純正零件 (GPC) 2007 Q1 法說會逐字稿

Good morning. 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).

Thank you. At this time, I would like to turn the conference over to Carol Yancey, Senior Vice President of Finance and Corporate Secretary.

Thank you. Good morning, 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 remainder of 2007.

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 the statements regarding the Company and its businesses. The Company's actual results could differ materially from any forward-looking statement, 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 share the duties on this call. Once we have concluded our remarks, we will look forward to answering any questions that you may have.

We released our first-quarter results earlier this morning, and hopefully you have had an opportunity to see them. But just to recap, sales for the quarter were $2,649,000,000, which was up 4%. Net income was $121.6 million, which was up 7%. Earnings per share was $0.71 since this year, compared to $0.66 in the first quarter of 2006, and this represents an 8% increase in EPS. This results were in line with our expectations for the quarter, and we feel that they put us in a position to report another solid performance for Genuine Parts Company in 2007.

Now, as far as the results by segment are concerned, our Electrical and Industrial operations turned in the strongest performances. EIS, our Electrical/Electronic company, was up 12% in the quarter, and this continues a pattern of double-digit quarterly increases for this organization. You may recall that EIS was up 20% in 2006, so business has been strong for this team for some time now, and the combination of solid demand patterns across the EIS customer base. The fact that the March Institute for Supply Management Purchasing Managers Index continues to show expansion in the industry causes us to feel good about EIS's growth prospects in the quarters ahead. As a result, we're anticipating another strong performance from this group in 2007.

Moving over to Industrial, we experienced good growth in this segment as well. Sales were up 8% for Motion Industries, and they continue to do a fine job for us. They had the challenging comparison, being up 12% in the first quarter last year, so we are pleased that the Industrial operations came through the quarter as well as they did.

We experienced solid growth across a number of industry segments, but the most notable would be in the areas of energy, mining and aggregates, equipment and machinery and food and food processing. These are all segments of the economy that should continue to enjoy good growth in the quarters ahead, and our Industrial operations are well-positioned to support this growth. Additionally, the industrial production capacity utilization indices remain positive overall, and we continue to feel quite optimistic about the outlook for our Industrial Group over the remainder of the year.

Our Automotive operations were up 3% for the quarter. While this is not up to our overall growth expectations for the Automotive segment, we actually are a bit encouraged by the trends that we are seeing. You may recall that Automotive was running 5% ahead through midyear 2006. Then, with the industrywide slowdown that occurred, our Automotive sales were only up 1% in the third quarter. They were then up 2% in the fourth quarter and now up 3% in the first quarter of 2007. So a gradual improvement over the past few quarters, and we expect this trend to continue as the year progresses.

Core US NAPA operations were up 4% in the quarter, but they were pulled down 1% by slower growth in Canada, combined with the impact of unfavorable currency exchange on our Canadian and Mexican results. Additionally, as a point of information, our company-owned store group continues to perform at a respectable level. These stores were up 6% in the quarter, with cash sales and commercial sales being up equal amounts.

Our seven key initiatives continue to play an important role in our overall strategy, and we are encouraged by several of the things that have recently developed in a few of these areas. They will favorably impact Automotive growth rates over the next few quarters. You may recall that we opened our first heavy-duty truck parts facility earlier in the quarter, and the volume is currently ramping up. We are encouraged by the early results, and this, too, will help Automotive volumes in the second half of the year.

One final reason that we are a bit encouraged about our Automotive results is that we saw a gradual improvement in demand as the quarter progressed, with March being the strongest quarter, and we are planning for sequentially stronger quarters as the year progresses. So overall, we're encouraged by some of the things happening within the Automotive operations, and we're optimistic about improving results from this group on a go-forward basis.

Now, before leaving Automotive, we would like to bring you up to date on our situation with Johnson Industries. As most of you know, we have been gradually exiting this business over the past two years. We have gone from 12 locations down to four during this timeframe. We had anticipated selling the remaining operations in the first quarter. But due to some complications that arose in the financing piece, we were not able to complete the deal, so these operations will remain with us for a while longer.

We will continue to explore all options, but for now, we will wrap up in our comments on Johnson by saying that we don't anticipate the remaining four locations to materially impact the comparison of 2007 to 2006 results positively or negatively. We will update you want any future developments in subsequent calls.

