純正零件 (GPC) 2004 Q3 法說會逐字稿

Good morning. My name is Miles, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Genuine Parts Company third-quarter results. (OPERATOR INSTRUCTIONS) Thank you. Ms. Yancey, you may begin your conference.

Thank you. Good morning and we appreciate you joining us today for the Genuine Parts third-quarter earnings conference call to discuss our results and the 2004 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 its management, statements of future economic performance and assumptions underlying the statements regarding the Company and its business. The Company's actual results could differ materially from any forward-looking statements due to several important factors described in the Company's latest SEC filings. The Company assumes no obligation to update any forward-looking statements made during this call.

We will begin this morning with brief remarks from Larry Prince, our Chairman. Larry?

Thank you Carol. Good morning and we do appreciate you joining us today for our third-quarter conference call. With me today on the call are Jerry Nix, our CFO, and Tom Gallagher, President and Chief Executive Officer.

I would like to say right here that we are proud to introduce Tom as CEO. And as you're aware, this is a change since our last conference call back in July. The GPC Board at its regularly scheduled Board meeting on August 16th elected Tom CEO. And it's interesting to note that he is only the fourth CEO in GPC's 76 year history.

This is a key step in our ongoing succession planning, and it gives us a great feeling to have a person of Tom's experience and ability to assume this top position. He's been with GPC for 34 years and has been President and COO for almost 15 years now prior to this promotion. Tom is bringing to us great leadership, and I know his plans for the future include moving sales and profit growth forward in all of our business segments. As a matter of fact, because of his promotion we will be asking him to do a little bit more of the work today than usual on this conference call, which will be pretty nice from my perspective.

We will take a few minutes this morning to comment on our third-quarter results, and then give you our best thoughts on the current picture and our feel for the balance of 2004. Following our usual pattern, I will begin with a review of our overall performance for the quarter, and then Tom will make more detailed comments on our four business groups. Then Jerry will review our financials, and afterward I will summarize our outlook for the final quarter, after which we will be pleased to open the call for questions and discussion.

We released our third-quarter results earlier this morning, and I am sure most of you have had an opportunity to see them. We were pleased with the numbers, which continued the positive direction we've enjoyed since the beginning of 2004. Both sales and earnings again reached record levels. And each of our four business segments were a part of our success for the quarter.

Total sales were 2.3 billion for the quarter, up 7 percent compared to the third quarter in 2003. Net income for the period was 97.9 million, up 11 percent compared to 88.3 million last year. And earnings per share were 56 cents versus 51 cents in 2003, up 10 percent.

Looking for a moment at our sales growth of 7 percent for the quarter, this exactly matches our second-quarter results which were also up 7 percent. We anticipated sales improvement in the quarter to be in the 5 to 7 percent range as we started the period. And we were pleased to see our GPC team reach the top-end of this expectation.

All 4 segments contributed significantly to our results, with sales from Motion Industries, our Industrial Group and EIS, our Electrical/Electronics Group, continuing to be especially strong. The manufacturing sector, which is their customer base, is moving ahead at a healthy rate. And our companies are giving them excellent service. Motion had sales growth of 14 percent for the quarter and EIS was up 15 percent. Automotive sales were up 3 percent for the period. And S.P. Richards, our Office Products Group, improved by 8 percent.

These numbers indicate a stronger-than-anticipated growth in each of our non-automotive sectors, with automotive being softer than earlier quarters this year. Here again it is clear that our diversity gives us a great balance. And when you put it all together, our 7 percent growth was right at the top of our target range.

Now we will ask Tom Gallagher to elaborate a bit on each of our businesses, and then Jerry Nix will cover the financials. Tom?

Thank you Larry. And I'd like to add my appreciation as well to all of you for being with us this morning. As Larry indicated, I will cover the results in a little more detail, starting with industrial and electrical and electronic, and then moving on to office products and wrapping up with automotive.

Our industrial operations turned in another strong quarter. After being up 7 percent in the first quarter and 11 percent in the second, sales continued to strengthen for our Industrial Group. And they were up 14 percent in the third quarter. This is a stronger performance than we had forecast at the beginning of the quarter, and it is reflective of the healthy manufacturing activity that we see across a broad customer base right now.

