純正零件 (GPC) 2005 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Genuine Parts Company, third quarter results conference call. [OPERATOR INSTRUCTIONS] Thank, Ms. Carol Yancey, Vice President of Finance, Corporate Secretary, you may begin your conference.

Thank you. Good morning, and thank you for joining us today for the Genuine Parts third quarter conference call to discuss our earnings results and the fourth quarter 2005 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 forward-looking statements made during this call. We will begin this morning with remarks from Tom Gallagher, our Chairman, President, and CEO. Tom?

Thank you, Carol, and let me add my welcome to each of you on the call today. We appreciate you taking the time to be with us. Jerry Nix, Executive Vice President, Chief Financial Officer and I will share the duties on this call. Once we've completed our remarks we will be pleased to answer any questions that you might have.

We released our third quarter results earlier this morning and hopefully most of you have had an opportunity to see them by now. Sales for the quarter 2.566 billion which was up 9%. Net income was 110.9 million which was up 13%, and earnings per share was $0.63 this year compared to $0.56 last year. And EPS increase was 12.5%. These results all exceeded our expectations and the quarter wound up being our strongest quarter thus far this year. We are certainly pleased with our results in the quarter and we feel that they are indicative of the good job being done by the GPC team throughout most parts of the organization.

Our enthusiasm for the third quarter performance was dampened somewhat by the terrible situations that occurred in Louisiana, Mississippi, and Texas and perhaps at this point, it would be appropriate to give you a brief comment about the impact of the hurricanes on our organization. In the case of Hurricane Rita we consider ourselves fortunate, while we did close all of our operations in the affected area for two days, and although we did have some customers across each of our business units that were impacted, we came through this storm reasonably well. We continue to work with these impacted customers as they restart their businesses but fortunately, Rita was not nearly as devastating as Katrina. In the case of Hurricane Katrina we employed 425 people in the affected area and most of them are now back to work. The majority of these individuals were significantly impacted by the storm and we are providing financial, as well as personal assistance to them as they start to rebuild their lives and this will be an ongoing process.

As far as GPC operations are concerned we experienced varying degrees of business disruption. EIS was the least impacted and returned to full operations several days after the storm hit. In the remaining businesses as of today, six NAPA stores remain closed. One motion industrial branch has not yet reopened and the S.P. Richards office products distribution center in New Orleans remains closed, with these customers being serviced daily by Houston, Dallas, and Birmingham. So while we are not yet back to where we were prior to the storm our folks have done an extraordinary and remarkable job in keeping our operations running and providing essential service into the affected area. And they continue to work closely with customers in all four business segments to help them get their operations back on normal footing. Literally hundreds and hundreds of GPC team members throughout the organization have played an important role in helping our people, our customers, and our companies through this incredible situation. We are deeply grateful to them, and we're extremely proud of all of them.

Now going back to the operating results, the industrial group continues to generate the biggest sales increases. They were up 12% in the quarter and this is the sixth consecutive quarter of double digit revenue increases for the industrial operations. They continue to experience consistent growth from a geographic standpoint, as well as solid growth across their broad customer and product categories also. So they have a nice balance in their sales results and we feel that this is indicative of the ongoing strength that we see in the manufacturing segment of the economy right now. Two of the indices that we follow closely are industrial production and manufacturer capacity utilization figures. These are good leading indicators for our industrial operations and despite some moderation in the September numbers, both of these indices are up year-over-year and they continue to point toward good industrial activity in the months ahead, which we feel bodes well for our industrial operations. Through nine months the industrial group has really done a fine job for us, running 12% ahead and we anticipate that they will be up 10 to 12% in the fourth quarter.

We will comment quickly on EIS, our electrical electronic company. Sales for the third quarter came in at a plus 2%. Now you will recall that we sold a segment of EIS earlier this year and the 2% increase in the quarter actually represents a 10% increase from the ongoing operations. This is a good bit stronger performance than we had projected and we think that it's the result of improving industry fundamentals during the quarter and also good execution of the growth plan by the EIS team. The sales comparisons will be distorted for two more quarters due to the disposition mentioned earlier and our expectation is for EIS to be even to up slightly in the fourth quarter which means that the ongoing operations will actually be up 7 to 9%.

Moving on to office products, it was another solid quarter from this group. They were up 8%, which follows a 6% increase in the first quarter and an 8% increase in the second quarter. So it has been a pretty steady performance from the office products team all year long and we are pleased to see the consistency and the balance in their growth with the large mega type resellers as well as with the independent dealers. Good increases with both categories of customers and this would indicate that overall industry conditions continue to be favorable, and recent employment figures are positive as well. So we would expect the office products group to be able to maintain their growth in the 6 to 8% range in the final quarter, and this would enable them to end the year up 7 to 8% which would be another good sales year from the office products team.