Finally, a few comments about Office Products. This segment was down 3% in the quarter. It has been quite some time since we have had a down quarter from the Office Products Group. Now, I will say that they were going up against their toughest comparison. They were up 13% in the first quarter of 2006, and this was by far their best quarter of the year. Office Products volumes were negatively impacted in the quarter by a number of weather-related closures in the Northeast and Midwest portions of the country, and they were also affected by a few key independent dealer acquisitions by the megas.

But with that said, we had expected a better performance from the Office Products Group in the quarter, and as a result they have revisited their current sales plans and initiatives. Our expectation is that Office Products will quickly get back on the plus side, and they will show improving results in the months ahead.

When we put it all together, we ended the quarter within the range that we provided in our February call. At that time, we said that we would be up 4% to 6% for the quarter, and it's interesting to look at the results by segment. We came through the quarter at expectation in Automotive and Industrial. We exceeded expectation in Electrical, but came in below in Office Products. As mentioned earlier, specific action steps are being taken there.

We will give you an update on how we see things shaping up for the remainder of the year in a few minutes, but first we will ask Jerry to review the financial performance. Jerry?

Thank you, Tom. Good morning. We appreciate you joining us on the call today. We will 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 were up a record high $2.65 billion, representing a 4% increase from last year and a solid start to 2007. We had indicated in our year-end 2006 conference call in February that the first quarter of 2007 would be a little soft relative to our expectation for the remainder of the year, so we were glad to get to the 4% increase, and we continue to believe that our sales growth will be a bit stronger than this in quarters two, three and four.

Gross profit in the quarter was 31.41% to sales, which is relatively flat compared to the first quarter last year. We believe we should be doing a better job in this area than we have over the last few quarters, and we see opportunity to show progress on this line in future quarters. This is especially true in our Automotive segment.

Through the first three months of 2007, pricing was not a significant factor for us, other than in the Electrical. Pricing by segment was 0.4% in Automotive, 2.0% in Industrial, 1.1% in Office Products and 2.4% in Electrical.

SG&A as a percent to sales decreased from 24.24% to 24.0%. We continue to intensely manage our costs. We feel good about the benefits of these efforts.

For the first quarter, we also experienced some improvement in property and general and insurance costs. Stock option expenses and Sarbanes-Oxley expenditures have leveled off relative to the last few years. Combined, these positive trends are helping us show the kind of progress we need on this line, and we look forward to additional improvement over the course of 2007.

For the quarter, our tax rate was 38.0%, and we expect the full-year rate to be approximately 38.3%. Our lower tax rate this quarter reflects the impact of [stature] that closed in the first quarter of an old tax year. I would also add that there was no material impact on the Company due to the adoption of FIN 48.

Net income, $121.6 million; that was up 7%. EPS of $0.71 compared to $0.66 last year was up 8%.

Now, let's discuss the results by segment. Automotive had revenue in the quarter, $1,261,500,000. That was up 3%. Had operating profit of $95.9 million, which was flat. So we had some margin deterioration from 7.8% to 7.6%, which we will discuss in a moment.

The Industrial Group had revenues of $833.4 million, up 8%. Operating profit, $64.6 million, up 12%. So nice expansion there from 7.5% to 7.8% in margin.

Office Products, revenue of $451.8 million; that was down 3%. Operating profit, $48.2 million. Operating profit was up 1%, so we had an excellent expansion in their margins, from 10.2% to 10.7%.

The Electrical Group had revenue of $106.7 million, up 12%. Operating profit, $7.2 million, up 49%. So outstanding improvement there, going from 5.1% to 6.8% operating margins.

So our total sales up 4% for the quarter, operating profit up 5%. Our consolidated operating margin increased slightly from 8.06% to 8.15%. Very pleased with the margin improvement in Industrial and Electrical, which you would expect to see with their level of sales growth. We are also pleased with the Office Products Group's margin. Despite the decrease in sales, this group got some help from improved gross margins associated with a more profitable mix of sales volume, both customer and product.

Margin gains in these three segments were offset by the decrease in Automotive, which mainly related to two areas. First, as Tom mentioned, our Canadian NAPA group experienced soft market conditions, and we were also impacted by the exchange rate to the US dollar. Second, our newly established heavy-duty group incurred some startup costs during the quarter, so as you would expect, this also impacted Automotive's operating margin.