Manufacturer capacity utilization and industrial production figures are good indicators for us in our industrial business. And both of these indices have shown steady improvement all year long. And this certainly indicates that the manufacturing sector is running at a solid rate, and this will benefit our industrial business over the final quarter of the year.

We feel good about the sales job that our industrial management team is doing right now. However, for planning purposes we want to remain a bit on the cautious side. And we would expect industrial growth for the fourth quarter to be in 8 to 10 percent range.

The picture for our Electrical/Electronics Group is similar to the industrial operations. They too are benefiting from a solid manufacturing activity that continues among their customer base. And they ended the quarter up 15 percent. This follows a 10 percent increase in the first quarter and a 17 percent improvement in the second quarter. So you can see that they have put together an awfully good sales year through 9 months. And as with the industrial operations, their growth is broad-based across their various product categories and across their customer segments.

We continue to feel optimistic about the electrical/electronic results and we think that the final quarter will be a good one as well. But similar to the Industrial Group, we're planning growth of 8 to 10 percent for the electrical/electronic operations in the fourth quarter.

Our Office Products Group continues to generate solid results. They were up 8 percent in the third quarter, following a 5 percent increase in the second and a 6 percent improvement in the first quarter. That's a pretty steady and consistent pattern with the third quarter being the strongest performance of the year. And they're seeing nice increases pretty much throughout their product categories and throughout their organization.

The office products team is really doing a fine job, and they have a number of initiatives under way that we think will keep their sales growth in the 6 to 8 percent range over the final quarter of the year.

Our automotive operations were up 3 percent in the quarter. This is just a bit below the 4 to 6 percent range that we gave you in our last call, so the quarter was not quite as strong as we had anticipated. Sales decreases at Johnson Industries in Mexico brought our overall results down about 1 point, which indicates that our NAPA business was a little stronger and in the lower-end of that 4 to 6 percent range.

You may recall from our last call that we said that we started to see some moderation in our automotive business in June. And this trend continued into July and August. Our sales were up in all 3 months, but not as much as they were in prior months. And this follows the pattern that we saw in the lower overall consumer spending figures that have been reported for that same period. Fortunately, we did see an improvement in September. And the early October results are more in line with September. So the last 6 weeks or so feel just a bit better.

Now we did make good progress on our 7 key growth initiatives that we have outlined in prior calls. And just to give you a better feel for this, we'll comment on a few of the more visible ones.

In the area of new distribution we got back on track in the quarter. You may recall that we opened 18 new NAPA stores in the first quarter, but then we were even in the second quarter. At that time we told you that we felt that we would add 40 to 50 new stores over the second half of the year. And we were pleased to have added 21 new stores in the third quarter. This is our best quarterly performance in a number of years. And we would expect to open a similar number or perhaps even a few more in the fourth quarter. And importantly, this will give us the momentum to open our stated goal of 100 new stores per year in 2005.

In area of NAPA auto care we made good progress as well, adding right at 300 new NAPA Auto Care Centers in the quarter. And in the area of store upgrades we converted 46 stores to the Pipeline Plus look and we completed just over 200 interior resets.

So it was a busy quarter and our folks made good progress on the key initiatives. And this will have a positive impact on our growth rates in the quarters ahead.

Now as I said earlier in my automotive comments, after a slower July and August we did see some improvement in the September results. And this has continued on into October. We're encouraged by this, but here again we want to remain on the cautious side. And with this in mind we're planning for automotive growth in the 3 to 5 percent range in the final quarter; not as strong as we had seen earlier in the year, but better than the middle part of the year. And it will enable the automotive operations to end 2004 with their best sales increase in several years.

So in summary, we feel that we had had another solid sales quarter at plus 7 percent. And this follows a 7 percent increase in the second quarter and a 9 percent improvement in the first quarter, putting us up 8 percent year-to-date.

Recapping our expectations for the fourth quarter, we're thinking 8 to 10 percent growth for the industrial and electrical/electronics segments, 6 to 8 percent for office products, and 3 to 5 percent for automotive. Putting it altogether, this will give us a combined GPC increase of 5 to 7 percent for the quarter. And it will put us in a position to report our best overall sales increase in a few years.

At this point I will turn it over to Jerry to cover the financials.

Thank you Tom. Good morning. Thanks for your interest and joining us today. We will continue with a review of the income statement and segment information, and touch on a few key balance sheet and other items. I will be brief, and then we will allow more time for your questions.

