純正零件 (GPC) 2012 Q4 法說會逐字稿

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Genuine Parts Company 2012 fourth-quarter and year-end earnings release call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I will now turn the call over to Carol Yancey, Executive Vice President, Finance, and Corporate Secretary. Please go ahead.

Thank you. Good morning, and thank you for joining us today for the Genuine Parts fourth-quarter conference call to discuss our earnings results and the outlook for 2013. 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 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 and CEO. Tom?

Thank you, Carol. And I would 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. This is a significant call for us in many ways, but none more so than the fact that this is Jerry Nix's final call. As you know, Jerry will be retiring at the end of the month after 34 years with Genuine Parts Company; the last 13 as our Chief Financial Officer.

And in looking back, it's interesting to note that Jerry has been on every quarterly conference call since we began doing them in February of 2011. So today is Jerry's 49th call. He has also been on every investor trip, and involved in every analyst meeting for over 25 years. And I think it's fair to say that Jerry has been the face of GPC with the investment community, and he has earned the respect and the admiration of all that has come in contact with, both inside and outside of our Company. He will be missed, but we're grateful to him for all that he has contributed to our Company over the last 34 years.

Now, we are fortunate to have Carol Yancey taking over as our Chief Financial Officer when Jerry retires. And many of you know Carol, because she has been a part of GPC for 22 years, and along the way she spent several years as Director of Investor Relations. Over the past several years she and Jerry have worked very closely together, preparing for this transition, and she is very well qualified to be moving into the CFO role.

Jerry and Carol will split the reporting duties today. And Paul Donahue is also on the call, and he'll give us an update on the performance of the automotive operations.

Earlier this morning, we released our fourth-quarter and year-end 2012 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 $3,119,000,000, which was up 3.5%. Net income was $160.2 million, which was up 19%. And earnings per share were $1.03 this year compared to $0.86 in the fourth quarter of 2011, and the EPS increase was 20%.

And this enabled us to end 2012 with sales of $13,014,000,000, which was up 4.5%. Net income was $648 million, which was up 15%. And earnings per share were $4.14 this year compared to $3.58 last year, and that's an EPS increase of 16%. These are all records for us in sales, net income, and earnings per share. But, clearly, we continued to experience some topline challenges in the fourth quarter, and they were a bit more pronounced in the Industrial and Electrical segments.

Although the 3.5% revenue increase in Q4 was our softest revenue quarter of the year, we were pleased that our folks operated well and still produced double-digit increases in operating profit, net income, and earnings per share for the quarter and for the year.

A review of the sales results by business segment shows that our Industrial business was up 2% in the quarter and up 7% for the year. After being up 22% in 2010, and 19% in 2011, the 7% increase in 2012 shows meaningful deceleration. And in looking back over the course of the year, we saw demand moderation as the year progressed. After being up 12% in the first quarter, the industrial operations were up 8% in Q2, 4.5% in Q3, and 2% in Q4. These trends are consistent with what we've seen across the industry. And it's an interesting to note that the fourth-quarter slowdown became a bit more pronounced in the final weeks of the year.

Our transmission, hydraulics, and electrical and automation products were among the best performers from a product category for the year. And automotive, iron and steel, lumber and wood products were among our top performing customer segments. Conversely, customers in the coal, aggregate, and cement, equipment and machinery, and equipment rental and leasing segments lagged our overall performance for the year.

As we look at predictive indices like industrial production and capacity utilization, we see that they remain at historically healthy levels, which is encouraging. At the same time, however, a more cautious attitude seems to have developed among our customer base over the latter part of the year. And our expectation is that this will carry over into the early part of 2013.

With that said, however, we do feel that the manufacturing segment of the economy, which is our customer base, is generally healthy and growing. And this bodes well for our Industrial business in the year ahead.

Staying within the manufacturing segment of the economy, EIS, our Electrical/Electronic distributor, also experienced a sharp slowdown in the fourth quarter. After being up 5% in Q1, and then 9% in the second quarter, followed by a 5% increase in the third quarter, EIS was down 2% in the fourth quarter and ended the year up 5%. And as with Motion, the latter part of the fourth quarter proved to be the most challenging.