Without these two factors, margin would have improved to 7.9% for Automotive and 8.3% for the total Company. Looking below this line at our pretax profit margin, which accounts for all of our operating expenses including interest and other, we see some nice improvement in the quarter, with pretax profit margins up 17 basis points to 7.4%. We've shown consistent improvement on this line for some time now, and we expect to show additional progress in the periods ahead.

Net interest expense of $6.7 million for the quarter -- that's down 7% from 2006. For the full year, we continue to expect our net interest expense to be in the $26 million range.

The other category, which includes corporate expense, amortization of intangibles and minority interests, was $13.1 million for the quarter. That's down 8% from $14.3 million in the first quarter last year. The leveling of certain expenses and improvement in other areas such as insurance, as mentioned earlier, have enabled corporate expense to compare favorably to last year. For the full year, we continue to expect this category to approximate our 2006 expense at around $50 million.

Now, let's touch base on a few key balance sheet items. Cash at March 31 was $250 million, up $100 million from March 31 last year. Our cash position remains strong, due to our growth in income and continued improvement in our working capital position. We'll discuss cash further in our cash flow comments.

Accounts receivable was flat compared to last year on a 4% sales increase for the quarter, so our level of receivables is in great shape relative to our rate of sales growth. We are very pleased with the improvement in our accounts receivable balance over the last two quarters, and we continue to feel good about the quality of our receivables. Our goal remains to grow receivables at a rate less than sales growth.

Inventory was up less than 1% for the first quarter last year and down nearly 2% from year end. After finishing each of the last two calendar years with around a 1% increase in inventory on high single-digit sales growth, we feel very good about our progress with this investment, and we will continue to focus on our inventory management initiatives to further improve our inventory numbers over the balance of 2007.

Accounts payable increased 2% from last year, reflecting the combination of increased purchases related to our sales growth, as well as the extended terms and other payable initiatives established with our vendors. In the first quarter of 2006, we also lost some extended terms with a major supplier. We have been working over the last 12 months to make up for that and regain some momentum in this area. We are pleased with our progress this quarter, and looking ahead, we expect to see additional improvement.

Working capital was $2.7 billion at quarter end, up 4% from the same period last year, due mainly to our improved cash position. We remain focused on improving our working capital position, and as we have shown improvement on our working capital efficiency -- and have shown improvement in this efficiency in each of the last three years. We have plans to continue this positive trend in 2007.

The current ratio of 3.1 to 1 -- that's consistent with the first quarter last year, and reflects that our balance sheet remains in excellent condition. We continue to generate consistent and strong cash flows, and our strong cash position provides the Company many opportunities.

For the quarter, cash from operation was much improved from the first quarter of last year, related mainly to positive working capital changes. For the full year, we currently expect our cash from operations to improve to approximately $500 million, and free cash flow, which deducts capital expenditures and dividends from cash from operations, should be in the $200 million range.

Priorities for cash remain -- first, the dividend, which we increased this year by another 8% to $1.46 per share, representing our 51st consecutive year of increased dividends paid to shareholders. Other priorities include the ongoing reinvestment in each of the businesses, share repurchases and, where appropriate, strategic bolt-on types of acquisitions. Capital expenditures were $23.7 million for the first quarter; that's down from $27.5 million in the first quarter last year.

Related depreciation and amortization was $20.7 million in the quarter, compared to $17.6 million last year. We are continuing to expect our CapEx to be in the $100 million range for 2007, and we would expect our D&A to be up slightly, in the range of $80 million to $85 million.

Another priority for us has been opportunistic share repurchases. As a part of our share repurchase program, we've acquired just over 400,000 shares of our Company's stock thus far in 2007. This follows the purchase of 2.9 million shares in 2006 and leaves us with an additional 14.9 million shares authorized for repurchase as of today. There is no set pattern for these repurchases, but we will remain active in the program, as we continue to believe that investment in the GPC stock, along with the dividend, provides the best return to our shareholders.

In including my remarks, I would add that our total debt remains unchanged 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 2008. The second $250 million is due in November of 2011, and prepayment of this debt is cost prohibitive, due to the make-hole provisions included in the debt agreements.