A review of the income statement shows total sales for the quarter were up 7 percent to 2.3 billion, continued strong results. And for the 9 months ended September 30th of '04, sales were 6.8, up 8 percent compared to same period last year.

Gross profit for the quarter was 29.77 percent to sales, which is flat compared to last year. And year-to-date gross profit is 30.38 percent compared to 30.51, down 13 basis points; still not where we want our margins to be, but we have reduced our percentage shortfall each quarter in '04, and we're working hard to make this a positive.

As we mentioned last quarter our top-line growth has certainly helped our gross margin dollars, but the strong sales growth at Motion and EIS has impacted our overall market percentages since these are historically lower gross margin businesses. We also continue to manage through the usual pricing pressures and shifts in customer and product mix. And we continue to feel the impact of lower discounts and vendor incentives, which we knew would be a factor this year, though to a lesser degree than in 2003. Our improved sales this year have helped this issue, but our planned inventory reduction has also been a priority, especially in industrial. And we should note that the incentives are tied more closely to incremental purchases than to sales.

SG&A as a percent to sales decreased slightly from 23.15 to 23.06 for the quarter, and for the nine months in '04 is 23.31, down 31 basis points. We're pleased with our ongoing improvement in this area over the last several periods, and we will continue to focus on effective cost management in the future.

Net income for the quarter of 97.9 million was up 11 percent with earnings per share at 56 cents compared to 51 last year. For the nine months, net income of 299.2 million was up 12 percent with earnings per share up 12 percent also to $1.71 per share for the nine months.

Now let's look at the operating results by segment.

In the Automotive Group we had sales in the quarter of 1 billion 229.9 million. That represents 52 percent of our total. It's up 3 percent. And operating profit of 101.9 million down 1 percent, so slight margin deterioration there. For the nine months, automotive had revenue of 3 billion 575.2 million. And that is up 6 percent with operating profit up 5 percent.

Industrial for the quarter had revenue of 636.7 million, representing 27 percent of the total. That's up 14 percent. And operating profit of 40.9 million, up 19 percent, so margin improvement in the industrial sector. For the 9 months industrial had revenue of 1 billion 874.6 million, up 11 percent. And operating profit is up 13.

For the office products sector for the quarter, revenue of 406.1 million; 17 percent of the total. They were up 8 percent with operating profit of 32.2 million, up 6 percent. So we had some slight margin decrease there due to the technology product and furniture being the leaders in their sales growth. For the full 9 months office products had revenue of 1 billion 165.2 million. That's up 6 percent with operating profit up 5 percent.

In the quarter the Electrical/Electronic Group had revenue of 85.4 million, up 16 percent; operating profit of 3.8 million, up 100 percent. So excellent margin improvement in that sector. For the 9 months they have revenue of 254.3 million. That's up 14 percent with operating profit up 109 percent.

In total, we had revenue in the quarter of 2 billion 349.3 million, up 7 percent; operating profit of 178.8 million. And that's up 5.5 percent. For the full 9 months revenue of 6 billion 844 million, up 7.5 percent. And operating profit is up 8 percent.

And we had interest in the quarter of 9.3 million. That's down about 3.7 million or 28 percent from the prior year due to our debt reduction program. For the full year of '04, we expect interest to be in the 35 to $40 million range.

Other category was 11.3 million for the quarter. That's relatively consistent with last year, although up about $400,000. Other is made up of 10.9 million in corporate expense, with increases in items like pension, legal and professional, including costs associated with Sarbanes-Oxley requirements, and benefits such as stock options and health care. The remainder is in minority interest of about 800,000 and amortization of intangibles of about $100,000.

Now let's touch base on a few key balance sheet items.

Cash at September 30th increased to $285 million from 31 million last year. As we reported on our last conference call, our growing cash balance is higher than usual, and reflects our stronger income and improved working capital positions, as well as our strong cash flow from the exercise of stock options. We plan to use approximately $125 million to pay down our current debt in November, immediately after the expiration of a prepayment penalty, which exceeds the interest earned on the cash we are holding.

Accounts receivable grew 3 percent on a 7 percent sales increase as we continue to maintain our receivables at a level below our growth rate and revenue. We also remain confident in the quality of our receivables at the current time.

