after they reported a small sales improvement in the fourth quarter following several quarters of decline.

We do believe EIS will have a good year with continued growth in the second quarter and for the year. Back in February we predicted moderate growth in the two three percent range, but today this appears to be on the low side. For our own planning purposes we anticipate they will mirror Motion Industries with growth of four to six percent.

Office Products, our S.P. Richards organization, had another solid performance in the first quarter with sales increasing six percent, just slightly better than expected. This group has really been a steady performer for us with sales growing in the four to five percent range even through the tough periods. In 2004 we expect their sales to continue to grow in the four to six percent range for the balance of the year.

Now we will turn it over to Tom Gallagher to cover the automotive group for us. Tom?

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 leave ample time to answer any specific questions that you might have, and we will take these questions after Jerry has had a chance to make his remarks.

As Larry said, sales for the automotive operations were up 10 percent in the quarter, our best performance in some time, and it continues a trend of gradually improving sales picture. To illustrate this point, we were up two percent in the first two quarters of 2003, then up three percent in the third quarter, up six percent in the fourth and now followed by the 10 percent increase in the first quarter of 2004. So our automotive sales picture has been showing some improvement over the past two to three quarters and we're pleased with the progress that the automotive team is making. We do want to point out that these increases are all unit increases without the benefit of any impact from price increases.

One question that might be asked is why the automotive sales seem to be picking up, and we would say that there are probably two primary reasons. One, we do think that the overall conditions in the automotive after-market have improved over the past six months or so, and it just seems to feel a little better right now. And secondly, we think that the growth initiatives that we outlined to you in our last quarterly call are beginning to yield some positive results. You will recall that these initiatives are in the areas of new distribution, NAPA auto care, major accounts, store resets and new merchandising planograms, outside sales representation, shop connectivity and the specialty markets of heavy-duty tools and equipment and paint and body equipment.

Time won't allow for individual comments on these points, but just a give you an idea of the progress being made I will comment on two of them. In the area of new distribution we added 18 new stores during the first quarter. This is our first positive quarter on new stores in a while, so it appears that we have stopped the slide and our automotive management team is focused on hitting the 100th new store commitment this year. In area of NAPA auto care, our goal for the year is to add an additional 1000 members. Through the first quarter we added just over 600, so we should make this objective as well. And we're making progress on the other initiatives also. As a result, we feel that we're in good position to meet our overall objectives for the year of generating an additional 200 to $225 million in revenue for the automotive group from these seven key areas of focus.

In addition to the progress made on the sales side we were also able to show some improvement on the operating side of the business. Jerry will cover this in his comments, but we were pleased to see some improvement in the operating margin for the automotive group in the quarter. After a number of quarters of slight slippage it was good to see the operating margin tick up a bit in the first quarter. Additionally, our working capital efficiencies showed some improvement as well.

So it was a solid first quarter performance and our automotive management team is committed to continuing to drive these improvements over the remainder of the year. And looking ahead, based upon how we see things right now, we would expect our automotive sales to be in the five to seven percent range over the remainder of the year.

At this point I will turn it back over to Larry.

Thank you, Tom. Now we have recapped the sales performance of our four businesses for you, so I would like to add a few remarks on our overall outlook for the Company in the second quarter and for the balance of 2004.

Putting it all together we will plan for sales growth in the five to seven percent range for the balance of 2004, up a bit from the four to five percent estimate we expressed back in February. We remain cautious in our outlook as it is still fairly early in the year and we really don't want to get ahead of ourselves based on one quarter. We would expect to grow our earnings at a rate equal or slightly better than our sales for the balance of the year. This would put our second quarter earnings per share in the 55 to 56 cent range compared to 52 cents in the same quarter last year. Based on sales growth of five to seven percent, our earnings per share for the full year should be in the range of 2.15 to 2.25 per share. This is an increase from our earlier estimates of 2.10 to 2.20.

With that we'll now ask Jerry for his comments, followed by questions and discussion.

