純正零件 (GPC) 2011 Q2 法說會逐字稿

Good morning. My name is David and I will be your conference operator today. At this time I would like to welcome everyone to the Genuine Parts Company second-quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the call over to Ms. Carol Yancey. You may begin your conference.

Thank you. Good morning and thank you for joining us today for the Genuine Parts second-quarter conference call to discuss our earnings results and outlook for 2011. Before we begin this morning, please be advised that this call may involve forward-looking 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 our Company's latest SEC filing. 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. 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 with us this morning. As we customarily do, Jerry Nix, our Vice Chairman and Chief Financial Officer and I will split duties on this call, and once we have concluded our remarks we will look forward to answering any questions you may have.

Earlier this morning, we released our second-quarter 2010 results and hopefully you've had an opportunity to review them. But for those that may not have seen the numbers as yet, a quick recap shows that sales from the quarter were $3,185,000,000, which was up 12%. Net income was $151.8 million, and this was up 22%, and earnings per share were $0.96 this year compared to $0.78 in the second quarter of 2010, and the EPS increase was 23%.

These are all record results for us so we feel we had another good quarter with solid contributions from all four of our business segments and we are proud of the job that is being done by the GPC team. Through their continued efforts, we feel we are positioned to have another good year in 2011.

Our review of the second-quarter results by business segment shows that our industrial and electrical operations continue to produce the largest sales increases. Motion Industries, our industrial distribution business, was up 19% in the quarter, and they went over $1 billion in quarterly sales for the first time. Acquisitions added about 3% to the industrial increase in the quarter. But importantly, the ongoing operations generated a very healthy 16% increase. So the underlying industrial business continues to perform well. And as we look a bit more closely at the detail of the results, we continue to be encouraged by the strong performance that we see across a broad base of the industrial business as evidenced by the fact that 11 of the top 12 product categories were up double digits in the quarter, and as a group they were up 19%. And then each of the top 10 industry segments had double-digit increases in the second quarter, and as a group they were up 26%. A review of the top 20 customers shows a combined 25% increase for this group, and one final point is that every geographic region was up double digits in the quarter.

So as you can see the industrial business remains quite strong and healthy. And they end the first half up 22%. And with the industrial production and capacity utilization indices each continuing to look favorable, we remain optimistic about the prospects for our industrial business over the remainder of the year.

Moving on to the Electrical segment, EIS had another strong performance with sales being up 28%. Acquisition revenue added 10% to the quarterly increase and [copper] pricing have a positive impact of 4%, which means that the ongoing operations were up 14% in the quarter which we feel is a solid performance. As with our industrial business the increases across the EIS product categories and customer segments are broad-based and consistent, which is indicative of a healthy end market, as well as a good job being done by the EIS team. They close out the first half [up] 34%, and with the Institute for Supply Management Purchasing Managers Index remaining above 50 through June, we are encouraged about EIS is prospects over the second half of the year.

Office products was up 4% in the quarter. This follows a 5% increase in the first quarter so a fairly consistent sales pattern through the first half of the year, despite the continued moderation and demand in new office products industry.

As has been the case for a number of quarters now, our sales to the independent office products channel have outpaced our sales to the mega-channel. The Independent business was up 7% in the quarter and this follows an 8% increase in Q1, so steady progress is being made with this customer segment. But then this is being offset by continued decreases with the mega-channel which was down 10% in the quarter.

On the product side, we had growth in all four of the categories. Technology, office supplies, furniture and cleaning and breakroom which we are pleased to see. This is the third consecutive quarter of positive growth across all four product groups simultaneously which is encouraging, and we feel it's an indication that our office products business is on a very slow but gradual improving trend.

Finally a few comments about Automotive. We are pleased to report another 9% increase for this segment. This follows 9% increases in the fourth-quarter 2010 and the first quarter of this year, so a very steady picture here and we feel it is indicative of the good job is being done by our automotive team. And looking a bit more closely at the sales results within our Company-owned store group, we did see additional softening in our retail sales in the quarter.

