純正零件 (GPC) 2006 Q4 法說會逐字稿

Good afternoon. My name is Russell and I will be your conference operator today. At this time, I would like to welcome everyone to the Genuine Parts Company fourth quarter earnings conference call. [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 morning and thank you for joining us today for the Genuine Parts fourth quarter and year-end conference call to discuss our earnings results and the 2007 outlook. 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 on future economic performance and assumptions underlying the statements regarding the Company and its businesses. The Company's actual results could differ materially from any forward-looking statements due to several important factors described in the Company's latest SEC filings. The Company assumes no obligation to update any forward-looking statements made during this call. We will begin this morning with remarks from Tom Gallagher, our Chairman, President, and CEO. Tom?

Thank you, Carol. And I would like to add my welcome to each of you on the call today and to say that we appreciate you taking the time to be with us this morning. As we customarily do, Jerry Nix, our Vice Chairman and Chief Financial Officer, and I will split the duties on this call. And once we've concluded our remarks we will look forward to answering any questions that you may have. Earlier this morning we released our fourth quarter and year-end 2006 results and hopefully you've had an opportunity to see them. But just to recap, sales for the quarter were $2.543 billion, which was up 6%. Net income was $119.5 million which was up 10%, and earnings per share were $0.70 this year compared to $0.63 in the final quarter of 2005 and EPS increase was 11%. So it was a solid quarter and this enabled us to report another fine year for Genuine Parts Company. For the year our sales were $10.458 billion, up 7% and the first time over the $10 billion mark for our Company. Net income was $475.4 million which was up 9% and we earned $2.76 per share this year compared to $2.50 in 2005 and the increase in EPS was 10%.

So it was another record year in all respects for our Company and we are proud of the job that was done by the GPC team. Looking at the results by segment, the Industrial operations continued to do a splendid job for us. Sales for this group were up 11% in the fourth quarter and they ended the year up 11% as well and as a matter of information, 2006 was their third consecutive year of 11% sales increases, so the Industrial team has really taken advantage of the healthy economy and they have performed well over an extended period. Similar to what we have reported in prior calls, our Industrial sales increases were well balanced geographically as well as across the major product categories and customer segments, which is encouraging and we go into 2007 with a fair degree of optimism for this group. Industrial production and manufacturing capacity utilization remained at healthy levels. The overall economic data remains positive as well and our internal growth initiatives are generating solid results. So we look -- we are looking for another good year from our Industrial operations in 2007.

Moving on to the Electrical/Electronic, this is our smallest segment at 4% of total Company revenue, but they had our biggest results. Sales for this group were up 17% in the final quarter and they were up 20% for the year. So it was a terrific year for this organization and, similar to our comments on Industrial, the external environment remains favorable and the internal initiatives are generating good results, so we go into the new year feeling that the Electrical/Electronic Group will be solid contributors to our results again in 2007. Revenue in the Office Products Group rose 4% in the fourth quarter and they were up 7% for the year. This follows an 8% increase in 2005, so it was another steady performance from the Office Products team. In looking a little closer at their results, we're pleased to see solid growth across their customer base, both with the independent Office Products reseller as well as the large national organizations, and we think that this is indicative of favorable industry conditions.

Additionally, we continue to see steady and positive job creation in the service sector of the economy, which we think bodes well for our Office Products Group as we enter into the new year. And finally, a few comments about Automotive. Sales for this group were up 2% in the quarter and up 3% for the year. Core NAPA operations were up 3% in the quarter and up 5% for the year. The difference is in the downsizing of Johnson Industries. After starting off 2006 with solid increases in the first two quarters of the year, we, like others in the after market, saw moderation in demand beginning early in the third quarter and this carried on through year-end. Our Company Owned Store Group experienced some moderation over the past two quarters also, but they still ended the year in pretty good shape. Company stores were up 5% in retail for the year and they were up 8% in commercial sales. That gave them a combined 7% increase for the year, so they continue to make steady progress, which we think validates the growth initiatives that they are implementing and we feel positive about the sales job being done by the Company on stores despite the industry wide slowdown.

There are a number of positives related to our seven key growth initiatives to point out for our NAPA operations in 2006. And while time won't permit a complete recap, here are a few examples. In the area of new distribution we opened a net of 64 new stores during the year. And while not yet up to our goal of 100 stores per year, this follows 47 new stores in 2004 and 55 new stores in 2005, so we're moving in the right direction and we are planning for our Automotive team to hit the 100 new stores in 2007. We made solid progress in NAPA Auto Care this past year. We were pleased to see a 2% growth in the number of Auto Care Centers across the country and an overall 5% growth in Auto Care volume for the year. This is our largest commercial program and it's good to see the steady and consistent progress being made here. Over 700 stores were remerchandised and reset in 2006, which will help drive additional retail sales in the year ahead. And we have plans in place to increase the number of store resets in 2007. Additionally, almost 400 outside sales representatives were added across the NAPA system this past year, which will help us capture additional commercial sales in '07.