And finally automotive. We had our strongest quarter of the year from the automotive operations. After a full percent increase in the first quarter and a 6% increase in the second quarter, automotive was up 8% in the third quarter with the NAPA business in Mexico making good progress while Johnson Industries continues to run decreases. This might be a good time to give you an update on Johnson. You may recall that we sold four of these operations earlier this year and we have just entered into an agreement to sell several more during the fourth quarter. Upon completion of the sale, we will be left with five locations doing about $150 million annually and these five locations can be run profitably in 2006. So although Johnson will continue to detract from our overall sales results for a few more quarters we will have downsized this operation considerably by year end and we do anticipate a profitable year from them in 2006.

Now going back to the NAPA business, we feel good about the progress being made by this group. They had their best quarter of the year and they continued to do a good job in the implementation of their growth strategy. The NAPA auto care, major account, store reset, outside sales, connectivity, and specialty market initiatives each showed steady improvements in the quarter. And we made progress in the area of new contribution as well by adding 11 new stores in the quarter. Now while not up to the 20 to 25 new stores that we are targeting on a quarterly basis, it's important to point out that we actually opened 17 new stores in the quarter, but then lost the six stores due to Hurricane Katrina as mentioned earlier, and because of the damage done, it's going to take some time to get these stores back in operation. Additionally, we had several more stores that were planned to open in September that got pushed into October due to the storms. These stores are now open and they will be included in the fourth quarter numbers. So we were on track to open the targeted 20 to 25 stores in the third quarter but due to the effects of the hurricanes we didn't quite get there but we are optimistic that we will be back on track with new store openings in the fourth quarter.

We continue to be pleased with the progress being made in our company-owned store operations. This is a group of roughly 900 stores and on a combined basis they were up just over 9% in the quarter with cash business growing 6%, and the commercial business increasing 12%. And we think that these results show that our various initiatives are working pretty well for us right now, and we are optimistic about what the Company's store group, as well as the entire NAPA organization will do over the remainder of the year.

As mentioned earlier our automotive results will continue to be affected by the decreases at Johnson Industries, however, and with this in mind we are planning on combined automotive increases in the 6 to 8% range for the fourth quarter. Now this is a quick review of the sales results for the quarter and at this point we'll turn it over to Jerry to cover the financials.

Thank you, Tom. Good morning. We appreciate you joining us today for our third quarter call. We'll first review the income statement and segment information and then we'll touch on a couple of key balance sheet items. We'll be brief and then we'll open the call up to your questions.

A review of the income statement shows the following. Total sales were up 9% to 2.6 billion, so a steadily improving sales picture and another pretty strong quarter for us. For the nine months ended September 30, sales totaled 7.4 billion, that's up 8% compared to same period last year. Gross profit for the quarter was 30.46% to sales compared to 29.77 last year, up 69 basis points. Year-to-date, gross profit was 30.87 compared to 30.38, up 49 basis points. We're encouraged by our margin gains this year and we are working hard to ensure that this trend continues into the coming periods.

As I mentioned the last call, one of the reasons for our gross margin gains is that we've experienced price increases in each of our businesses this year, and working with our customers we have been able to pass most of these along to them. For the nine months ended in September, our cumulative pricing is up 0.009 of a percent in automotive, 4.7% in industrial, 2.6% in office products, and 2.3% in electrical. SG&A as a percent to sales increase 36 basis points from 23.06% to 23.42 for the quarter and for the nine month period was 23.65, up 34 basis points. Despite these increases, effectively manage our cost continues to be a very important initiative for us, we're challenged by items such as employee benefits, insurance, legal and professional expenses such as Sarbanes-Oxley costs which remain higher than in our prior year periods. Freight costs and SG&A are also trending up as you would imagine and finally I would add that our performance-based compensation costs, such as bonuses and stock options have increased in accordance with our improved results.

Looking ahead we would expect more of the same challenges over at least the near term. But we have seen it before and we're confident that our focus in this our area will generate improved results and turn this into a favorable trend. Net income for the quarter $111 million, was up 13% with earnings per share at $0.63 compared to $0.56 last year, up 12.5.

Now let's discuss the operating results by segment. Automotive we had revenue in the quarter of $1.329 billion, that represents 52% of the total, up 8.1%, with operating profit $108.6 million, up 6.5%, so margins at 8.2%, from 8.3 the prior year. For the full nine months automotive group had revenue of 3.792.8 billion, up 6%, operating profit up 3.3, so margins again at 8.3 compared to 8.5 the prior year.