After ending 2010 with a 5% increase in retail, we were up 4% in the first quarter and then up just slightly in the second quarter. So we have seen some weakening in our retail business and the biggest impact has been felt in the discretionary categories, which we attribute largely to the higher gasoline prices and cautious consumer sentiment.

The nondiscretionary categories continued to perform reasonably well in the quarter. On the wholesale side our fleet business was up 5% in the quarter similar to our first-quarter results, and our commercial and [installer] business was up lower double-digit once again, and this is largely attributable to the continued good progress being made in our two primary installer initiatives.

Now for auto care and major accounts. You may recall that these two programs combined represented about $2 billion in sales force in 2010, which was up low double-digits over 2009, and they are up low double-digits through June of this year as well. So we continue to experience good growth in these two important commercial programs. When we put it all together we are pleased to be able to report another 9% increase for automotive operations, and we feel good about their prospects over the remainder of the year.

So that's a quick overview of the second-quarter sales results and Jerry will now take a few minutes to comment on the income statement and balance sheet. Jerry?

Thank you, Tom. Good morning. Appreciate your joining us on the call today. We will first review the second-quarter and six-month income statements and segment information, then touch on a few key balance sheet and other financial items. Tom will come back to wrap it up, then we'll open the call up to your questions.

A view of income statements shows the following. Total sales reached another record high of $3.2 billion for the second quarter, up 12% from last year and our fifth consecutive quarter of double-digit sales growth. For the six months, total sales were $6.2 billion, up 13% from 2010 and as we head into the half -- last half of the year, we remain optimistic about the continued positive sales momentum in all four of our business units.

Growth gross profit for the second quarter was 28.76%, up 22 basis points from our margin in the first quarter this year while down only 12 basis points from 28.88% in the second quarter last year. For the six months, gross margin [is now] at 28.65%, which is down 40 basis points from 29.05% for the same period last year.

This area has been a challenge for us for several periods now, so we are pleased to see the sequential improvement to the overall gross margin and to also narrow the gap in the year-over-year comparison. We had told you last quarter we are working hard to stabilize our gross margin by the end of 2011, and expected to be operating on a relatively even run rate with the prior year. So it's good to see us move in that direction this quarter.

That said, we have more work ahead of us as we continue to address ongoing competitive pricing pressures, changes in product mix, and a growing mix of sales and national accounts in most of our businesses which generally come with low margin but higher sales volumes. As discussed last quarter, we both buy and sell side initiatives to reduce supply chain costs, increase distribution efficiencies, and maximize pricing potential to help us offset these factors and further stabilize gross margins in the coming quarters.

In the meantime, we'll continue to offset any decreases in the gross margin line with cost savings in our overall improvement in operating expenses. For the year, our [cumulative] pricing which represents supply increases to us was plus 1.4% in automotive, plus 2.6% in industrial, plus 1.5% in office products, and plus 3.6% in electrical.

Now turning to SG&A. Expenses of $675 million were up 8.5% from $622 million for the same period in 2010, and as a percent to sales improved by 65 basis points to 21.18% versus 21.83% last year. For the six months in 2011 SG&A stands at $1.3 billion, a 9% increase from the same period 2010 and at 21.62% of sales, which is a 77 basis point improvement from last year. We're encouraged that our expenses continue to improve as a percentage of sales and we attribute this progress to the combined benefits of greater leverage associated with our sales growth and ongoing measures to control costs.

As a reminder, we carried over approximately $55 million in permanent cost savings from initiatives in 2008 and 2009, to significantly reduce employee headcount, consolidate facilities and more effectively manage freight and transportation costs. In addition, since our 12% headcount reduction in 2008 and 2009, we added back 1% in 2010 including acquisitions, and have only added another 2% with acquisitions thus far in 2011.

Furthermore, our ongoing costs initiative reduced further savings of approximately $20 million through the second quarter of this year. These initiatives continue to help us address costs in areas such as freight, utility and warehouse management. We expect to see additional savings from these initiatives over the balance of the year.

Our cost savings continue to positively impact our overall results and our management team understands we must remain focused in this area. Tight in managing our expenses remain a top priority and we will continue to assess the proper cost structure of our businesses as revenue growth continues.