One of the external indices that we closely follow is the Institute for Supply Management Purchasing Managers' Index. This is usually a pretty good leading indicator for our Electrical business. As a matter of information, the PMI averaged 57.3% for all of 2010, and our Electrical business was up 30%. In 2011, the PMI averaged 55.2% and we were up 24%. For 2012, the full-year PMI was 51.7%; but perhaps more significant is the fact that the last seven months of 2012, the average has been 50.4%.

This is a fairly tepid number, and it's indicative of the slower end-market conditions that our electrical/electronic operations are experiencing right now. As with our Industrial business, we think that these conditions will persist for another quarter or two. But we remain optimistic about our Electrical segment turning in a solid performance in 2013.

Moving on to Office Products, we actually had our best quarter of the year in Q4. After being down 1.5% in the first quarter, and down 1% in quarters two and three, S.P. Richards was up 3% in the final quarter. And this enabled them to end the year even with the prior year. Both the independent dealers and the mega customers had positive results in the fourth quarter, which was good to see.

And on the product side, cleaning and breakroom and furniture had the strongest results in the quarter. We were pleased to see all four product categories -- cleaning and breakroom, furniture, technology and office supplies -- end the year with positive fourth-quarter results. Although the office products environment continues to be challenging, with the plans and the initiatives that S.P. Richards has in place, we look for a year of moderate growth from this segment of our business in 2013.

So, that's a brief overview of our Industrial, Electrical and Office Products businesses.

And at this point, we'll ask Paul to give you an update on the automotive operations. Paul?

Thank you, Tom. And I'd like to add my welcome to each of you this morning. I'm pleased to join Jerry, Carol and Tom, and to have the opportunity to provide an update on the fourth-quarter performance of our North American Automotive business. As you know, Automotive is the Company's largest business segment, and we ended the fourth quarter with sales up 5%, which is improved from the 2.5% growth that we Reported for the third quarter. For the 12 months ended December 31, our Automotive business finished up 4% over 2011. The 5% revenue growth in the fourth quarter includes relatively flat comparable store sales, and a positive sales contribution from our acquisition of Quaker City Motor Parts. Sales to our commercial accounts, the dominant segment of our business, continued to outpace our retail sales.

We did not see significant changes in the external factors, which continued to impact our industry in the quarter. Headwinds related to the mild winter temperatures in the northern half of the country, along with the ongoing uncertainties surrounding the economy and consumer confidence seemed to persist.

Consistent with the past two quarters, our results varied significantly by region of the country in the fourth quarter. In the traditional cold-weather regions -- our Central, Midwest and Eastern divisions, which comprise over one-third of our overall business -- they consistently underperformed the under other regions across the US. Although the comps from these regions were consistent on a sequential basis, the regional disparity remained significant and impacted key weather-sensitive product categories in these regions.

On a positive note, we believe that a return to more normal winter weather patterns, which we are beginning to see play out, should drive a potential upswing in demand over the next several months. We remain pleased with the positive contribution from Quaker City Motor Parts, which we acquired back on May 1 of 2012. Their fourth-quarter and year-to-date sales contributions were in line with our expectations. And we are excited with the opportunities that Quaker City will provide to us in the future. Our Quaker City team and our strong group of independent owners are energized and focused on our key initiatives to drive growth in 2013.

As we mentioned earlier, our commercial business continued to outperform our retail business in the fourth quarter. Within our Company-owned store group, the commercial side of our business ended the quarter up 1%, consistent with our growth in this segment in the second and third quarters. Non-fleet-related business performed reasonably well, generating a 4% increase, led by our NAPA AutoCare and our Major Account business. The increase in average ticket value drove the gain, while our average number of invoices was flat.

Turning to our retail business, sales were down mid-single-digits in the quarter. So while we are not pleased with our retail performance, we are encouraged by the initiatives our team has put into place to positively impact our retail sales in 2013. We have seen over the past few quarters a slight downward trend in our average number of invoices per day, while our average dollar value increased. We believe this to be consistent with retail sales trends, both in the aftermarket and retail in general.

So, as we look forward to 2013, we expect a more normalized winter weather pattern to improve demand. We are pleased to note that while it's still early in the year, we are seeing improved sales trends in the northern half of the US. We are also seeing a pickup in sales in some of our winter-related product categories, such as our batteries and our rotating electrical categories.

The aging vehicle population, continued growth in the number of older vehicles, and the positive year-over-year miles driven numbers, up 0.6% through November, bodes well for the automotive aftermarket. And we feel NAPA is well-positioned to capture its share of the increase in demand generated by these positive trends.