Now looking at the Industrial Group, for the quarter, they had revenue of 711.2 million, that represents 28% of the total, that's up 12%. Our operating profit of 53.7 million up 31%, and so very good margin enhancement from 6.4% to 7.5%. And for the nine months, the revenue of 2.100.5 billion, again, up 12%, operating profits up 22% for the nine months so asset margin improvement going from 6.7%, to 7.2%. Office products for the quarter, we had revenue of 437.8 million that's up 7.8%, represents 17% of the total. Operating profit, 33.6 million, up 4.4%, so the margins came in at 7.7%, compared to 7.9. For the nine months, they had revenue of 1.250.3 billion, up 7%, operating profit up 6%, so the margins down slightly from 9.3 to 9.2 but still outstanding at above 9%.

Electrical group had revenue of 87.0 million in the quarter, represents 3% of the total. Their sales increase was up 2% with operating profits up 24% at $4.7 million, so, again, excellent margin enhancement there from 4.4 to 5.4, and for the nine month period, the electrical group had revenue of 255.1 million up three-tenths of a percent with operating profit up 12.5% bringing our operating profit margin for the nine months to 5.0, versus 4.4 the prior year so very good improvement there. And then looking at the total, had 2.555.5 billion, up 9% in sales, operating profit up 12, and operating margin enhancement from 7.6 to 7.8 in the quarter and for the nine month period, with revenues of 7.373.4 billion, that's up 7.7%, operating profits up 8.2 so, again, margin improvement for the full nine months going from 8.0 to 8.1%.

So with total sales up 9% and operating profit up 12% for the quarter, we're able to show some improvement in overall margin for the quarter and the nine months. Strong gains in industrial and EIS offset the slight margin decreases in automotive and office products. We still feel good about our margin in the office products group, but I would like to comment further on our automotive margins. Our margin for this group continued to be challenged by specific issues associated with Johnson Industries, our AC Delco distributor and our remanufacturing operations. Tom covered Johnson Industries pretty well so I will move on to a situation in our remanufacturing operations.

As discussed in last quarter's call, we repositioned our rotating electrical line within our remanufacturing operations. In effect we made some pricing adjustments in order to drive additional growth and this has impacted results in all three quarters this year. We're working our way through these adjustments and we expect our impact to moderate somewhat in the fourth quarter and as we head into 2006. Although we didn't improve our automotive margin for the third quarter we continue to plan for some gradual improvement in the quarters ahead. This combined with a good job being done in the other three segments should enable us to show overall margin enhancement for the year as we've planned.

We had interest expense in the quarter of $8.2 million that's down about 1.1 million, or 12% from the prior year, due to our debt reduction compared to 2004. For the year we continue to expect interest to be at approximately $30 million. The other category of $12.3 million for the quarter was up about 500,000 or 5%, and that's made up of $11.3 million in corporate expense, with the remainder in the amortization of intangibles and minority interest. Corporate expense is up 4% from the third quarter last year, and year-to-date is up 7%. We've planned for this increase this year, and continue to attribute it to many of the same costs mentioned in our review of SG&A. This will be cost allocated to corporate expense such as stock options and legal and professional costs including Sarbanes-Oxley-related expenses.

Now, let's touch base on a few key balance sheet items. Cash at September the 30, increased to 340 million from 285 million last year. Our cash position has been much improved over the last several quarters due to our stronger income, the improved working capital position and to a lesser degree cash flow from the exercise of stock options. Through September, our cash from operations is strong, at $494 million, and free cash flow, which deducts the capital expenditures and dividends from cash from operations is approximately 273 million.

We're encouraged by the continued generation of excellent cash flows and the possibilities a strong cash position provides the Company. Our priorities for cash remain, the dividend, share repurchases, reinvestment in each of the businesses, and where appropriate strategic bolt-on type of acquisitions. Our strategy would be to target the small acquisitions that can quickly add value to our existing businesses. Accounts receivable is up 7% on a 9% sales increase so we'll continue to maintain our receivables at a level below our growth rate and revenue. We also continue to feel good about the quality of our receivables inventory was unchanged from September last year and is down 2% or about $41 million from December of '04. We feel good about this inventory level that's relative to our sales growth, and we continue to look for inventory management initiatives to further improve our inventory numbers going forward.

Payables. Payables were up 21% from last year, reflecting increased purchases due to increased sales volume, as well as the effect of the extended terms established with our vendors. We made significant progress in this area and it has had a tremendous impact on our working capital position. Our working capital was at 2.6 billion at quarter end. That's up 4% compared to 2.5 billion, at September 30, last year. Now, with the change partially reflecting our increase in cash. At this level of working capital, we continue to improve our working capital efficiency. Current ratio, 2.9 to 1 the same as in the prior year and the balance sheet, excuse me, remains in excellent condition.