Now let's discuss the results by segment. Automotive had revenue in the quarter of $1,585.1 million, up 9%, and that represents 50% of the total. They had operating profit of $138.8 million, up 10%, so nice margin expansion from 8.6% to 8.8%. The Industrial group had revenue in the quarter $1,051.3 million, that's up 19%, representing 33% of the total. They had operating profit of $85.3 million, up 42%, so very strong margin improvement from 6.8% to 8.1%. Office Products had revenue in the quarter of $418.0 million, that's up 4%. That represents 13% of the total, operating profit, $31.4 million, up 3% with margins at 7.5% compared to 7.6% the prior year.

Electrical had revenue in the quarter of $136.8 million, up 28% representing 4% of the total operating profit of $9.2 million, up 32% with margins at 6.7% compared to 6.5% for the second quarter in 2010.

Putting it all together, total operating profit margin for the second quarter improved 40 basis points to 8.3% from 7.9% in the second quarter of 2010. For the six months, total operating margin of 7.7% is up 30 basis points from last year.

The improved expense leverage associated with our sales growth and our cost management efforts noted earlier have driven the increase in operating margin for both the quarter and the year. We had net interest expense of $6.2 million and $12.7 million for the second quarter and six months, respectively, which is down slightly from 2010.

We continue to expect our net interest for the full year to be approximately $25 million to $26 million. Other category which includes corporate expense, amortization of intangibles and noncontrolling interest was a $16.8 million expense in the quarter as $29.7 million of the six months through June. Slight increase on this line for the quarter and the year reflects higher expenses with incentive-based compensation such as bonuses and stock options.

We continue to project the other category to be in the $45 million to $55 million range for the full year. That assumes steady levels of incentive-based compensation over second half of the year, which we would expect to incur with normalized levels of growth.

Tax rate for the quarter was approximately 37.2% compared to 38.0% for the second quarter in 2010. For the six months our 35.8% effective rate compares to 38.0% for the same period last year with the decrease in rate due to favorable adjustment in the first quarter associated with the expiration of the statute of limitations related to international taxes.

Currently we expect the tax rate for 2011 to be about 36.5%. Net income for the quarter, $151.8 million, is up 22%, EPS of $0.96 compared to $0.78 last year, up 23%. For the year,(Sic-see press release) net income $278.3 million, up 24%, EPS $1.76 compared to $1.42 last year is also up 24%.

Now let's touch base on a few key balance sheet items. Cash at June 30 of $517 million is up $105 million from $412 million at June 30 last year. We've built our cash position from increased earnings, effective asset management and cost reductions; and we'll continue to use our cash to fund several ongoing priorities such as increasing the dividend, capital expenditures, acquisitions and share repurchases, which we will discuss in more detail later. We expect to continue to generate consistently strong cash flows through the balance of the year.

Accounts receivable, $1.6 billion increased 16% from June 30, 2010 on a 12% increase in sales for the second quarter. This is a higher growth rate than we would like to see as our goal of GPC is to grow receivables at a rate less than revenue growth. Fortunately, we remain satisfied with the quality of our receivables but we have work to do in this area to get our trade receivables more in line with sales.

Inventory at 6/30 was $2.25 billion, that's up approximately 4% from June last year. In consideration of our sales growth we believe that our management team continues to manage this key investment very well and we remain focused on further improving our inventory levels over the balance of 2011.

We improved our accounts payable position again this quarter with trade payables increasing to $1.49 billion, up 16% from June 30 in the prior year. Our progress in trade payables primarily reflects the impact of increased inventory purchases associated with our higher sales volume, as well as extended payment terms and other payable initiatives with our vendors. With the improvement in our accounts payable, our days payable continue to improve as well and we remain pleased with the positive direction of this working capital account.

Working capital $2.5 billion at June 30 is down 4% from last year, and for comparison purposes when we add back the $250 million current portion of debt at June 30, 2011, working capital is up approximately 5% from June 30 last year. We [concur] with our ongoing privacy and managing working capital and our balance sheet remains in excellent condition.

