純正零件 (GPC) 2009 Q3 法說會逐字稿

Good morning. My name is LaTwinda and I will be your conference operator today. At this time, I would like to welcome everyone to the Genuine Parts Company third quarter 2009 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Ms. Carol Yancey, Senior Vice President of Finance, you may begin your conference.

Thank you. Good morning and thank you for joining us today for the Genuine Parts third quarter conference call to discuss our earnings results and the outlook for the remainder of 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 the assumptions underlying those statements regarding the Company and its business. 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 comments from Tom Gallagher, our Chairman, President, and CEO. Tom?

Thank you, Carol. And I would like to add my welcome to each of you on the call today and to say that we appreciate you taking the time to be with us this morning. As we customarily do, Jerry Nix, our Vice Chairman and Chief Financial Officer, and I will split the duties on this call. And once we've concluded our remarks, we will look forward to answering any questions that you may have.

Earlier this morning, we released our third quarter 2009 results and hopefully you've had an opportunity to review them. But for those who may not have seen the numbers as yet, a quick recap shows that sales for the quarter were $2.607 billion, which was down 10%. Net income was $107.6 million, which was down 18%. And earnings per share was $0.67 this year, compared to $0.81 in the third quarter of 2008, and EPS decrease was 17%.

In looking at the individual results by business segment, our Automotive revenues were down 1% in the quarter. This follows a 7% decrease in the first quarter and a 5% decline in the second quarter. As a matter of information, currency exchange impacted our results by 1%, and without this we ended the quarter even with prior year. So while we are not yet where we feel we should be in our Automotive operations, we were encouraged by the third quarter improvement over the first two quarters and we do see some positive things happening in our Automotive segment.

Within our Company store group, we closed or consolidated a number of stores; however, our same store sales were up 1% in the quarter. This follows decreases of 3% and 1% in same store sales in the first two quarters, and we're encouraged by the trend in the same store sales and we look for this to continue in the quarters ahead. Our independently owned stores were even in the quarter as a group. This follows a 4% decrease in the first quarter and a 2% decrease in the second quarter, so we are seeing sequential improvement in this important segment of our Automotive business as well.

As far as the composition of our Company store sales is concerned, we continue to experience stronger results in the cash or retail side of the business than the wholesale or commercial side. Our cash business was up 4% in the quarter, while our commercial business was down 2%. The cash portion of the business has held up reasonably well for us and in fact our third quarter performance is the strongest of the year. And while still down on the commercial side, the 2% decline is the smallest decrease of the year and we do see some positive signs in this segment.

As has been the case all year long, our biggest challenge in the commercial side is in the Fleet category. Fleet customers would range from contractor and landscape type companies all the way up to large trucking companies. We continue to run low double-digit decreases in this portion of our business, but we are encouraged by our progress in the remainder of our commercial business. In fact, our installer business was actually up mid single digits in the quarter, following solid results in the second quarter, which shows some good progress being made in our commercial business with the exception of Fleet, and we feel that these results validate the effectiveness of a number of the initiatives that have been put in place over the past six months, and this progress should continue in the quarters ahead.

Just as a reminder, examples of some of the initiatives undertaken more recently would be in the area of pricing where adjustments have been made to certain product categories to meet market pricing, a heightened focus on some specific product categories -- friction, rod control and chassis parts would be examples -- an increased focus on key installer programs like NAPA AutoCare, major accounts as well as our priority accounts. And we continue to feel that we're making progress in all three of these areas.

So summarizing our comments in Automotive, we're not satisfied with where we find ourselves year-to-date, at down 4%. However, after being down 7% in the first quarter and 5% in the second quarter, we feel that the 1% decline in Q3 does show good sequential improvement. And with some of the positive things that we have seen over the past two quarters, our expectation is for our Automotive operations to get back on the plus side in the fourth quarter.

Moving on to the Industrial segment, it was another challenging quarter for these operations. After being down 16% in the first quarter and 22% in the second quarter, we were down 22% again in the third quarter and we're now down 20% year-to-date. The ongoing effects of the recession on the manufacturing segment of the economy have really had a dramatic impact on demand across the majority of our Industrial customer base. And this is evidenced by the fact that through September, 11 of our 12 major product categories are down year-to-date and some are down significantly.

Most customer categories are down as well, with Automotive, Iron and Steel, Equipment and Machinery, and the Housing and Construction related segments all experiencing the steepest declines. So the impact has been widely felt throughout most parts of our Industrial business. However, on the positive side, Food Processing, Beverage, and some of the Energy related segments are generating growth for us which is good to see. So there are a few bright spots as well.