So, in summary, overall demand in the automotive aftermarket in the fourth quarter proved similar to what we experienced in the second and third quarters of 2012. We remain positive about the core fundamentals impacting the automotive aftermarket and our Automotive Parts group. These positive industry fundamentals, coupled with our internal growth initiatives, provide us ample growth opportunities for 2013, and well into the future. So that completes our overview of the Automotive business in the fourth quarter and for 2012.

And this time, I will hand it over to Jerry to get us started with our review of the financial results. Jerry?

Thank you, Paul. And, Tom, I want to thank you as well for those kind remarks. It's been a lot of years and a lot of calls, and we've built many great relationships, which I will certainly miss. And most important is that Genuine Parts is in good hands with Tom and Paul, and so many other excellent leaders across our businesses. Certainly Carol fits into that category, and we're very fortunate to have her assume the role of CFO.

Carol and I have worked together for all of her 22 years with the Company. And I can tell you, she is one of the best and brightest, and very prepared to lead this Company as CFO.

So, we appreciate you joining us on the call today. And to move things along, I will first review the fourth-quarter and the full-year income statements and segment information. Then Carol will pick it up to review a few key balance sheet and other financial items. Tom will come back to wrap it up, and then we'll open the call up for your questions.

A view of the income statement shows the following -- total sales of $3.1 billion for the fourth quarter, and that's an increase of 3.5% from last year. And it's relatively consistent with the third-quarter increase. For the year, total sales reached another record high of $13.0 billion, which is up 4.5% from 2011. Although the sales environment grew more challenging for our Industrial and Electrical businesses in the fourth quarter, our Automotive sales had held steady, and the Office Products group posted their best quarterly results for the year. We remain confident in our growth initiatives and are planning on another year of respectable sales growth again in 2013.

Gross profit for the fourth quarter was 29.2% of sales. That's down approximately 40 basis points from the fourth quarter in 2011. But for the full year, gross margin of 29.0% is up about 10 basis points from 28.9% in 2011. So, despite the decrease we experienced in the fourth quarter -- which we attribute that to the competitive sales environment overall and the lower levels of vendor incentives at the Industrial Parts group -- we are pleased to show at least slight progress for gross margin for the year. Our ongoing initiatives to effectively manage supply chain costs, increase distribution efficiencies, and maximize our pricing potential offer us additional opportunities to further improve our gross margin. And our management teams across all of the businesses are committed to this effort.

For the year, our cumulative price, which represents the prior increases to us, was a negative 0.3% in Automotive; plus 1.6% in Industrial; plus 2.7% in Office Products; and a negative 0.1% in Electrical.

Now turning to SG&A -- total expenses, $659 million in the fourth quarter, down 2% from 2011; and at 21.1% of sales versus 22.6% in the fourth quarter last year. For the year, total SG&A expenses, $2.8 billion. That's up 2% and at 21.2% of total sales, compared to 21.8% for the same period in 2011. Our management teams have done an excellent job of managing our expenses throughout the year, and our ongoing cost savings initiatives have yielded much of the improvement on this line. We continue to control our costs through ongoing investments in technology, which is has positively impacted the operating efficiency in our distribution centers and stores, as well as supply chain initiatives in such areas as freight and logistics, among others.

Additionally, in December of 2012, the Company's pension plan was amended to freeze future benefit accruals for all participants effective January 1 of 2014. In connection with this amendment, the Company recorded a one-time non-cash curtailment gain of $23.5 million, which is included on our SG&A line for the fourth quarter and the year. So, throughout the organization, we made solid progress in controlling our expenses. And we'll continue to assess and align the proper cost structure of our businesses as we move through the year and beyond.

Now let's discuss the results by segment. For the fourth quarter, Automotive had revenue of $1531.6 million, up 5%. They had operating profit of $122.5 million, up 36%; so outstanding margin expansion there from 6.2% to 8.0% of sales. The Industrial group for the quarter had revenue of $1054.8 million, up 2%. Operating profit, $78.1 million; that's down 12%. So margin degradation there from 8.6% to 7.4%. Office Products had revenue for the quarter of $402.9 million. That's up 3%. They had operating profit of $36.4 million. That's down 5%. So, again, margin deterioration from 9.7% to 9.0%, which is still outstanding operating margin for that business. The Electrical group had revenue in the quarter of $135.4 million. That was down 2%. They had operating profit of $12.5 million. And that's up 21%, so just superb operating there, going from 7.5% to 9.2% operating margins in the quarter.

