純正零件 (GPC) 2007 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Genuine Parts third quarter earnings conference call. (OPERATORS INSTRUCTIONS) I'll now turn the call over to Miss Carol Yancey, Senior Vice President of Finance and Corporate Secretary. Please go ahead, ma'am.

Thank you, good morning and thank you for joining us today for the Genuine Parts Company third quarter conference call where we'll discuss our earnings results and the outlook for the remainder of the year. 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 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'd 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 Chairman--[technical difficulties]

Okay, just one moment.

Thank you, Carmen. We can resume?

Yes, ma'am.

All right. Thank you. I'll pick up where I left off and we would just say that we appreciate all of you being on the call this morning. Jerry Nix, our Vice President Chairman and Chief Financial Officer, and I will share the duties on this call as we normally do. Once we've concluded our remarks we'll be pleased to answer any questions that you may have. Our third-quarter and nine-month results were released earlier this morning, and a quick recap of those that may not yet have had a chance to see them shows that sales for the quarter were $2.798 million, which was up 4%. Net income was $128.6 million, which was up 6%, and earnings per share were $0.76 cents this year compared to $0.71 cents in the third quarter last year, and this represents an EPS increase of 7%.

For the nine months, this now gives us sales of $8.216 million, which is up 4%, net income is $380.3 million, up 7%, and EPS is $2.23 compared to $2.06, and up 8%. So, the third-quarter results were comparable to the year-to-date results on the revenue side, and we are pleased to be able to once again get a bit of operating leverage on the earnings side. Now, as far as the individual businesses are concerned, the industrial operations continue to turn in the strongest sales performances. Ocean Industries, our industrial company, was up 7% in the quarter, and they're up 8% year-to-date. So,business remains good in the industrial segment and after being up 11% in both 2005 and 2006, we're certainly pleased with the good job being done by our industrial management team.

We continue to experience solid growth across a number of the diverse industry segments, notably chemicals, equipment and machinery, food products, and food processing, and energy-related industries among others. And, as in the second quarter, we saw a continuation to the improving sales balance among the individual industrial divisions across the country, which is encouraging. The industrial group made two smaller acquisitions during the quarter, giving them a total of five acquisitions year-to-date with combined annual revenues of approximately $50 million. These smaller bolt-on-type acquisitions remain part of our ongoing growth strategy for our industrial operations, and they will help to sustain the overall good industrial results on into 2008. Additionally, the most recent industrial production and capacity utilization figures each remain at very favorable levels. These indices are usually good leading indicators for our industrial operations and, at the current levels, the outlook for this segment is positive.

Moving on to the electrical group, EIS was up 4% in the quarter. Now, while not up to the growth rates over the first two quarters, we feel that the EIS team continues to make progress. In looking at the EIS results, it's important to remember that they had an extraordinary third quarter in 2006 when they were up 23%. So the comps were pretty challenging. Additionally, their third quarter 2007 results were impacted by some supply shortages in the quarter, and we estimate that this cost them 2% to 3% of top-line growth. While not completely resolved, we do expect the supply issue to be less of a factor in the fourth quarter. EIS is up 7% year-to-date and, as with the industrial group, we're experiencing good growth across the EIS customer base.

The most recent institute for supply management purchasing manager's index remains above 50, indicating continued expansion in the industry, and we're optimistic about EIS' prospects in the quarters ahead. Automotive was up 3% in the quarter and their up 3% year-to-date. We did see a slight improvement from the automotive increase in the second quarter, but not quite up to our expectation for the quarter. After experiencing a strengthening in the automotive results in May and June, we saw our per-day sales soften in July and got off to a slower start to the quarter than we had planned. Now, we did see improvement in August and September, and on a per-day basis, September was actually our best month of the year, which is encouraging. We think it's interesting to look at our automotive business geographically. In areas like the southwest, the mountain states, the mid-atlantic, and the midwest, our business is good. and we're pleased with the progress being made in these locations. Our biggest challenges are in the Southeast and California. Perhaps somewhat ashes tributable to the subprime situation, but regardless, we're not performing up to expectations in these areas, and our automotive management team is working hard to improve the results in these two parts of the country.