These are just a few examples of positive achievements from the NAPA Team this past year and they will help us to capture additional market share in 2007. Now as we look into the new year the overall industry fundamentals are generally favorable. And as demand picks up, which it invariably will, and as we continue to execute the elements of our growth strategy, we think that the NAPA organization is positioned to turn in a solid performance in 2007. Before concluding my remarks, a few comments on our heavy duty truck parts initiative. In our last call we told you that we felt that this was a good growth opportunity for Genuine Parts Company. You may recall that it's a $15 billion segment of our industry and we estimate that we currently have about 4% market share. We have just opened the first truck parts distribution center here in Atlanta and we plan to open at least one more operation in 2007. Over time, this initiative will have a national distribution footprint and we feel that it opens up another exciting growth opportunity for us in the Automotive segment of our business. We look forward to giving you further updates in subsequent calls. At this point I'd like to turn it over to Jerry and ask him to cover the financials.

Thank you, Tom. Good morning. We appreciate you joining us on the call today. I will first review the income statement and segment information and we'll touch base 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 for the fourth quarter were up 6% to $2.5 billion. We finished the year up 7% at $10.5 billion. So another record sales year for us and we remain optimistic about the opportunities we have to continue this trend. We're very proud of the GPC team for their accomplishments and continued committment to sales growth. Gross profit in the quarter was 32.07% to sales compared to 32.69 last year. Fortunately, we had improved our gross margins in each of the first three quarters of the year so year-to-date gross profit held constant with last year's 31.32%. We're pleased to hold our ground on gross margin but believe we could be doing a better job here and see opportunities to show additional progress on this line going forward. We'll continue to focus on product and customer mix as well as our global sourcing initiatives.

For the year our cumulative pricing, which represents supplier increases to us, is up 1.7% in Automotive, 2.6% in Industrial, 3.0% in Office Products and 6.9% in Electrical. Now let's look at the SG&A. For the fourth quarter SG&A as a percent to sales decreased 91 basis points from 25.35 to 24.44%. And for the full 12 months in '06 was 23.95%, which is down 12 basis points from '05. In each of our calls this year, we discussed a continued challenge of increases in items such as property and general insurance, fuel related costs, such as freight and utility expenses, and employee benefits, such as pension, healthcare, and stock option expenses. To offset these increases we've intensely managed all of our costs in our businesses and, where necessary, implemented certain cost cutting measures. So we're pleased with our progress on this line and continue to look for additional savings from these efforts in 2007. Net income for the quarter of $119.5 million was up 10%. EPS of $0.70 compared to $0.63 was up 11. We're very pleased with these kind of earnings growth and feel good about our record level of earnings for the year. Now let's review the results by segment.

For the quarter, Automotive had revenue of $1.2495 billion, that's up 2%. They had operating profit of $78.5 million, that's down 6%. So operating margin degradation there at a 6.3% of sales. We'll discuss the operating margin situation in just a moment. The Industrial Group for the quarter had revenue of $771.2 million, that's up 11%. They had operating profit of $78.4 million, that's up 27%. So strong margin enhancement added 10.2% of sales. Office Products had revenue in the quarter $427.6 million up 4%. Operating profit of $45.0 million up 7%. So again, outstanding margins at 10.5% of sales versus 10.2 the prior year. Electrical Group had revenue in the quarter of $101.3 million, that was up 17%. Operating profit $5.4 million up 15% and margins very strong at 5.4% of sales for the quarter. Now look at the full year. Automotive had revenue of $5.1851, that's 49% of the total and the first time that that's been under 50%. And we had increase in revenue for the full year in Automotive of 3%, operating profit $399.9 million flat for the year, with operating margins coming in at 7.7% compared to 7.9 the prior year.

Industrial Group had $3.1076 billion representing 30% of the total, up 11% for the year. Operating profit $257.0 million and that's up 20% for the year, with excellent margin enhancement going from 7.7 to 8.3 % for the year. Office Products revenue for the full year of $1.7798 billion representing 17% of the total, that's up 7%. Operating profit $166.6 million up 6%. So strong operating margins continued above 9% at 9.4%. The Electrical Group had revenue for the full year of $408.1 million representing 4% of the total. They were up 20%. Operating profit $22.6 million up 30% and strong margins for the full year 5.5% of sales. So with total sales up 6% for the fourth quarter, operating profit up nearly 8%, our consolidated operating margin improved to 8.2%, an increase of approximately 20 basis points. This gave us an 8.1% total operating margin for the full year, which is consistent with 2005. Our fourth quarter increase was mainly due to our margin improvement in Industrial and Office, which demonstrates the great job being done in these businesses.