Now, for the year, Automotive had revenue -- $6320.9 million, and that represents 49% of the total, and is up 4%. Operating profit of $540.7 million, up 16%. So, again, just super margin, 8.6% from 7.7% of revenue the prior year. The Industrial group had revenue for the year of $4453.6 million, and that represents 34% of the total, and is up 7%. Their operating profit, $352.1 million, is up 4%; so a slight margin decrease there from 8.1% to 7.9%.

Officer Products had revenue for the full year of $1686.7 million. It represents 13% of the total, and was down 0.2%. They had operating profit of $134.4 million, and that was up 0.2%, so a slight margin improvement for the year, 7.9% to 8.0% of sales. The Electrical group had revenue for the full year of $582.8 million, representing 44% of the total, and that's up 4.5%; and operating profit of $50.9 million, up 25%. So, record operating margin for the Electrical group at 8.7% of sales.

Total operating profit was up approximately 10% in the fourth quarter. And operating profit margin improved 50 basis points, to 8.0% from 7.5% in the fourth quarter of 2011. Now, this follows margin improvement of 70, 40, and 20 basis points for the first, second and third quarters of 2012, respectively. Total operating margin for the year is 8.3%, and that's up 40 basis points from 7.9% last year. We're extremely pleased with this level of margin expansion, and continue to believe that we have additional opportunity to expand operating margins again in 2013, although more likely in the range of 10 to 20 basis points.

We had net interest expense of $4.9 million and $19.6 million for the fourth quarter and the year, respectively, which is down from 2011 due mainly to the new lower interest rate on our $250 million debt agreement that was funded in November of 2011. We'll discuss our debt position later, but we currently expect our net interest expense to approximate $20 million again in 2013.

Beginning in this quarter, we separated our amortization from the other category, as our amortization of intangibles was more significant in 2012 due to the Quaker City acquisition. Total amortization expense was approximately $4 million and $13 million, for the fourth quarter and the year, respectively. The (technical difficulty) line now represents corporate expense of noncontrolling interest, and was $11.2 million in income for the fourth quarter, and is $26.6 million expense for the full year. This is much improved from 2011, and primarily reflects the pension curtailment gain discussed above.

Additionally, the income associated with our 30% investment in Exego was accounted for on this line. For 2013, we currently project accommodation of the amortization and other lives to be in the $60 million to $70 million expense range, which will be relatively consistent with 2012 before the curtailment adjustment.

For the quarter, our tax rate was approximately 36.4%, and that's up from 35.8% last year due to the nontaxable status of a favorable retirement plan adjustment that was recorded in the fourth quarter of 2011. For the full year, 36.4% rate compares to 36.6% for the same period in 2011. And we expect our full-year tax rate for 2013 to be in the range of 36.0% to 36.5%.

Net income for the quarter -- $160.2 million, and that's up 19%. EPS increased to $1.03 compared to $0.86 last year, and that's up 20%. For the year, net income is up 15%. EPS, at $4.14, is up 16% over 2011. Excluding the December 2012 pension curtailment gain discussed earlier, net income was up 8% to $145 million for the fourth quarter, and was up 12% to $633 million for the year. EPS before the adjustment was up 8% to $0.93 for the quarter. And we were up 13%, to $4.05, for the year.

This record level of earnings achieved in 2012 both before and after the pension gain, reflects the third consecutive year of double-digit earnings growth for the Company. I want to recognize all of our associates at Genuine Parts Company for achieving this significant milestone. We're extremely proud of their accomplishments.

So, with that, I'll turn it over to Carol to touch on a few key balance sheet items.

Thank you, Jerry. And before I begin my remarks, I want to thank everyone for the tremendous opportunity. I'm very appreciative, and it's been nothing but a pleasure to work with Jerry for all these years. We've had a very well-planned and prepared transition, and I look forward to the opportunity.