We were pleased to see that we did have equal contributions to our sales growth in the quarter between independent ownerships and company stores. Both groups were up 3% so we had good balance in the results. And then within the company stores, we saw comparable growth between the cash and commercial business, each up 3%, again indicating good balance. Now, although we don't see any significant change in the external environment and the automotive aftermarket in the near term, we do continue to feel positive about the initiatives underway within our automotive group. We expect that our efforts in the import parts and heavy truck parts segments the enhance our automotive growth rates in the months ahead as will improve results in key initiatives like major accounts and new distribution among others. As a result, we expect to see automotive sales grow in the 3 to 5% range in the fourth quarter, continuing to show gradual improvement and starting to build a little momentum going into 2008.

Now, before leaving automotive, we do want to bring you up-to-date on Johnson Industries. We were successful in selling one additional location at the end of the quarter, and we've now sold nine Johnson locations over the past two years. We have three locations remaining, and we continue to explore our options on these with the hope to selling these remaining three within the next few quarters. Finally, a few comments on office products. This segment was up slightly in the quarter 0.3%. This follows a 3% decrease in the first quarter and a 1% increase in the second quarter, so although we have seen modest improvement over the past six months, we continue to encounter a sluggish marketplace.

As in automotive, we see good growth in certain parts of the country, but then softer results in areas like Florida. On a positive side, we are pleased to see that our business with the independent office products resellers remains good and is growing in mid single digits. Conversely, our business with the megas was down in the quarter and is running behind year-to-date. We did reduce the year-to-date deficit in the quarter, however, and we expect to reduce it a bit more over the final three months of the year and, most importantly, we do anticipate solid growth with the mega channel in 2008, which will certainly help the overall office products growth rates.

Now, although conditions in the office products industry remain challenging, our expectation is that SP Richards will show modest improvement in the fourth quarter, and we fully expect them to get back to more historical growth rates in 2008. So, that's a quick overview of sales results by business unit and at this point we'll ask Jerry to cover the financials.

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 touch on a few key balance sheet and other financial items. We'll be brief and open the call up to your questions. View of the income statement shows total sales were up 4% to $2.80 billion, and this was another record sales quarter for us. For the nine months ended September 30, sales totaled $8.22 billion, also up 4% compared to the same period last year. Gross profit in the quarter was 31.12% to sales, up 33 basis points from 30.79 in the third quarter last year. For the nine months, gross profit of 31.31 is up 23 basis points, compared to the same period in '06.

We're pleased with our improvement in gross margin for the third quarter and for the year, and we'll continue working hard to show further improvement in the quarters ahead. As we break down our progress on this line, we believe our initiatives to improve product and customer mix continue to factor into our gross margin gain in the quarter. In addition, it would appear we have benefited to some degree from the vendor price increase we received in our businesses which, in certain cases, allows us to adjust our customer pricing accordingly. This was probably more of a factor in our non-automotive segments as pricing and automotive have been relatively flat since the first quarter of the year. For the nine months ended in September, our supply pricing is up 0.9% in automotive, 3.9% in industrial, 2.4% in office products, and 5.4% in electrical.

For the quarter, SG&A as a percent of sales increased 20 basis points from 23.50 to 23.70 and for the nine-month period in '07, was 23.84, relatively flat compared last year. We attribute our third quarter increase on this line to the lack of leverage on relatively weak top-line growth in automotive and office products. This will certainly be more of a factor than any specific cost increases we could point to. We recognize the need for improvement in this area. We'll continue to intently manage the costs in our businesses to show more progress. We've been able to reduce our SG&A as a percent to sales in each of the last quarters -- each of the last three years, I'm sorry, and we expect to continue this trend again 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, $128.6 million, was up 6%. EPS of $0.76 cents compared to $0.71 last year, up 7%. Now, let's discuss the results by segment. Automotive had revenue in the quarter of $1.381.0 million, that was up 3%. Operating profit, $115.0 million, also up 3%. So, their margins held steady at 8.3% in sales. Industrial had revenue in the quarter of $849.6 million, that was up 7%. Operating profit of $69.7 million, up 12%. So, good margin enhancement there from 7.8% to 8.2% for the third quarter.

