純正零件 (GPC) 2006 Q3 法說會逐字稿

Good morning. My name is Taiwanda and I will be your conference operator today. At this time, I would like to welcome everyone to the Genuine Parts Company 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] Thank you. Ms. Yancey, 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 outlook for the remainder of 2006.

Before we begin, 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 these statements regarding the Company and its businesses. The Company's actual results could differ materially from any forward-looking statements due to several important factors described in the Company's latest SEC filings. The Company assumes no obligation to update any forward-looking statements made during this call.

We will begin this morning with remarks from Tom Gallagher, our Chairman, President and CEO. Tom?

Thank you, Carol. I would like to add my welcome to each of you and to thank you for taking the time to be with us this morning. We appreciate your continued interest in Genuine Parts Company. We will follow the same format today as we have done in the past with Jerry Nix and I sharing the duties. We do have a few prepared remarks which we will go through first, and then after that, we'll look forward to answering any questions that you may have.

We released our third quarter results early this morning and hopefully you've had an opportunity to review them, but for those who haven't, we will quickly recap them for you. Sales for the quarter were $2.7 billion, which was up 6%. Net income was $121.3 million, which was up 9%, and earnings per share was $0.71 this year compared to $0.63 last year and this is a 13% increase. So we were able to get good operating leverage on the sales growth with net income up 9 on a 6% sales increase. And on the revenue side, we would point out that we had one less sales day in the third quarter this year and on a per-day basis, our sales were up 7% in the quarter which is in line with our year-to-date performance.

The results by segment followed a similar pattern to the first and second quarter with Industrial and Electronic operations enjoying the strongest results.

Looking at Industrial first, their sales increase in the quarter was 11% and this follows a 12% increase in the first quarter and a 10% improvement in the second quarter so business continues to be good for our Industrial Group. As we review the details of their results, we continue to be encouraged by the consisting contributions that we are seeing geographically as well as consistency pretty much across customer categories and product groups. As a result, we like the balance that we see in the Industrial figures right now, and this combined with the continued strength in the Industrial production and capacity utilization indices presents a positive picture for this segment of our business in the months ahead. For planning purposes, we're saying 8 to 11% growth over the final quarter and this will give our Industrial operations a solid double digit increase for the third consecutive year.

Before leaving Industrial, we would say or comment that we did complete one acquisition in the quarter where [Ruston] Industrial Supply. This is a five-location operation headquartered in Ruston, Louisiana, $30 million in annual sales, and we'll look forward to giving you an update on the progress in ensuing calls.

Moving on to Electrical/Electronic. This group continues to generate outstanding results. They were up 23% in the quarter and they're running 20% ahead year-to-date so they're having another fine year. We pointed out last quarter that the run up in copper pricing is giving an added boost to the EIS sales but they're still generating mid-teen increases in the underlying business which helps to underscore the good job that the EIS team is doing. As we look out over the final quarter, we continue to be encouraged by the Institute for Supply Management Purchasing Managers Index which at 52.9 for September shows that the EIS market is still growing at a healthy rate, and we look for EIS to be up 12 to 15% in the fourth quarter, which will give them another year of double digit growth.

The Office Supply Group was up 5% in the quarter, which on a per day basis was right in line with their 6% increase in the second quarter so we continue to see steady progress from this segment of our Company. In looking a bit more closely at the Office Products results, we had a good balance in the growth across their customer base, both with the independent office products resellers as well as with the large national office products companies, and we saw good growth as well across their four major product categories, which is encouraging. So we feel good about the steady progress being made and we would expect the Office Products team to generate a sales increase in the 6 to 8% range over the final quarter, which will put them up 7 to 8% for the year.

And finally Automotive. Sales for this group were up 1% in the quarter. If we back out the impact of the downsizing of Johnson Industries, the core NAPA operations were up 3%, which means they were up a little over 4% on a per day basis. This follows 7% increases for the NAPA operations over the first two quarters so we did see some moderation in growth rates in the third quarter, which we think was primarily attributable to the higher gasoline prices as well as the one less sales day in the quarter.

Our Company-owned store group performed well in the quarter with sales up 5% and they continue to show good progress in both the cash and commercial sides of the business. The cash or retail business was up 4% in the quarter and the commercial was up 6%. On a year-to-date basis, Company store retail sales are plus 5% and commercial sales are up 8%, which we feel are solid results and indicate to us that our growth initiatives are being effective.