Inventory was up 4 percent from the prior year, a reasonable rate of growth for us relative to our sales growth this year. Effective inventory management is an important issue for us and we look forward to continued improvement in this area.

Accounts Payable were up 25 percent from last year. And this reflects increased purchases due to the increased sales and the extended turns established with our vendors.

Working capital was 2.4 billion at quarter end, up 3 percent compared to September last year. Improving our working capital efficiency is another ongoing initiative for us.

Our current ratio of 2.9-to-1, so the balance sheet remains in excellent condition.

Total debt of 626 million was down 76 million from the same period last year, and represents 20 percent of our total capitalization compared to 24 percent last year. Based on our planned debt of about 500 million at year-end we would expect our total debt to capitalization to be approximately 15 to 16 percent at December 31 '04. With the debt reduction plan for this year we will have reduced our debt by over $100 million a year for 3 years in a rows, so this has been a priority for us for awhile now.

Another priority for us in addition to the debt reduction and of course our dividend has been opportunistic share repurchases. As part of our share repurchase program we purchased approximately 465,000 shares in the third quarter, bringing our year-to-date total to around 550,000 shares. This leaves us with just over 6 million shares authorized for repurchase. And we will remain active in the program as we continue to see an investment in Genuine Parts Company stock will provide a good return to our shareholders.

We continue to generate strong cash flows, feel good about how we're using these funds to build our businesses and create value for our shareholders. Cash flows from operation have been very strong all year. And free cash flows, as we measure free cash flow as cash from operations less capital expenditures and dividends, are $267 million through September, and should be about 350 million for the year.

Capital expenditures were $21 million, down 5 million from the third quarter last year. For the 9 months our capital expenditures were 46.6 million. And our spending in the final period will put our annual expenditures for '04 in the 65 to $75 million range. And that's about where we were in each of the last 2 years.

Depreciation and amortization is 16.6 million for the quarter and year-to-date is 49.8 million. This will likely be a little higher in the fourth quarter, so we should close the year at approximately 70 to 75 million for the year.

We're pleased with this quarter's results and the gains we made this year. And as you would expect, we have initiatives in place to continue our growth pattern over the balance of the year and in the long-term. We are continually looking to improve our results through growing the sales, managing our margins and controlling our costs. And of course we're also working hard to maintain our healthy balance sheet and continued strong cash flows.

Now I will turn it back to Larry.

Thank you Jerry. Before we open for questions, I would like to add a few remarks relative to our outlook for the Company in the fourth quarter and for the balance of 2004.

We continue to feel that sales growth in the 5 to 7 percent range is an appropriate target for the balance of the year. We really see nothing on the horizon at close range that would change our picture dramatically in either direction. September was a solid month, and October seems to be tracking our third quarter growth rate pretty closely.

Given revenue growth of 5 to 7 percent, we would anticipate our fourth quarter earnings per share to be in the 51 to 54 cent range compared to 50 cents in the same quarter last year. For the full year this type of growth would put us in the range of 2.24 to 2.25.

With that, now we will be pleased to take your questions. Miles?

(OPERATOR INSTRUCTIONS) Jackie Weiss, Merrill Lynch.

Good morning guys. How are you?

Hi Jackie. Jackie, before you ask your question, could I correct something I just said a moment ago?

Sure.

I said for the full year our growth range would be -- I believe I must have said 2.24 to 2.25. I meant to say to 2.22 to 2.25. So that ties in with the quarterly numbers that I had given just a moment before. I'm sorry for the mistake. And now we will go ahead with your question.

Sure. That makes sense. A couple of questions. First, thanks for your update on your strategic initiatives in the auto segment. Can you elaborate, what allowed you to be more successful with new store openings in the third quarter? And what do you see driving them in the fourth quarter and beyond?

I'll take that question. I think that we just needed to get additional emphasis from our team. And I think we told you at the end of the second quarter that we had some openings that we had anticipated in the second quarter that just slid into the third quarter. So we did pick up the ones that slid a little bit. And I just think our team got more energized in the third quarter, and they're clearly focused on this as top priority. And we're confident that they will hit their number in the fourth quarter as well.

What about the pricing environment in automotive? What are you seeing there?

We see it to be about the same as what it has been on the outbound. And then we can give you an update on what we see with price increases coming from the manufacturers. Jerry?