Office products for the quarter a revenue of $460.4 million. That was up 0.3%, operating profit, $33.2 million, down 6%. So we had margin degradation from 7.7 the prior year to 7.2%. The electrical group had revenue of $111.9 million. That was up 4%. Operating profit of $7.7 million, up 27%. So, outstanding margin improvement there from 5.6% to 6.9%. Looking at the nine months the automotive revenue was $4.037.6 million. That was up 3%. Operating profit of $325.7 million, up 1%. So, slight margin decline from 8.2% to 8.1%.

The industrial group had revenue for nine months of $2.522.7 million, up 8%. Operating profit, $204.3 million, up 14%. So, again, strong margin improvement, 7.6 to 8.1. Office products had revenue for the nine months of $1.342.9 million. That's down 1%. Operating profit of $119.1 million, that's down 2%. So, slight margin degradation to 8.9% for the nine months of '07. Electrical group, $329.4 million, up 7% for nine months. Operating profit, $23.2 million, up 35%, so again, outstanding job being done by the electrical group, moving from 5.6% to sales to 7.1% to sales in operating profit margin.

In summary, our operating profit for the company grew 5% on a 4% sales increase. This enabled our operating margin to expand 10 basis points to 8.1% compared to 8.0% in last year's third quarter. We're very pleased with the improvement we continue to see in industrial and electrical. And this is indicative of healthy business conditions and good operating in these business units. In automotive, we made solid progress in maintaining our margins despite a challenging sales environment. Progress in margin for these three segments was partially offset by the margin decrease in our office products group where we continue to face difficult market conditions and sluggish top-line growth. Fortunately, conditions have not worsened and, in fact, have been pretty constant over the year, but improved sales growth in office products as well as automotive will help us produce the kind of steady, long-term operating margin progress that we're planning on.

Looking at our pretax profit margin which accounts for all of our operating expenses, such as interest and other, we saw improvement of 12 basis points to 7.41%. For the year, pretax margin is up 17 basis points to 7.46. We continue to show consistent improvement on this line each period, and we expect to continue this trend in the quarters ahead. We had net interest expense $4.7 million for the quarter, that's down 30% from '06. For the full year, we expect our net interest expense to be approximately $22 million. The other category which includes corporate expense, amortization of intangibles, and minority interest was $13.5 million for the quarter, up $1.5 million or 12% from the third quarter last year. This increase is mainly due to the usual cost fluctuations and corporate expense. For the nine months, this line is up less than $1 million at just 2%. For the year, we expect other to be about the same as it was in 2006, at approximately $50 million.

Now, let's touch on a few key balance sheet items. Our strong cash position of $330 million at September 30 is up $116 million from September 30 last year. We expect our cash position to remain strong as we grow our income and continue to make excellent progress on our working capital position. At the same time, we do not anticipate maintaining this level of cash going forward, and our cash balance will vary based on level of cash used for acquisitions and share repurchases which may materially fluctuate from quarter to quarter.

I might add here that subsequent to quarter end we did close on a sale lease-back transaction related to company-owned NAPA stores consistent with our limited investment in store real estate. That proceed from the were approximately $56 million and the net gain of approximately $20 million will be amortized over the lease term of 20 years. We believe this transaction further strengthens our cash position and investment options, which we'll discuss later in our comments. Accounts receivable increased 2.5% from last year from a 4% sales increase on the quarter. So, we're pleased with our level of receivables relative to the growth rate and revenue again this quarter. Our goal remains to grow receivables to a rate less than sales. And we should add that we continue to feel good about the quality of our receivables.

Inventory was up 2% from the third quarter last year and is down slightly from 12-31-06. On a 4% sales increase for the quarter and the year, we remain comfortable with our progress in this area and we'll continue to focus on our inventory management initiatives to further improve our inventory numbers in the quarters ahead. Another area where we've seen significant improvement this year is in accounts payable which is up 7% from last year, September 30. 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 hope to continue making progress in this area. Working capital, $2.8 billion at quarter end was up 5% for the same period last year due mainly to improved cash position.

We'll continue to focus on improving our working capitalization and related working capital efficiency, which we have improved in each of the last three years. Our current ratio, 3.0-1, is consistent with the third quarter of last year and continues to emphasize that our balance sheet remains in excellent condition. We continue to generate consistent and strong cash flows and are encouraged by the opportunity of the strong cash position provides the company. Cash from operations remain strong in the third quarter, and for the full year we expect our cash from operations to improve to more than $500 million and free cash flow which deducts CapEx and dividends from cash from operations should be in the $220 to $240 million range for the full year.