In Automotive, we experienced a decrease in operating margin for the quarter, primarily due to slower sales growth in this segment over the last half of the year. It's just very difficult to leverage our fixed expenses with a 1% and 2% sales increases. In addition, we recorded $5 million of additional costs at Johnson Industries related to our continued downsizing of that business unit. And at our Remanufacturing Division we incurred expenses of approximately $4 million related to consolidation of facilities. If we exclude these types of costs from our Automotive comps , operating margin for the Parts Group is consistent with last year's margin for the fourth quarter and the year. Excluding these charges on a consolidated basis, our total operating margin would have improved another 30 basis points in the fourth quarter to 8.5% and 10 basis points for the full year to 8.2%. Regarding our Johnson Industries operation, we can tell you at this time that we continue to work toward a prompt resolution with this business. We have nothing specific to report to you today, but we're hoping to be in a position to provide more clarity on this segment's future in our next call.

Despite these challenges in Automotive, we expect to see improved sales growth for this group relative to the third and fourth quarters of 2006 and we're forecasting improved margins for the Automotive Parts Group as well as the Company in 2007. I'll add here that our pre-tax profit margin, which considers all our operating expenses including corporate expense as well as interest, improved again in '06, up 12 basis points to 7.37% of sales. This is the third consecutive year of improved pre-tax margins, which we're pleased to report. Had net interest expense of $6.2 million for the quarter and for the full year our net interest expense was $26.4 million down 11%. We would expect this net interest to be about the same in 2007. The other category, which includes corporate expense, amortization of intangibles and minority interest, was $7.2 million in the fourth quarter compared to $9.6 million last year. For the year, this category was flat with '05 at $49 million and we currently expect this expense to be approximately $50 million again in 2007.

Now let's touch base on a few key balance sheet items. Cash at December 31 was was $136 million, down $53 million from $189 at December 31 of '05. While still strong, this decrease relates to increase in cash use for working capital requirements, capital expenditures, stock repurchases, and dividends. We expect our cash position to remain strong as we grow our income and improve our working capital position in the year ahead. Accounts receivable increased 3% from last year on a 6% sales increase for the fourth quarter, so our receivables grew less than our growth rate in revenue. As mentioned in our last call, we were looking for some improvement in this area in the last quarter of 2006 and management really came through and did a great job for us. We're very pleased with this level of growth for the year and we continue to feel good about the quality of our receivables. Our goal at GPC remains to grow our receivables at a rate less than sales growth.

Inventory 12-31-06, it was up less than 1%, up approximately $20 million from last year, and this follows a 1% increase in 2005 as well. Inventory remains at $2.2 billion and we've shown steady improvement in this area for awhile now. On a 6% sales increase for the quarter, 7% for the year, we remain very pleased with this 1% increase in our continued progress and control of this investment. We'll continue to focus on our inventory management initiatives in 2007. Accounts payable decreased 7% from last year to $910 million. After making significant progress on this line in each of the prior two years, we did slip a bit in this area in 2006. Looking ahead we have plans in place to better manage our trade payables and show improvement on this line in '07. Working capital $2.6 billion at December 31 was up 3% from last year. We remain focused on improving our working capital position and working capital efficiency improved to 25% in '06 from 26 % in '05. We intend to continue this positive trend into 2007.

Current ratio at 12-31 3.2 to 1 and we would emphasize that our balance sheet remains in excellent financial condition. We continue to generate consistent and strong cash flows and our strong cash position provides the Company many opportunities. Cash from operations was approximately $434 million for the year, which was consistent with 2005. Free cash flow, which deducts capital expenditures and dividends from cash from operations, was $79 million and that's down from last year due to the increased capital spending and dividends. Our priorities for cash remain -- First, the dividend, which we've paid every year since going public in 1948 and yesterday, the Board approved an 8% increase in dividends for 2007 to $1.46 per share. This represents 53% of 2006 earnings and marks the 51st consecutive year of increased dividends paid to shareholders. Other priorities for the cash include the ongoing reinvestment in each of the businesses, share repurchases, and where appropriate, strategic bolt-on types of acquisitions.

Capital expenditures were $32.9 million for the fourth quarter, that's up from $26.4 million in the fourth quarter last year and for the full year CapEx at $126.0 million up from 85.7 in '05. Increase in spending in '06 was due to productivity enhancement investments in IT systems, new stores and facilities, and a number of these projects were in process which were completed and placed in service during the year. In 2007, we should see our CapEx spending moderate back to approximately $100 million. Depreciation and amortization was $17.9 million in the quarter, 73.4 for the year. And this is up from '05 and this directly relates to the increase in CapEx for the year. Depreciation and amortization is expected to be in the range of $75 to $85 million in 2007. Opportunistic share repurchase has been another priority for us and as part of our repurchase program, we purchased approximately 2.9 million shares of our Company stock during 2006. We also purchased 2.8 million shares in '05.