Total debt at June 30, 2011 remains unchanged at $500 million. The first $250 million credit [for system] matures in November this year and is accounted for in current liabilities. We have a new signed agreement extending this debt at a 3.35% interest rate for another five years, and will reclassify the debt to long term upon the funding in the fourth quarter. Second $250 million in debt is due in November of 2013. Total debt total capitalization June 30 14.6%, and we are comfortable with our capital restructure at this time.

Following several consecutive years of strong cash flows we expect to generate strong cash flow again in 2011 and currently estimate cash from operations of approximately $700 million for the year. At this level, free cash flow -- free cash flow after deducting capital expenditures and dividends should exceed $300 million which is in line with last year. We are pleased with the continued strength of our cash flows and remain committed to our ongoing priorities for the use of the cash.

These priorities are first, the dividend, which we've paid every year since going public in 1948, and have increased for 55 consecutive years. Our 2011 annual dividend of $1.80 per share represents a 10% increase from $1.64 in 2010 and represents a payout ratio of 60% of our 2010 earnings. Currently, the dividend is yielding approximately 3.2% and historically yields 3% to 4%.

Additional priorities for cash include the ongoing reinvestment in each of the four businesses, strategic acquisitions where appropriate, and share repurchases. Capital expenditures, $27.2 million for the second quarter up from $18.1 million invested in the second quarter last year.

For the six months, capital spending totaled $41.7 million for 2011 compared to $27.9 million in 2010. We expect our CapEx spend to be in the range of $100 million to $110 million for the full year with the vast majority of these investments weighted toward productivity-enhancing projects primarily in technology.

Depreciation and amortization, $22.9 million in the quarter, $45.5 million for the six months, which is in line with the same periods in 2010. We expect D&A to hold relatively constant with last year at approximately $90 million for the full year.

Strategic acquisitions continue to be an ongoing important use of cash and integral to our growth plans for the Company. Our Industrial business completed two acquisitions in the first quarter with combined annual revenues of approximately $60 million. We continue to anticipate additional opportunities to some acquisitions over the balance of the year and remain disciplined in our approach to the settlement of our growth strategy, generally targeting those bolt-on types of acquisitions with annual revenues in the $25 million to $150 million range, although there are certainly exceptions to this rule.

In the second quarter of 2011, we used our cash to repurchase approximately 900,000 shares of our Company stock under the Company share repurchase program. Year to date, we have purchased approximately 1.1 million shares and have another 14.9 million shares authorized and available for repurchase. We have no set pattern for these repurchases, but we expect to remain active in the program as we continue to believe that our stock is an attractive investment and, combined with the dividends, provides the best return to our shareholders.

We remain optimistic in our outlook for the second half of 2011 and look forward to reporting continued progress in growing our sales and earnings. We are committed to producing steady and consistent growth for the Company and we believe we have the right people and the right strategy to do so.

As always, we'll continue to support our growth plan with strong cash flows, healthy balance sheet, further maximizing our return to shareholders.

This concludes our financial review, and I'll conclude my comments by expressing our sincere appreciation to all of our dedicated GPC Associates. We are extremely proud of this group and can't say it enough.

We also want to thank our customers and suppliers. We appreciate their continued support as well.

Tom, I'll turn it back to you.

Thank you, Jerry. That concludes our review of the second quarter and first-half results and, as mentioned earlier, we are proud of the job that has been done by the GPC team thus far in 2011.

Now, as far as the rest of the year is concerned, we continue to be optimistic about our prospects in each of our four businesses over the remainder of the year. End market conditions are generally favorable in each case and the growth initiatives for each of the businesses are well-defined.

Our current expectations are for full year revenue growth of 9% to 11% which is in line with our prior guidance, and this implies revenue growth of 6% to 9% over the remainder of the year, with Automotive being up 6% to 8% over the remainder of the year, Industrial 8% to 10%, Office Products, 3% to 5%, and Electrical Electronic up 10% to 12%.

We recognize that our second-half growth expectations are tempered down from where we are through June, but some uncertainties remain which are beyond our control, including the ongoing impact of the higher gasoline prices on miles driven and consumer spending; the high level of unemployment and sub optimal job creation; and the general fragility yet of the economic recovery.