Our priorities for the cash remains first the dividend, which we continue to raise each year on one reinvestment of each of the businesses, share repurchases, and, where appropriate, strategic bolt-on types of acquisitions such as the five acquisitions at Motion Industries thus far in 2007, as previously mentioned by Tom. We're optimistic about additional acquisitions and opportunities for the industrial group in the future. Capital expenditures of $31.0 million for the third quarter is down from $34.6 million in the third quarter last year. Year to date, our CapEx of $83.8 million, and we currently expect this to be in the range of $100 to $110 million for 2007. This compares to $126 million in CapEx for the 12 months in 2006.

Depreciation and amortization was $22 million in the quarter and stands at $64 million through September. This expense remains up from 2006 and for the year we would expect depreciation amortization to be approximately $85 million. Another priority for us had been opportunistic share repurchases, and as a part of our repurchase program, we've purchased approximately 3.1 million shares of our company stock during the first nine months of the year.

In addition, we've purchased another 200,000 shares thus far in October, and with the purchase of 2.8 and 2.9 million shares in '05 and 2006 respectively, this leaves us with an additional 12 million shares authorized for repurchase and no set pattern for these repurchases. We'll remain active in this program as we continue to see and believe that an investment in the Genuine Parts Company stock along with the dividend provides the best return to our shareholders.

Before closing, we would add that our total debt remains unchanged at $500 million and represents 15.6% of total capitalization. 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 '08. The second $250 million is due in 2011, and any prepayment of this debt is cost prohibitive due to may hold provisions included in the debt agreements. At this point we've made no decision regarding our plans for the debt as it comes due in November of 2008. We're pleased with our overall results for the third quarter and nine months, but we're clearly not satisfied with every aspect of our business. We continue to see several key areas where there's room for improvement. Primarily, top-line growth, controlling costs, and further improving our operating margins.

Thus far in 2007, we've had good margin improvement in industrial and electrical, solid progress in the core NAPA business, and an improving trend in overall automotive. In office products, for year-to-date we have a 10 basis point margin decrease, we have some work to do. We know that, and we're working on it. For the total company, we've improved our operating margin by 10 basis points through September and expect to report more progress in the future. So, overall we're encouraged by opportunities for more growths in the fourth quarter. We'll support these initiatives to drive this improvement with a strong and healthy balance sheet and continued strong cash flows, further maximizing our return to shareholders. We want to thank all Genuine Parts Company employees and associates for their effort. We look forward to continued progress. Tom, back to you.

Thank you, Jerry. So, that's a quick review of our third quarter and nine-month results. Now, as far as the rest of the year is concerned, we're looking for revenue growth in the fourth quarter of 4% to 5%, and that will put us up 4% for the year. We expect the earnings per share to be in the range of $0.74 to $0.79 for the quarter, that will give us year-end earnings per share of $2.97 to $3.06, which will be up 8% to 9%. And we're pleased that these results will give Genuine Parts Company another year of record sales and earnings. So, that's how we see things right now. And at this point we would like to open up the call to your questions. Carmen?

(OPERATOR'S INSTRUCTIONS) Your first question comes from Matthew Fassler with Goldman Sachs.

Good morning to all of you. I would like to start off just by asking about a couple of your end markets and business initiatives. First of all, in the office products business, you talked about the majors being down. If you could talk about the trend within the majors and whether or not they followed what seems to be some improvement in the days-adjusted trend toward the end of the quarter.

All right. Matt, this is Tom. Yes, they did. We were able to reduce the year-to-date deficit in the quarter, and it got progressively stronger as the quarter went on. And, as I said, we fully expect this important part of our business to -- to grow at a decent rate in 2008.

Now you had [intromated] earlier in the year with some of your larger customers who were having some pretty well-documented problems. There were some adjustments that you thought you'd be able to make away from the majors. And as you think about both the improvement that you just alluded to and the marginal improvement that you made in Q3 over Q2, would you say that some of those external -- some of those additional efforts that you made, that you think pushed you over the top were pushing you ahead, or is sort of the underlying demand in the marketplace?