In prior calls, we've given you periodic updates on the seven key automotive growth initiatives, and although our time today won't allow a complete review, we will comment on perhaps the most visible of the initiatives, new distribution. And we were pleased with our progress in the quarter, opening 29 new stores, which is our best quarter of the year. This puts us at plus 49 year-to-date and we would expect to end the year with 70 to 80 new stores which will help drive sales in 2007.

Now as far as Automotive sales for the fourth quarter, we are planning for an increase in the range of 4 to 6%. We did see an improving trend in our NAPA business in September and this has carried on thus far in October, which is encouraging. But we will continue to have a drag from Johnson Industries, which will offset some of the improvements made in the core NAPA business, and we think that an expectation of 4 to 6% is appropriate at this time.

Before leaving Automotive, a quick comment on a new initiative that was announced during the quarter, which is the heavy duty truck parts initiative. This involves the distribution of replacement parts for Class 6, 7 and 8 vehicles, the over-the-road trucks. For years, we have sold select products for these vehicles through the NAPA system and we feel that we currently have about a 4% market share. However, this is a $15 billion segment of the market and by expanding the product offering and creating a separate division within the Automotive Group, we feel that this presents an exciting growth opportunity for us in the years ahead. We will open our first distribution center for this business here in Atlanta during the first quarter and then we will have a gradual rollout until we have a national footprint and we'll look forward to giving you an update on our progress in this key initiative in the ensuing calls.

So that's a quick recap on the revenue side, and at this point we will ask Jerry to review the financials. Jerry?

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

A review of the income statement shows the following. Total sales up 6% to $2.7 billion. That's another record sales quarter for us and overall business conditions remain strong. As mentioned by Tom, adjusting sales to a per day basis, we would have been up 7%. For the nine months ended September 30th, sales totaled 7.9 billion. That's up 7% compared to same period last year.

Gross profit in the quarter, 30.79% to sales, up 33 basis points from 30.46 in the third quarter last year. This represents our third consecutive quarter of improving gross margins and year-to-date gross profits up 21 basis points to 31.08. We're pleased with this improvement in our gross margins and we believe we have opportunities to show additional progress on this line going forward.

Among several factors, our ongoing initiative to improve product and customer mix have had a positive impact on our gross margins as have the price increases in our businesses. For the nine months ended in September, our cumulative pricing is up 9/10 of a percent in the Automotive Group, 1.7% in Industrial, 2.3% in Office Products, and plus 6.1% in the Electrical sector.

For the quarter, SG&A as a percent to sales increased slightly from 23.42 to 23.50 and for the nine month period in 2006 was 23.79%, up 14 basis points. As we discussed in the last two calls, we continue to be challenged by increases in items such as property and general insurance, fuel-related costs such as freight and utility expenses, and employee benefits such as pension, health care, and stock option expenses. To offset these increases, we are intensely managing all of the other costs in our businesses. So despite the slight increase in total expense for the quarter, we did show some progress and would expect to recognize additional savings from these efforts over the remainder of the year and into 2007.

Net income for the quarter was $121.3 million, up 9%. Earnings per share was $0.71 compared to $0.63 last year, up 13%. We're very pleased with this kind of earnings growth.

Now let's discuss the results by segment. The Automotive revenue in the quarter of $1,345.6 billion. That represents 50% of the total, up 1%, and operating profit $112.1 million. That's up 3%, so even with the moderate sales increase, we were able to show some margin improvement there, going from 8.2 to 8.3% of sales.

The Industrial sector had $791.7 million in revenue. They represent 29% of the total. That was an 11% increase. They had operating profit of 62.0 million. That's up 16% so good margin expansion there, going to 7.8% to sales.

Office Products, revenue in the quarter 459.1 million, representing 17% of the total, up 5%, operating profit $35.3 million. That's also up 5% so that margin stayed steady at 7.7%.

Electrical Group had revenue in the quarter of $107.4 million. That represents 4% of the total. They were up a strong 23%, and operating profit of $6.1 million, up 29%, so good margin improvement there going to 5.6% to sales.

Now if you would, we'll look at the nine months numbers and you can, Automotive had revenue of $3,935.6 billion, up 4%. Operating profit to $321.4 million, up 2.1%, so margins at 8.2% compared to 8.3 the prior year and with the progress that we saw in the third quarter, we believe we'll still be able to at least be flat, maybe up slightly, in operating margin in the Automotive sector for the full year.