At this debt level, total debt to total capitalization is 16.1% at March 31. This is slightly higher than last year, due to FASB's newest standard related to the accounting for pension and other post-retirement benefit plans, as mentioned in our prior call in February. To comply with the new standard, shareholders' equity was reduced by $284.8 million net of taxes on December 31, 2006.

We're pleased with what we consider a solid start to 2007, but we recognize that there's also room for improvement. We know we must remain intensively focused on growing our sales, controlling costs and improving our operating profit margins. We will support this growth with a strong and healthy balance sheet and continued strong cash flows, further maximizing our return to shareholders.

I'll turn it back to you at this point, Tom.

Thank you, Jerry. So that's a recap of our first quarter. As mentioned earlier, with sales up 4%, net income up 7% and EPS up 8%, we ended the quarter in line with where we expected to be. As far as the remainder of the year is concerned, we continue to feel positive about our prospects, and we are planning for year-end growth of, in the Automotive, 4% to 6%; Industrial, 7% to 9%; Office Products, 3% to 5%; and Electrical/Electronic, 8% to 10%. Achieving these revenue projections will enable us to hit our earnings expectations, and we continue to be comfortable with the range given in our last call of $2.95 per share to $3.05 per share, which would be up 7% to 10%.

At this point, we would like to take your questions, and we will turn the call back to Feah.

(OPERATOR INSTRUCTIONS). John Murphy, Merrill Lynch.

Just a question on working capital. Clearly, it was pretty strong in the quarter here. I was just wondering if you could maybe parse out how much was seasonal and how much was really structural, based on your initiatives. Maybe secondly, just kind of remind us the seasonal working capital through the quarters, the flows.

John, I'll try to answer that. I'm not sure that we can tell you how much of it is seasonal. Our folks did a good job -- as we mentioned, inventory down 2% from year end. Our receivables are flat on the 4% sales increase, and that is primarily due to the March being short a day there and the way the month ended.

But I'll have to look into that and try to get you an answer on how it seasonally breaks out. But we still think that we're going to get $500 million of cash flow, cash from operations, for the full year. Now, how that will break out by quarter, I just don't know.

Then if you can take a look at EIS, it's going very strong here. How much of that strength is being driven by external factors and demand, and how much was internal initiatives also? Because I know you had great performance in the margin there.

I'd say, as far as the revenue side of it, John, that's a combination of good market demographics and some real focused initiatives from the EIS team. As far as the internal objectives from the operating side, this team does a heck of a job in converting on the sales volume that they get. To go from 5.1% last year to 6.8% this year is just an extraordinary performance, and they continue to make good progress in raising their operating margins.

We have said that our near-term goals for EIS are to get their operating margins in the 6% to 6.5% range, and they have moved them up 4 or 5 points from where they were just a few years ago. So if we can sustain margins at this level going forward, then we will assess at that point what they can do to take them further. But they are doing a terrific job.

Then, just switching gears to Office Products, it sounds like you said there was some consolidation or acquisitions by some large competitors. Have you guys taken a look at those acquisitions? Are there other opportunities to make acquisitions in that business?

The acquisitions that were made -- it was a couple of independent office products resellers that were acquired by the megas, the big national companies. What happens in that case is that there's a temporary dip in the volume for us, because they take those companies over, they wind up doing more of the purchasing through their internal system, and then over time this equalizes itself. As the volumes continue to grow for them, we in turn share in that. So this is a temporary thing.

We would not have an interest in exploring any acquisitions of office products resellers. We are purely a distributor, and we don't want to compete with our customer base.

Just lastly, on commercial vehicles, what inning are you guys in? I mean, are we still in the first inning here? Will that continue to be a little bit of a drag on the cost side through the remainder of the year, or are you ramping up pretty quickly there?

You're talking on the heavy-duty?

The heavy-duty side, yes.

Well, we're still very early in it. We have been open less than three months, so we are just ramping everything up. We've got the full cost load, but the volumes are not yet up to levels they can absorb the costs. We would expect that this will continue to be a drag through the first half, and then we will start to get to the point where we can minimize any impact.

But the infrastructure is in place for now?

It is in place; that's right. Now, we've got one facility open, and we're going to get that one ramped up over the next few months, and then we're going to look at opening a second facility in the second half of the year.

Michael Ward, Soleil.

Jerry, you mentioned there was one less day in the month of March?

