純正零件 (GPC) 2007 Q2 法說會逐字稿

Good morning. My name is Carol, and I will be your conference operator today. At this time I would like to welcome everyone to the Genuine Parts Company's second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over the your host, Ms. Carol Yancey, Senior Vice President of Finance. I'll turn the call over to her at this time.

Thank you. Good morning and thank you for joining us today for Genuine Parts' second quarter conference call to discuss our earnings results and the outlook for the remainder of the year.

Before we region this morning 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 it's management, statement of future economic performance and assumptions that are underlying the statement regarding the company and its businesses. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. We will begin this morning with remarks from Tom Gallagher, our Chairman, President and CEO. Tom?

Thank you, Carol.

I would like to add my welcome to each of you on the call today and to say that we appreciate you taking the time to be with us this morning. Jerry Nix, our Vice President and Chief Financial Officer and I will share the duties on this call as we normally do, and once we have concluded our remarks we'll be pleased to answer any questions that you may have. Our second quarter and mid-year results were released earlier this morning and a quick recap for those that may not as yet have seen them shows that sales for the quarter were 2.770 billion which was up 4%. Net income was 130.1 million which was up 8% and earnings per share were $0.76 this year compared to $0.70 in the second quarter last year, and this represents an EPS increase of 9%. For the six months this now gives us sales of 5.418 billion, and up 4%, net income of 251.7 million, up 7%, and EPS is $1.47 this year compared to $1.35 last and up 9%. So the second quarter results were comparable to the year-to-date results and in line with our overall expectations.

Now as far as the individual businesses are concerned the industrial and electrical operations continue to turn in strong performances. Ocean Industries, our Industrial Company leads the way with a 9% increase, this follows an 8% increase in the first quarter and the Industrial Management Team is doing a fine job for us. We continue to see good growth patterns across a number of their industries, notably food and food processing, chemicals, equipment and machinery, and energy-related industries among others. We were also pleased to see a bit of strengthening geographically in the Midwest, East and Southeast.

These three areas came back some from a softer first quarter and we are encouraged by what we see happening in each of these regions. Their continued improvement in the months ahead will help to sustain the overall industrial growth rates. Additionally the industrial production and capacity utilization figures each remain at very solid levels. In fact the figures for June just released a few days ago show further strengthening with industrial production increasing to 115.3 and capacity utilization over 80% at 80.3. These are good leading demand indicators for our industrial business and we are encouraged by what we see right now. As a result, we're looking for our industrial operations to continue to generate 7 to 9% increases over the remainder of the year.

The Electrical Group also performed well ending the quarter up 7%. They are up 9% year to date. Keep in mind that this business was up 18% through June of last year, so they are going up against tough comparisons but they are making good sales progress again in 2007. Looking across their top 25 customers and their top 20 product categories. We see solid increases up and down the line in both cases, which shows good balance in their growth.

Additionally the Institute for Supply Management Purchasing Manager's Index , which is a good leading indicator for our business, continues to remain toward the upper end of the historic range, indicating a healthy industry climate for our electrical operations, and as a result, we would expect EIS to generate 7 to 9% increases over the course of the year. Our automotive operations were up 2% in the quarter, down just a bit from the 3% increase in the first quarter and automotive is up 3% year to date. Going in to the quarter we anticipated little stronger performance from automotive based upon improving trends in the latter part of the first quarter.

However, April was challenging month for us, and we got off to a very slow start to the quarter. We did see improvement in May and June, however, and in fact had our best back to back monthly performance thus far this year which is encouraging. Sales for the company store group were up 2% in the quarter, in line with the overall automotive results but we did see moderation from first to second quarter growth rates and the pattern for the company stores was similar to the overall automotive results, a soft April, but then improved results in May and June.