Industrial had 2 billion 336.4 million in revenue, up 11%. Operating profit for the 9 months of 178.6 million. That's up 17% so excellent margin expansion from 7.2 to 7.6% to sales.

Office Products. Revenue for the nine months of 1 billion 352.3 million, up 8%. Operating profits of 121.6 million and that's up 6%, and then the operating margin running very strong at 9.0% to sales.

The Electrical Group had 306 million -- $306.8 million for the nine months. That's up 20%. Operating profit of 17.2 million, up 35% for the nine months, so again strong margin improvement from this sector going from 5.0 to 5.6% to sales.

So with the total sales up 6% for the quarter, operating profits up 7.5%, our consolidated operating margin improved to 8.0% of sales, an increase of approximately 20 basis points. We're very pleased to experience some margin improvement in Automotive, Industrial, and Electrical, and as we've said in the past, we're satisfied the Office Products continues to sustain their high margin level.

In the third quarter, the real difference for us was Automotive's ability to work through the negative comps associated with Johnson Industries and the rotating electrical business issues which have challenged this group for some time. But minimizing the impact of Johnson on a comp basis, but still have work to do with this business unit. Furthermore, we continue to evaluate all options for the Johnson business, and as mentioned in our last call, we did anniversary the rotating electrical issue pricing adjustments in the second quarter of this year. So we're encouraged by the operating margin improvement this quarter and we continue to plan for some gradual improvement in this area going forward.

Had net interest expense of $6.7 million for the quarter , and that's down 18% from '05. For the full year, we currently expect our net interest expense to be in the $26 million range. Other category, which includes corporate expense, amortization of intangibles and minority interest, was $12.0 million for the quarter. That's down slightly from the third quarter last year. We feel very good about our improvement in this category and believe this expense will range from 50 to $55 million for the full year.

Now let's touch base on a few key balance sheet items. Our strong cash position of $214 million at September 30th is up slightly from cash on hand at 12/31/05, but down from September 30th of last year due to additional pension payments of $90 million since 9/30 of the prior year as well as the increase in share repurchase and dividends compared to last year. We expect our cash position to remain strong as we grow our income and continue to improve our working capital position.

Accounts receivable increased 6% from last year on a 6% sales increase for the quarter so our receivables grew in line with our growth rate in revenue. It should be noted though that our receivables would have been up 5%, excluding acquisitions, when we purchased the receivables. Our goal at GPC remains to grow our receivables at a rate less than sales so we need to show more improvement here and we plan to do so before year-end. I would add here that we continue to feel good about the quality of our receivables.

Inventory was up 1% from the third quarter last year and down 1% from year-end. On a 6% sales increase for the quarter and 7% for the year, you can see we're very pleased with the continued progress in this area and we'll continue to focus on our inventory management initiatives. Considering that acquisitions and new operations are included in this number, an excellent job is being done in controlling this investment.

Accounts payable decreased 3% from the prior year, but it's up 4% from 12/31/05. I would add that over the last two years, we've made progress on this line due to increased purchases related to the stronger sales and extended terms established with our vendors. We believe we have additional opportunities for further improvement as we go forward and we'll continue to work on this working capital component.

Working capital was 2.6 million at the quarter end. That's up 3% from the same period last year. We remain focussed on improving our working capital position for the last few years and we're pleased that our working capital efficiency continues to trend favorably. Our current ratio, 3.1 to 1, compares to 2.9 to 1 for the third quarter last year. And as this would emphasize that our balance sheet remains in strong financial condition.

We also continue to generate consistent and strong cash flows. We're encouraged by the possibilities that this strong cash position provides the Company. For the full year 2006, we continue to expect our cash from operations to improve to greater than $500 million and free cash flow, which deducts at CapEx and dividends from cash from operations, should be in the range of 190 to $210 million. Our priority for the cash remain. First the dividend, which we've been able to increase for 50 consecutive years. Then ongoing reinvestments in each of the businesses, share repurchases and where appropriate, strategic bolt-on types of acquisitions.

Capital expenditures were 34.6 million for the third quarter. Year-to-date, our CapEx 93.2 million and we'd expect this to be in the 110 to $120 million range for the full year. Now this is up from 86 million that we spent for CapEx in 2005 due mainly to investments in IT systems, new stores and facilities. This number's high for us but a number of projects were in the process of being completed and thus capitalized during the current year. We would expect our ongoing CapEx to be in the 80 to $90 million range.