That's correct.

Now, how did the quarter balance out as far as days?

We had an equal number of days, 64, for the quarter.

A question on fuel. Outside of the industry implications, does it affect your operating costs at all as fuel prices increase?

Well, the delivery costs for our outbound transportation is where we would be affected. I might mention that our teams across the business have done a terrific job of really optimizing their outbound delivery routes and taking some miles out of the overall transportation system that we have.

Did it affect the first quarter?

Yes, it had some effect, but not material.

Then on the Office Products, it looks like you're expecting somewhere around a 5% to 8% type increase the rest of the year. Can you quantify at all how much of an impact that was? Did that account for all the shortfall, with the acquisitions and the inventory changeover there?

Well, that was part of it. I mentioned that we had lost a number of days across the Office Products system because of the weather in the Northeast and Midwest. That was a significant component as well. That's now behind us, and we are looking for improved results going forward. We think they will end the year, as I mentioned, somewhere in the 3% to 5% up range.

Keith Hughes, SunTrust.

This is [Shazad Ali] in for Keith. Just a quick review on the Company-owned store sales. You said it was up 6% and the same for cash and commercial. Does that mean cash and commercial were both up 6% as well?

Yes, it does.

Can you dig a little into the product categories in the Automotive segment?

Product categories that experienced good growth?

Yes, as in what's done well, what hasn't.

Well, things like batteries and rotating electrical performed well in the quarter. Obviously, heavy-duty is ramping up, so it performed well. Temperature control had a good quarter. As far as lines that did not perform as well, ride control was not a strong performer, nor was exhaust, nor was under-hood.

EIS did very well. What was the copper impact there? I'm just wondering.

The copper impact was probably about 2%.

So it helped out 2% because of the price increase?

Yes, absolutely.

And fuel prices -- how is that going to impact NAPA going forward? What do you guys see coming into the strong summer driving [season]?

Well, the impact is in two areas. Externally, if it has a negative impact on miles driven, there won't be quite as much demand for replacement parts if the miles driven are not increasing. Internally, if fuel prices go up, we will have some incremental increase in operating costs. But as I mentioned earlier, we have got some fairly sophisticated delivery management software that is being used in the businesses, and they are doing a good job of reducing miles driven, plus we're swapping out vehicles for more fuel-efficient vehicles.

When it comes to Johnson Industries, can you give us a timeframe? I know we discussed first quarter; maybe you can give us an [update]. Can you say second quarter, definitely you will have an answer for us? Or you just can't give us an answer yet?

No. As I said, we can't get any more specific than what we have. We will continue to explore the options, and the first opportunity we have to give you a more clear picture on it, we will be happy to do that.

And there's no impact from Johnson, or negligible?

It will be neutral to us in 2007 compared to 2006.

Jonathan Steinmetz, Morgan Stanley.

Just to follow up quickly on the Johnson Industries side, when you say neutral to us in 2007 versus 2006, there was a fair bit of lumpiness, I thought, if I remember correctly, in the fourth quarter in terms of losses and spending there. You're saying that will recur throughout the year, effectively?

What we're trying to say is that we don't expect it to be a positive or a negative. We're trying to stay conservative in our comments on Johnson. We don't know exactly where we're going, but we have -- as long as these operations are with us, we are going to take the steps that we need to take to minimize any impact at all. We have already done some things here recently. I think we just want to stay conservative and say that it would not impact us positively or negatively, 2007 compared to 2006.

But you are not making a comment that these are breakeven operations or anything?

No, I'm not saying that at this point.

Can you quantify the heavy-duty startup costs, to the extent you feel like you have certain costs you couldn't bucket revenue against?

Well, I would say that new operations in the first quarter impacted operating income just under $1 million.

Jerry, you kind of suggested you thought you had more initiatives in place on the Auto side, on the margin side, on top of just the operating leverage that can accompany greater sales growth. What specifically are you guys doing on the gross margin side that you think you can accelerate here?

Global sourcing would be one of those. We have been doing that for some time. I think you'll see a pickup in that. I think the ongoing trying to make sure that we get the right product mix and adjusting pricing where we can and yet stay competitive.

You have 300-and-something-thousand SKUs. Are you finding a lot of opportunity on price where there's inelasticity?

I don't know, Jonathan, that I could say we are finding a lot. We're certainly finding some, and they continue to work each product category.