Additionally our comparisons get even more challenging in the second half of the year, with last year's revenues being up 13.5% over the final six months and earnings per share up 22%. On the earnings side, we feel that a range of $3.40 to $3.50 is appropriate at this time and this is up from our prior guidance of $3.32 to $3.42. At the $3.40 to $3.50 range, this would represent an EPS increase of 13% to 17% for the full year. And with revenues up 9% to 11% for the year, and EPS up 13% to 17% following the 11% revenue and 20% EPS increases in 2010, we would consider that a solid performance by the Genuine Parts team.

At this time, we would now like to try to address your questions and will turn the call back over to David. David?

(Operator Instructions). Christopher Horvers, JPMorgan.

Thanks and good morning, guys. So a couple questions. First, just from a topline perspective, clearly there are reasons to be cautious, given the environment and the compares. But I guess, is it fair to say that you're not necessarily seeing anything right now that would cause that concern?

That's fair and through the first half of July, things look about like they did through the second quarter.

Okay. And as you think about the retail slowdown to up slightly in the auto business, how much of that is just kind of April's weather? And I guess the other way to ask it is, did you see a retail rebound later in the quarter if you have that information available?

No, our results actually were fairly consistent through the quarter. We did not see any spikes or any big peaks or valleys. We just think in looking at the outbound sales flow that it is more tied to consumer spending and to discretionary items.

On the commercial side, it looks like again you'll post industry-leading sales growth on the commercial side of the business. So -- is it simply your initiatives are -- you lagged in 2009, you had a good 2010 on the commercial side, is 2011 you recapturing that market share that you temporarily gave away in 2009? Is that how we should think about it?

I think to a degree yes. We actually feel that we started to recapture some of the market share in 2010, and I just think our people are doing a really good job in executing the strategies that they have to continue to have a strong presence on the commercial side of the business. I think our execution is quite good right now.

Is there any competitive set that you would say that one more, you're being more successful taking share from one competitor versus another?

No, I wouldn't say that.

I tried. And then really the biggest question on the margin side is the industrial margins. And from a modeling perspective, that was a substantial surprise. So we are just curious as how sustainable is that, and then, underneath that, was there anything with vendor allowance dollars in this quarter or LIFO that would make that expansion more one-time in nature to this quarter?

No, the latter part of that question there's no LIFO in that second-quarter number. There certainly is some impact on the vendor rebates. We are expecting just because revenue is better that we will have about a year overall in rebates, and so we are up slightly in rebates in the second half.

How sustainable did that, longer term we've stated that our goal is to get the operating margin for the industrial back to the 8% and 8.5% range, and with the sales strength that they have had in the last 18 months, we think we can achieve that this year. Unless something falls off dramatically here in the second half, we feel good about what we are seeing in the industrial side at this point.

So I guess as you look at the trend in the industrial margins back half of the year you had about an 8 -- the second quarter, you did an 8.1% here, so is 1Q the anomaly, is there some seasonality that we should think about that just --?

A combination of both. There is some seasonality, but the first quarter was a phenomenal phenomena as you call it, and I think we're going to be in the 8% to 8.5% range. As things continue to improve in the industrial side, we won't tell them to stop at 8.5. If we continue to show strong revenue and get the rebate levels back to where they were, then we can sustain that. So --.

One additional comment. The first quarter in the industrial business is generally a lower operating margin quarter. Last year in the first quarter, we were at 6.1%, this year, 6.6%. And then sequentially the quarters get a little bit stronger as the year progresses. So the main thing for us and the focus of the management team is to keep the revenue line strong and continue to show quarter-over-quarter operating margin improvement.

Thanks, guys, very much.

John Murphy, Bank of America.

Good morning, guys. This is [Elizabeth Lane] on for John. I just have a couple of questions. You mentioned that the Automotive segment was fairly consistent throughout the quarter. Was that the case for the other segments as well, or were there particular months that stood out?

No, in fact we had a lot of consistency on all four of the businesses through the quarter and, in fact, the overall Company on a per day basis we were up 12 in April we were up 11 in May and we were up 12 in June. So quite stable.