At the August 21, 2006, Board meeting, our directors authorized an additional 15 million shares for repurchase and combined with the shares previously authorized, we have 15.3 million shares remaining as of December 31. Now, year-to-date in 2007, we purchased another 200,000 shares leaving us with 15.1 million shares available for repurchase today. Have no set pattern for repurchase, but we remain active in the program as we continue to believe an investment in the GPC stock, along with the dividend, provides the best return to our shareholders. We feel good about our priorities for cash as we move into 2007. We continue to believe that the use of cash in these areas serves to maximize the total return to shareholders. Finally, I want to reiterate our total debt position, which remains unchanged from the previous two years at $500 million. As we've discussed in previous calls, we expect our debt to remain at its current level until our first $250 million credit facility comes due in November of '08. The second $250 million is due in 2011 and any pre-payment of this debt is cost prohibitive due to the make-whole provisions included in the debt agreements.

Despite no change in the debt, our total debt to total capitalization at December 31, '06 did increase to 16.4% from 15.57 in 2005. Now this was due to the FASB's new standard related to the accounting for pension and other post-retirement benefit plans. Without this change our total debt to total cap would have been 15.0%. To comply with the new standard shareholders equity was reduced by $284.8 million net of taxes on December 31, 2006. This entry aside, we still feel very good about the funding status and the financially sound position of the GPC pension plan. Overall, we had a very good fourth quarter. We're extremely pleased with our strong results for 2006. With another record year behind us, we've now increased sales in 56 of the last 57 years and increased profits in 44 of the last 46 years. We're proud of this record and we feel it reflects an unending committment to steady and consistent growth at Genuine Parts Company.

We've got many good things happening at GPC and in the markets we serve. We turn our focus to 2007, our goals remain to show continued improvement on growing these sales, controlling costs, and improving our operating margins. We'll support these initiatives with a strong and healthy balance sheet, continued strong cash flows, to further maximizing our return to shareholders. We feel good about our benefits and their prospects for growth in 2007. We're very proud of the hard work of our employees and they are to be congratulated for their accomplishments in 2006. We are very pleased with their efforts in making Genuine Parts the great Company we believe it to be and we know we have the right people in place to make it an even greater Company in the years ahead. I'll turn it back to you, Tom.

Thank you, Jerry. Well that recaps our performance for the fourth quarter and year-end and we are pleased to report that it was another record year for Genuine Parts Company. With sales up 7%, net income up 9 and EPS up 10%, we feel that solid progress was made throughout most parts of the Company in 2006 and we go into 2007 with expectations that it will be another good year. Now as far as 2007 is concerned, we feel that our annual revenue growth will be in line with our stated long term goal of 6% to 8% and in line with our revenue growth over the past three years. Our expectations are for more modest growth in the first quarter, however, and then gradually building over the remainder of the year. Our thinking for the first quarter is influenced by the fact that we're going up against our strongest quarter in 2006 and also by the fact that the Automotive segment has not yet come back to more historical rates. You will recall that the entire after market saw a slowdown in demand over the second half of 2006.

In our case, our Automotive operations were up 1% in the third quarter and 2% in the fourth, with the NAPA business being about a point or so better. While we have seen a modest improvement in demand over the past few weeks, our thinking is to remain on the cautious side for now and we're planning for 2% to 4% growth in Automotive in the first quarter. For Industrial we're saying 7% to 9% in the quarter. For Electrical/Electronic 8% to 10% and for Office Products 3% to 5%. You may recall that Office Products was up 13% in the first quarter of this past year, by far their strongest performance in 2006 and our expectations for the quarter are tempered by the strong comparison. Blending all of this together would put us up 4% to 6% from a total Company perspective in the quarter.

Now, as mentioned earlier, we do feel that 6% to 8% is a reasonable expectation for the full year and revenue growth in this range should enable us to produce earnings per share for the year between $2.95 and $3.05, which would be up 7% to 10%. Additionally each of our businesses will continue to be focused on operating margin expansion, asset management improvements and working capital efficiency and we look forward to reporting on our progress on a quarterly basis. At this point we'll ask Russell to open up the call to your questions. Russell?

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q & A roster. Your first question comes from Himanshu Patel with JP Morgan.

Hi, good morning, guys.

Good morning.

Two questions. First, on the demand side for the Auto business, in the third quarter we had a lot of softness and I think the fuel cost environment was sort of the main thinking behind that weakness. I'm just wondering what's your thoughts on what happened in the fourth quarter because that issue seems to have obviously receded.

Well, in our case, we had just a modest improvement Q4 over Q3, but not up to the historical levels. We are looking for a bit further improvement over the first quarter of '07, but again, not back to where we feel it should be. We've done some anecdotal investigation on it. We find that at the repair side, the demand has not come back to more historical rates, but we do think that we'll see some lift in the business as we work our way toward the end of this quarter and on into the second quarter.