Jonathan, I might add that we have more opportunity on the bottom of the SKU count than we do on the top end, obviously. But the sales impact from those bottom SKU count numbers are just not as great as the top. So we can move some of the slower movers up more easily than the fast movers.

How many days inventory -- you talk about sort of containing inventory as your sales growth, and you've done that. But how many days do you think you can take out over a period of, let's say, two years?

We don't look at it that way. We've got other metrics that we follow. What we can say is that we feel that we can continue to keep our inventory growth to less than our revenue growth for a period of time yet, because we know about how much we expect to take out by business unit.

Rick Weinhart, BMO Capital Markets.

My first question is on the Office Products division. In the press release, you did mention that you've seen some demand softening in the industry over the last several months. I'm wondering if you're seeing that in the same categories that the office superstores have talked about recently, meaning the furniture or technology, primarily, and also a little furniture, or if you're seeing something different in terms of categories.

No, it's very consistent. They are the two categories that had the toughest comparisons in the quarter.

You also mentioned working on jump-starting sales. Should we take that to mean those initiatives are going into effect in second quarter, or is that more of a second half kind of event?

I think you'll see the evidence of it more in the second half, but the initiatives are already underway. We're encouraged by what we see. I might also add that if we look at our performance in Office Products on a per-day basis through the quarter, we actually saw progressively improving numbers, not enough to get us into positive territory. But March was a better month than February; February was a better month than January. So we continue to feel like a lot of the things they are doing are showing up somewhat. But we just need another couple of months to really get tangible evidence.

Switching gears to the Automotive area, the industry has talked, I think, a lot about seeing a pickup in demand related to folks just having to repair their vehicles after delaying repairs for some time and maintenance. I'm wondering if you're starting to see that, if that's part of why you're seeing the acceleration in sales from quarter to quarter -- if by looking at the categories, if you have any insight into that?

Well, one thing we can tell you is that the repair tickets at the installer's place of business are greater today when a vehicle comes in than what they might have been a year or two ago, which validates what you have said about when they do come in, there's more work that's needed. But we also know the consumer is on a fixed or tight budget, and they only want to repair what absolutely needs to be repaired for safety or drivability.

So we do see things improving. We've got a number of initiatives which we mentioned earlier that are kicking in over the remaining three quarters that we think will continue to show a positive impact on our overall automotive results. But I don't think we'd go so far as to say that the industry has made a dramatic turn.

I didn't hear mentioned, I believe, the Midas award that you had. Midas has announced, I believe, that you were becoming a supplier for them, a major supplier. I'm wondering if you can give us any details in terms of what the timing will be of that impact, and then perhaps if you want to talk a little bit about why you were chosen, if there was a particular strength involved?

Well, thank you for bringing it up. We specifically didn't mention it because we didn't feel it's our place to point that out, in particular. But there are two major accounts that have recently awarded their business to the NAPA organization, Midas being one of them. The impact on sales will show up a bit in the second quarter, but really it will be much more impactful over the second half of the year.

As far as the reasons for the relationship, I would just say that it's because of the consistency of performance that the NAPA organization can provide. We've got a large footprint of NAPA Auto Parts stores around the country that can provide very, very good service to these types of accounts on a national basis.

Stepping back and looking at the Automotive Division, the operating margin rate has been -- I realize there's some short-term pressures here with Johnson Industries and with heavy-duty. But over the long term, you have seen some declines in the operating margin rate for probably the last decade or so.

I'm wondering, one, if there's one major factor that has been driving that. Is it pricing, perhaps, or is it something else? Two, as we move past Johnson Industries and just look at the core business, should we expect that to reverse anytime soon, maybe in 2007 or into 2008?

Well, I would start by saying that the core NAPA business operates well above the operating margins that you see here for the whole automotive group. We continue to be pleased with the progress that that part of the business is making.

As far as the external factors that have caused some of this, certainly it's a competitive marketplace and has been for a number of years. There's not as much inflation in the industry as there had been in some periods in the past. As far as where do we think we end up over the little bit longer term, we have said that we would expect our Automotive margins to get back to 9% to 9.5% -- not in one year, but a gradual improvement. When we get back there, then we will assess. We don't think they are going back to 11% or 12%, as we had seen at some points in the past. But our first goal is to get them back to 9% to 9.5%.