We'll start off with a discussion of a few key balance sheet items. Cash at December 31 was strong at $403 million, which is consistent with our cash position at September 30, although down from the $525 million at December 31, 2011. Our current cash position reflects strong cash flows for 2012, resulting from our increase in earnings, effective asset management, and cost reductions. This was offset by the more than $500 million used in 2012 for several investing activities, including our January 1 investment in Exego, the leading automotive distribution company in Australia and New Zealand; the Electrical group's Light Fab acquisition on February 1; and the Automotive group's Quaker City acquisition that was May 1.

Accounts receivable of $1.5 billion at December 31 increased 2% from 2011 on a 3.5% sales increase for the fourth quarter. Our goal is to grow receivables at a rate less than revenue growth, so we are very encouraged by our progress with receivables. We will continue to remain focused on this area in 2013. And we're very satisfied with the quality of our receivables at this time.

Inventory at December 31, 2012, was $2.6 billion, up approximately 7% compared to December 31, 2011. Primarily this increase relates to the impact of our acquisitions in 2012. And without acquisitions, our inventory grew by just 2%. We continue to believe that our team is doing an excellent job of managing our inventory levels. And we remain focused on maintaining this key investment at the appropriate levels as we move through 2013.

Now we will add, here, that are comparisons to the prior year's inventory reflect the revisions to our 2011 balance sheet that we previously disclosed in our third-quarter 10-Q. Our accounts payable balance at December 31 was $1.7 billion, which is up 17% from the prior year. The significant increase in trade payables reflects the impact of our extended payment terms and other payables initiatives negotiated with our vendors. We are very pleased with our progress in this area. Improving our payables position has always been an important priority for us over the last couple of years, and it's had a product positive impact on our days in payables.

Working capital of $2.3 billion at December 31 is down approximately 15% from December of 2011, as reported. It's also down 6% on a comparative basis, which takes into account our current debt of $250 million. Effectively managing accounts receivable, inventory, and accounts payable is very important to us. And our ongoing progress in these key accounts has had a tremendous impact on improving our working capital position and cash flow. Our balance sheet remains in excellent condition at December 31, 2012.

Our total debt at year-end remains unchanged at $500 million. The $250 million of total debt that's due in November of 2013 is accounted for as current debt at the end of December 31. While we have not announced any specific plans for this debt beyond the due date, we will most likely renew the debt amount later this year. There is another $250 million debt that is due in November of 2016. Our total debt to total capitalization at December 31, 2012, was 14.3%. And although comfortable with our current capital structure, we want to remind you that in September of 2012 we entered into a multi-currency syndicated credit facility agreement for $850 million.

This agreement, which carries a five-year term and an interest rate of LIBOR plus 75 basis points, replaced the $350 million unsecured revolving line of credit that was scheduled to mature in December of 2012. This new facility provides us with expanded borrowing capacities to support our growth opportunities as may be needed from time to time. There were no amounts borrowed under this new agreement at December 31, 2012.

The Company continues to generate solid cash flows. And as we mentioned earlier, 2012 was a very strong year for us. Cash from operations reached over $900 million, a new record for us. And free cash flow, after deducting capital expenditures and dividends, was approximately $500 million, also a new record. The continued strength of our cash flows is encouraging, and we remain committed to several ongoing priorities for the use of our cash, which we believe serve to maximize shareholder value.

Our first priority for the cash is the dividend, which we have paid every year since going public in 1948, and we've now raised for 57 consecutive years -- effective with yesterday's Board approval of a $2.15 per share annual dividend for 2013. This represents a 9% increase from the $1.98 per share paid in 2012, and it's approximately 52% of our 2012 earnings per share. This is well within our goal of a 50% to 55% payout ratio. Our goal would be to maintain this level of payout ratio going forward.

Our other priorities for cash included the ongoing reinvestment in each of our four businesses; strategic acquisitions, where appropriate; and share repurchases. Our investment in capital expenditures was $30.4 million for the fourth quarter. And for the full year, total CapEx spending was $102 million, compared to the $103.5 million for the same period in the prior year. This was at the low end of our expected range for 2012. And, based on the timing of certain projects and overall plans for this year, we expect our cash used for CapEx for 2013 to be in the range of $115 million to $135 million.

The vast majority of these investments will continue to be weighted towards productivity-enhancing projects, primarily in technology. Our depreciation and amortization was $25.1 million in the quarter, and it's $98.4 million for the year, which is up slightly from 2011.