And similar comments can be made about EIS, our Electrical segment, which is also directly tied to the manufacturing segment of the economy. You may recall that EIS was down 25% in the first quarter, followed by a 34% decrease in the second quarter and we were down 30% in the third quarter. And as we have experienced with our Industrial operations, the declines in Electrical are pretty much spread across the breadth of product categories and customer segments also. So we continue to find the end market demand to be quite challenging in our Industrial and Electrical operations, but as mentioned in our last call, we seem to have stabilized somewhat over the past five to six months.

While not showing any definitive signs of getting any better at this point, fortunately it is not getting any worse either. Recent Industrial production, manufacturers' capacity utilization, and purchasing manager index numbers show some improvement over the past few months and as a result we have seen a slight increase in our average daily sales volume at Motion and EIS over this same timeframe. This is a bit encouraging, and if the improvement in these three indices is sustainable, this should result in an increase in demand in both Motion and EIS mid to late first quarter or early second quarter of next year.

And finally, a few comments on Office Products. After being down 7% in the first quarter and down 6% in the second quarter, this group ended the third quarter down 5%. So we continue to see a steady to modestly improving trend within the Office Products group, despite the ongoing decline in office worker employment numbers. As has been the pattern all year long, both the independent office products reseller and mega dealer customer segments had decreases in the quarter. The independents were down 4% and the megas were down 8%, and on a year-to-date basis, the independents and megas are down 5% and 12% respectively. So both segments of our customer base have been impacted. On the product side, our best performing categories in the quarter and year-to-date are Cleaning and Break Room Supplies followed by the core Office Supplies segment and our weakest results are in Technology products and office Furniture.

One of the key demand drivers for Office Products is growth in office employment. This is where the majority of the office supplies are being used, and after several years of steady growth, office employment has been in contraction for seven consecutive quarters now, resulting in lower demand across the industry. This presents some significant challenges for our Office Products team to overcome. But they continue to maintain their focus on initiatives that will help them and their customers get back to positive growth as the office employment picture starts to stabilize and improve somewhat in the quarters ahead.

So that's a quick review of the sales results for the quarter, and we'll now ask Jerry to discuss the financial performance. Jerry?

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. Tom will come back on for a brief recap and then we'll open the call up to your questions.

Review of the income statement shows the following. Total sales for the third quarter in 2009 were down approximately 10% to $2.6 billion, and reflect another period of slight sequential improvement for Automotive and Office Products as well as more consistent results in our Industrial and Electrical businesses. Gross profit in the quarter was down slightly at 29.4% of sales compared to 29.5% in the third quarter last year. Our gross margin year-to-date of 29.6% also remained down slightly from last year and is primarily driven by reduced volume incentives earned, which was caused by the lower levels of purchases. For the year through September, our [chemistry] pricing, which represents the prior increases to us, were a negative 1.9% in Automotive, plus 0.3% in Industrial, plus 3.5% in Office, and plus 1.5% in Electrical.

Now let's look at SG&A. As a percent of sales, SG&A increased 67 basis points to 22.8% versus 22.1% in the third quarter of 2008, and for the year-to-date period, SG&A is up 82 basis points to 23.2% compared to 22.4% last year. The increase for the quarter and year-to-date is due the loss of expense leverage on lower sales, which remains a challenge for us even with our continued progress in reducing our cost structure, which we would like to discuss further. For the third quarter, SG&A expenses of $595 million were down $43 million compared to $638 million last year. For the nine months thus far in 2009, SG&A of $1.8 billion is down approximately $142 million.

As we discussed last quarter, our improvement in SG&A expenses is driven through the initiatives that we have been implementing to reduce our cost structure. These initiatives include a reduction in headcount and other cost reduction efforts related to personnel, such as salary pay freezes, deferral of additional stock option grants, travel limitations, and reduced retirement benefits. During the quarter, we reduced our headcount by another 500 employees for a total workforce reduction of approximately 1,900 employees or 6% of our headcount in 2009. Combined with our workforce reduction efforts in 2008, our total employment has been reduced by over 11% from the beginning of 2008.

In addition to these personnel related savings, we continue to benefit from cost reduction initiatives in areas such as facility rationalization, fleet management, and fuel and energy consumption. We estimate that in total our targeted cost reduction efforts have resulted in savings of approximately $20 million and $55 million for the third quarter and for the nine months respectively. We'll remain diligent in managing our expenses and we'll do so with a continued focus on providing and maintaining excellent customer service. We're currently on track to achieve cost savings of $65 million to $75 million in 2009, which is an increase from our previous estimates.