Now as mentioned earlier, we were looking for a little stronger performance from automotive but we feel that the overall after market remained a bit sluggish in the quarter, which had a moderating impact on our results. However, we also feel our increases will be somewhat stronger in the second half of the year due to a number of specific things that will add to our revenue growth over the next six months. Just to cite a few examples, our truck parts and import parts initiatives are starting to gain some momentum and their revenue contributions, while modest the first half of the year will be more significant in the quarters ahead. New store openings will play more of a role. Through June we opened a net of 18 new stores. We're planning to add 50-plus new stores over the third and fourth quarters, which will help drive additional revenue in the second half. Our major account business will benefit from the recent agreement with Midas and Tire Kingdom. Neither had a material impact in the second quarter but each will contribute nicely over the second half. Additionally, there are a number of other specific initiatives underway as well and our expectation is for automotive to show improving results as the year progresses and to generate increases in the 4 to 6% range over the remainder of the year.

Moving on to Office Products you will recall we were down 3% in the first quarter and in our last call we said we expected to show gradual improvement as we moved our way through the year. Office products did end the second quarter on the plus side with a 1% increase so they were able to build some positive momentum and despite the continued industry-wide softness, with we did see improving quarter-over-quarter trends in each of their four major product categories, office supplies, tech products, office furniture, and cleaning and breakroom supplies. And this is encouraging.

Additionally a number of their specific sales initiatives are starting to show good returns and we have several new or expanded business opportunities that will come to fruition during the next few months, including a new distribution center in Edmonton, Alberta that will generate additional volume in Canada. When we put it all together, we continue to look for a gradually improving situation from our office products group and our expectation is for them to be up 3 to 5% over the remainder of the year. That's a quick overview of the revenue picture by business unit. A this point we'll ask Jerry to cover the financials, and then we'll have a few summary comments on the quarter and the second-half outlook.

Thank you, Tom. Good morning, we appreciate you joining us on the call today. We'll first review the income statement and segment information then we'll touch on a few key balance sheet and other financial items. We'll be brief and then open up the call up to your questions. A review of the income statement showed as Tom mentioned, total sales were up 4% to $2.8 billion and this was another record sales quarter for us. For the six months ended June 30, sales totaled 5.4 billion, also up 4% compared to the same period last year.

Gross profit in the quarter was 31.4% to sales consistent with the first quarter and up 40 basis points from 31.0 in the second quarter last year. The 31.4% gross profit for the first six months of 2007 is up 17 basis points compared to same period in '06. We're pleased with our improvement in gross margin during the second quarter and we'll continue working hard to show more progress over the balance of the year. We would add here that price increases in our businesses became slightly more significant in the last few months. This is similar to the trend we saw last year at this time, and pricing as well as our initiatives to improve products and customer mix all factored in our gross margin gain in the quarter. For the six months ended June 30th, our cumulative pricing is up 0.6% of percent in the Automotive Group, 2.3% in Industrial 1.8% in Office Products and 4.2% in electrical.

For the quarter, SG&A and a percent to sales increase 16 basis points from 23.66 to 23.82%. And for the six month period in '07 was 23.91, down slightly from 2006. After experiencing some positive trends in the first quarter we failed to show progress we were looking for in this quarter and this is primarily due to the lack of stronger top line growth in the Automotive and Office Products segments which we need to gain leverage on our expenses. We also point out that startup costs for our new heavy duty and import initiatives impacted this line. Regardless, we have to do a better job in this area, and we'll continue to intensely manage the cost in our businesses.

We have been able to reduce our SG&A as a percent to sales in each of the last three years and we expect to do the same in 2007. For the quarter our tax rate held at 38.0 and we currently expect the rate to remain at approximately 38% for the full year. This is down from 2006 rate of 38.3 due mainly to lower state income taxes. Net income for the quarter was 130.1 million, up 8%, and EPS of $0.76 compared to $0.70 last year was up 9%.

Now let's discuss the results by segment. While the second quarter Automotive had revenue 1.3951 billion, that was up 2% at operating profit, 114.8 million, up 1%, so margins slips from 8.3 to 8.2%. Industrial had revenue in the quarter of 839.7 million, up 9%, operating profit of 70.1 million, up 19%; and excellent margin expansions going from 7.6% to 8.3%. Office Products had revenue in the quarter 430.7 million, up 1%; operating profit of 37.7 million, that was down 2%, so a little slippage there from 9.0 to 8.7%. Electrical Group had revenue in the quarter of 110.8 million, up 7%, operating profit of 8.3 million, up 33%, so an outstanding job done by the Electrical Group going from 6.0 to 7.5%.