Depreciation and amortization was $20.2 million in the quarter compared to $17.2 million last year. For the year, we expect our depreciation amortization to be up from last year and in the range of 75 to $85 million.

As mentioned, opportunistic share repurchases have been another priority for us and as part of our repurchase program, we have repurchased approximately 2.9 million shares of our Company stock during the first nine months of this year. We also purchased 2.8 million shares in 2005. At our August 21, 2006 board meeting, our board of directors authorized another 15 million shares for repurchase and as of today, we have an additional 15.3 million shares authorized to be acquired. We have no set pattern for repurchase, but we remain active in the program as we continue to believe that an investment in GPC stock, along with dividends, provides the best return to our shareholders. We feel good about our priority for cash, pardon me, and we continue to believe that the use of cash in these areas serves to maximize total return to shareholders.

Before closing my remarks, I want to reiterate our total debt position, which remains at $500 million. This represents 15.2% of total capitalization compared to 15.9% last year. As we've discussed in previous calls, we expect our debt to remain at this level until our first $250 million credit facility comes due in 2008. The second 250 million is due in 2011 and any prepayment of this debt is cost prohibitive due to the mea culpa provisions included in the debt agreement.

We're pleased with our results for the third quarter and the nine months. We're encouraged by the opportunities that we have to finish the year strong. As always, we're committed to show continued improvement on growing sales, controlling costs, improving our operating margins, and we'll support these initiatives, a strong and healthy balance sheet and continued strong cash flows, further maximizing the return to shareholders. We feel good about our businesses and their prospect for growth in the future.

We also are very proud of the hard work of our GPC employees and we're very appreciative of their efforts in making Genuine Parts Company the great Company that we believe it to be. I'll turn it back to Tom at this point. Tom?

Thank you, Jerry. So that's a recap of our third quarter results and with sales up 6%, net income up 9, earnings per share up 13, we feel that we came through the quarter in pretty good shape. On a year-to-date basis, our sales are up 7%, net income's up 8% and EPS is up 10%, and we feel that we're positioned to report another solid year for Genuine Parts Company in 2006. With fourth quarter revenue expectations as outlined earlier, Automotive up 4 to 6%, Industrial 8 to 11%, Electrical Electronic 12 to 15%, and Office Products up 6 to 8%, we feel we'll end the year with sales up 7 to 8% and we continue to be comfortable with our prior earnings guidance of $2.70 to $2.75 with a bias toward the higher end of the range. At this point, we'd like to open it up to your questions and we will turn it back over to Taiwanda.

Yes, sir. [OPERATOR INSTRUCTIONS] Your first question is from the line of John Murphy with Merrill Lynch.

Good morning guys.

Good morning, John.

You guys have done a good job answering most of my questions here, but I have two left. On the heavy truck division, how big a part of that is -- how big is that in your Auto division and who are the major competitors out there and what kind of market shares do they have? Is it a very fragmented market?

We'll take that in pieces, John. First of all, within the Automotive business, this is -- I might add this is complementary to what's being done. This is not in conflict with what's being done in the Automotive business. We'll continue to do the kinds of business we're doing there. But we currently have what we think is about 4% of a $15 billion market. As far as the competition, it is highly fragmented. The two largest players are privately held companies, Truck Pro and Fleet Pride. And we would think that there's plenty of opportunity for us to grow this and if we can take this up, if we can double the volume, we're looking at 600 billion and we think the potential is significantly more than that.

Okay. And that would all be done relatively organically? Or would there be any small bolt-ons?

Well, we would look at small bolt-on acquisitions. Right now, the plan is to open in the first distribution center in Atlanta in the first quarter and then we will build out a footprint over time to give us a national network, and that will be a combination perhaps of organic growth as well as some bolt-on acquisitions.

Thank you. And then just a second question on general maintenance that consumers or drivers are doing on their vehicles right now. It sounds like there's a lot of preventive maintenance that's been put off because of the high gas prices. Now with the recent pull back, do you see any potential for pick up in auto sales? Again here maybe more than what you're looking for in the fourth quarter in 2007?