Now let's discuss the results by segment. Automotive had revenue in the quarter, $1,381.6 million, representing 53% of the total and down 1%. Operating profit of $107.7 million was down 4%, so slight margin decrease from 8.0% to 7.8%. Industrial Group had revenue in the quarter of $711.5 million, representing 27% of the total. That was down 22%. Operating profit, $36.5 million, down 53%. So margin degradation down to 5.1% as an operating margin. Office Products revenue in the quarter, $436.3 million, representing 17% of the total and down 5%. Operating profit, $26.7 million, down 20%. So again, margin deterioration to 6.1%. The Electrical business had revenue in the quarter of $89.4 million, 3% of the total, down 30% with operating profit of $6.8 million, and down 34%. So slight margin deterioration there from 8.1% to 7.6%.

So in summary, the consolidated operating margin for the third quarter fell approximately 130 basis points to 6.8% from 8.1% in the third quarter of 2008. For the nine months, our 7.0% operating margin is down 110 basis points from last year. Our decrease in operating margin is primarily the result of the deleveraging of SG&A expenses, particularly in our Industrial and Electrical businesses. We had net interest expense of $6.7 million, and $20.5 million for the quarter and nine months respectively, which is down slightly from the same periods in 2008. We expect our net interest to be approximately $27 million to $29 million for the full year.

The other category, which includes corporate expense, amortization of intangibles and minority interest, showed a $356,000 expense for the third quarter and is $27.9 million through September. Costs on this line are down significantly from last year due to the positive impact of our cost reduction efforts and lower expenses for incentive based compensation.

In addition, this line reflects a favorable $4 million retirement plan valuation adjustment recorded in the third quarter. You may recall we had a $3 million positive adjustment in the second quarter, which basically reversed a $3 million valuation charge required for the retirement plan in the first quarter. As you can see, these quarterly valuation adjustments can go either way depending upon the markets. For now, we've assumed no valuation adjustment in the fourth quarter. We project that the total other category will be in the $40 million to $50 million range for the full year 2009, which is an improvement over last year.

For the quarter, our tax rate was approximately 36.9%, which is down from last year's third quarter and our previous 2009 rate due to favorable tax treatment on a $4 million retirement valuation adjustment noted earlier. For the nine months, our tax rate is approximately 37.6%, which is up slightly from last year, due to the favorable tax impact for the sale of Johnson Industries during the first quarter in 2008. We expect our tax rate for the full year in 2009 to be in the range of 37.5% to 38.0%.

Net income for the quarter, $107.6 million, down 18%. Earnings per share of $0.67 compared to $0.81 last year, down 17%. Now, this compares to declines of 25% in the first quarter and 20% in the second quarter, and for the nine months net income is $300.4 million -- that's down 23%. EPS of $1.88 compared to $2.36 in 2008, which is down 20%.

Now let's move on to discuss our balance sheet, which remains quite strong. We remain conservative in managing our cash, as we mentioned to you in our previous calls that we would be in 2009. Cash at September 30th increased to $363 million compared to $124 million in September last year and $68 million at December 31, 2008. Our cash position remains strong and has allowed us ample funding for ongoing acquisitions, dividends, and capital expenditures as well as the Company's pension contribution. So despite our decline in sales over the past few periods, we continue to generate consistently strong cash flows and expect our cash position to remain sound, although it's likely to vary based on the timing of the investment opportunities that may arise.

Accounts receivable decreased 7% from last year on a 10% decrease in sales for the quarter, and although we still see room for more improvement in receivables, we continue to feel good about the level and the quality of our receivables. We also remain diligent in monitoring the financial condition of our customers and their ability to pay to ensure the adequacy of our reserve for bad debts, and we believe we're properly reserved at September 30, 2009. Going forward our goal at GPC remains for our change in receivables to be favorable to our change in revenue, thus improving our day sales outstanding.

Inventory 9/30/09 was $2.2 billion, down 6% or approximately $130 million from the third quarter last year and from December 31, 2008. This includes additional inventory of approximately $64 million from acquisitions dating back to the fourth quarter last year. So without this acquired inventory, we've decreased our inventory by 8%. We're pleased with this steady improvement in our inventory levels and will continue to manage this investment tightly.