Jackie, we've got 9/10 of 1 percent increase for the 9 months. And because someone else wants to ask a question for the others, I will give it to you for all four sectors at this time. We have 4.6 percent increase in industrial for 9 months, office products is 0.5 percent, with the Electrical/Electronic Group being 1.8 percent.

Those were 9-month figures, or were those for the third quarter?

No, those were full 9 months year-to-date numbers.

Let me ask you a question. In the third quarter, was the third quarter reflective of those general trends? Or was there some deviation?

You're talking about pricing?

Yes.

No, we were at 0 in automotive for the 6 months, so we've seen a pick up there. And that's an across the board number across all the product lines as well. And the industrial was 4.4 at the end of the second quarter, and office products was 2/10, and EIS was at 0.5 at the end of second quarter.

My last question relates to the industrial segment. Sales were up very strongly in the quarter. Your margins were up just slightly. Can you talk about some of the margin drivers in the segment and how we should think about operating leverage going forward for industrial?

I think you're right, with that kind of a sales increase we probably should have produced more margin improvement. And I think you'll see that going forward. We still have the issue with the inventory reduction over there, and we're working our way through that. But at this point you'll see some margin improvement for the year for them. And it will probably be a little more than we showed in the third quarter. They did go from 6.1 to 6.4 percent.

Will the inventory reduction -- when do you expect that largely to be --?

In 2005 we will have that behind us. We're going to continue to try to keep our inventories in line and reduced them further, regardless of any vendor incentives. That will be our goal, to improve our working capital, to bring those inventory levels down to a point that we don't affect our sales and service level.

It might be interesting at least to mention -- and we've said this before -- our long returned goal operating margins in industrial is in the range of, I believe about 8 percent is what we told you before. And we think we can achieve that realistically. And I believe we will improve toward that number pretty steadily in the quarters that are coming up.

So we shouldn't expect that obviously in fourth quarter, but maybe by the end of '05?

Right. That's correct.

Thanks a lot you guys.

Darren Kimball, Lehman Brothers.

Congratulations on all the good stuff happening and the management changes. The fourth quarter margin outlook in automotive, I was wondering if you could comment there. It's typically the low point for the year. Is that still likely to be the case?

It's possible, Darren. A lot of that depends on what kind of pricing we see in the fourth quarter, and also what our inventory results are. But you're right; it will be improved over the fourth quarter last year. But it is not likely to be as good as in the third quarter.

That's helpful. At this point in the year on the rebate headwind volume discount and rebate headwind, can you guesstimate what that headwind is for 2004?

I'm sorry, Darren, would you repeat the question?

The reduction in volume rebates, can you take a guess at what that headwind is on sort of a full-year 2004 versus '03 basis?

Last year -- and we mentioned this in previous calls. Last year it cost us about 35 to $40 million in income. And this year it is going to be about half of that.

On the pipe -- just getting back to the 7 initiatives. On the Pipeline Plus and interior resets, have you guys shared full-year goals? Or what are your goals around that in terms of store count?

I don't think we gave specific numbers on that. We outlined the opportunity that we had. And we are making very good progress on both of those. That's about as much as I think we've shared in prior calls.

That's great. Thank you.

Jonathan Viennese (ph), Morgan Stanley.

First question is a little color on the automotive sales. Can you just talk about what divergence you saw, if any, between the do-it-for-me and the portion you guys ascribe to do-it-yourself, and then maybe talk a little about geographic and product category type of issues?

I'll try to take that Jonathan. The difference between the DIY and the DIFM was pretty negligible. They were both up about the same for us.

As far as geographic differences, all areas are running good increases. We may be a little bit stronger on both coasts, but all areas are running nice increases for us quarter and year-to-date.

Product categories, we're making good progress I think in areas like filtration, breaks, batteries are all running nicely for us. Conversely, like others who have reported, we see some challenges in some of the temperature control product categories. We did not get the heat this summer that we've had in some prior summers, and that's reflected in our sales. But overall, we're pleased with the progress thus far this year.

Great. and on the payables, it looks like it extended out a few days. Is that a function of the business mix shift? Or is that a function of sort of extending days with your vendors in automotive and the other areas?

It really is not a function of the business mix shift; it's just a function of the strong sales that we have and the purchases associated with that, and also the extended term with vendors. It is actually about a 50-50 split between the increase.