Okay. And then what was the full year sales and profit impact from Johnson Industries?

The sales impact would have been about two points for the full year and then on the profit side, our margins would have been constant without the JI and the $4 million that Jerry mentioned for remanufacturing restructuring.

Constant with 2005?

'05, that's right.

Right, okay, and just to clarify, your comments earlier suggested that we would get some clarity on Johnson Industries maybe by next quarter?

We had actually thought that we might have an opportunity to be a little more definitive in today's call, but we think it best to wait until the next call and hopefully give you some more definition on that.

Okay, great. Thank you very much.

Thank you.

Your next question is from Matthew Fassler with Goldman Sachs.

Thanks so much and good morning to you.

Good morning, Matt.

A couple of questions here. If Johnson Industries were not to be resolved in the immediate future, would you expect some continuing -- some ongoing one-off charges, if you will, as you continue to kind of clean this up internally?

I don't think that we're going to see anything significant beyond what's already been done. We'll have to wait and see what the ultimate resolution is, but from where we sit today, we think that the worst is behind us and hopefully, we can give you, as I said, more clarity and definition when we visit next.

Understood. On the store growth, the growth I guess in Company owned stores for the NAPA business, you talked about 64 openings in 2006. Can you just give us the precise number that the base then would have been at the beginning of 2006?

Well, right now, we're at 5849 stores.

Right.

So you can just take the 64 off that.

That's Company owned stores or that total included?

No, that's total stores. Company stores are roughly 1,000.

And are the 64 all Company owned or does it also include franchise?

No. It's about 50/50, Matt, in terms of the new ones that opened.

So if we were to try to look at the kind of organic number, if you will, or same-store number for your Company owned stores we would probably take a point or two off the growth rate that you gave us?

it would be a point or less.

A point or less?

Yes. When you look at a store count of roughly 1000 and roughly 32 on a 1000 store base and then also new stores don't generate the kind of volume that we do in established stores, so it would be less than a point I think.

Fair enough. Just a little more color, if we could, on the expense control, because obviously extraordinary this quarter. Through the nine months you were actually up a little bit on a year-to-year basis and in the fourth quarter you took the SG&A ratio down by about 80 basis points. Anything in particular driving that improvement?

I think for the most part our management team is just doing a really top notch job in trying to match expense levels with revenue levels and I think Jerry mentioned that our CapEx was up by a significant amount this year. I think some of the investments that have been made are largely geared toward driving further improvement in productivity and I think that's helped us somewhat as well. We had good growth in productivity levels this past year across the businesses and I think our headcount's remained fairly constant despite the revenue increases.

Great. And then finally, copper prices having an impact anywhere in the business?

Well, the copper price would be most prevalent in the Electrical/Electronic and we saw -- we benefited from the run- up that we saw for most of 2006 and they've moderated some, so we're not getting that same level of lift. I might also mention that we continue to be pleased with the growth we're seeing at EIS despite some moderation in the copper prices. As far as the other businesses are concerned, the impact is no where near as significant as it is at EIS because of the magnet wire that we sell there.

Great. Thank you so much.

Thank you.

Your next question is from Rick Weinhart with BMO Capital Market.

Hi, good morning, everyone. A couple questions. First, if we could talk a minute about the office supplies business. One of your suppliers, I believe your largest supplier's ACCO brand who talked about putting in a major price increase in January and one, I wanted to check with you. You had some pretty decent inflation in the business last year in 2006 and that was, I think, one of the first years you've seen it in some time. I'm wondering if your expectation is for more inflation on the business this year and two, if you're seeing that price increase in early January, did you in fact buy in advance of that to capture any margin or were you more concerned with the working capital impact?

I'll try to answer the various components of your question. First of all just a point of clarification. ACCO brands is a very, very important supplier to our Office Products Group, but they are not the largest supplier, but an important supplier, all the same. The price increases last year were a little bit stronger than what we've seen in some prior years, 3% for the full year, if I'm not mistaking. We would not expect price increases to be at that level in 2007. We think they will moderate some. And keep in mind from a distributer's perspective, our attitude is that if the vendors need price increases, we're very supportive of that provided that the price increase is applied across all of their customer categories and at the same time , but from a distributer standpoint, a little bit of price increase is actually good for us. It gives us some additional leverage.

Okay, great, thanks. And on the price increase itself though, I mean, was it something that you would have taken advantage of the buying opportunity out of that?

I'm sorry, I missed that part. Thank you for bringing it up. We would have but not to a large degree. We try to make a calculated, informed judgment on how much we'll participate in forward buying like that, but we'll take advantage of it if we think our inventory levels will support it.

Okay, thank you.

Thank you for the question.