Accounts payable up $54 million or 5% from last September, and is up $115 million or 11% from December 31, 2008. With this increase, our days payable has improved to 56 days from 47 days last year. We're very pleased with this improvement and attribute much of our progress to the ongoing negotiations to improve our payment terms with certain suppliers.

We continue to make progress managing our working capital, which was $2.6 billion at September 30, 2009, up approximately 6% from September 30 last year and about even with working capital at December 31, 2008. The increase from the third quarter last year reflects the accounting for $250 million in debt as current liabilities at September 30, 2008. As this debt agreement expired and was renewed at a favorable rate last November, the $250 million was reclassified to long-term debt in the fourth quarter, so on a comparable basis, working capital of September 30, 2009 is down 4% from last year. As you can see, our balance sheet remains in excellent condition.

We continue to generate solid cash flows and our strong cash position provides us with the financial flexibility to explore many opportunities. After another very good quarter from a cash perspective, we currently expect to maintain our cash from operations at approximately $750 million for the full year, which is a significant increase from 2008. After deducting capital expenditures and dividends, free cash flow for the year should be in the area of $400 million, which should also be significantly improved from our 2008 cash flow. Priorities for the cash remain, first, the dividend which we have increased for 53 consecutive years. This represents a strong track record of consistent growth and dependability of an above average dividend yield, which is currently in the range of 4% to 4.5%. The continued strengths of our cash flow provides us confidence in our ability to sustain our dividend record. Other priorities for cash include the ongoing reinvestment in each of the businesses, share repurchases, and where appropriate, strategic types of acquisitions in each of our business segments.

Capital expenditures for the third quarter of $12.4 million were down $3.4 million from third quarter last year, and for the nine months in 2009, capital expenditures of $49.4 million. Related depreciation and amortization, $22.6 million in the quarter, $67.5 million for the nine months. For the full year, we continue to expect our CapEx spending to be in the range of $65 million to $75 million, and we expect our D&A to remain relatively steady with 2008 in the $85 million to $95 million range.

Strategic acquisitions are also an ongoing and important use of cash and are integral to our growth plants plans for the Company. Through the nine months in 2009, we've closed on six acquisitions and we expect these new operations to be accretive to our earnings, although any accretion will be minimal in 2009. We targeted these bolt-on types of acquisitions with annual revenues in the $25 million to $75 million range, and we intend to follow a similar pattern of strategic acquisitions in the future. We remain disciplined in our approach to this growth strategy and look forward to more success in this area.

Opportunistic share repurchases have and continue to be a priority, and although we've not made any share repurchases thus far in 2009, we have approximately 18.5 million shares authorized for repurchase. We've been active in the share repurchase program since 1994. We have no set pattern for repurchases, but we continue to believe that investment in GPC stock along with the dividend provides the best return to shareholders.

It's probably important to emphasize that thus far in 2009 we've been more focused on cash conservation as well as acquisition opportunities. With the economic uncertainties and historically low business valuation levels, we feel this is the best way to manage our cash. Balancing these considerations against share repurchases is an ongoing process, but we absolutely believe that our stock is an attractive investment. Depending on acquisition activity in the fourth quarter, we could be more active in our share repurchase program as we close out 2009.

Total debt remains unchanged at $500 million -- although as mentioned earlier, the $250 million in current debt in the third quarter of 2008, which expired in November last year, was renewed on favorable terms for another five years and reclassified to long-term debt during the fourth quarter of 2009. Our $500 million in long-term debt at September 30th, 2009 includes $250 million which matures in November 2011 and $250 million due in November 2013. Total debt to total capitalization, September 30th, 2009 -- 16.1%, and we're comfortable with our capital structure at the current time. Our balance sheet is strong and provides us with ability to take advantage of growth opportunities even in the midst of the current economic weakness.

In summary, you can see that Genuine Parts Company remains very profitable and financially sound and continues to generate significant cash during these challenging times. While keeping an eye on the economy, we remain focused on those areas of our businesses that we have control over and will continue to support our growth plans with a strong and healthy balance sheet as well as sound cash flows, further maximizing our return to shareholders. Our greatest challenge for the next few quarters will be achieving stronger topline growth, which is needed to effectively maintain and grow our operating margins and overall earnings. As you can see, with sales down 10%, we'll lose some margin despite quite meaningful cost reduction in our businesses.

That said, we're confident in our management teams, their growth strategies and the positive fundamentals in each of our businesses. No question that 2009's been a difficult year due to a lot of factors. I have -- even though we're not satisfied with these results, we're not discouraged. We know that we will emerge from this cycle a much better company.