Thank you very much guys.

Frank Brown, SunTrust.

Can you all quantify to any degree what the storm impact might have been on that automotive sales number?

We can't give you a precise number on that. Certainly we were impacted with store closures, distribution center closures for a day or more. But it's awfully hard to be able to pinpoint that exactly. The fact of the matter is the storms impacted all of our businesses to one degree or another, but we're up and running and moving forward now.

I would ask on the office products side, an 8 percent sales gain is really strong. I know that the business correlates with job growth. And I guess we saw some job growth earlier in the year and it seemed to weaken in the summer. Do you have any comments of the with respect to the job market and how that might impact S.P. Richards?

We do track that, and that's an important indicator for us. I think right now the significant thing to focus on would be the white-collar work as opposed to the total labor. It's the white-collar jobs that drive the business more than total employment.

The other thing is we would just say that the office products team is just working a lot of strong initiatives right now. And they're having some success in a number of different areas. And they've got a nice balance to the growth that they're getting currently.

Great. And just one last question on Johnson Industries. I think you said that there was a -1 point impact there in the quarter. Could you just look for it a little bit and tell us how that might play out?

Yes. We did have a decrease there in the quarter. And we anticipate that the next quarter or two we are going to continue to be challenged as we work on some of the new initiatives that they're putting in place there.

We can tell you that we've got a new fellow that has moved into Johnson just recently, and he will be taking over the role of president of the organization. And it's one of our experienced Automotive Parts Group general managers, and one of our best and brightest young managers that is enthusiastically joining the JI team. So we feel good about what they will accomplish, but it's going to take them just a little bit of time have to work their way through this.

Thanks for taking my questions.

Dox Blassis (ph), Gates Capital Management.

I was just wondering -- it looked like your tax rate was just a tiny bit lower than in previous quarters. What was that due to? And is that expected to continue for the full-year?

You could see our tax rate for the full-year is going to be 38.1, 38.2. And it is down some. And it is just some state tax savings and things that we've done, as well as some foreign tax credit that we're taking.

Was there anything in the cash flow numbers that were one time in nature that maybe slipped into the fourth quarter instead of the third quarter this year?

No, not that I am aware of. And if it is, it would be immaterial or I'd be aware of it. But I don't think there's anything in there out of the ordinary. It would be one time issues.

Thanks.

Chip Ruhe, Kramer Rosenthal.

I have just got a couple of questions; two easy ones. Jerry, you mentioned that you'll be retiring some debt. Just if you could save me looking it up and let me know the rate on that? And how much money did you spend on the share repurchase in the quarter that you mentioned? I know you gave the share count. And last, either for Tom or Larry, who wants to take it, I was surprised to hear you talk about an 8 percent margin goal promotion since that's almost where you were in 2002. And I wonder if you think the business has been permanently impaired that you really can't get back to exceeding that level. And then have you -- what do you think the margin goals for all of your segments are? And what heavy lifting might be needed to achieve those goals?

I will take the first one. You had asked about money we spent on the share repurchase. We paid some place between 36 and $37.50 a share on it. I don't really know the dollar spend on that. And your other question. I'm sorry (multiple speakers)

What's the rate on the debt that you're going to call (multiple speakers)

It's a variable rate, and it's floating. It is certain points over LIBOR, and it's and all over the place as LIBOR changes. The rate that will be on the 500 million that will be left there is 2 pieces of that 250 million that expires in 2008 and 250 million and expires in 2011. That average rate on that is about 6 percent.

Thanks.

(multiple speakers)

We didn't get to finish that.

We've got one other question. The question had to do with our operating margins.

In the case of industrial, I think your observation is on target. If we move back to 8 percent we're basically getting it back to the point that we saw when things were really rolling in the industrial sector. Our target right now is to get it back to that point, and we will be gradually getting it back to that point.

I don't know longer range whether we should target something above that or not. I think we just wait and see. 8 percent is a pretty strong margin in that business if you look back historically. So let's just stay with the 8 percent on that one.

You asked about the other segments and what our longer-range goals were. And for our automotive, as we have said earlier, we feel we can move it back to 9 to 9.5 percent. Here again, that's a target we want to hit. If we can hit it, then we will go from there. It could possibly go higher, but we would be very happy to get it back to that point, and we believe that we can.