Sure. And on the Industrial business, also a competitor of yours had recently reported, AIT, and talked about certain inventory buildups in the channel for their customers as a result of weaker sales for them in the quarter. Obviously you had a very strong quarter in that segment. I'm wondering, were you able to overcome those same issues or weren't you seeing that kind of buildup in the channel?

I don't think we experienced the same buildup that maybe they referenced, honestly. I think in our case, the customers just continued on with steady buying patterns.

Okay, thanks. My last question is on the pension impact. It sounds like it was an accounting change that drove that. I'm wondering if your expectation or what your expectation would be for 2007 pension cost? Is there any change in that like as a result of this?

We will see another $2 to $3 million increase, if things stay the way they are now, in our pension expense in 2007. I would say though that the FAS 158 was not run through the income statement. That was strictly a balance sheet adjustment.

Right, okay. Thanks very much.

Thank you.

Your next question comes from Keith Hughes with SunTrust.

Hi, good morning, guys. This is [Shazad Ali] in for Keith.

Good morning.

Just digging down into the Auto segment. During last quarter's call, you kind of dug into the categories, the product categories. Could you maybe do that again for us?

As far as the categories that are growing at a little bit faster clip?

Yes. Maybe like where you saw some weakness in some trends, filtration, oils, heating -- .

Well, we continued to see good growth in the two categories you just mentioned, filtration and oil. Our battery business is good. Our heavy duty business, T&E business is good. Our paint business was good. Where we're seeing more sluggish demand is on some of the under-hood categories as well as in the temperature control. We did not have a very good year on temperature control in 2006, nor in the fourth quarter. So the under-hood categories and heating and cooling would be where we've got some work to do yet to get the demands up.

Okay. Thanks. You went over Company owned store revenue. Could you maybe break it down for the quarter what it was for cash and commercial and also just overall?

For the year, I'll look for it for the quarter but for the year, the cash was up 5% and the commercial was up 8% and I'll have to look and see if I have it in my notes here as far as the quarter. I can tell you that we did see some moderation both in cash and commercial business in Q3 and Q4, but it was still at a very respectable rate. But our year got off to a very good start over the first two quarters and then we did see some moderation even at the Company stores over the second half of the year.

Okay.

But it was five and eight for the full year.

Okay. On heavy duty truck parts, traction, can you give us a little more color on maybe the contribution during the quarter and what you're seeing currently?

Well, there was really no contribution in Q4 because we just got it opened up here in the last couple of weeks. So there was nothing that contributed and this will ramp up as 2007 goes on, the contributions will not be significant in '07. The contributions will really start to make an impact in '08 and the years beyond as we continue to buildout the footprint.

Okay, thanks. Lastly, on the Electrical segment, how was operating margins ? Why were they experiencing crashing? Looks like year-over-year they were down a little bit. Maybe can you shed some color on that?

Well, year-over-year for the full year, they were actually up 40 basis points. We saw just a slight degradation in the quarter and that was just some year-end adjustments and trueing up at the end of the year. But they did show a nice 40 basis point improvement, 5.5 to 5.1 '06 over '05.

Okay. Thanks and congratulations on a good quarter.

Thank you.

Your next question is Jonathan Steinmetz with Morgan Stanley.

Thanks, good morning, everyone.

Good morning, Jonathan.

A few questions here. First of all on the Industrial, can you just help me out a little bit understanding some of the seasonality of the EBIT line? For example, the revenue was down about $20 million versus the third quarter and the EBIT is up about 16. I'm just trying to understand if there are a lot of accruals that get unwound in the fourth quarter? We see this every year but I'm just trying to understand why.

Well, Jonathan it is true-up situation where throughout the year we would accrue bad debts on a percent of sales. We actually go through and they are to determine exactly what the actual bad debt write-off would be. We estimate as best we can the first three quarters of the year what our inventory gains for the year are going to be and then we actually do the write-off in the fourth quarter and we also get the actual LIFO calculations and we picked up a little income out of LIFO there along with the inventory gains. But it's nothing anymore than a true-up situation each fourth quarter.

Okay, how much LIFO pick up was there, Jerry?

I don't know. It's a small amount in the total.

Okay. Do you guys think you've hit a new level in terms of EBIT margin on the Industrial business overall? I mean, we're up about 10%. I don't expect it to stay there with the seasonality but are we higher than we've been in the past?

We have -- we're higher than we've been. Our target for Industrial ongoing is 8% to 8.5% and they finished the year at 8.3 and it all will now be a function of top-line revenue growth. If they continue double digit revenue growth, then they will continue to show some improvement there. But longer term, our target for them is 8% to 8.5%.

Okay. Turning to the Auto, just to be clear, excluding some of these charges or whatever you want to term them, is Johnson Industries basically a breakeven operation, so that if you were to exit it we should just expect the sales to go down and sort of no major impact on EBIT? Is that a fair way to think about it?