Well, I think some of the initiatives within the office products group are bearing some fruit. As I said earlier on my comments, we're certainly encouraged by the mid-single digit increase with the independent office products resellers. I think that's healthy growth in the current environment. And we continue to work very closely with the mega channel. They're very important customers to us. And we think we've got some opportunities to mutually grow together as we go forward.

Great. My second question relates to the auto -- automotive business. You've obviously been working on a number of different initiatives over the past year, imports, heavy trucks, etc. If you could give us sort of a status update on the most important of those and also talk about whether in the aggregate they contributed to your -- to your improvement here in the third quarter.

All right. Well, taking the imports first, we did open our second distribution point a little bit earlier in the year. We're in the process of building that out and building the volume in that operation. We expect that that one is pretty much performing at plan and we expect the growth to be accretive to us in 2008. The truck parts initiative, we have the one operation that we did get open earlier this year. We delayed the further rollout temporarily while we're worked on some infrastructure issues, which we have resolved. We will open the second distribution point in the first quarter of 2008, and we think that we'll be on plan for good revenue growth with that one in 2008. As far as their contribution thus far in 2007, there's really been minimal contribution from those two operations. We expect to see significant contribution in 2008.

And my final question, please. Taking about an early look at 2008 more broadly. This year will end up being a somewhat slower year for revenue growth for Genuine Parts based on your forecast, I guess commensurate with some moderation in economic growth. As you think about 2008, would you think that -- as you take an early look at it and you think about what you're seeing in the economy, would this be another year of more moderate growth or do you see it as being a bounce-back year for you and what you're seeing big picture for the broader U.S. markets?

Well, we've looked at what we feel each of the segments can deliver in 2008. And on a blended basis, I'd say that we're looking for something in the 5 to 7% range. You probably know that longer term we've said that our overall expectations are to grow the top line 6% to 8%. So we've got a little work to do to get back to that level. But we do think 2008 will show improved revenue performance across the business.

In other words, accelerating or just up year to year? Accelerating gains, that is, or simply gains year to year, just to make sure I understand what you're saying here.

I'm not sure I understand your question, Matt.

When you say improved revenue performance, are you suggesting bigger revenue growth or simply revenue growth period.

Bigger revenue growth. I would say 5% to 7% we're going to be up 4% this year. And we're looking for improved performance in automotive, in office products. We think that industrial and electrical electronic will be looking for comparable performance.

Thank you so much for your help, Tom.

All right. Thank you.

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

Good morning, gentlemen.

Good morning, Tony.

I guess one question I wanted to ask -- did you note that the industrial -- you've made acquisitions that have totaled $50 million to date, is that correct?

No, it's $50 million on an annualized basis.

Okay. $50 million on an annualized basis. Is there enough -- I mean, from an acquisition standpoint, I mean, that's a couple percent or so worth of growth that you should be able to get every year, is there enough opportunity out there to continue to allow for further acquisitions and then as you make more and more of these, how does that influence or impact what will be the pricing environment, if you're swallowing up more and more of your competitors? Could you comment about that?

Well, as far the opportunities, there are a number of opportunities for acquisitions of the size that we've done thus far this year, and then larger, and we would expect that we will be able to continue to add to the overall industrial revenue growth with these types of acquisitions over the next several years. I don't think that there will be any impact on the -- the pricing environment as we go forward. We -- we believe these will be pricing neutral to us.

And are these acquisitions helping with existing customers, deepening sort of your -- your product that you -- that you already supply, or is this introducing you to new customers that you'll be able to build a bigger book of business or a combination of the two?

Well, it's a combination of the two. Some of the acquisitions would be in -- what we call the bill supply segment that we've been interested in for a couple of years now and we're rounding out some geographic footprint with some of the acquisition necessary that area, and we're also broadening into some other areas that do open up some new customer opportunities for us.

Okay. Maybe shifting a little bit to the automotive side, you noted the west in California and the Southeast in Florida as being tougher markets for you right now. Is -- have you seen those markets continue to deteriorate, or are you at least now seeing some stability and that perhaps is why you may feel a little bit more confident that this automotive segment may start to put up a little bit better trends?

Well, we don't see a significant deterioration in those markets, but we don't see improvement at this point in those markets as yet either. So, I think our relative optimism for automotive is really based upon some of the initiatives that the management team has in place and the confidence in their ability to execute on some of those initiatives.