In office, our goal there is to hold the margin in about the 9.5 percent range. We think it's a great place to be. Realistically we don't think it should move any higher.

In the Electrical/Electronic Group, we said that we would shoot to move that one into the 5 percent range, which we're getting very close to doing at this point in time. Here again, we get it to 5, we will take a look and see what we might be able to do beyond that.

So those are our targets, and that's about all I have to say on that unless there are other questions.

Allen Zwiffler (ph), First Manhattan.

Another boring quarter. A couple of things. When you talked about the store openings, you said 18 in the first quarter, none in the second, 21 in the third. I presume those are net numbers.

Yes sir, they are.

Could give us the gross?

I don't have those numbers with me. I'm sorry care.

But how should one view it in general, meaning what has been the trend? Are you closing stores at a more rapid pace? How does one look at it in the macro sense?

We're not closing more stores than we're opening. But these numbers that we report have always been net numbers. We do close some stores and we also in this -- we consolidate some stores. One of the reasons we have not shown more store opening grow in the last year or so is because we are taking some small stores and consolidating them down as leases expire, and moving them into better locations and taking advantage of that. But yes, there's always going to be stores that are closed or relocated that would be closed for a period of time and added in those numbers.

But just for example, in the second quarter you say it was flat. And so I'm just trying to get the delta between a flat number and a plus 21 number. That's a big change. So could you -- if you don't know the third quarter number, could you at least give us a little color on the delta? Do you know what I'm trying to ask?

Yes. Well, for instance, we would have opened someplace between 40 and 50 stores in the second quarter and we have would closed someplace between 40 and 50, and some of those have been relocations and so forth.

So then -- but that's a pretty big number of closures, which I'm not saying is bad. I'm just trying to understand the trend.

I think that number is high. Probably what you need to do -- we're sitting in the room. We don't have that number in front of us, but it's no number that we mind sharing, so if you want to follow up on that with Jerry, we will get you that number.

That's fine. I just wanted to understand because opening -- because it ties into my next question, which is that you had the automotive operating profits down a tiny bit. And so I was just wondering if that was a function of my first question, meaning that you were more aggressively opening stores, which cost you money.

That's a true statement, but we've had that all along. Anytime we open these stores we expense as much of that as we can rather than capitalizing it. So there is an issue of that. And as you go forward, if you open 100 stores and you're not opening any, there's going to be some pressure in your SG&A.

So maybe that's a part of it. Is there any other reason why -- it's a little number and it's a nitpick, but is there any other reason why your profits in automotive were down slightly?

Just to chip in a moment, I think it has to do with the leverage on a 3 percent sales increase, which was a little softer than usual. I think that is part of it. If we see sales are going to ride in the 3 percent range, we need to do a little bit of trimming, and we will. I think that's what happens when you slip down from a 5 percent range or so, 5 or 6 to a 3, you don't get the leverage. And we just have a little work to do on that.

That's fine. Lastly, in the office product area, good sales growth. Was there some mix change that would be a reason why you didn't get as much operating leverage as you would have hoped?

There is some of that Allen. The technology products carry a lower margin, and we saw some of that. Jerry mentioned earlier both the technology products and the furniture growth impacted us a little bit there.

And that was -- was that just for the quarter, meaning did a lot of people buy furniture in the quarter? Or is that just something that's an ongoing mix shift?

Well, both of those sales -- the rate of increase in those product categories are greater than the other in the quarter. And likewise so was it year-to-date. And we don't know what it is going to be going forward, if they will outgrow the basic office supply group or not. But it certainly was a factor in the quarter and year-to-date.

I think I might just chip in one thing. If you wanted to go back even a quarter or 2 or maybe 3 as the economy really started to look better, I think furniture sales in particular -- we were reporting even back at that time that we could see the impact on that part the office products business. So it started several quarters ago to look better in that area. And I think that's continuing.

Just because I'm kind of dumb, is that out of your biggest product categories these days guys? Or is still the bread and butter -- you still do bread and butter stuff? I wasn't quite clear as to how big those businesses are as a percentage of office.

The biggest segment is still our core office products, basic office products group. So furniture would not be the leading category.

Thank you very much guys. Keep it up.

(OPERATOR INSTRUCTIONS) Dave Siino, Gabelli & Company.

