純正零件 (GPC) 2006 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Genuine Parts Company first-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Ms. Carol Yancey, Senior Vice President of Finance and Corporate Secretary. Ms. Yancey, you may begin your conference.

Thank you. Good afternoon and thank you for joining us today for the Genuine Parts first-quarter conference call to discuss our earnings results and the outlook for the rest of 2006.

Before we begin today, please be advised this call may involve forward-looking statements such as projections of revenue, earnings, capital structure and other financial items; statements on the plans and objectives of the Company or its management; statements of future economic performance and assumptions underlying the statements regarding the Company and its businesses.

The Company's actual results could differ materially from any forward-looking statements due to several important factors described in the Company's latest SEC filings. The Company assumes no obligation to update any forward-looking statements made during this call.

We will begin today with a brief remark from Tom Gallagher, our Chairman, President and CEO. Tom?

Thank you, Carol, and I would like to welcome each of you on the call today. We appreciate you taking the time to be with us and we thank you for your continued interest in Genuine Parts Company. Jerry Nix, our Vice Chairman and Chief Financial Officer, and I will share the duties on the call today, as we normally do. And once we have completed our remarks, we will look forward to answering your questions at the end.

We released our first-quarter results this morning, and perhaps many of you have had the opportunity to see them by now, but just to recap, sales for the quarter were 2.554 billion, which was up 9%. Net income was 113.9 million, which was up 7%. And earnings per share was $0.66 this year, compared to $0.61 in the first quarter of 2005. And this was up 8%. These results are in line with our internal expectations for the quarter and they gave us a solid start to the year.

In looking at the results by segment, the Industrial operations continue to perform well. Their sales were up 12% in the quarter, and as has been the pattern for some time now, their growth is fairly consistent geographically and across broad customer product categories also. So they are experiencing a good balance in their sales growth, which is encouraging.

And the recently released industrial production and manufacturing capacity utilization figures continue to show strength in the manufacturing sector of the economy. And these indices are positive leading demand indicators for our Industrial operations for the next several quarters.

So the Industrial group has gotten off to good start to the year and the outlook is positive. With this in mind, we are anticipating revenue growth of 8 to 10% for the Industrial Group over the remainder of the year.

Moving on to Electrical/Electronic, they too experienced double-digit growth in the quarter, generating a 13% increase. And they had good results from both the electrical and electronic sides of the business. So as with the Industrial operations, they had a nice balance in their growth, and we feel good about their prospects for the remainder of the year.

The most recent Institute for Supply Management Purchasing Managers Index was 55. Anything above 50 indicates expansion in the industry demand, and this is the 11th consecutive quarter above 50. So the external conditions are positive for this segment of our business. And we look for their growth to be in the 8 to 10% range over the remainder of the year as well.

Our Office Products Group also generated a double-digit improvement, coming in with a 13% increase. And the strong results in the quarter follow a 10% increase in the fourth quarter of 2005. So the sales trends are very encouraging for the Office Products team. They experienced good growth in the quarter in each of their four main product categories -- office supplies, technology products, cleaning and breakroom supplies, and office furniture. And they grew their business nicely across their broad customer base, both independent office products resellers as well as the large national office products organizations. So as with the other business segments, there was good balance in the Office Products sales results.

As we look out over the remainder of the year, we are optimistic about our prospects. The employment figures, as well as the new job creation numbers, continue to be encouraging. And we're planning on 7 to 9% growth from the Office Products team for the remainder of this year.

And finally, Automotive. Sales for this group were up 5% in the quarter, with the core NAPA operations being up 7%. The difference is due to a sizable decrease at Johnson Industries, primarily attributable to the downsizing that was done in 2005 when we sold eight of their 12 locations.

The 7% increase in the NAPA business for the quarter followed a 7% increase in 2005 and in 2004. So these operations have been performing pretty well for us over an extended period of time.

Our Company store group was up almost 9% in the quarter and the independently owned stores were plus 5%. These results are consistent with what we saw throughout all of 2005, so good steady progress in both cases.

And in looking further into the Company store results, our cash business grew at a respectable 6% for the quarter and our commercial business was up 10%, so we continue to grow nicely in both sides of business.