For the six months Automotive revenue 2.6566 billion, up 3%, operating profit 210.7 million, up 1%, and operating margins for the six months of 7.9%. The Industrial Group had revenue for the six months 1.673 billion, up 8%, operating profit, 134.7 million, up 16%, operating margin going from 7.5% to 8.0. Office Products revenue in the quarter -- for the six months, 882.5 million, that's down 1%, operating profit 85.9 million, which was flat with operating margins staying at a strong 9.7%. The Electrical Group had revenue in the -- for the six months of 217.6 million, and that was up 9%. Operating profit 15.5 million, up 40%, and with operating margins making significant move from 5.6% to 7.1% of revenue.

In summary, our operating profit for the total company grew 6% on a 4% sales increase, improving our operating margins approximately 10 basis points to 8.3% for the quarter. Progress on this line was due to strong results in Industrial and Electrical. We're very pleased with our performance, and this is indicative of the favorable business conditions and good operating that we continue to see in these business units. Automotive and Office Products markets have remained soft throughout the quarter similar to Q1.

The low single-digit sales growth for the Automotive and Office Products segment creates some challenges, such as leveraging our expenses as mentioned earlier, and has prevented us from showing further improvement in operating margin in the quarter. The good news is our Office Products margins remain very strong for the year, and excluding the startup cost by heavy duty and import parts businesses, business sales initiatives, our Automotive margin for the quarter was even with last year on just a 2% sales increase. We also minimized the impact of some of the other issues we discussed in past quarters, including the situation at Johnson Industries, and with improves sales over the second half of the year, we expect to see our Automotive margins improve. Looking at our pre-tax profit margin, which accounts for all of our operating expenses, such as interest and other, we saw improvement of 24 basis points to 7.58%.

For the year, pre-tax margin of 20 basis points to 7.49, we continue to show consistent improvement on this line each period, and we expect to continue this trend in quarters ahead. At net interest expense of 5.2 million for the quarter, that's down 19% from the second quarter of '06. For the full year, we expect our net interest expense to be approximately $22 million. Other category, which includes corporate expense, amortization of intangibles and minority interest was 15.9 million for the quarter, that's up only slightly from the second quarter last year. We look for expenses in the other category to be around $50 million for the full year, which is comparable to the prior year.

Now let's touch base on a few key balance sheet items. Our strong cash position of $275 million at June 30th is up 85 million from June 30 last year. We expect that cash position to remain strong as we grow our income and continue to make excellent progress on our working capital position. Accounts receivable increased just 1% from last year on a 4% sales increase for the quarter. So we're very pleased with our level of receivables relative to our growth rate in revenue again this quarter. Our goal continues to be to grow our receivables at a rate less than sales, and we should add that we continue to feel good about the quality of our receivables. Inventory was up 3% from the second quarter last year and down 1% from year end. On a 4% sales increase for the quarter and the year, we remain comfortable with our progress in this area, and will continue to focus on our inventory management initiatives to further improve our inventory numbers over the last half of 2007.

Accounts payable increases 1% from last year at June 30th, and is up 13% from December 31. Increased purchases related to our sales growth as well as extended terms and other payable initiatives established with our vendors have driven the increase on this line and looking ahead we see opportunities for additional improvement. Working capital of $2.8 billion at quarter end, up 6% from same period last year due mainly to our improved cash position. We'll continue our focus on improving our working capital position and related working capital efficiency which we improved in each of the last three years. Current ratio 3.1 to 1, consistent with second quarter last year, which would emphasize that our balance sheet remains in excellent condition. Continued to generate consistent and strong cash flows and encouraged by the opportunities and strong cash position provides the company.

In cash from operations remains strong in the second quarter and for the full year, we continue to expect that cash from operations to improve to approximately $500 million. Free cash flow which deducts CapEx and dividends from cash from operations should be in the $200 million range. Our priorities for cash remains first, the dividend, which we increased in 2007 for the 51st consecutive year, ongoing reinvestment in each of the business, share repurchases, and where appropriate strategic bolt-on types of acquisitions. (inaudible) in the second quarter our Industrial Group made two small accusations (inaudible) in the U.S. and (inaudible) in Western Canada. Combined these companies will add approximately 20 million in annual revenues, and we expect to report additional acquisitions of this type over the balance of the year.