No. I think you should figure that we're not operating at breakeven currently and we will wind up having a little bit of a loss on a monthly basis as we continue to operate this business. But we hope to give you, as I've said, more definitive information when we visit on our next call.

Okay, and last question on the payables going down by about 60 million year on year, can you just talk a little bit about what you're doing to try to extend out payables and how much of this is a mix function between the Industrial and the Auto business changes?

There's certain amount, Jonathan, that as the mix between the two business segments, but I think we mentioned in our third quarter call that we had a couple of our vendors that we had on the extended terms with us because of some debt that they had. They had to come off of that and we swapped out discounts in lieu of that and that's primarily what that is. But we'll continue to work and try to push our vendors terms out in all four business segments. The Automotive, because that industry was already familiar with it, was the first one that we attacked and we'll continue to work that in the other three business segments.

Okay, and so do you think extension of payables can be a source of cash in '07 and '08?

Yes.

Any quantification?

No. We don't really know and some of these things take a long time to come to fruition. I don't believe we'll have anymore vendors drop off so anything we can do at this point will be an incremental positive.

Okay, thank you, guys.

All right, thanks.

Thank you, Jonathan.

Your next question comes from John Murphy with Merrill Lynch.

Good morning, guys.

Good morning, John.

I have three questions here. First, simply on working capital. It sounds like it will continue to be a use of cash in 2007, but grow slower than your sales growth. Is that correct?

I don't think I would agree with that, John. I think it's not going to continue -- John, I think it's not going to continue to be a use of cash but a source. We've got some work to do in the payables side. I think we can continue to improve our inventory. We've done a superb job in the last two years in keeping inventory growth less than 1%, but I think there's further improvement we can make there as well as in our receivables.

John, I'd jump in. We brought the working capital down to 27% 2 years ago, 26% the following year and then 25% this past year. And we think we can show further improvement in '07 and '08.

Okay. And then on the CapEx increase that we saw in 2006, what do you expect the payback is going to be on that increased CapEx and there's quite a jump there. Is there a time frame you're looking for to get the payback in?

Well, every particular project that gets approved has a payback period that gets approved and overall, we're looking for most of these that we get a return back in three to four year time frame. But the CapEx numbers were more leaning toward productivity enhancement to IT-type projects and therefore we've probably have already seen some improvement there. If you look back over the last three years, our employee count is really down a little bit with the increased revenue growth. So without some of these, we would have had to add headcount and I think we already are seeing some return.

So it would be fair to say that worse case scenario, it's a four year payback but you think the window actually might be a lot faster?

Well, we hope so, yes.

And then lastly, you said that you had 700 stores that have been remerchandised and reset. Could you just walk through the exact benefits of doing that and how many more stores you're targeting in 2007?

Yes. I'll try to answer that. When we do a store reset, we go in and completely relay the front of the store out, the retail sales area, and it usually includes new displays and gondolas and just freshening up the entire front of the store. We normally see a lift in our retail sales that is a low double digit increase in each of the stores when we do a complete reset like that. So the payback on that is fairly quick when we do it. As I mentioned we did 700 this past year. We'll do 800 plus in 2007 and our goal is to continue to keep doing these on an annual basis because every five years or so, you really need to go in and reset a lot of these stores.

And does that have anything also to do with a more efficient inventory system?

It could, because what we put on display is market specific and certainly the products that we think are going to be more rapid in terms of sales demand.

Great. Thanks a lot, guys.

Thank you.

Your next question comes from Cid Wilson.

Hi. One question regarding some of your margin opportunities. You mentioned that you're going to be looking at your margin mix and also sourcing opportunity. I was wondering if you can touch a little bit further on that.

Well, Cid, if you're talking about the gross margin there, we already have a global sourcing office that's opened in Shenzhen in China. We've gotten some benefit from that but we expect to see continued improvement out of that. We're always monitoring product and customer mix, so we would expect to see improvement in our gross margin going forward. I think with our SG&A and bringing those costs down, if we just looking at operating margins, you can see the improvement that was made in the Industrial and the Electrical Group and we see an opportunity to further improve the Automotive because we had decline there and we need to see that come back in '07.

Okay, that's all I have. Most of my other questions were answered.

Thank you, Cid.

Your next question comes from Tony Cristello with BB&T Capital Markets.

Hi, good morning, gentlemen.

Good morning, Tony.

I was wondering, and I missed the commentary on this, can you talk a little bit about your remanufacturing business, Rayloc, and what was the profitability standpoint of that in the quarter?

Well, we took a charge in the quarter of $4 million in order to do some rationalization of facilities there. So that was the impact in the quarter and we feel that it positions us to have a nice improvement this year in 2007.

Okay. So you're expecting then a profit contribution then from that business?