As far as our progress on the seven key growth initiatives, we continue to show solid progress in six of the seven areas. The one area that we did not do as good a job on in the quarter was new distribution. We did open 43 new stores, but we also closed or consolidated 50, resulting in a net decrease of seven for the quarter. While disappointing, our Automotive Parts Group management team recognizes the importance of this particular initiative and we expect them to do much better on this over the remainder of the year.

So this is a quick recap of the revenue performance for the quarter. And at this point, we will ask Jerry to cover the financials.

Thank you, Tom. Good afternoon. I appreciate you joining us on the call today. We will first review the income statement and segment information and touch on a few key balance sheet and other financial items. We will be brief, and then we'll open the call up to your questions.

A view of the income statement shows that total sales were up 9% to $2.6 billion, a solid start to the year and another record sales quarter for us. The sales increase was in the 7 to 9% range in each quarter in 2005 and up 8% for the year. We are encouraged by the continued trend of strong and consistent results. We know that everyone on the GPC team is working very hard, and we're very proud of their accomplishments.

Gross profit in the quarter was 31.47% to sales, which is basically unchanged from the first quarter last year. We feel good about maintaining this level of overall gross margins and continue to believe there's room for improvement in the quarters ahead, especially in Automotive and Office Products.

I might add here that through the first three months of 2006, pricing was not a significant factor for us other than in the Electrical Group. Pricing was flat in Automotive, plus 0.3% in Industrial, plus 0.6% in Office Products and up 3.1% in Electrical. For the quarter, SG&A as a percentage of sales increased slightly from 24.09 to 24.24%.

Effectively managing our costs continued to be a very important initiative for us, and despite the ongoing cost control measures in our operating units, we did experience increases in our items such as property and general insurance costs that were associated with the current market conditions and the catastrophic events of 2005.

In addition, we continue to be challenged by items such as legal and professional expenses, high freight and utility costs, pension costs and stock option expenses, including the cost of FAS 123R. That said, we are not pleased with this level of expenses right now and we're taking the necessary steps to show improvement on this line over the balance of the year.

Net income for the quarter is $113.9 million. That was up 7%. And earnings per share was $0.66, compared to $0.61 last year, up 8%.

Now let's discuss the results by segment. Automotive had revenue of $1.2278 billion, representing 48% of the total. And that was up 5%. Operating profit of 95.9 million, up 1%. So we showed some margin degradation there, from 8.2 to 7.8%.

Industrial, $771.2 million in revenue, representing 30% of the total, up 12%. Operating profit of 57.5 million, up a strong 19%. So good margin enhancement there, from 7.0 to 7.5%.

Office Products -- we had 466.0 million in sales, representing 18% of the total and up 13%. Operating profit of 47.7 million was up 3.6% and operating margins at 10.2, while down from the prior year, were still very strong.

Electrical Group had revenue of $95.5 million, representing 4% of the total. That is up 13%. Operating profit of 4.9 million, up 47%. So strong margin improvement there, from 3.9 to 5.1%.

So with total sales up 9% for the quarter, operating profit was up 7%, resulting in the decrease in operating margin of 10 basis points. Although we're very pleased with the margin improvement in Industrial and Electrical, current gross margin pressures and higher costs such as freight and delivery especially challenged our Automotive and Office Products segments in the quarter.

In addition, Automotive continued to absorb excess costs from Johnson Industries, which on a comparable basis to the first quarter last year was a drain on margins, although to a much lesser degree than in the fourth quarter of 2005.

We had interest expense of $7.2 million for the quarter. That's down 10% from the prior year. For the full year, we'll continue to expect our net interest expense to be in the $25 million range.

Other category of 14.3 million for the quarter was up from 12.7 million from the first quarter of 2004. The primary component of other is corporate expense, although this line also includes the amortization of intangibles and minority interest. We would expect to see an increase in corporate expense this year, specifically those costs associated with pension, employee benefits and other personnel-related costs, as well as insurance and legal and professional expenses. In total, we continue to expect this category to be in a range of 50 to 60 million for the full year.