In capital expenditures were $29.1 million for the second quarter down slightly from 31.1 million in the second quarter last year. Year to date our CapEx was 52.8 million, and we would expect this to be approximately $100 million for the full year. This compares to the 126 million in CapEx for the 12 months in '06. Depreciation and amortization 21.3 million in the quarter, which stands at 42.0 million through June. This expense is up from the prior year and for the full year, 2007, we would expect depreciation and amortization to be the range of 80 to $90 million.

Another priority for us has the been opportunistic share repurchases and as part of our repurchase program we repurchased approximately 1.1 million shares of our company's stock during the first six months of the year. This leaves us with an additional 14.2 million shares authorized for repurchase as of today. No set pattern for these repurchases, but we remain active in the program as we continue to see the investment in GPC stock along with the dividend provides the best return to our shareholders. In closing, we add that our total debt remains unchanged at 500 million and represents 15.6 % of total capitalization. As we discussed in prior calls we expect our debt to remain at its current level until our first 250 million credit facility (inaudible) November of 2008.

Second 250 million is due in 2011 and any prepayment of this debt is cost prohibitive due to (inaudible) included in the debt agreements. We're pleased with our results for the second quarter and six months and encouraged by opportunities for more growth over the balance of the year. That said we have identified key areas where there's room for improvement. Primarily top line growth, controlling our cost and improving our operating margins. We support these initiatives to drive the improvement with a strong and healthy balance sheet, continued strong cash flow further maximizing our return to shareholders. Tom, I turn it back to you.

Thank you, Jerry. A few final comments on the second quarter. Overall we felt like we came through the quarter in pretty good shape although the 4% revenue increase was a little lighter than we were looking for, we were able to operate well and net income was up 8% and EPS up 9% Now as far as our revenue side is concerned, industrial and electrical are performing well and each should continue to be up in the 7 to 9% range over the remainder of the year. Automotive and Office Products are having to work their way through softer end markets. However as mentioned earlier we feel we have some good things underway in each of these businesses, and we anticipate an improving sales picture in the second half. As mentioned earlier, Automotive we expect to be up 4 to 6% and Office Products 3 to 5% for the remainder of the year. When we put it all together we're looking for a combined GPC revenue increase of 5 to 6% in the second half. And with this in mind we remain comfortable with the full year earnings guidance of $2.95 to $3.05 which would be up 7 to 10% for the year. At this point we'll turn in back over to Carol and open it up to your questions. Carol?

(OPERATOR INSTRUCTIONS) +++ q-and-a Your first question comes from the line of John Murphy with Merrill Lynch.

Good morning, guys.

Good morning, John.

When we take a look at the operating margins here, you are having very good performance in Industrial, very good performance in EIS or Electrical and pretty good performance in Auto. If we think of these margins and the actions you are taking internally, where do you think these margins can go? I mean Auto as been as high as 9 to 11% range historically, Industrial has been as high as 9% and EIS is really sort of all time highs here in the second quarter. How much more room do you think there is on the margin side?

John, we have said in the past that our goal is to get Automotive to 9 to 9.5%, for Industrial to get them to the 8, 8.5% range, Office Products to hold them in around the 9.5 to 10% range, and Electrical Electronic, we had said we wanted to first get them to 5.5 to 6. of course, they are there and Industrial is there so I would say the near term objectives are to get the Automotive up. Jerry mentioned that if we back out the impact of our two new initiatives, the import parts and truck parts initiatives, they were able to hold their margins in the quarter at 8.3, and we think they did a pretty good job with not much revenue to work with. So we still think we can look to 9, 9.5% for them. From an overall corporate standpoint our goal is to get it to 9%, and then at that point we'll assess how much further we think we can push it.

You are certainly making progress. On the pricing side, I mean, you had a very good pricing quarter here. We're having good pricing performance recently. How much of that do you think is going to continue to going forward?

Well, I think we have seen the first round. There are certain things that are happening globally that will probably effect some pricing as we get our way deeper into the year. You know about some of the things happening in Asia, which is where some of the product is sourced and some of our vendors, I'm sure will be passing pricing on. But I think we have seen the bulk of it in the Electrical side. Maybe there's a little bit more to come in Industrial. I do think we'll see Office Products pricing increase over the remainder of the year as with Automotive.