Great, thanks. And second, miles driven started to decline in the spring, which is generally a negative indicator for demand for replacement parts and tires. But the last data point that the FHWA has is April. Do you have any sense of what travel trends have been like so far in the summer, and does it still look like that could be a little weak?

No. We are still operating all the same data point that you are, so we don't have anything more current than that. The only thing we can look at at this point is like on the retail side, we can see the slowdown in the discretionary items, and we know anecdotally in talking to our commercial customers that the consumer is getting the absolute needed repairs but trying to defer as much as we can at the time or currently. But that's about as much as we know at this moment.

Great, thanks very much.

Tony Cristello, BB&T Capital Markets.

Thank you. Good morning, gentlemen. Tom, one of the questions I want to discuss is sort of the acquisition environment. And if the environment remains steady in the industrial side and you continue to see progress in the results, can you talk about what that implies for your ability to continue to get acquisitions done? Are the acquisitions opportunities still there, are they getting better, are they getting worse, and how should we think about it on a go-forward basis?

I would say that for the past six to nine months, the opportunities I think have been relatively constant. I believe we have discussions going on, we have been able to do two -- get two completed thus far this year. We may or may not be able to get any more completed, but there are discussions that are going on. And we think the environment is going to remain about where it is or perhaps it might get a little bit better.

When you then look at sort of the overall operating environment, you've posted very consistent results. Do you still look at the data in the industrial production and those type of numbers as sort of your gauge for how you are predicting your guidance for the balance of the year, and what things will look like? Obviously going back to when we were hitting the financial crisis and the recession, things seemed to drop off quite materially.

I'm just wondering, has your visibility changed or the way you go about providing guidance any different than it was a few years ago?

No, not materially. We look at the same data points that we've looked at historically. We do try to stay in close communication with our customer base on a plant by plant basis to find out what their order backlogs look like and what their expectations are. The combination of those two would suggest to us right now that our business, the end market will remain white healthy as we go through the remainder of this year. The government came out just this morning with the June industrial production and capacity utilization numbers, and they were very good and very steady. So we feel good about the second half of the year in the Industrial business.

Okay. And the office products side, sort of a tale of two cities there. I mean, the independents are doing quite well. Do you think that that is sustainable as long as nothing else changes from an economic perspective? Is there something that you have done that your peers haven't to sort of capitalize on that piece of business?

No, I think the first part of the question, is it sustainable, we feel yes. We feel that the independent operators are cautiously optimistic about the outlook over the next couple of quarters.

The main concern is job creation and the office products business. And we have seen some thus far this year, and that follows a pattern that we saw develop in 2010. As long as that continues, I think that part of the business should remain in line with where it is currently.

Okay, and one question on automotive. You've discussed the sequential flattening from plus 4 in the first quarter. Are you doing anything different? I know over past quarters you've discussed the interest in wanting to increase your exposure, increase your mix to the retail side and some emphasis there.

Has there been anything from either an advertising standpoint or anything you have done differently that you would say has helped, even though it's flattening out, that you've seen your business improve from a mix standpoint? Maybe I need to ask the question a different way. But you kind of understand where I'm going with that question.

I think our advertising over the past several quarters has been sharper and more effective than it might have been prior to that, so I give our team there high marks. I think our e-commerce initiatives which we don't talk about too much but I think they have been quite good over the past couple of quarters. So our teams are working on store resets and new plan-a-grams and the things that we normally do on an ongoing basis.

I think we are pleased with what had been done. We don't think they are reflective, we don't think our results are reflective of the good work that's been done in these areas. And hopefully, as things stabilize somewhat and we get a little bit more discretionary spending, we will see the results reflected in our Retail business.

Helpful, thank you.

Scot Ciccarelli, RBC Capital Markets.

I guess my question is the industrial has been very strong for a while, and in fact, it seems to be coming from various geographies and end markets are very broad-based. When you see, historically, if you have seen that kind of really broad-based strength, how quickly can that really change on you? In other words, does it start to kind of creep up on you? Or is there something that -- on a dime, multiple businesses and end markets can really change.

Prior to the second week of October in 2009, we would've said it would be a very gradual -- or 2008, I should say, would be a very gradual change. But we saw in the fourth quarter of 2008, we saw a very quick drop-off. But that was during the financial crisis, as you'll recall.