Well, I think your observation about some of the maintenance being postponed is probably accurate. At least that's our feeling. Now we did see, I mentioned that September, we saw signs that were encouraging. September was in fact the best month for us in the quarter, and we see the continuation of that in October. We wouldn't want to say that the sales are going to revert back more to high single digit range yet, but we do think 4 to 6% is a reasonable expectation for the fourth quarter and then we'll take it from there on into next year.

Great, thank you very much.

Thank you, John.

Your next question is from the line of Himanshu Patel with JP Morgan.

Hi, good morning, guys.

Good morning, Himanshu.

Just one clarification. Sales from Ruston, were any of those in the third quarter industrial figures already?

We had about 2, 2.5 million in the quarter. We acquired that Company in September.

So not a meaningful number.

Okay. Okay. And then the margin outlook for the Auto business. I mean, it sounds like you're flat to slightly better than year ago. Should we sort of think of that trend continuing? I mean I know previously you guys had talked about expanding margins into the second half. Are you guys still pretty comfortable with that?

We are. We were up 10 basis points in Automotive in the quarter. Our core NAPA operations did a little better job in the quarter for us, which we were pleased with, and we think that we should be able to show continued improvement in the fourth quarter.

Okay. And then, for the revenues on the Auto side. You gave a little bit of color on the cadence of sales over the course of Q3. I'm wondering if you could dial back to the second quarter where, I think, sales were up about 5% between those months of April through June. Did you see a dramatic tail-off in sort of the latter part of that quarter?

We saw some moderation in the quarter, and that continued into the very first part of this quarter, and then we saw, as I said, a nice pick-up in September and continuation in October.

Okay, great. And then I just wanted to clarify something from the earlier question. In terms of market share in the after market commercial truck segment, you guys think you could essentially double from where you are right now. Over what time period are you -- ?

Well, we would say that this business is over $1 billion increased revenue opportunity sometime over the next six to seven years.

Great. Thank you very much.

Thank you.

Your next question is from the line of Keith Hughes with Suntrust Robinson Humphrey.

Thank you. To follow up on that last answer, what kind of capital requirements will be needed to get this truck initiative up and running and what over the next year or two will you have to spend to start heading towards those numbers?

Well, Keith, we think that the CapEx numbers that Jerry gave you have the projections embedded in them for the heavy duty business. Really the facilities will be leased facilities, leased distribution points, so our investment's going to be in inventory and in furniture and fixtures, and we don't think it's going to be a huge number as we build this out.

Is there going to be a getting acquainted period more with some of your suppliers to get them comfortable with what you're doing in terms of trying to grow that business or do you already have a good head start on that currently?

Well, I think it's a good question. I think there will be a period of time where we'll be getting to know one another and looking for ways to work together. I might point out that we have a similar business in Canada. Within our Canadian operations, we have a free standing heavy duty business and this is going to be a replication of that. So we already have relationships through our Canadian business with many of the vendors that we hope to just strengthen as we continue to broaden our position with them.

Was there a certain brand name associated with this? The NAPA name? Is it going to be a new name? How is that going to work?

It's going to be called Traction, which is the name that we use up in Canada, and it's a name that's known within the Canadian marketplace and we hope to leverage that through North America.

And finally the revenues from this would be in the Automotive segment, is that correct?

Yes, they'll be reported there.

Okay. Thank you.

Thanks.

Your next question is from the line of [Tony Crostello] with BB&C Capital Markets.

Hey, good morning, gentlemen.

Good morning, Tony.

I guess the first question I just wanted to maybe get a little more clarity on is when you look at sort of as the quarter progressed on the Automotive side, were you seeing more of a negative impact on the retail front than you were on the commercial front with respect to sales or sales softness?

Tony, we actually saw that in equal proportion across the businesses. We saw evidence of deferred maintenance and anecdotally we validated that by talking to a number of larger customer across the country to see how their business had progressed during the quarter and I think that was fairly consistent with what we had heard from many of them.

Okay. And has it come back then, the strength you're starting to see, or the pick up in September, has it come back equally as well or are you seeing that driven by one category versus the other?

No, they're both, as we look at our September results, for instance, we had good distribution among both sides and that's continuing on through October.

Okay. And then one of the things you talk about is fuel costs and what that might -- impact it might have on the consumer, but what about your -- running a distribution model. How can I look at benefits to you on the cost side with retreating fuel price as well? Is it a meaningful number that you could see a penny swing or is fuel not that much in terms of a percent of revenue or such?