Now let's touch base on a few key balance sheet items. Cash at March 31 was $150 million. That's comparable to 158 million on hand last year. Our cash position remains strong due to our growth in income and continued improvement in our working capital position. We will discuss cash further in our cash flow comments in a moment.

Accounts receivable increased 9% from last year on a 9% sales increase for the quarter. So our receivables grew in line with our sales. We feel that we can get our receivables back down to a level below our growth rate in sales, which is our ongoing objective. And we feel good about the [cost] of our receivables at the current time.

Inventory was up 2% from the first quarter last year and down 1% from year end. This is very similar to our comps at this time last year, and we went on to close 2005 with less than a 1% increase in inventory for the year. On a 9% sales growth this quarter, we are very pleased with our progress in this area, and we will continue to focus on our inventory management initiatives to further improve our inventory numbers over the balance of 2006.

Accounts payable increased 9% or $76 million from last year, and this represents another period of improvement for us in this area. Our increase in payables over the past few years have been due to the combination of increased purchases related to stronger sales, as well as extended terms established with our vendors. We have made good progress on this line, and looking ahead, we have plans for even further improvement.

Working capital, $2.6 billion at quarter end, is up 3% from the same period last year. Improving our working capital position is another important initiative for us, and we're pleased to see further progress on our working capital efficiency.

Our current ratio, 3.1 to 1, and is consistent with the first quarter last year. And we continue to emphasize that our balance sheet remains in strong financial condition.

We continue to generate consistent and strong cash flows, and we are encouraged by the possibilities the strong cash position provides the Company. For 2006, we currently expect our cash from operations to improve to approximately $500 million. And free cash flow, which deducts CapEx and dividends from cash from operations, should be in the range of 190 to $210 million.

Our priorities for cash remain a dividend, which we increased this year by 8% to $1.35 a share, representing our 50th consecutive year of dividend increases; reinvestment in each of the businesses; share repurchases; and where appropriate, strategic bolt-on types of acquisitions.

CapEx was $27.5 million for the first quarter, and that's up from 20.8 million in the first quarter last year. Related depreciation and amortization was 17.6 million in the quarter, compared to 17.1 last year. Now, we'll continue to expect our CapEx to be in the 80 to $90 million [sic] range for '06. We expect to see our D&A to be up slightly in the range of 65 to $70 million.

Another priority for us has been our opportunistic share repurchases, and as a part of our share repurchase program, we have purchased approximately 600,000 shares of the Company's stock thus far in 2006. Now, this follows the purchase of 2.8 million shares in '05 and leaves us with an additional 2.7 million shares authorized for repurchase as of today. We have no set pattern for the repurchases, but we will remain active in the program as we continue to see that investment in GPC stock will provide a good return to our shareholders.

We continue to believe that the use of cash in these areas serves to maximize the total return to shareholders.

In concluding my remarks, we would add that our total debt remains at $500 million. This represents 15.5% of total capitalization, compared to 16.3 last year. As we've discussed in previous calls, we expect our debt to remain at this current level until our first $250 million credit facility comes due in 2008. The second $250 million is due in '11, and prepayment of this debt is cost-prohibitive due to the make-whole provisions included in the debt agreements.

Overall, I am happy to say we're very pleased with our start to 2006, but we recognize that we must also continue to improve in certain areas. Looking ahead, we remain intensely focused on growing sales, controlling costs and improving our operating margins. As always, we will support this growth plan with a strong and healthy balance sheet and continued strong cash flows, further maximizing our return to shareholders.

I will turn it back to Tom at this time.

Jerry, thank you. Well, that's a recap of our first-quarter results. And from our perspective, we came through the quarter pretty much in line with where we thought we would be. The Industrial and Electrical/Electronic segments had terrific results, and we're mighty proud of these management teams.

Our major operating challenges in the quarter were in Automotive and Office Products, and the issues here are the same ones that we talked about in our February conference call. In Automotive, the NAPA operations continue to produce solid results, but they're being brought down by the results at Johnson Industries and the repositioning of the rotating electrical product line. We will anniversary the rotating electrical situation during the second quarter. And we look for an improving picture here over the second half of the year.