Right now, we would think and expect that it will be more gradual, and we'll have several points of indication as we go into a slower period. We don't see any evidence of that right now.

Scot, historically, we have tracked the industrial production and manufacturing capacity utilization numbers with a six- to nine-month time lag. And that's been over numerous cycles into and out of slowdown. So you do normally have -- with that one exception Tom mentioned -- you do have some indication in a -- and some time that you can adjust.

Okay. I guess I'm curious on asking for an opinion here. It sounds there is a disconnect between what you're seeing as the end markets and obviously June was a little bit better. But some of the more broader (technical difficulty) out there. What would you guys attribute that to?

We don't really know. We get asked this question a lot quite honestly. And we read and hear the same media reports that you do. There does seem to be a disconnect between what we read in here and what we are experiencing in the marketplace. And we try to just keep our teams focused on the opportunities that we have in the marketplace and filter out some of the negative things that we continue to read and hear about. We don't want to be immune to them, but at the same time there are plenty of opportunities yet before us in each of the four businesses. And for us, the key is just to continue to execute as well as we have been.

That's very helpful. Thanks, guys.

Keith Hughes, SunTrust.

Thank you. The sequential gross margin progress, if we look at that by segment was there any one segment that stood out as you move from first to second?

No, there's not -- and all of our business units have been under gross margin pressure, and they all need to improve and they all have individual and specific plans to improve. But no, you can't look at any one segment and say the improvement overall came from that segment.

Is this progress going to be hampered, given the lower sales view you have for the second half of the year versus what we saw in the first half?

I don't think so. The initiatives are the same, regardless of the volume. And we would not expect to see it hampered. If it is, we would be disappointed.

There's more internal stuff that is --.

That's correct.

Thank you.

Thanks.

Matthew Fassler, Goldman Sachs.

Thanks a lot, and good morning. I just wanted to engage you a bit on the pricing environment in the automotive business. Both what you're seeing broadly and some follow-up on the steps you're taking. You've done some work over the past number of years to increase your competitiveness there. Just interested in that's playing out in the current environment.

Well, the competitive environment is about as it has been, and it's probably the way it's going to be in that it is a competitive industry, and we just have to learn how to operate effectively in that environment. As far as our price positioning, I think that our price positioning is better than what it was back in 2009 and the early part of 2010. Our teams are very, very focused on watching what's happening in the marketplace and reacting on an ongoing basis to what's happening in the marketplace.

But we don't see any material changes on the horizon up or down. Our expectation is that it will continue to be as competitive as it has been.

Got it. And then, as we think about the potential for operating leverage in that business, your results overall are quite good. The operating margins are up some, the incremental flow-through I guess on the incremental revenue isn't that far above the base operating margin. So as we think about the profit composition of the incremental sales, does that reflect the pricing posture or is there a mix factor that contributes to that? Just to make sure we understand it.

There is a may factor in there. There are certain product categories that have different gross profit contribution, and as we get more revenue growth from some of those categories that has an impact on the overall gross profit, there are also customer categories that have different gross profit contribution. I think Jerry made a comment in his remarks that we are doing very good business with major accounts throughout all of our businesses. And generally speaking, the gross margins are a little lower on those but the dollar volumes are significantly higher. So it's a combination of product category and customer category shifting.

Got it. Thank you so much, congrats on the quarter.

Gregory Melich, ISI.

We lost him, David. Why don't you go onto the next one?

Michael Ward, Ticonderoga.

Thanks. Good morning. A couple of things. On the automotive, the cash business is still roughly 25% to 30% of the total?

Yes sir. That's right.

So that's suggesting professional mechanic is up somewhere around 12% or 13% again?

I don't know. I just said low double-digit. We'll let you do the calculating.

Okay. No, for the professional account for the professional market, so the major accounts is one of the big areas, I assume new car is still low single digits?

When you say new car, I'm not following.

New car dealers, I'm sorry.

Yes, that's not -- it's a big business in total but it's not a high percentages of our total volume.