Two quick questions. Jerry, with the payables going up so much towards the end of the third quarter, and your comment that the vendor incentives are more of a function of purchases than actual sales, does that imply that the fourth quarter you should see some relief on that side of the business, particularly on the margin side in industrial?

I think so, yes, David. And that's what we are expecting to see.

So will that number -- you said it will be half -- let's say 20 million for the full year. Does that mean fourth quarter will be --?

We're doing the best we can to estimate that over each quarter of the year. We are required to do that. And I don't know the impact on it on the fourth quarter.

But going forward we won't -- it will be a (multiple speakers)

Again, it will be somewhat of an issue in '05, but it will be less of an issue than it is in '04.

Sure. Jerry, I think you started to talk about pricing -- or maybe it was Tom -- pricing on the auto parts side. And one of your largest vendors just came out and said that they're seeing some pressure obviously from steel prices. I'm just wondering how the pass-through has been working. I assume your product acquisition costs have gone up. And I'm wondering to what degree have you been able to pass that on to your customers.

You're right. We are seeing some increased pricing activity. And we are able to pass some on in the normal course of doing business.

And that's a reflection of your pricing -- that's reflected in your pricing number going from 0 to 0.9?

Yes.

So more of the same in the fourth quarter then?

We would anticipate that right now, yes.

Just a housekeeping question. Jerry, the cash balance, you made a comment about option exercises. What was the contribution from that?

About 28, $29 million came in from the options being exercised.

Thank you very much.

Jim Color (ph), Barrow Hanley.

Just a couple of quick questions. On the margin squeeze on the auto side, I heard Larry say that it was partly a leverage issue with the sales running 3, a little bit below your expectations. But is it also fair to say that there's a little bit of inability to pass-through some of the incoming cost increases that you're getting?

And then the second question -- I won't call it a high-class problem; I will call it a high-class opportunity. You've got $280 million cash. You're going to retire some debt in the fourth quarter, but you are also going to generate more cash in the fourth quarter. And next year you're going to generate another 350 after dividends and everything. You're going to be well in excess of the debt on the balance sheet, which is already quite low. Any thoughts about what you might do with all that opportunity?

I will answer the last question about the cash. We have an ongoing policy. We want to continue to increase the dividend at the Board's direction. How much that will be, we don't know at this point. We also will be more active in the share repurchase program. But we're looking at any small bolt-on strategic-type acquisitions that might make some sense. But at this point it seems to make the most sense to put that cash into Genuine Parts Company.

We're not neglecting any of our businesses as far as reinvesting back into them, as evidenced with the stores. So that will not be a hindrance to investing back into the businesses. But as we go forward, we will manage that cash as best we can and have should shareholder value. And that includes a share repurchase program.

I'll take a stab at the first question. And one of the things that did impact our margins in the quarter was the decrease in sales at Johnson also resulted in decreasing profitability at Johnson. So that had an impact.

As far as the costs and our ability to pass those on, costs on product we're able to pass on, and do that reasonably effectively I think. Some of the costs that we're experiencing are the same costs and others are; things like increased health care and increased operating costs with the price of fuel going up and what not. And it's there that we could use another point or 2 of revenue to help leverage some of those increases.

I don't think -- just to add to what Tom said, I don't think anything fundamentally has changed in our business having to do with parts. We have to plan pretty carefully in parts -- our expenses in particular -- to balance it with giving service. That's always been true. And from time to time we have to make adjustments when sales are not as strong as we had hoped.

And we're doing all that, but I don't think any of that takes our -- when we plan for that 9, 9.5 percent margin in automotive, we have taken into consideration the fact that things like health care and other costs have gone up. So there's nothing fundamentally going wrong in the parts side of it. We have just got to manage a little sharper on the margin side of it if sales persist in the area that they are in right now.

Great. Thanks a lot guys.

(OPERATOR INSTRUCTIONS)

Miles, do we have any further questions?

We do not, sir. Are there any closing remarks?

We just want to thank everyone for joining us. We appreciate your continued interest in Genuine Parts and support of Genuine Parts. And we look forward to talking to you at our next conference call.

Thank you, sir. Thank you, ladies and gentlemen, for joining today. We appreciate your participation. This does conclude today's Genuine Parts Company third-quarter results conference call. You may now disconnect.