Okay. Was your business hurt by the temperature control in a lot of markets this summer? It was unseasonably cool, and I'm wondering if that was a segment that maybe was a bit softer for you than you were originally planning for.

Yes, that's absolutely right. Like everybody in the industry, it was not a good year for temperature control.

Does -- in most of that you don't pick back up. Sort of a lost sale or deferred sale for what will be next spring or early summer, but how has some of the hotter weather in late September and early October, does that -- is that at the margin maybe a modest positive for this sort of the automotive business, but you don't certainly want to see that continue into November or December, or is that not something you'd like to see this time of year just in a general basis?

Well, this time of year most people are starting to think about the colder climate in the north for sure. And they start to get their vehicles ready for the winter season. Warmer temperatures just delay that some.

Okay. So that -- then you would view what we've seen from a weather standpoint as a modest negative?

I would stay's just neutral at this point. A neutral at this point.

Great. Thanks, guys.

All right. Thank you, Tony.

Your next question comes from Michael Ward with Soleil.

Hello?

Good morning.

Good morning, everyone.

How you doing?

Doing fine. A couple questions. First off, Jerry, did you say your share [remuch] was 12 million shares?

12 million shares remaining in the authorization. That's correct.

Okay. And that's a -- is that program a number of shares, not a value?

That's correct.

Okay. The second thing, the working capital. How much more room for improvement do you have? Like you made great strides over the last several quarters --

We have. It's been a gradual thing, and we -- we've shown some significant progress in it this year. I can't answer how much more room there is for improvement. There certainly is more, and we're going to continue to push it. And I think that's the general nature of the company once we achieve an objective, then we raise the objective. And that's kind of where we are with working capital.

Okay. It seemed like the third quarter. I guess it's seasonal, you get a bump. This year you got a pretty nice bump. Was there anything unusual in it?

No. We looked back at that, Mike, and the same thing, couldn't spot anything that's unusual.

Okay. And then lastly, do you have the store count for the automotive? The company owned at independence?

In terms of the total store count for new distribution?

Well, the total store count.

We can give that to you, Mike. We've got it. Just let us get the accurate number. 5,853.

53, okay. That's down a little bit. Was that company owned?

We had a rather unique quarter in the sense that we opened 40 new stores in the quarter but we closed or consolidated 54. So we had a decline in store count in the quarter. We're still up year to date. We expect the positive in the fourth quarter. But we did rationalize some of the stores in the quarter.

Okay. And what was -- was it on the company owned or independent?

More on the company owned.

Okay. Thank you very much.

Thank you, Mike.

Thanks.

Your next question comes from [Jonathan Steinmetj] with Morgan Stanley.

Good morning, everyone.

Good morning.

A few questions, can you talk on the auto side in terms of product categories what was stronger and what was weaker. And can you also comment a little bit on what proportion of your business would be related to batteries and how are some of the increases in lead prices and the increases in battery I assume prices do to your customers affecting the top line in the auto business? Is that something that moves the needle?

Well, as far as the product categories, batteries was one of the ones that had another good quarter. Other categories that experienced good growth in the quarter, some of the oil products, some of the chemicals. The brake category, all performed pretty well for us. Ones that had softer results, we talked about temperature control earlier. Exhaust, ride control would be ones that did not perform at the overall level. As far the battery pricing, though, the lead pricing, that's a positive in the sense that it's across the industry, leading to higher prices for batteries in the entire industry. And that will help add manufacturer to the top line going forward. And -- add to the top line going forward.

And do you have a number what the batteries will represent so we can monitor this?

We don't. I'll be happy to get it for you but we don't have it handy.

Okay. Do you think you'll make more on a dollar basis on a battery if your price goes up, is there dollar marks to gain?

Dollar margin because we're selling the unit at a higher price. The percentage of margin would not change.

One last one on this topic. When you decide thing like battery or some of the oil-related and chemicals, these are things where the underlying commodities have had a lot of inflation. Are these strong on a unit basis or strong on a revenue basis because of the pricing issue?

Both.

Okay. Jerry, can you clarify -- can you discuss your free cash flow guidance again? It seems like you've done American that on the operating cash flow line than what you sort of mentioned I think in your guidance. Are you suggesting there's some unwind in some of the capital in the fourth quarter, or are you just being somewhat conservative?