Where are you seeing some of the strength? Is it any lines in particular or regions in particular? Are you selling more to older vehicles? Is your content and the average age of vehicle, is it going up with this aging fleet? It seems like you're outpacing the industry so I'm just curious where the strength is coming from.

I mentioned in my comments, more broadly speaking, that NAPA Auto Care and major accounts are both growing in low double-digits and we are getting nice growth in those two important parts of our Commercial business. And then, as far as -- we are selling it's more car parts, it's more critical components. As these vehicles continue to age, they're experiencing higher frequency and also a greater demand for repair parts, and I think we are benefitting some from that.

Are you getting second and third generation on some of these components?

In some cases, yes we would. In some cases.

Jerry, you mentioned on the cost side, I thought you said you were able to hold onto $55 million for the cost cuts you made in 2008 and 2009, and then you have an additional $20 million in costs. Is that correct?

The $20 million is from the current year, and every year we go in with some cost-saving initiatives, and that's what we've accomplished thus far and the $55 million, you're right. It's from '08 '09 time period.

Okay. Lastly, do you have a share count for the end of the quarter?

Yes we do, hold on a minute. Right at 152 million. We've got [151 812].

Thank you very much.

Gregory Melich, ISI.

This is Mike [Montoni] on for Greg. Can you hear me? Great. Sorry about before. I just had a question for you on the inflation that you're seeing right now saw -- it looks like mixing it out across the divisions about 2% increase this quarter from vendors, and to you all, when you look at the 6 to 9 sort of back half topline guidance, can you help us understand, number one, how much of that might be inflation versus volume, and then, what you're hearing from vendors?

We would expect price increases to be a bit above where we are by the end of the year. A bit above the second-quarter numbers by year end. As far as what we are hearing from vendors, we have a lot of discussions with the vendors and they continue to think that they need some price increases.

Our posture on that is we're fine with that, provided that we don't lose competitive positioning and provided also that they're applied simultaneously across all of their customer segments. So we may see -- we will see those numbers go up a bit. But I don't know that they would double between now and year end.

Let me just point out, there is a danger in saying that the price increases average out to 2%. You've got automotive at 1.4, and they represent 50% of our revenue, and you've got electrical at 3.6 and they represent 4% of our revenue. So I would just caution you that it's not quite as straightforward as that.

Understood. And then just a follow-up on the gross margin rate, obviously you made substantial improvement there sequentially, and I'm not sure, Jerry, if you could just a little more color. It sounds like a little bit better vendor rebates, and also internal initiatives, and I think you had some work you were doing with price optimization on the auto side. Maybe is that one thing that's helping here? Can you just share a little bit more?

It is a combination of all that, Mike. The rebate certainly helped the industrial side some, we do have the pricing software that we are working into the Automotive side. We had previously done that in the office product side, so it's a combination of a lot of things. And it's buy side and sell side and it's product mix, custom mix, there's a lot of tweaking, and that's why it takes some time to get gross margin turned around and start to improve.

So it's a combination of all of those things, but you are right. The rebates did help show some improvement in the Industrial side.

That's helpful. Just the last question I have was for the full year the outlook for $700 million of cash flow from Ops, I think year-to-date were at about $250 million. Typically it seems to be normally relatively flat one half versus two half. Is there anything specific, maybe inventories are up 4% and we should anticipate that will be up less or how do you sort of get there?

If you look at this point last year, that change was a source of cash and this year it's a use of cash. And we were down June 30 last year 2% in inventory, and we are up 4% in inventory this year. And then we were also last year, I think, the receivable was up 9 and they're up 16 now. I think you'll see some further improvement in that inventory number, as well as receivable. We are comfortable that the $700 million in cash from operations that will be able to achieve today.

Great, thanks. Good luck.

You do have one additional question from Mario Gabelli, Gabelli & Co.

Jerry, the last question answered it. Tom, thanks very much. Interesting dynamics, good quarter.

Thank you very much. Appreciate it.

There are no additional questions in queue at this time.

David, thank you for your job on the call today, and we appreciate all of those that did call in. We appreciate everybody's ongoing continued support of Genuine Parts Company and we look forward to talking to you, if not sooner, on our third-quarter conference call.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.