Thank you Larry. Good morning. We appreciate you joining us today. We will first review the income statement and the individual segment information. Then we will touch on a couple of key balance sheet items. We will be brief and then open the call up for your questions.

A review of the income statement shows that total sales were up nine percent, a great start to the year and a nice follow-up to our five percent sales increase in the fourth quarter.

Gross profit for the quarter was 31.27 percent to sales compared to 31.57 last year. That's down 30 basis points. This reflects the continuing impact of lower discounts and vendor incentives, shifts in customer and product mix and pricing pressures, as have we discussed before. We do have plans in place to improve these margin trends and believe their impact will not be as great in '04 as they were last year.

SG&A as a percent to sales decreased 52 basis points from 24.39 to 23.87. We are pleased to report continued improvement in this area and effectively managing our cost remains an important initiative for us.

Net income of $100.2 million was up 13 percent with earnings per share at 57 cents compared to 51 cents before the cumulative effect adjustment recorded in '03. After the cumulative effect adjustment in '03 EPS was up 46 percent compared to the first quarter of 2003.

Now let's look at the operating results by segment. The automotive had sales of 1,127,000,000. That represents 51 percent of our total. It's up 10 percent with operating profit of 93.3 million and that's up 12 percent, and so we did see a slight margin improvement there from 8.2 to 8.3.

The industrial group had revenue of $609 million, representing 28 percent of the total. They were up 7 percent with operating profit of $46.1 million, up 7 percent as well. So their margins remained flat at 7.6 percent.

Office products had revenue of $387 million, representing 17 percent of the total. That was up 6 percent. We had operating profit there at $43.8 million, up 5 percent. And so we show slight margin deterioration to 11.3 percent but still outstanding margins.

The electrical/electronic group had $83 million of revenue, 4 percent of the total, and is up 10 percent. And a very good recovery in our operating profit side with $3.2 million of operating profit, up 102 percent. So their margins continue to improve up to 3.9 percent.

We did have interest expense in the quarter of $10 million, which is down nearly $4 million or 27 percent from the prior year, and that's due to the lower debt levels that we're carrying.

The other category was $14 million for the quarter. That's up about $3 million and is made up of 13.3 million in corporate expense where they remained in amortization of intangibles and minority interest. The increase is due primarily to pension cost, which for the year should be about $7 million greater than in '03. And we also have higher legal and professional costs, much of which relates to the Sarbanes-Oxley requirements.

Let's touch base on a couple of key balance sheet items. Cash at $28 million is up $3 million from the same period last year. We continue to improve our cash management processes, providing better utilization of cash and relatively low cash balances on hand.

Accounts receivable is up four percent on a nine percent sales increase, so we've done a good job in this area maintaining a level of receivables below our growth rate and sales. I also feel a good about the quality of our receivables at this time.

Inventory up three percent from the prior year, but down slightly from year-end. That's a very good trend for us considering our sales gains in the quarter. We continue to focus on our inventory management and would expect to further improve our inventory numbers as we move through 2004.

Payables were up 12 percent from last year as purchasing volume was greater this year in the first quarter that last year. This was expected as we did not participate in the year-end buys at the end of '03 as we had in '02.

Working capital was $2.4 billion at quarter-end compared to 2.3 billion for the same period last year. We continue to focus on improving our working capital efficiency.

Our current ratio was 3.4-to-1 versus 3.2-to-1 for the prior year, and thus the balance sheet remains in excellent condition.

Total debt of $662 million was down $185 million for the same period last year, which represents 22 percent of our total capitalization compared to 28 percent last year. After our dividend increase and opportunistic share repurchase, our first priority for excess cash is the continued reduction of the debt in '04.

Capital expenditures were 12.1 million. That's down from 25.7 million in the first quarter of last year. Last year's expenditures were high due to some IT projects that were placed into service during that quarter. We continue to project our capital expenditure for the year to be in the 65 to $75 million range, which was comparable to our expenditures (ph) in each of the last two years.

Depreciation and amortization is 16.2 million for the quarter. Again, we look for that to be approximately 70 to $75 million for the year.