So that's our financial review, and I would just close by expressing our sincere appreciation to all of our GPC associates for their efforts and to our customers and their suppliers and our suppliers for their continued support. Tom?

Thank you, Jerry. Well, that recaps our third quarter and nine month results, and with sales down 11% through September, net income down 23%, and earnings per share down 20%, it obviously has been a tough and challenging year for GPC. As you heard earlier, Automotive has improved a bit over the past two quarters and we expect this to continue in the coming quarters. Office Products seems to be moving in the right direction, but at a slower pace than Automotive. Our biggest challenges have been and continue to be in the Industrial and Electrical segment, and at this time we feel that it will be another quarter or two before we see any material recovery in either of these businesses.

With that said, our expectation for the fourth quarter is for revenues to be down 5% to 6%. That's an improvement from the 11% decrease in the first, 12% in Q2, and 10% in Q3, but this would still put us down 9% to 10% for the year. On the earnings side, we anticipate fourth quarter earnings per share to be in the $0.44 to $0.50 per share range, and this would put us at $2.32 to $2.38 for the year. This would be down 18% to 21%, which is about in line with where we find ourselves through nine months.

So that concludes our remarks, and at this point, we'd like to take your questions. We'll turn the call back over to the operator. Operator?

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Scott Ciccarelli from RBC Capital Markets.

Good morning. This is Austin Paul sitting in for Scott today.

Good morning.

My first question relates to the segment breakout you've provided, specifically the operating profit on the other line item. You mentioned the positive impact of the $4 million on the pension valuation. But when I add that back, I still get a lower number, both sequentially and year-over-year. I was wondering if you could help me understand what else is in that other line item and if this represents a new run rate going forward?

I don't believe it represents a new run rate, Austin. What's in that line is our corporate expense, and that includes a number of things such as that pension. But you're right, we were down about $9 million to $10 million there, and $4.5 million of that was due to the retirement plan adjustment. The other was due to stock option, lack of stock option expense, and also an adjustment to the bonuses that we accrued. We are obviously not going to be paying out the bonuses that we had planned on at the beginning of the year, so it's a combination primarily of those three items that makes up most of it.

Great. Thank you. And my second question relates to the pricing trends. You've talked about previously the NAPA segment. What are you seeing there, both this quarter and going forward? Can you please talk about how that affected both sales and operating profit at that segment?

I'll try to answer that question. As far as what we're seeing currently, we think there's some stability in the marketplace currently. But we also feel with our pricing checks and surveys that we've got a little more adjusting to do on some specific product categories, and we'll be making some of those adjustments in the fourth quarter. As far as the impact thus far this year in Automotive, it's negative 1.9% through September.

Great. Thanks, guys.

Thank you.

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

Good morning. Thank you. Can you hear me?

Hi, Tony.

We got you.

Okay. I guess one of the questions I wanted to talk -- I have a few. When you think about the trends in automotive, if I were to strip out Fleet now, would it be close on your core Automotive to being back up to flat to positive on a sales basis?

Core Automotive would be up, absent Fleet. The Fleet impact is -- what's happening there is costing us about 2 points currently.

Do you think that the sequential improvement is totally related to the initiatives or are you -- and I guess in that, are you gaining some share back? Or do you think that the trends in the industry as a whole have perhaps accelerated a little bit or continued to strengthen, given the duration of the macro?

That's a multi-part question, but trying to break it down, I would start by saying that of the four businesses that's we're in, the best economy or the best segment is the Automotive, without question. So we were underperforming as you know for several quarters, and I think now what's happened is that we're performing a bit better. It would suggest that maybe we're regaining a little bit of a share that we lost in some prior quarters, and I do think it's sustainable as we move through the next few quarters.

When you look at -- shifting gears to the office segment, do you think or can you attribute anything to what happened this quarter and what was the sequential improvement, and is there something that you might see happen to exhibit I guess further improvement on office? I mean, typically it's more of a late cycle recovery, but I'm just wondering if there's anything specific that you saw that led to that improvement?

No, I think we started to really feel the effects in Office Products in the fourth quarter of last year, and our folks have been working awfully hard over the past several quarters to try to recover from that. So they've got some focused initiatives that I think are yielding a little bit of positive impact for them, and I don't think there's any dramatic change in the external climate. I mentioned earlier that office worker employment is one of the key drivers for us, and if we look back, we were really running quite well in the 2004 to 2007 timeframe.