Absolutely. They were profitable in 2006, but we felt we had too much capacity within that segment of our business and we felt we needed to rationalize some of it in order to position it for performance going forward.

Okay. Are you seeing any pricing differential between remanufactured core versus what you would get for a new core and is that putting some pressure on that segment causing the need for realignment or refocus?

Yes. I think you hit on a key thing and that is that there has been a fair amount of new product that has come into the marketplace from offshore, and that product has been priced very competitively which causes the re-manned product to have to be adjusted price wise in order to be -- have the differential to keep it as an attractive alternative. Additionally, there's been a lot of pressure in that particular segment of the industry. So there's been over capacity and capacity has to be taken out in order to continue to keep those that are in the business viable and performing. So that was part of our strategy there.

Is it ever or has it been a consideration to maybe get out of the actual reman and if there becomes more and more product coming in from overseas that you could then have sort of a steady pipeline or access to?

I think for us, the way we view it, there's always going to be a market for good quality remanufactured products, so I think we're always going to be in that segment, but it looks to be an industry trend that you'll have both a new product manufactured someplace, most probably in a low cost country, and then you will have remanufactured product that you will augment the new product offering with as well.

Maybe just shift gears real quick. When you look at the industry as a whole on the Automotive side, it was a tough year in 2006. When you look at the fourth quarter and maybe into early '07, are you seeing any strength or weakness on a geographic basis per se in terms of sales and then second, are you seeing any regions becoming a little bit more competitive as you start to see an O'Riley movement to the Southeast and some other competitors sort of back fill some of their existing locations?

Well, I think any time you have a new entrant into a market you're going to see some increased competition and that's something that we've seen for a number of years now. Our experience has been that we can hold our own reasonably well as new people come into a marketplace, but we've got to stay very focused and we've got to make sure that we execute as crisply as we're capable of doing. As far as the year, '06 was kind of a split year in that the first half was really pretty good. Our NAPA business for the first half was up 7%. The second half was not as strong. We ended the year up five. It's our thinking that '07 is going to be the reverse of that and that we're going to see the year get off to a little bit slower start and then the second half will be a little bit better. As far as the geographic question, we do see some difference in demand in different parts of the country, but our thinking is that as the year progresses in '07, we're going to get back to more reasonable rates throughout all parts of the country.

Okay, but there was no region that you said exceptionally softer than usual or than typical or one that was maybe fared a little bit better?

No. We would just say that we did see some difference but not significant enough to single them out and say that this one is exceptionally strong or this one is exceptionally weak.

Okay.

I would say this, Tony, just to add a little bit more color to that. If you go up through some of the Midwestern states where the economy is very challenged currently, obviously we'll feel that. If you go into other parts of the country where the economy is strong, we benefit from that. Historically, Florida would be one that would be a little bit stronger but then you get into the whole issue of weather. And the weather the past several months in Florida has been unusually warm and has kept some of the demand down in that part of the country.

One last question, if I can. Recently, U.S. Auto Parts Network, an online sort of distributer, wanted to know if you had any comments on the opportunity there and what your thoughts are as sort of a new competitor in the market with a little different operating model?

Well, we're aware of the new entrant. We've said before that we take every competitor very, very seriously and we try to learn as much as we can about them and the way they go to market and try to compare that to what we do and the way we go to market. You may recall that we do have an online E-commerce program as well, NAPAonline.Com, and we think that it performs pretty well. There's some new software that actually is going into that entity here in the next 90 days that we think will position it to perform even better going forward. So we're watching them but we watch all of them because we do take every competitor very seriously.

Okay, great. Thanks gentlemen.

Thanks for the call.

Your next question comes from Justin Boisseau with Gates Capital Management.

Hi. I may have missed it earlier but did you give your thoughts on cash flow from operations for 2007?

We did not, but it will be about the same with some improvements, slight improvement in '07 than what it was in 06.

Okay, terrific. Thanks, that's all I had.

Thanks.

Your next question comes from [Tom Clancy] with Philadelphia Trust Company.

Hi, guys. Could you elaborate on the decline in other assets and did they flow through the income statement?

The decline in other assets did not flow through the income statement. That's a part of FAS 158. That was pre-paid pension and that got adjusted down into the equity section of the balance sheet and also through the tax accounts but that is a part of the FAS 158 adjustment.

All of that is?

Yes.

Okay, thank you.

Okay, thanks.

Your next question comes from Jerry Marks with AutoRetailStocks.Com. Mr. Marks, your line is open.

So it sounds like he dropped off. Do you have any other questions in the queue, because we are right at an hour now.

No, sir. At this time there are no further questions. If there are any closing remarks, sir?

No. We have none but we do appreciate each of you joining us on the call today. We appreciate your continued interest in and support of Genuine Parts Company. Feel free to give us a call at any time if we can get anything for you we'll be happy to do so. Have a good day.

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