At Johnson, we continue to take steps to bring our cost structure down while at the same time exploring all options with this segment of our Automotive operations.

In commenting on the Office Products Group, these operations have the highest operating margins in GPC, as well as in their segment of the office products industry. However, we have experienced some slippage over the past few quarters and initiatives are underway to turn this around. And we do expect them to end the year with operating margin improvement over 2005.

So in summary, we are pleased with where we stand after the first quarter. Overall, the year is off to a good start, and we feel that revenue growth of 7 to 9% and earnings growth of 8 to 10% is a reasonable expectation for 2006.

At this point, we will turn it back over to Chandra and open it up for your questions.

(OPERATOR INSTRUCTIONS). John Murphy.

Question -- I apologize, I didn't catch the beginning of the call. I got on a little bit late. But I'm just wondering, on the inventory workdown, how much can you get out of inventory this year? And what are the big efforts that you are making there to work down inventory? It's not just a function of Johnson; there were some other excess inventories floating around in the Company. Is that correct?

Well, John, I would say that the first part of your question is how much more can we get down? Our long-term goal is to make sure that our inventory increase is less than our overall revenue increase. And we have been successful in doing that for a period of time now, and we think we can continue to do that over the remainder of this year.

As far as where the reductions are coming from, they are coming from most parts of the Company. And throughout the Company, we've got a fairly good focus on bringing inventories down some without hurting sales.

John, I would also point out that since we've been in this inventory reduction project and will continue in it, our service level has improved in all of our business segments.

But is there anything that you're doing different as far as systems or management that is allowing that inventory reduction? Or is it really just getting back to basics here?

Well, I think certainly all of our management teams are focused on it. That's one thing. But beyond that, we do have some new forecasting logic in some of the businesses and we've upgraded some systems. That's helping us somewhat do a better job.

And then on the cost side of the equation, it sounds like -- I'm not sure whether there's a problem of absorption, or it's not a problem of absorption -- will there be some leverage as the sales rate grows during the course of this year on top of the cost reduction actions that you are taking?

Well, we are expecting that we'll end the year with operating margin improvement in all four of the segments. When I say all four of the segments, I just need to qualify that our NAPA business will show operating margin improvement, and in fact held their margins constant in the quarter.

We still have to work through the rotating electrical and still have to work through the Johnson issue. But the Industrial will continue to show good progress, as will Electrical/Electronic. And we anticipate that the Office Products team will come back and show operating margin improvement by the end of this year.

And some of these -- John, excuse me -- some of these cost reductions we are doing, they are only going to enhance that leverage as we go forward.

I'm sorry, I just want to make sure I got that right. So on a same-store basis, you're saying automotive operating margins were about flat.

In the NAPA side of the business.

Okay. And then just one last question on Johnson Industries. Do you think we will be talking about this again next year? And if not, what kind of opportunities are out there in the dealer network right now for you outside of this Johnson Industries?

Well, one way or another, we won't be talking about this this time next year because we will either have it fixed and be moving forward, or we will find other alternatives. But Johnson is -- keep in mind, Johnson is a smaller part of our overall Automotive Group. It is one that we've downsized and we will continue to do what we need to do to improve that situation.

I think the second part of your question is, how do we grow our sales with the original equipment dealers? Is that the second part of your question?

Yes, the new car franchise dealers, correct.

I think there is an opportunity there, especially for where those operations have good used car businesses. That's where we can continue to grow our business.

Himanshu Patel.

Could you elaborate a little bit on the margin issues that are being faced in the Office Products business? And also, Jerry, maybe you could come back to kind of the revenue growth numbers that you put out there. You're talking high-single-digit revenue growth in that business for the rest of the year. But obviously, the trend in the last couple of quarters has been a lot stronger.

I will take the margin side of it first. And it is primarily gross profit. And there are two areas that are impacting that primarily. One is going into 2005, there were a significant number of price increases that had been announced by the manufacturers. Our Office Products team did some forward buying ahead of those price increases. And that gave us some enhanced margins through the first part of 2005.