And in that period of time, white collar employment was going up anywhere from 1.6 to 2.1 million jobs per year. Last year, white collar employment contracted about 1.6 million, with 900,000 of those occurring in the fourth quarter. And thus far this year, we've contracted about 2.1 million jobs. If we're looking for positives, at least sequentially, the job contraction is going down. It was down 1.1 million in the first quarter, roughly 600,000 in the second quarter, and 400,000 in the third quarter. But it still means we're going to be down 2.3 million to 2.4 million for the year, and that's the biggest headwind that our Office Products team faces today.

I guess last question, I'll let someone else ask, but when you look at the Industrial Motion piece of the business -- if you go back to the early 2000s and the last time you faced a tough operating environment, it seemed like from the bottom to the period where you were able to recover and get back to growth again over the levels from the falloff, it was about eight quarters, if I'm not mistaken. Now, obviously there could have been some acquisitions and some other things. How do you categorize what you did or saw or experienced from the bottom of that period to what appears to be maybe the bottom of this period? Because I think in our discussions, you've always said you've got a pretty good six-month window of visibility and if you're starting to see some improvement, I mean, how would you categorize our thinking? Or how should we think about the time or when you would expect motion to surpass where you were a year or 1.5 years ago?

That's a tough question to answer as you know, because nobody really knows how long it's going to take for the economy to really come back to a level that we're more accustomed to. I'd say, first, that the depth of this cycle has been deeper than I've experienced in my 40 years working at Genuine Parts Company. This one came on more suddenly. It's deeper and it seems to be more broad-spread than any that I can recall. With that said, one thing that is a little bit encouraging is that when the industrial production and capacity utilization figures started to tick up in July and August, we saw our average daily sales volume tick up a little bit as a result of that.

We've felt for some time that inventories were fairly lean and the reaction time to any pickup in demand would be shortened some, and we're hoping that that's an indication that that will prove to come to fruition. But we need another couple of months yet to see what happens with the manufacturing segment and if in fact these increases that we saw in July and August really are the beginning of a modestly improving trend. We're thinking that if it does continue for a couple more months, then we should see a more noticeable improvement in our Industrial business sometime mid to late first quarter or early second quarter. But that is fully dependent upon that trend continuing.

Okay. Great. That was very helpful. Thanks, guys.

Thank you, Tony.

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

Thanks a lot and good morning to you.

Good morning, Matt.

First question I'd like to ask relates to Automotive margins. You talked about the negative expense leverage in the Industrial related businesses as being a challenge. If you look at the Automotive margin, your sales trend did improve. But your margin, which had been up in each of the prior two quarters, came under a little bit of pressure and the profit decline was slightly steeper than the year-to-date number. I know you might have been cycling somewhat on factors perhaps in the first half of the year, but could you lend some transparency to that trend and talk about what might have transpired in the way you came to market that might have impacted your margin there?

Matt, it's not a large enough number it to have been any one thing. We've looked at that and tried to determine it. We did make some price adjustments and our gross margin was affected a little bit there. And we have closed some operation that's were nonprofitable, some stores, as Tom mentioned in his remarks. And I think it's a combination of a lot of those type issues. There's no one thing there. I would say that by the time we make the turn here in the fourth quarter, then we will start to see that operating margin look better, get back to what it had been through the first six months versus what it showed for the third quarter.

Was the investment in price material in taking that margin down?

Not material to the overall, no, but it certainly would have had an impact.

On Automotive. Got it. And so you've looked at elasticity and you've looked at the payback that you're getting on some of these price investments and you're comfortable with the payout?

Yes. Matt, what happens, just a little more amplification on that, what happens is that we lower prices on a particular day, and the impact on margin is immediate. But the impact on revenue -- it takes a little bit of time for that to settle into the marketplace and for us to recapture some business. So there's a little bit of lag between the pricing action and the revenue contribution.

Got it. Second question, within the other line, so-to-speak, that below the line series of items, how significant or how much of that number related to the bonus accrual number?

Well, it was about $2.5 million associated with the fact that we didn't grant any options this year, and then the other $2.5 million would have been associated with adjustment for bonus reserves.

Got it. Okay. But your view is that the run rate for that business is still call it $10 million to $12 million in an ordinary quarter?

That's correct.

Okay. And then within the Industrial business -- it's interesting, some of the Industrial macro data including some data that came out this morning looks to be getting somewhat better. Tom, you indicated that July and August I guess or August and September were perhaps a little bit better in terms of run rate. Are there parts of the Industrial segment where you're seeing headway versus where it had been before? You talked about Automotive and machinery and equipment for example still being under pressure, but are those segments coming back in any way?