Lastly, could you just review quickly the Midas and Tire Kingdom agreements, the recent agreements there.

Well, these are both agreements that were recently completed, and we did not get much impact in the second quarter. We didn't expect that much impact in the second quarter, but they are starting to roll out and take full form now, and we would expect that they will really be contributory in the second half and on in to next year and beyond.

Those are very much leveraging your existing distribution structure, correct? There is not any real incremental investment that goes along with that other than inventory?

No, sir. That's right.

Great. Thank you very much.

Thank you.

Your next question comes from the line of Matthew Fassler with Goldman Sachs.

Thanks a lot, and good morning to both of you.

Good morning, Matt.

Two questions, I guess, if I could. If you could address the Office Products business operating margin. The revenue clearly turned around this quarter, but the margin took a bit of a hit on a year to year basis, I realize that margin comparison is tough, but any color you could give on whether that had some relationship to the sales pickup would be helpful.

It didn't have much relationship to the sales pickup, I think it may be an abberation, we would expect our margins would come back again over the 2nd half of the year. I think Jerry mentioned year to date we're at 9.7%, which is near a historical high for them, and I think we'll look for them to continue to produce those kinds of margins over the course of the year.

Got you.. I guess the second question I would like to ask, if you could be a little bit precise about some of the sales drivers in that business that you see helping to propel your revenues forward in the second half? Because I guess some of your customers have talked to -- about some tough revenue trends.

Well, the one thing we did say in the comments was we're opening a new distribution point in Western Canada, so that will certainly help to drive some business. Additionally we have got some product category specific initiatives that are underway in Q3 and Q4. We have just launched a -- a unique cleaning and breakroom supply marketing piece for our customers that has gotten pretty good acceptance, we have similar types of initiatives going on furniture on some private label product and some others as well, so those things will help to drive some incremental volume. And then we have some expansion of existing business relationships that will kick in the second half. And then we have some new business relationships that will start over the course of the second half. We think there are a number of things that will help to drive improved performance sequentially as we go through the year.

One last question, if I could, on auto parts, I know the market has been sluggish for sometime. If you were to except the month of April, which was an unusual month from a weather perspective, if you could give us a census to whether the May -June numbers were close to your 2nd half guidance. I think you characterized the market as kind of sluggish over all even without the impact of the weather so if you have any additional insights of what might be holding it back that might be helpful too.

First of all as far as the may/June performance, I mentioned we were pleased to see it and it's the best back to back monthly performance that we have seen thus far this year, and it was in line with the guidance we had given at the the end of the first quarter.

Yep.

As far as other things that are impacting, you know, the price of fuel, obviously is one thing, and -- and we have seen -- I have only seen miles driven through the month of April, but we have seen very modest decreases in three of the four months through April, and year to date, we're down about 7/10th of 1% in miles driven, so that has an impact. I think we're seeing evidence of deferred maintenance, and that -- that is not something new, but I think we're seeing more of it today, which is having some impact. We talked to NAPA auto care customers around the country. We talked to major accounts around the country, and I think we see low single-digit growth in those businesses as well. So that's another anecdotal piece of information that we take. And we have been looking lately at replacement tire sales. And looking back over the past couple of years, we think we can tie that statistic to our overall Automotive growth rates, and that would bare out that the demands are off, and people are deferring things like that.

Got you. Thank you so much for your help.

Thanks, Matt.

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

Thanks, good morning, gentlemen.

Hi, Tony.

I guess following up on the Automotive theme, when you look at the mix of business on the commercial and the DRY, are you seeing a little bit better performance on the commercial side right now in the softer environment?

Commercial is a little bit stronger, yes, but cash is holding up for us surprisingly well. It might be helpful to give you an idea of the kinds of products that are moving well and others that -- that are not up to the overall performance. If we look at things like batteries, brakes, even oil and filtration, we say they are performing pretty well for us, conversely if we were to look at some of the underhood, or some of the undercar product categories, they are not doing quite as well, and I think it goes back to miles driven and also deferred maintenance.