Coming into this year, into '06, the number of price increases were nowhere near as dramatic. They were about 25% of the number that we saw in '05. And we did not take advantage of those to the degree that we did in the prior year. So that is one of the factors. And that will moderate as we work our way through the second quarter.

The second part of it is a mix issue. And technology products have been growing at an accelerated rate now for two quarters. And this segment of the market has historically had a lower margin than the core office products. Our folks have several initiatives under way right now that should help to improve the situation over the remainder of the year. And they are primarily on the sell side -- both sell-side price and sell-side mix. So we think that we will work our way toward better figures as the year progresses.

And Himanshu, on the question about the sales, we had [technical difficulty] that we think for the remainder of the year we would be up 7 to 9% for the full year, which implied that for the next nine months we would probably be up in the 8 to 10 range. But in the first quarter, the 9% that we posted, we would be happy to post that the rest of the way. But we don't see -- I guess our conservative nature coming through there -- we just feel like that at this point, the guidance should be in the 7 to 9% top-line range.

Jerry, could you run back through the pricing numbers that you gave for each division this quarter?

Yes, the Automotive was flat. The Industrial Group was 0.3%. The Office Products Group was 0.6%. And the Electrical Group was up 3.1%.

And then the last question -- on the Industrial business, the margins are clearly seeing some benefits now from what is happening on the revenue line. I'm just wondering -- are we going to reach a point on the Industrial business, if you presume revenue growth kind of continues at this clip for the next year, could this business break out into the 8 to 9% margin range on a full-year basis? Or is there a reason to think that there's some sort of lower operating leverage, I guess, you've got in that business the further down the curve?

No, we have said that our goal in the Industrial business is to get the margins up to 8 to 8.5%, and then once there, to assess where we can take them from that point on. But your assumption that we can get to 8 to 8.5% is a reasonable one. And we think that revenue growth staying strong the way it has, that we'll continue to make progress toward that number.

And I'm sorry, one last question. Tom, you had mentioned you had expected margin improvements in each of the businesses. Just to clarify, you were referring to the Auto business in aggregate, or just the pure NAPA business?

No, the NAPA business will show progress this year over last year. The remaining businesses, we'll see what happens between now and the end of the year. We are confident that in our remanufacturing operations, the rotating electrical side, we will show some improvement in the second half over the first half. But I was talking really the core NAPA business.

Keith Hughes.

Have you seen any kind of material change in the pace of business in the automotive sector in the last 30, 45 days as gas prices started moving up?

Not yet we haven't. And just anecdotally, we did see the January miles driven, and they showed a nice increase for the month of January. So right now, things are holding up pretty steady and pretty consistent.

And question for Jerry -- the $200 million of free cash flow -- could you go over again what you're taking off that? I assume you're taking a dividend, but would that also include changes in working capital?

Yes, we are actually -- what we are taking is cash from operations, which does include that change in working capital. But what we are really backing out of there is capital expenditures and the dividend.

Jonathan Stein [sic].

Good afternoon, everyone.

Jonathan, we're not happy on that last name. We know that it is Steinmetz.

Thanks. A few questions -- first on the Auto, in the fourth quarter, you gave a number as to what Johnson Industries and the reman cost you. Ca you give a number for this quarter that would the sort of apple-to-apple with that?

We can tell you that it cost us $5 million this quarter.

Okay. Second question. Jerry, you talked about some initiatives on the SG&A side to try to control costs. Can you talk a little bit about what specifically those initiatives are?

Yes, Jonathan, we're looking at every expense category that we have, primarily the big ones. And we are trying to figure out a way of adjusting deductibles and so forth on these insurance categories. Also the freight -- we're looking at anything we can do on hedging fuel costs and so forth. But by and large for us it always boils down to headcount. And we are looking at headcount reduction pretty much on all of our operations except for Motion Industries and EIS.

And how big a line item is fuel costs for the Company?

I don't know that I have a specific number on that. When you've got the number of vehicles that we have and you've got freight going out each night, as well as delivery out of these stores in the Automotive side, it's probably 2 to $3 billion.

2 to 3% of sales, I would think.

And just to follow up with that, when you think about the increases in those kind of costs and then the pricing numbers you gave us, Auto flat, I think Industrial up 0.3, do you see opportunity in the last three quarters of the year to start to increase prices selectively?