I would say as a general response, first, is that light Industrial -- which would be things like Food Processing and Energy related, alternate Energy -- those seem to be a bit more responsive than the heavy Industrial. We don't see any pickup, material pickup in Automotive at this point and frankly, with new car sales estimated to be, what, some 10.5 million for the year, we don't anticipate any material improvement in that until we get into 2010. But we do see -- anecdotally, we see some things happening. There is some steel furnaces that are being fired back up. We do see a little bit of an uptick in some production in some of the mining and aggregate sectors. We're seeing a little bit increased demand there. So it's more encouraging than it might have looked a couple of quarters ago, but I think it's still early to say that we're really starting to climb out.

And then finally on cost structures, it sounds like you're making some new reductions. Is it feasible that if necessary in 2010, your SG&A number could come down again or have we hit sort of bedrock here?

I think it can continue to come down. Most of that is related to employees and so forth, but we've got some further facility rationalization that we're working on and can take place and costs associated with that come down, so -- and a number of other longer term things that we're looking at in an infrastructure situation that we could bring that down. But to support the revenue growth, these expenses won't just be added back. Certainly, depending on the level of revenue growth we have, we may have to readd headcount to some operations but by and large we'll benefit from these cost reductions going forward. But there's some further reduction that can be made, assuming that we continue to see revenue decreases.

If I could just tag onto that, our cost reduction initiatives are tiered. We've got near term, midterm, and longer term. And the near term obviously we can affect most quickly, but the midterm and longer term are we think pretty impactful, and we've got teams working on various initiatives to continue to keep bringing that cost structure down.

Got it. Thank you so much.

Thank you.

Your next question is from the line of Michael Ward with Soleil Securities.

Thank you. Good morning.

Good morning.

Jerry, wondering if I could follow up a little bit on your cost saving initiative. I think you said $65 million to $70 million this year?

That's correct.

What is that up from?

I'm sorry, Mike?

What was your previous target?

That's what we had targeted. We thought we would get about $60 million to $65 million, and we have $55 million through the nine months, so we raised that to $65 million to $70 million.

Okay.

For the full year.

What types of items are they? Are these cost reductions that can stick or is it just temporary type?

They're cost reductions that can stick. As I mentioned previously, if we have revenue growth come back strong, then we're going to have to add some headcount back and that will take away some of it. But by and large, some of these changes in closing, losing operations and so forth are things that we have done and those costs will be permanent. There's some other changes that we've made as far as putting in systems and so forth that makes us more productive. Things like that.

Okay. Tom, you touched a little bit on inventories at some of your customers on -- particularly on the Industrial side, EIS side. Is there anything out there that you can look at that suggests they're leaner heading -- they reacted much more quickly to reducing orders, and is that what is allowing the pickup to continue a little faster than you thought?

We know from the visits into customer facilities that like most companies, they were leaning out inventories as we were working our way through the early stages of this cycle so that we pick up on an ongoing basis. But I think the best evidence we have is the fact that July and August indices showed a little bit of an uptick, and August and September average daily sales volume showed a little bit of an uptick. And that's fairly rapid response to those indices in our opinion, so I think it validates the thought that the inventories have been leaned out some.

When they buy the components and they're sitting in their inventory, they own the inventory; correct?

Yes, sir, that's right.

Do they have the ability to send that back to you?

Well, we would do some adjustments on an as needed basis.

So going forward, do you thing the system will be a little bit more efficient?

We're thinking that, Mike, but without the benefit of absolute fact base, that's our thinking right now.

Okay. I really appreciate it. Thank you.

Thank you.

Your next question is from the line of Gregory Fowlkes with Morgan Stanley.

Thanks, guys. Two questions. One on the SG&A and then on Office Products. Just to go a little bit further on the SG&A, if you look at the year-to-date dollars, it's been quite a bit more, I think almost double from my math versus the cost savings. Could you just help bridge that gap? And then I hate to be the curmudgeon, but if next year is again another down year, have we reached a stage where to cut much more in terms of headcount and other areas, you're really getting into the franchise? And then a follow-up on Office Products.

Greg, let me address that. The first issue, the difference is some of our SG&A dollars are down simply because business is off. You have certain expenses that are associated with just handling additional volume and those -- when business goes down, delivery expense and those kind of things go down accordingly. These SG&A savings that we're referring to are targeted savings and those are specific initiatives that we went out on. And some of that is on fuel savings, change in delivery routes, going to route optimization programs and so forth. Some of it's headcount reduction and anything associated with that.