When you look at your plan for store openings, is -- in this situation are you more hesitant to open newer stores in a softer environment? Or is it just a function of timing and leases and everything having to line up to -- to determine if we're going to get 50 opened by the second half or not?

It's more the latter than the former. And then the other thing, in tougher times there are some stores that get consolidated. So when we report -- we are report net stores. We open more stores than what we report, but we also consolidate some.

How many stores -- if that net 18 that you noted, is that reflective of how many stores that have closed, or did you give that number, I'm sorry, if I missed it.

That's the net number, that takes the number open minus the number of closed and that's the net that's remaining. So it was 18 for the first half.

Okay. Okay. Are you -- and when you look, then, at your -- the May/June period, would you categorize those months as pretty even in terms of trends, or was one month a little bit better than the other?

No. They were both -- and we had a difference in the number of sales days. If we look at it on a per day basis, they were both equal.

Okay. Okay. Okay. Perfect. And then last -- just one last question, when you look at the industrial segment, you noted some market strength coming -- coming back, and it sounds like the markets there versus some of the markets where you might be seeing softness in Automotive obviously are a little bit different. Could you categorize some of the markets where you are still seeing some softness on the Automotive side, and your confidence that things will improve in the second half. I know you thought that things would be better in the second quarter than they were. Why the -- what makes you feel better now -- I mean, obviously you had May and June, which were good months, but what makes you feel better that you think the second half is going to be materially better on a sales rate than what we saw on the second quarter.

Well, the things that we listed earlier, will be more impactful in the second half than -- than they were in the first half. Things like the new store openings, or the major account contributions of Midas and Tire Kingdom. Some of the things we talked about earlier. Those we feel will help us for sure. Also, some of the specific initiatives that the Automotive parts group has in place will help drive some in additional revenue over the second half. The first part of your question, I think, had to do with some geographic differences. And I would say the Southeast, especially deep into the Southeast, into Florida for instance, continues to be challenged because of some of the more unique problems that they are trying to work they way through. Some portions of the Midwest continue to be a little more sluggish than other parts of the country. But even in those areas, with the plans we just reviewed with our Automotive Management Team, we have got a degree of confidence that with good execution they'll come through the remainder of the half in -- in the ranges that we gave you, 4 to 6%.

Okay. That's perfect. Great. Thanks, guys, I appreciate it.

Thank you, Tony.

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

Thanks, good morning, everyone.

Good morning.

First of all on the Auto margin, Tom I think you mentioned sort of a target of 9% down the line you were at 8.2 in the quarter -- do you think you need more than sales growth and operating leverage to move that up 80 basis points? Are there any for instance 10 or $15 million expense reduction initiatives that could help get you along there, and if so, what types of things would that be?

First of all our objective of getting it to 9% is not one year to the next. It's extended out over a couple of years. We do in fact need to get revenue growth a little bit better than what we have seen thus far this year in order to leverage the cost structure that we have. We have ongoing initiatives, not just in Automotive but in all of the businesses -- we have ongoing initiatives looking at various components of the cost structure and different ways that we can approach things to try to be more efficient, streamline processes, take cost out. So that's part of the -- the every day type of approach that our management teams take to running their businesses.

Okay. Jerry, I just wanted to square something away on the cash flow forecast, if I'm not mistaken you said 500 million operating and 200 million free cash flow, which I guess we define a little differently, you count after dividends. But you have done, I think 356 by that measure so far this year and about 180 on the free cash flow line. Is there any reason why you couldn't do above that, it just seems versus the earnings number you put out there that it's weak. Is there a big working capital drain on the second half of the year or it is a conservative forecast?

It's a conservative forecast, I think we can do better, how much better I don't know. But we have had that 200 million number there since the beginning of the year, Jonathan and hopefully we will be able- but there is no unforeseen cash flow drain or anything.

Would you expect working capital to be a use in the second half of the year? You have gotten a nice bump here in the first half is there any reversion or could it still be - ?

No. It's a going to be a use. I don't see that happening. I think we're going to continue to bring our inventories down, and, you know, certainly lessen our revenue growth if there's an increase there, and -- but we'll manage our receivables, and I think there are additional things we can do with the payable side of things.