Well, it is a component of the expense side of things, for sure. And what we've been trying to do, first of all, we will benefit from some moderation, but we also look to improve the efficiency of the fleet that we run in each of the businesses. And that's a combination of better utilization of the equipment, some moderation, alteration in the composition of the equipment, just a number of things that we've been doing. As far as how you model that going forward, I'm not sure that we could give you good guidance on that only because we really don't know what's going to happen with the price of fuel.

Okay. Fair enough. And then certainly the Industrial segment continues to drive a very large percentage of your profit growth and I'm assuming that, at least your visibility or what you're talking about should continue. Do you still feel like you've got a good six months visibility out in terms of how your customers are lining up in terms of demand?

At this point we do and we continue to be encouraged by what we see.

I'd also point out, Tony, that we've made these three small bolt-on type acquisitions in Industrial Group that have annualized revenue of about $100 million that will be picked up going forward, as well.

Okay. Okay and then lastly, in this environment where you've seen difficulty on the consumer side and obviously it's impacted your Automotive. How is the morale or how are your employees feeling? Obviously with September being better, I'm assuming that there's been a pickup a little bit there but has that impacted the number of stores that maybe you wanted to open or couldn't open because of the tough environment, and then or maybe perhaps the stores that you close. You opened up a net 29, was that your target this quarter?

Yes, that came in line with what we had expected. We haven't moderated our plans. We haven't pulled back at all. We hope to show similar progress as we close out the year. I think our team is absolutely determined to continue to take market share in the Automotive side of the business. They've got outstanding plans. I'd say that our plans going into the quarter are as good as we've seen in a while and they are resolute in that they're going to be successful in the implementation of those plans.

Okay. Great. Thank you, guys.

Thank you.

Your next question is from the line of Jonathan Steinmetz with Morgan Stanley.

Great, thanks. Good morning, everyone.

Morning.

A few questions. On the Automotive business, this sort of negative impact from gas prices and then potentially some bounce back makes intuitive sense, but can you maybe talk about what evidence you're seeing in that in terms of which product categories have been stronger and weaker and maybe any bounce back in particular product category?

Well, as far as the product categories that are doing a little better job, filtration, oils, which would indicate that more oil changes are being done, have both come back nicely. Product categories that haven't come back as yet, heating and cooling, exhaust product. We haven't seen a bounce back as yet. But I think it's early in the quarter, but at this point, we do feel like the business environment has improved from what we saw through the middle part of the second quarter.

Okay. On the balance sheet, Jerry, the payables here were down year on year. Can you just talk about how much of this is perhaps business mix shift related in different amounts of terms in the businesses versus is it getting tougher on the auto side to push terms out on any of these suppliers that are having financial difficulty?

I don't believe it's anymore difficult on the Automotive side. I would point out two things. First of all, you look at our inventories and where we are with that. We're down 1% on inventories year-to-date. We also had a major supplier in the Automotive side that had some long restrictions that they couldn't do it so they had to come out of the program so that affected that. But I don't believe it's any more difficult to push those terms out. The Automotive folks were more familiar with it than the suppliers in the Industrial and the Office Products and Electrical side, but we continue to work it on all angles. But it was primarily one major supplier that has to come out from under because they had some long restrictions that they were bumping into. But that's it, primarily that and the inventory reduction.

Okay. What percentage of the Industrial business is selling into the Detroit three automotive plants and how much impact did the big fourth quarter production cuts have on your type of business with them?

We do business with the Detroit-based vehicle manufacturers and we do significant volume with them and our business with that customer category is not nearly as strong as it is with the others. But as far as an impact on the fourth quarter, we're showing good growth in some of the industries that are experiencing extraordinary demand right now, things like pulp and paper, mining and aggregate. A lot of the energy-related businesses are all running strong currently and we're able to offset some moderating demand in the vehicle manufacture segment.

Okay, and last question. When you look towards '07, which of the segments do you think has the most possibility for margin expansion potential, even margin expansion?

Well, we're going to look to all of them to improve margin. As far as which ones have the opportunity, every one has an opportunity to show further improvement next year. Industrial, if the revenue stays at the level it's at, can get a lot of leverage off of that kind of volume as can the Electrical Electronic. But as I said, we're planning and expecting that all four of the segments will show improvement in 2007.

Okay. Thank you.