Well, keep in mind, we don't set prices. And those pricing numbers that I gave you are prices to us. And so generally, we pass on pricing increases or decreases, but we don't set pricing. So it would be pretty difficult for us to just put price increases through in the businesses that we're in without having it go through the entire system.

It would be our expectation, though, that Automotive will move up between now and year end, as well the Industrial and Office Products segment. We think Electrical/Electronic will probably moderate. But the remaining three will probably move up just a bit.

(OPERATOR INSTRUCTIONS). Darren Kimball.

Did you say what your sales goal was for the rest of the year for the Auto segment? Did I miss that?

No, we didn't give it out by segment. We just said 7 to 9 in total.

I did tell -- I did say for the other three. And we would be looking for 6 to 8% in the Automotive Group. And if you total all of the ones up, that would put you 7 to 9% for the year.

So everybody else is sort of above the full-year objective and Auto is a little bit below. Is that accurate?

Yes, but the Automotive, keep in mind that the NAPA business is running 7. And the impact of the Johnson Industries sale last year will moderate as the year progresses.

Right. I just was wondering if I could ask about sort of the big picture here on the margins a little bit. You have mentioned a few issues that are behind what you might do on the cost side. But Jerry said it all comes down to headcount. And I'm just wondering with such significant upside from a revenue standpoint versus your expectations, I mean, that would typically create the opposite kind of a problem and you guys would see cost leverage. I'm just surprised to hear you say that after a quarter from a revenue standpoint like you had that you actually have to tackle creeping cost issues.

Well, keep in mind, contributing to the cost that we have are the things that Jerry mentioned in his remarks -- the increased pension costs, the expensing of the long-term incentive program. Those are the kinds of things that we see some increase in. Our insurance costs are up rather dramatically.

So we will continue to work up and down the operating statement. I think what Jerry was saying is that payroll is, aside from the cost of goods, payroll is the next largest category that we have. And if we are going to impact it, we will impact it there more quickly and more efficiently than we will in some of the other areas. But we're looking at everything.

I was just going to say one of the key things for us, and it's a little bit beyond our control, is pension expense. We're looking at an additional $15 million in pension expense in '06 over '05. And that basically is about $0.05 a share to us. And there's not much we can do about changing the discount rate that was in place at 12/31/05 and the return on asset numbers. But those are what they are. And we've got to figure out someplace to take that $15 million of expense out in other categories.

The other thing I would add, Darren, is that we're not going to do anything that's going to taper the revenue growth at all. We are going to be pretty focused and pretty smart about what we do. We're not going to slow up the revenue growth in order to take costs out by any stretch.

I just feel you guys must know something about the cadence of business either on the sales or the cost side, because some of these issues that you're talking about are constants throughout '06. I mean, not the JI stuff, but the pension costs hit you all year long. So if you are going to go from a margin decline to a margin increase on the full year, I mean, that's quite a change in the balance of the year.

I don't think so, Darren. We are only down from 8.2 to 8.1 in the first quarter. And we've got three quarters to overcome that. And we just expect to see some improvement. That's just kind of the way we operate. And I think we will see it. The last thing we want to do is throw out any cautionary things there that we don't feel like the rest of this year is going to go well, because we do.

Just one or two more housekeeping things. The pricing issue in the EIS business, is that copper pass-through, mostly? What is driving that?

Mostly copper. And it came out the beginning of the year. And we expect that it will moderate as the year progresses.

And my last question is just on the -- coming back to the Auto segment -- could you just talk about a little bit about what's going on in Mexico and Canada as far as how they are impacting sales and possibly margins?

Yes, the Mexican business is performing nicely. We continue to make good progress. It's not a big part of the Automotive Group, but they are doing a nice job for us. And the same thing can be said in Canada. That one is a good bit bigger than in Mexico, but they are performing quite well as well.

Chandra, do you have any other questions?

We are showing no further questions at this time, sir.

Okay, thank you very much. We appreciate everyone joining us on the call today and we appreciate your continued interest in and support of Genuine Parts Company.

That concludes the call.

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