Total debt of $501 million remains unchanged in 2005 and is down 125 million from the same period last year. This represents 16% of our total capitalization, compared to 20% last year. As we said for the last few quarters we expect our debt to remain at the current level of $500 million until our first 200 million credit facility is due in '08. The second 250 million is due in 2011. Prepayment of this debt is cost prohibitive due to make hold provisions included in the debted aggrievance. Capital expenditures were at 19.0 million, down from 21.0 million in the third quarter last year. Our year-to-date expenditure of 59.3 million, and we currently expect our CapEx for the year to be in the 80 to $85 million range. Depreciation and amortization was 17.2 million for the quarter and 51.4 million for the nine months ended September 30. With three quarters behind us we would expect this to be approximately $70 million for the full year.

Opportunistic share repurchases have been a priority for us and as part of our share repurchase program we've purchased approximately 2.2 million shares of our company's stock this year through September, and we added another 200,000 shares in early October, giving us 2.4 million year-to-date. This leaves us with 3.6 million shares authorized for repurchase as of today. We have no set pattern for repurchases. We remain active in the program as we continue to see that investment in the GPC stock would provide a good return to our shareholders. Our results for the third quarter continue the trend of improvement sales and earnings and through the nine months we feel good about our businesses and their prospects for growth in the future. We're proud of the hard work of so many of our employees and we wouldn't be in this position without their efforts day in and day out. And I hear they really came through for us in their communities during the hurricane crisis in the Gulf Coast region. We are extremely proud of each one of them.

So as we look to the fourth quarter and the periods after that, we remain focused on growing sales, controlling costs, and ultimately improving our margins. This is an ongoing plan for, as is managing our balance sheet and generating excellent cash flows. We believe our emphasis in these areas support our future plans for maximizing shareholder value. That concludes my remarks and I turn it back to Tom for some final remarks and then we'll take your questions.

Thank you, Jerry. Now that's a recap of our performance for the quarter and as a result of the good job that was done by the GPC team, we go into the final quarter positioned to have another solid year. Through nine months, sales are up 8, net income is up 10, earnings per share up 9. Earlier in our comments we gave you our current estimates for the fourth quarter sales growth for each of the four business segments. Just to recap, automotive up 6 to 8, industrial up 10 to 12, office products up 6 to 8, and electrical electronic even. When we put it all together, this will give the combined company a sales increase of 6 to 8% for the fourth quarter and revenue growth in this range should enable us to report earnings per share of $0.60 to $0.63 for the quarter and this will put us at $2.47 to $2.50 for the year which will be up 10 to 11%. At this point we'll turn it back over and we'll be pleased to answer any questions that you may have.

[OPERATOR INSTRUCTIONS] The first question comes from Jonathan Steinmetz with Morgan Stanley.

Thanks. Good morning, everyone.

Good morning, Jon.

Just a couple of questions on the auto business to start. Can you talk a little bit about where you saw strength, geographically or across product lines and maybe what the cadence in the quarter looked like and how we moved into October?

This is Tom. The quarter progressed relatively well. We got off to a little slower start in July but then we saw some nice pickup in August. We did have one less day to work with in July. But August was a strong month for us and then we closed it out nicely in September. Geographically, our strongest areas would be in the southeastern part of the country, despite the impact of the hurricanes and then through the central part of the country, the remaining portions performed well but not quite up to the performance of the southeast and the central part. As far as product categories we continue to do a good job on some of the critical products that we sell, our brake and chassis business had a good quarter, batteries had a good quarter. Filtration had a good quarter for us. The rotating electrical had a good quarter for us, with the repositioned pricing so we saw some good results in those product categories.

Okay. You talked about the impact of Johnson and the reman. Do you have an idea if you were to X those out what the margins would have looked like year-over-year without those businesses?

I can tell you that the core NAPA business actually had margin improvement in the quarter and is showing good margin improvement year-to-date as well. So we are really pleased with the progress that the NAPA team is making and we just need to continue to focus on the JI and the -- and the reman business to get them to the point that they can help and be accretive to margins.

And how much room do you think you have over the next two or three years, maybe, Jerry, on the payables side on a days basis? How much further do you think you can realistically stretch that out?

I'm not sure that we know. We're going to continue work in that area. A number of our vendors, Jonathan, are giving us discount in lieu of terms which is fine. We'll take that as well. But we're going to continue to work with all of them going forward. I can't give you an answer from a days standpoint. We are at about $145 million in extended terms there and we'll continue to work in that and we haven't contacted all of the vendors to this point.