Thank you.

Thanks.

Your next question is from the line of Chip Rewey with Cramer Rosenthal.

Morning, guys.

Morning, Chip.

Wanted to follow-up on the Johnson Industries issue. I mean we had anniversaried. When do we anniversary the branch sale? And then what's the outlook going forward? How much longer are you going to be take some pain on what you have left there seeing as it's something you're working to get out of? If you can't sell it, when are you just going to shut it down and just kind of move past it? And that's it for now. Oh, and also can you break out. You gave us the revenue impact of that. Can you give us the dollar operating income impact of Johnson on the segment?

Let me answer that last part of that then and Tom can answer the other ones that you raised. Last year in the fourth quarter, Johnson cost us $10 million in profits and it was 13 million for the full year. And of course, that was with 12 operations. There were some costs associated with selling eight of those and we're down to the four. So that was the impact that it had for the full year. And we don't -- it was minimal in the third quarter. The big impact was in the fourth quarter.

And then as far as when we anniversary, it will be in the fourth quarter. And then your second component was what are our plans going forward? And I would just say that we continue to be very actively engaged in looking at all options available to us with Johnson and that is a top priority for us.

Okay, thanks a lot.

Thank you.

Thanks.

Your next question is from the line of [Jerry Marks] with [Auto Retail Spots.com.]

Good morning.

Good morning, Jerry.

Just to kind of follow-up. There was a lot questions about [inaudible]. Yesterday the guys from Monroe were saying that there's kind of a lag between when they can pass through the price increases that they're seeing. They're a little bit different because they're all retail. How does that work for you guys? Can you guys pass through? Is it a benefit or is it a disadvantage?

Price increases for a distributor are basically positive because we do, in fact, pass them along as we get them.

So when you mentioned to Jonathan Steinmetz that oil will come back, was that maybe some of it where you were passing through some price increases and then there was a bit of a resistance and now you see people taking those price increases?

When you say, I don't want to confuse the two things. We're talking about the sale of lubricants, is that what you're referring to?

Yes.

All right. The pricing on that has remained pretty steady. It's the price of fuel that we were referring to earlier, gasoline diesel fuel that has moderated in the quarter.

Okay, so lubricants haven't really changed much -- ?

No.

The other question I had was we've been hearing a lot from some of your DIY competitors about sourcing more from China. Have you guys had any talks or any potential changes in terms of your sourcing of your products?

Well, we have been actively involved in global sourcing for a number of years. We have ramped up the initiative over the past year and we continue to want to be kept apprised of what the global marketplace really is.

Okay. Last question I just had. I didn't hear anything about your NAPA Auto Care Centers. Could we have a little bit of an update on that?

Well, the NAPA Auto Care is 13,000 members. We continue to make progress there. It's a big important part of our commercial business and we continue to look for ways to further strengthen that program but we're pleased with the progress that we make in that initiative.

Great, thanks.

Thank you.

Thank you.

Your next question is from the line of [Tim Color] with [Beryl Hanley.]

Good morning and congratulations on another nice quarter.

Thank you.

I just had one follow-up question on the opportunity that you described in the Class 6, 7, and 8 trucks. Is the billion dollar potential revenue opportunity that you see there based on just a sort of a competitive analysis that you've done or is it based on basically replicating in the U.S. the kind of market share that you've got in Canada? And secondly, are the margins, could you talk about that business in terms of margins, growth rates and return on investment compared to your Auto division, excluding that? In other words, is it a similar type of profitability and growth or is it different? Thanks.

Tim, I'll try to answer that. As far as the revenue expectation, that is an extrapolation of what we do in Canada. And if we can replicate the kind of market position that we have in Canada, we think that the billion dollars is an achievable number for us. As far as the margins in looking at our Canadian business, the Truck Parts division and the Automotive division run pretty close to one another in terms of operating income and they run pretty close to one another in terms of returns. So the financial side of it, we think is attractive and that's really what led us to say that we were going to try to replicate it across the U.S.

Okay. Great, thanks very much.

Thank you very much.

[OPERATOR INSTRUCTIONS]

Taiwanda, do you have any further questions on the line?

At this time, there are no further questions. Will there be any closing remarks?

No, we don't have any, and we won't hold the call open any longer. We're just very appreciative of the interest and support and appreciate everyone joining us on the call today and we look forward to talking to you after we have our year-end results.

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