On the balance sheet I'm not going to beat you up about the amount of leverage per se, but you are down to a little over 200 million of net debt, you didn't spend a lot on the quarter and acquisitions. Is there stuff that's larger out there than the 20 million in industrial revenue you mentioned? In other words, is there stuff that could add 100 or 200 million in revenue on the industrial side that could soak up some of this growth in the cash balance?

Yes, there is, and we have got two or three of them, and we're considering those and looking at them. In our case we'll be more active in that area in the second half of the year. We'll be more active in the share repurchase in the second half of the year. Our issue with these large acquisitions is still evaluation issue. And if we can get that right, then you -- you know, we may see one of those larger ones in the second half.

And to the extent your board is asking for your advice as to whether to pay down the 250 million in debt that sort of is less prohibitive to pay down, would you want to pay down debts further or do you think there are better uses of cash from some of these acquisitions?

I think right now the ones we have on the drawing board would probably be better use of the cash with the acquisition. But there is a lot of time between now and November of 2008 and what the board will think and what we will advise them can change. But right now I would say there's more potential to get a better return doing these acquisitions.

Thank you very much, guys.

Thank you.

Your next question comes from the line of Cid Wilson with Kevin Dann and Partners.

Hi, good morning. My question is regarding the pricing that you mentioned earlier. It sounded like, if I heard correctly -- that -- that of the price increases, that there wasn't as much of a price increase in Automotive as there was in Industrial. I was wondering if that's a function of any pricing pressures, or if you can elaborate further on that.

Cid, we haven't seen the level of price increases coming through in Automotive as yet that we have seen in Industrial. I think Jerry said we are up 6/10th year to date in Automotive and 2.3 in Industrial. It will be our expectation that we will see more of a price increase movement in the second half of the year because of some things happening globally in the industry.

Okay. And my second question is, can you give us -- maybe some further color in terms of your rollout of heavy duty and you know -- when you look at your -- your EPS guidance, you know, what -- how much of that is -- is factoring in the extra expenses in heavy duty?

I think we said -- I'm going to come at it a different way, maybe, but we said both the heavy duty and the import parts initiative cost us about 10 basis points in operating margin in the quarter. As far as the impact on the guidance, we don't give that specific information out, but that has been factored in there, and with our continued plans for expanding those businesses.

Okay. And my last question, and I'm not sure if I heard this, but you mentioned that that May and June were -- were certainly much better than April, any comments on -- on July month to date?

No -- not at this point. We would say that we continue to be optimistic about hitting the 4 to 6% over the second half of the year.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Himanshu Patel with J.P. Morgan.

Hi, this is Himanshu Patel.

Good morning

Morning. You saw a nice 70 BIPS increase year on year increase in Industrial margins, and last quarter it was about 30 BIPS is there something specific to this quarter or should we assume a similar kind of increase to continue for the rest of the year? That would sort of suggest that you could outdo your goal of 8 to 8.5% on the industrial margins.

I don't think there's anything extraordinary it's more a matter that we were just able to leverage the 9% sales increase that they had. And as far as our ability to exceed the 8, 8.5, there's no cap on it. We just set some nearer term goals for each of the businesses, and as we approach the top end of those, we'll assess what we think our potential is to expand them further going forward.

Okay. And then on your heavy duty parts business, you said that you would see some revenue contribution in the second half, but on the earnings is it likely to be neutral, or should we expect some sort of (inaudible) in that business as well.

No and all of that is factored in to the guidance that we have given. We would not expect that to be contributory '07. We do expect it to be in .08.

All right. Thanks, guys.

Thank you.

Your next question comes from the line of Keith Hughes with SunTrust.

Thank you, all of my questions have been answered.

Thank you, Keith.

(OPERATOR INSTRUCTIONS)

Carol, do you have any other questions in the queue?

We have no further questions at this time. Are there any closing remarks?

We're just not going to hold the call open any longer, and we would be happy to answer any questions from anybody one on one as they call us later, but we appreciate those of you on the call today for joining us, and we appreciate your continued interest in and support of Genuine Parts Company and look forward to talking with you later in the year.

Ladies and gentlemen, that concludes today's teleconference. You may now disconnect.