There's some other things we've done, we went to a soft freeze on our pension plan effective 1/1. We granted no stock options this year. So from a comparative standpoint, the long-term incentive compensation is down. Now, if we go into next year and we still are down in revenue, we will not grant stock options next year. But if we see an improvement, certainly we like to go back to giving our people the long-term incentive compensation that they have gotten used to. So some of the things will depend upon -- how quickly and how much they come back in the SG&A category will depend on the revenue side of things.

But in answer to your question, it will be very difficult to have targeted initiatives other than some of these facility rationalizations that we're going to proceed with, regardless if revenue comes back. With the exception of those, to continue just to reduce people count, you're right, it becomes very difficult beyond -- keep in mind, since first part of 2008, we cut our headcount 11%. So it will be difficult, and I believe that we're pretty efficient before we even started that and -- but that does present a challenge for us going forward.

So basically you could make some targeted reductions, but we shouldn't expect it to be $60 million to $70 million again.

I think that's a fair statement.

On the Office Products, you mentioned inflation there I think over 3% now year-to-date. Could you explain where -- in what parts that is and what's moving that, and how should we look at that going forward?

This is a number that's spread across all product categories and all product lines, and some of it will be carry-over when you get forward buys in anticipation of price increases and try to take advantage of that to protect your gross margins. We don't have a specific category that is -- some of them, they've got decreases obviously in a number of product categories, but it's spread across all product lines. And I don't know that any one is large enough or significant enough to point it out.

And so that, just to be clear, that's the -- your sourcing cost is up 3% and you've generally passed that through 100%?

I hope it's 100%, but our gross margins stayed fairly stable over there, so that would say we've been able to pass most of it along.

Great. Thank you.

Okay. Thanks.

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

Just real quickly, in S.P. Richards, if you take out the tech products and the furniture, would those businesses have been running up this year?

Yes, we are running -- the other two categories, just as a reminder, would be the Cleaning and Break Room and the Core Office Supplies, both positive for the year, negative in Tech and Furniture.

All right. Thank you.

Thank you, Keith.

Your next question is from a line of Brian Sponheimer with Gabelli & Company.

Hi, good morning, just a question still on office. I may have missed it. I got bounced off for a minute. When you're talking about office product margins, you said that gross margin has stayed flat sequentially and year-over-year. But operating profit for the segment went from 8.3% in the second quarter to 6.1%. What in G&A is making that so? And is that something that we should expect to see going forward?

One big piece in that, Brian, is they increased their allowance for doubtful accounts a bit in the quarter. We think it should be recoverable, but we did in fact beef up the allowance -- so the reserve in the quarter in Office Products.

And they did have some discontinued inventory that they sold in the quarter that didn't provide them the normal gross margins that they would get.

Okay. Thank you. All my other questions have been answered.

Thank you.

Thanks, Brian.

We have time for one more question. Your last question comes from the line of Erika Wolford with Cleveland Research.

Good morning. I was just hoping that you could talk a little bit about the margin trends that you're seeing within the Industrial part of the business -- looks like you saw a good sequential uptick in the third quarter from the second quarter.

The margins in the Industrial, operating margins are effective in a negative way. We think our Industrial margin is still good, but on that kind of a revenue decrease, it's very difficult to get your expenses cut and cut fast enough and deep enough to maintain the operating margins. And they did have good operating margin, but on that 22% revenue decrease in the quarter, to be down 53% in operating profit is not a number that we are proud of and not a number that we're happy with. And the Industrial management team is working on that, and hopefully as we go to the end of the year, we'll see some improvement there.

I would remind you and the others on the call that the Industrial Group is affected by volume incentive rebates that are earned from the vendors, and we've cut our inventory significantly at the Industrial sector this year as well as the purchases have been off just because business is off 20%. So that has been a major impact and that's affected our gross margin in the Industrial sector as well as the operating margin. They've done a very good job in cutting their SG&A type expenses, but we have just barely overcome the incentives that they would have earned, had we maintained our inventory or the normal purchasing cycle.

Thank you.

Okay. Thank you. Operator, you have any additional questions?

No, sir, that's all the questions that we have. Do you have any closing remarks?

We appreciate each of you joining us on the call today and we're grateful for your continued interest and support of Genuine Parts Company. And we look forward to talking to you in the future.

This concludes Genuine Parts Company third quarter 2009 earnings conference call. You may now disconnect.