Okay. Great. Thank you very much.

Thank you.

Your next question comes from Gerry Marks with Raymond James.

Good morning. Actually, just a follow-up on Jonathan's questions, in terms of the payables. Jerry, can you give us an idea in terms of where you are seeing more of the improvement, whether it's automotive, versus industrial, and what percentage of your payables are automotive versus industrial?

Well, obviously, the automotive 52% of the revenue. We have seen the most progress there and that's where that industry is more likely and familiar with the extended term proposals that are out there, but we are getting some from every one of our business segments. Jerry, I don't know what percent of payables they make up but I would say they'd be in line pretty much with where their sales are, about 50%.

Okay. And you said you had six stores that were closed or it sounded like destroyed because of the hurricanes?

That's right. We had six facilities that are not yet open. We had a number of others that were -- had some damage but they are all open other than those six. And those six, because of facility issues, it will take us longer to get back.

Where and how are you accounting for any extra costs for having to deal with damaged and ruined stores like you indicated in terms of taking care of your employees during these tough times?

Gerry, we are accounting for the expenses just as we would in any other expense going through SG&A. I would point out that we are insured for all of these losses. We have a high deductible, but we are insured and we plan and we already taken some of that deductible at the current time. Our employees have stepped up to help the remaining employees affected by this and we have raised almost $500,000 from the employees and the Company has agreed to match up to $500,000 to contribute back to the cause and so that 500,000 will just flow through SG&A.

Okay. And it sounded like -- did I hear right, you had over a 4% price increase for industrial? I think that's been going on for a quarter or two. When do you guys anniversary that?

Well, we had strong price increases in the industrial group last year, as well, and we have 4.7% thus far this year.

So you don't see any -- this is just kind of a constant thing that you think continues on for the next couple of years or--?

I'm not sure how long it continues on when you look at what happened with scrap steal and oil and petroleum-based products. I mean, it's our manufacturer pushing the prices through because they feel like they have to.

Okay. Thanks.

Great, thank you.

Your next question comes from Mark Stillwell with Veteran Advisory Services.

Hi, Tom, I wonder if you have any reflections as to what some of the consolidation and deals going on in the auto parts sector, obviously the headlines involved helped these that are up here and suppliers to the automotive companies themselves but surely there's some ripple effects that are affecting some of your suppliers.

Well, obviously anything that happens in the supplier community is of great interest to us. Our situation right now is that we are fortunate to be aligned with some of the premier suppliers in the industry, and we continue to feel good about the job that they are doing. We'll have to see what the effect of things like the Delphi situation and others that are going on. We'll just have to see what the effect or the impact of those will be in the long term, but for right now, our supply line is in pretty good shape.

Well, would you want to speculate a little bit, as you look ahead, as to what impact that might have on you? It's not just that, but as you know, there's some LBO firms that are getting into trying to consolidate some of the suppliers.

I wouldn't want to speculate on what might happen. I would say that regardless of where the money comes from, I think it's a positive that there are people that want to invest in this industry, and I think any business is better off if it's in the hands of owners that want to grow and see the business expand.

Thank you.

[OPERATOR INSTRUCTIONS]

Do you have any additional calls in the queue at the current time?

Yes, sir. We have questions at this time.

Okay. Well, if we get to a point, we don't have any there we're not going to just hold the call open so. But go ahead and run the ones you have.

Okay. At this time you have a question from Tim Collar with Beryl Hayley. I'm sorry, his line dropped off. You have a follow-up question from Jonathan Steinmetz with Morgan Stanley.

Thanks. Just on the office products margin, can you talk a little bit about what's happening there? Was there a product mix issue going on? Maybe just a little more color.

I can take that, Jonathan. There is an impact from product mix and the composition of the sales, certainly. And there's a lot of pressure in the industry right now and we're just having to make sure that we maintain our share.

Okay. So given the pressure, it's not something you see changing significantly any time really soon. Is that a fair statement?

I think the margin pressures will be there for some time come. That's true in all of the businesses for that matter. But I would say that we continue to feel good about the progress that they are making and we continue to think that they are going to maintain a very, very high operating margin in the office products business.

Okay. Great. Thank you very much.

Jonathan, we have said for sometime, though that if they could keep their margins up over 9%, we would be pleased with that and they're able to do that thus far.

Okay. All right. Great, guys.

Thank you.

At this time, you have no further questions.

Okay. Thank you. We appreciate everybody joining us on the call today and we appreciate your continuing interest in and support of Genuine Parts Company. We look forward to talking to you at our fourth quarter and year end conference call in February. Thank you.

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