Well, I'm always somewhat conservative. At the same time, I think the numbers are realistic. If we generate the $500 million from operation and we just back out where we think our CapEx is going to be and where we think our dividend -- we know where our dividend are, then we think that 220 to 240 free cash flow number is a pretty good number. Keep in mind that we also generated the additional cash from the sale lease-back.

Okay. But -- I thought you said that was after [quarterren].

Yes, it was.

What is your comparable -- I want to make sure we're on the same page? What is your comparable operating cash flow number through the first nine months?

Well, we -- we got net cash increase was $195 -- $194 million. I'm not sure -- we got cash provided from operations of $608 million.

Okay. Because I'm looking at 618, and I'm trying to understand to get the $500 million would suggest some sort of unwind. I'm trying to seek clarity.

I'll have to revisit that, Jonathan. I -- we don't have any intention of unwinding.

Okay. All right. Terrific. And last question here. When you think about niche and other type of acquisitions going forward, there's a lot of strength I guess in some of your end markets globally or outside of North America might be the way to put it. Any thoughts given some of the emerging markets growth and that kind of thing to try and move any of the business into some of those areas?

Jonathan, we look at that on an ongoing basis, and we just have to make what we think is the best decision around each of the opportunities that we may know about. And if we find that it's -- what we think is a good opportunity for the shareholder, certainly we would be open-minded about it. To this point we have not seen anything that we think makes good sense for the GPC shareholder.

Okay. Thank you very much.

Thank you.

Your next question comes from Rick Weinhart with BMO Capital Markets.

Good morning, gentlemen.

Good morning, Rick.

I have a couple of questions. One, on the automotive division, I believe you had a couple of national account wins which started flowing through I believe it was in this quarter. If we backed those out, I'm just trying to get an idea of what the run rate looked like from the second to third quarter in that division. Was it appreciably lower in the third quarter if we back that out?

I know -- what I would say to you is that we're just really ramping the two accounts specifically that you're referring to. They're just really coming on stream nicely. We did see our major account business had good growth in August and September. September we were short a day, but on a per-day basis we had our best back-to-back performance that we had seen all year from major accounts. And that's certainly partly attributable to the two new lines of business that were added. But they did not significantly impact the overall automotive numbers.

Okay. So it a situation where you're slowly transitioning those accounts throughout the quarter, or was there something else impacting that?

No. We had some transitional period that we had to work through. We're through that now. And we should see the benefit, the full benefit across the fourth quarter, and that will be the first quarter we get a full three months of benefit from it.

Okay. Great. Thanks. And again, following up on a question earlier on your initial look at 2008. Your optimism for the automotive and the office products business in terms of getting modestly better, are you expecting the industries to recover, as well, or is this purely initiatives that -- and market share gains such as the national account stocks bring in?

I would say it's more internal initiatives and our expectation for those than it is for significant improvement in the end markets. Although, I do think that we could see some modest improvement in the end markets in each of those segments.

Okay. Thanks. And one last question. On your -- I believe, Jerry, it was in your commentary, you were discussing the -- is that you've had some significant SG&A reductions the last couple of years in the fourth quarter. I'm wondering if, there's over 100 basis points each time. I'm wondering if you expect to see similar magnitude, and if so, what's driving that?

It's the standard year-end adjustments thing, where we go throughout the year. And if we have proof of -- accrue for bad debt examples we'll accrue for that on the percent of sales basis and write off for actual numbers at the end of the year. I can't answer whether we think it should be at this point. There shouldn't be anything dramatically different than there has been in the past.

Okay. And usually you've also had not quite as large but an offset in lower gross margins. Can you -- can you talk about what drives that in the fourth quarter? Is that your lower inventories or is there something else?

We actually do inventory writeoff in the fourth quarter and we adjust for the inventory gains at this point. It's the net effect of all of that.

Okay. And your expectations for this year is at this point similar to what you've seen in the past years?

Yes.

Great. Thanks for your help.

Thank you.

Your final question comes from [Keith Hughes] from SunTrust.

My question's been answered. Thank you.

Thank you, Keith.

You have no further questions at this time.

Carmen, thank you. We appreciate your help on the call. I thank each of you for joining us this morning. We appreciate your continued interest in and support of Genuine Parts Company. And we look forward to talking to you at the end of the fourth quarter and the year end.

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