Once again, our results in the first quarter are very encouraging to us. We have a positive outlook for the balance of 2004. We will continue to focus on our initiatives to grow the sales in earnings, control costs and manage our balance sheet. We also expect to generate excellent cash flows to support our dividend and other uses of cash which maximize shareholder value.

We will now take your questions.

(OPERATOR INSTRUCTIONS) David Siino, Gabelli & Co.

Jerry, could you just run down the price increases in each of the four segments?

For the automotive parts group we had a decrease of three-tenths of 1 percent. For the industrial group we had 2.8 percent increase. And then the office products was flat and the electrical/electronic group was flat.

Has your outlook for inflation in the business changed any over the past three to six months?

Not at this point. We see the increase in the raw material costs at all of our suppliers going through, so we do expect to see some. But as you can see the only area we've seen it in is in the industrial side.

Was there any LIFO benefit in the quarter or anything to speak of for the rest of the year?

No.

Okay. Maybe Tom, could you just break down the automotive retail, wholesale, Canada and how much did new stores contribute?

Well, the contribution from the new stores was negligible in the quarter. We add these on an ongoing basis as the quarter progresses, so we really won't see a contribution from the 18 new ones until we get into the second quarter. And as far as the breakdown, the contribution from all of the entities was positive and pretty much in line with the overall increase.

And company-owned versus independent stores, the same thing?

Pretty much the same thing, that's right. Frankly, we saw good growth on both sides and we're especially pleased with the independent ownership. They seem to be enjoying solid growth right now and seem to be doing a great job for us.

Last question, maybe for Larry. Could you just talk about some of the opportunities in health-care distribution and how that business is growing for you?

I am going that to pass that to Tom. This is in the office products group and it's kind of a fledgling effort that is interesting. Tom, you want to take that?

Sure will Larry. David, that is in office products business and that is just an additional product category that was just added in this year's catalog, so it's very early in the process. Keep in mind it's a very limited number of SKUs and all consumable-type items not intended to enable the office products dealer to go after the big medical institutions; more intended to enable them to service some of the smaller to mid-sized doctor and dental offices and medical facilities around the country. Early on we're encouraged, but it is very early in the process and obviously we're growing from a base of zero. So it will take us a little bit of time to ramp this one up.

Thank you very much.

Jerry Marks, Raymond James.

A couple of quick questions. First of all, in the other category where you break out your segment sales it looks like that other line net of effective discounts went down. Is that the vendor credits that you were talking about, Jerry?

No, that's (indiscernible) -- that's an old EITF thing. That's all moved out of sales and so it's just a function of the increased revenue. That's why that would go up.

Why it went down?

I am sorry, yes.

I guess I was a little bit confused because when you talked about the margin pressure you indicated that you're still seeing some pressure on the vendor credit side. I guess you also said that your unit volumes were up. I was wondering why your unit volumes would be up but you wouldn't be getting more vendor credits done.

We're not running our inventories up. As we go through this process, and sales continue strong, and our volume purchases for the year run at a certain level, then we will earn the same incentives or more. But at this point we're not -- for the quarter our inventories are down about 1 percent of $12 million, so we're selling out of existing inventory.

I thing most of this too, the impact is more felt at Motion Industrial than any other group. And we're -- if you noted with the sales up about seven, their margins -- their profits were up a similar amount. And actually they would have leveraged that seven to a higher number, other than the fact that they have less income from incentives this year than the same quarter last year. So frankly, they're operating real well and if the incentives had been the same it would have been -- the operating margin naturally would have been higher. But we're still working very closely with Motion to gradually bring inventory levels down. So that was reflected in the number, and that's an answer to your question.

If I'm understanding this right, what basically you're assuming in terms of your vendor credits is from the volumes that you were running at last year and if we are to see that come up in your volumes and you start drawing more inventory that could potentially be higher then as we progress through the year?

That's a fair assumption, yes.

The other question I has why the depreciation and amortization seemed to go down about $1 million year-over-year.