Tony Cristello, BB&T Capital Markets.

First, on the Automotive segment, if you could comment a little bit about any geographic strength or weakness you might have seen across your network for the quarter?

Well, our strongest areas for the quarter were the western half of the country. The weakest areas in the quarter were the eastern portions of the country. Some of that is weather-related, for sure. But we seem to perform better west of the Mississippi.

Probably had more favorable weather or, I guess, drier weather out on the West Coast than you would have.

We did. That's right.

Going back to last quarter, you had some changes in the [Raylock] piece of the business. I'm just wondering if -- was that resolved? Did that have any impact during this quarter?

No, it didn't. I think we had a good performance. I mentioned rotating electrical was a strong performer, and that was helpful to us in the quarter.

Now, are you doing more? What's the mix of your business in terms of reman versus new for rotating electrical?

We do a lot more reman than we do new.

With what is going on in terms of -- it appears to be more product flow coming in from overseas. Will you start to see that dynamic shift at least to more of an even balance between the two? I'm assuming its starters and alternators is your biggest course?

That's right. As far as what happens going forward, we do think that there will be more product that will come from offshore. We, in fact, will be a participant in that and currently are, to a degree. As far as what percentage of the total market will it ultimately command, I don't think we're prepared to answer that. We'll just have to wait and see.

Has it impacted the actual core refunds or core charges that you're able to, one, get back from your vendors and, two, charge to your customer or discount to your customers, if you will?

Well, it has. You can buy a new without a core price, or you can buy a reman that has an exchange and a core value to it. The other thing that has had some impact is you know what has happened with scrap metal and the demand that we have seen in some of the Asian countries. That has taken some of the core out of the system as well.

Shifting gears a little bit, did you comment on how many locations you may have opened during the quarter?

No. We had a net increase of six for the quarter, and while that may seem modest, it's also one of the things that gives us a bit of encouragement. Because as we look back over the past several years, we actually had a decrease in store count in the first quarter of prior years. So the fact that we came through this quarter with a net increase gives us some optimism about what our team is going to do over the remainder of the year.

Are you still planning for that 50-company store benchmark and 50 carrying the NAPA banner? Is that --?

Yes, sir. That's right.

When you look at your focus on the inventory and managing that, can you maybe discuss a little bit the current environment that your vendors are facing, and what they are coming to you with in terms of wanting some terms or what they are offering in terms of rebates, and how that is playing a role in you trying to maintain your inventory but yet not wanting to pass up what could potentially be a good deal?

Well, We don't see any material change, first of all, in what is coming from the vendor community. If we were approached and were offered something that was compelling, we would certainly look at it, and run our analysis and determine whether or not it made sense for our Company. If it did, we would probably participate. If it didn't, we would pass.

We have got a real focus on the whole area of working capital, cash from operations, free cash flow. We have done a good job; I think our team has done a good job for several years now, and we want to continue that momentum.

Do you anticipate downward pressure a little bit in the Automotive, just because of the heavy-duty and what's going on in the Canadian business, for the next few quarters? Or is that something that will sort of resolve itself maybe out of just one more quarter?

No, I think we're probably looking at kind of staying where we are. Certainly, we're trying to take some steps in Canada to increase the sales, and also, if we don't see that increase, to take some costs out. But as we build the volume in the anti-duty thing, that will take care of itself. So it's going to be under some pressure, but I wouldn't expect us to see downward movement in at least the third and fourth quarter. We're probably going to continue to see that in the second quarter.

If you look at the basis points, the combined -- I think you said it would have been 7.9% without the impact from Canada and heavy-duty, so about 0.3%. How much of that was heavy-duty? How much of it was the Canadian? Then the exchange rate you mentioned -- are there any other areas in the Canadian business that might be having -- or that is causing somewhat of a softer margin, if you will?

No, I don't think so. Right now, we were just looking at the Automotive. As Tom said, the impact of the heavy-duty thing was about $500,000 to $1 million, and the remainder of that would have been in Canada.

[Carol Choi], Goldman Sachs.

This is Carol Choi calling in for Matt Fassler. I have a quick question on the Automotive segment. Can you remind us what trends you were seeing in your Company-owned stores in the prior couple quarters versus what you saw this quarter?