I don't know. We probably got some assets that were fully depreciated. It's such a small number I can't answer it.

That's all I had. Thanks.

John Murphy, Merrill Lynch.

You have answered most of my questions here, but I just had one quick question on the competitive environment as AutoZone is sort of moving into the commercial side of the business, if you've seen any pressure from them on the auto side; if there's anything else going on there.

I'll take that question. We haven't seen any change either way on that. It's about as it has been for some time.

Thank you.

Ashish Pant, Farallon Capital.

Tom, just a couple of questions. The automotive performance was definitely very good and the sort of north of 10 percent unit growth, where do you think you're taking share from because it's clearly in excess of what the industry is growing at? Any sort of comments on that would be helpful.

The only thing I could say, I don't think I can answer it specifically. I can tell you that our growth is broad-based across many product lines and it's also geographically dispersed. We're getting good growth in all places right now. So I just think that perhaps the market being a little bit better and perhaps the focus that our automotive team has on our key initiatives has got them moving ahead reasonably well currently.

You said growth was broad-based. Is it from specific sort of -- one area that you all have a very good franchise is the heavy trucks and the truck parts segment where the other retailers are not really even present in any reasonable way. Is that a driver? That's something that we had heard. But any comments on that? Or is it coming just across the board, across the product range?

I would say that as we look at all seven of our key initiatives we're enjoying good progress in every one of the areas. So I don't think we could single one in particular as a main reason. And again, as we look across the broad product offering that we have we're enjoying good growth across the spectrum right now. So we're pleased with the fact that we seem to just be just doing a pretty good job in a number of areas.

Just another question on that. Jerry, you mentioned that auto pricing was kind of flat really. In terms of in the last -- with sort of the growth that you've seen in your commercial business, any change in pricing strategy because what we've heard is some of the DIY people might be actually raising price a bit? Are you at all witnessing that in your markets?

We haven't seen any evidence of it. We hear the same thing that as you hear, but we haven't really seen any evidence of it to this point. Our position on price increases is well known. We've been willing to accept some all along, assuming that the rest of the market would take it and it would hold, and that position hasn't changed.

Thank you.

Frank Brown, SunTrust Robinson Humphrey.

Nice quarter. I just wanted to touch base on the margins, I guess both for automotive and industrial, and get a feel -- I understand that volume rebates are probably still an issue. Is there a way that you could talk about margins if you exed out lower rebates and tell us on these sales volume trends how margins are looking in those businesses?

If you took the rebate situation out of the equation our margins would be showing more improvement than they are showing. But if our sales revenue top line growth continues where it is the rebate issue will take care of itself over the remainder of the year. And as we go the rest of the year you'll continue to see the margins show some improvement. I can't quantify that for you because I simply don't know because we would be talking about projections.

Thank you very much.

(OPERATOR INSTRUCTIONS)

Do we have any further questions in the queue?

Alan Zwickler, First Manhattan.

I just want you to know it got sunny here as soon as you left. I don't know what it is doing down there, but I bet it is sunny down in Atlanta today. When you look at the auto business and you break down the commercial versus the do-it-yourself, is there -- I know this question has been asked a couple of different ways, but which side of the business, shall we say, did better in the first quarter or where they somewhat equal?

I will take that and they were somewhat equal in the quarter, so we got good performance on both sides.

I kind of figured that. Thank you. Good luck.

David Siino, Gabelli & Co.

Just a quick question on inventory Jerry. Are you still looking at net neutral for the year?

Yes, I would hope so. We're actually looking to reduce that inventory further, but it certainly will depend upon what the revenue growth is.

You said the first quarter you took inventory out of industrial?

Yes, primarily the industrial. But we're down $12 million in inventory in the first quarter overall.

Thank you.

(OPERATOR INSTRUCTIONS) There are no further questions. At this time I would like to turn the conference back over to Larry.

We appreciate all of you being with us and we are going to try our best to follow this up with another good quarter and look forward to hearing from you. Thank you.

This concludes today's Genuine Parts company first quarter results conference call. You may now disconnect.