We were pretty consistent in the first quarter with what we saw toward the latter part of last year.

Cid Wilson, Kevin Dann Partners.

Can you touch a little bit more on what drove the margins on the Office (technical difficulty) business, given the trends in sales?

As far as the margin, it really was a couple of things. Primarily, it was mix. I mentioned earlier that we did see some sluggishness in our technology products and in furniture, and both of those margins are not as strong as what they are in core Office Products. Our core Office Products actually had a decent quarter, so that would have helped the margin for us.

My second question, a follow-up on Midas -- can you talk about where the opportunities are for deals similar to what you got with Midas? Maybe if you can touch a little further in terms of where maybe some of the regions where you (technical difficulty) see the best opportunities?

Well, I think any other company that is in businesses similar to the business that Midas is in would be a candidate or a prospect for us. We continue to work those on an ongoing basis.

There are some installer groups like that that are regional, and we work with them. There are others that are national, and we work on the national ones as well. I can't tell you whether or not we're going to land any additional ones over the next quarter or two, but I can tell you we are working on it.

When looking at the fact that it seems like NAPA is doing very well, certainly better than most of your competitors, maybe can you talk a little bit more about where you are finding the best opportunities in terms of where you are capturing market share? Because it seems that with your comps and both DIY and commercial both tending strong, it's clear that you're gaining market share in both areas, but particularly in the DIY side. But is it more on the product label side? Is it more on the hard part side? Or can you touch more about where you are seeing the most market share opportunities?

Well, I think if we look at the trend for several quarters, I think the growth of our commercial business has been very strong, and has been a little bit better than our DIY business. We happened to have a quarter in the first quarter where they were both up 6%. But I would guess on a go-forward basis than our commercial business very well may grow at a little bit faster rate than our DIY business. So we continue to focus on both of them.

You are familiar with what we call our key initiatives, the seven key drivers. We just continue to focus pretty intensely on all seven of those areas, which will have an impact on our business going forward.

(OPERATOR INSTRUCTIONS). Himanshu Patel, JPMorgan.

[Ranjiv Panathan] for Himanshu. Could you talk about the Industrial segment? It sounds from your guidance that you expect your current rate of revenue growth to pretty much persist through the year. What gives you confidence in that? Is there any particular Industrial segment that is driving that growth, or is it broad-based?

Well, I would say that if we look at our business across all of our product categories, all categories are up. Some are up better than others, obviously. If we look at our business across our customer categories, we're performing well in the ones that I had mentioned in my comments. Some that are not performing as well -- pulp and paper is one. Lumber and wood products would be another. I think that would be reflective of maybe what is happening with housing starts.

But as we look out across the customer base, we're optimistic about what we think is going to happen over the remainder of the year. As I said, the Industrial production numbers and the capacity utilization numbers both are hovering at some pretty good levels right now. So that, for us, normally is a leading indicator, and we're encouraged by what we see there. So the combination of the initiatives that we have got going, some new business that is coming onstream, hopefully a small acquisition or two, we think, will enable us to sustain our growth in this range.

Chip Rewey, Cramer Rosenthal.

On Auto, it was a pretty stormy first quarter, and you had mentioned that Richards had the impact of weather keeping people out of stores. I know in the past, bad weather is pretty good for Auto, but there is a little bit of a delay in getting to the stores and fixing the cars. So do you think that's what accounted for the sequential March strength? Are you kind of seeing that into April or May, or is that -- what are you seeing there?

I think we did, in fact, have some negative impact initially as a result of the storms. Then you are right, it tends to help. I think that's what has helped lines like the batteries and the rotating electrical to perform well, frankly, through the first quarter.

But the extreme temperatures -- normally, we would get a near-term negative impact. Then it gets to be positive, and then there's a delay factor that is usually positive for us as well. When we get into the summer months, if we get some real heat, any of the components that might have been impacted a bit in the cold weather have a tendency to fail when you get the hot weather. So we do think that the sequential quarters will show continued improvement.

There are no further questions at this time. Would anyone like to have any closing remarks?

Yes, thank you. We don't have any closing remarks. We just thank each of you for joining us on the call, and we appreciate your continued interest in and support of Genuine Parts Company. We look forward to talking to you after our second-quarter release.

Thank you for participating in today's conference. You may disconnect at this time.