Turning to 2013, we would anticipate another increase, primarily related to amortization, and also the increased capital spending. We are currently expecting depreciation and amortization to be approximately $105 million to $115 million for the full year. Strategic acquisitions continue to be an ongoing and important use of our cash for us, and they are integral to the growth plans for the Company. Our investment in Exego and Quaker City in the Automotive group, as well as a small acquisition in the Electrical group, performed as planned throughout 2012. And we're encouraged by their continued growth opportunities.

We will remain active in seeking new acquisitions for our businesses in 2013, generally targeting those bolt-on types of acquisitions with annual revenues in the $25 million to $125 million range.

Finally, in 2012, we used our cash to repurchase approximately 1.4 million shares of our common stock under our share repurchase programs. We have another 12.2 million shares authorized and available for repurchase today. While we have no set pattern for these repurchases, we would expect to be active in the program again in 2013 as we continue to believe that our stock is an attractive investment; and, combined with the dividend, provides the best returns to our shareholders.

In closing, we want to be sure and thank all of our GPC Associates for the great job they are doing. Another year of record sales and earnings is a great accomplishment, and one we are very proud of. The Company enters 2013 well-positioned for continued growth in our businesses. And, as always, we'll support our growth with strong cash flow, a healthy balance sheet, and further maximizing our return to shareholders.

Tom?

Thank you, Paul, Jerry and Carol. And, Jerry, once again, thank you for being such a significant contributor to the overall success of Genuine Parts Company over the years. We wish you and Cheryl the absolute very best in the years ahead.

Now, summarizing our view on 2012, we feel that the GPC team has a lot to be proud of. Among the positive accomplishments this past year were sales, net profit, and earnings per share records; and operating margin improvement of 40 basis points to 8.3%. Cash from operations and free cash flows set new records as well. Working capital was reduced roughly 6%, and working capital efficiency improved to an all-time low.

Both return on average assets and return on invested capital also showed nice improvements once again in 2012. And with the action taken yesterday by our Board, dividends have been increased for the 57th consecutive year. So we feel good about the GPC team's achievements in each of these areas.

The one area where we did not perform as well as we would have liked is on the growth side. After being up 11% in both 2010 and 2011, we went into 2012 expecting more than a 4.5% sales increase. But after a solid first quarter, we saw moderation as the year progressed, reflective of the overall industry slowdowns that we saw in our respective businesses.

As we look toward 2013, we see market conditions being quite similar, at least over the first half, to what we experienced in the second half of 2012. And our expectation is for modest growth in each of the four industries that we operate in during the first half of the year, and a bit stronger growth in the second half. This seems to be consistent with the general consensus for the overall economy in the year ahead.

With that said, our expectation is for revenue growth in Automotive for the full year of 5% to 7%; Industrial, 4% to 6%; Electrical, also 4% to 6%; and Office Products, 1% to 3%. And this would give us total revenue growth of 4% to 6% for the year. And with revenue growth at this level, our guidance would be for earnings per share to be in the $4.30 to $4.40 range, which would be up 6% to 9% over the $4.05 earned in 2012, prior to the curtailment gain.

So, that will conclude our prepared remarks. And, at this point, we'll turn the call back over to Chris for your questions. Chris?

(Operator Instructions). Chris Horvers, JPMorgan.

Thanks. Good morning, everyone. Again, congratulations, Jerry. We'll certainly miss you out on the road and on the calls.

Thank you, Chris.

I wanted to start with the Automotive side. That was really encouraging to hear that the northern part of the country is starting to see some improvement, and starting to see -- in batteries and rotating electrical. I was thinking about last year. Did you see a lot of pull forward and spring demand because of the warm weather in January, February and March? And does that mean that we have to wait to 2Q for some of these trends to really emerge, and see some acceleration in the top line in Auto?

Yes, Chris, this is Paul. Just a couple of comments; and your question is a valid one. Our three divisions that make up the northern tier -- the Central, Eastern and Midwestern divisions -- they had a very solid first quarter last year. And, absolutely, looking back now, we can see that business was pulled forward; because, sequentially, then, Q2, Q3 and Q4 were soft, and mid-single-digit soft in Q3 and Q4. But I am pleased to see -- again, it's only one month. But those three divisions have rebounded nicely in the month of January, led really by the Midwest division, which is up significantly. So, we're cautiously optimistic, Chris, that we're going to see some growth out of the northern half of the country this year.

And have you seen much on the brakes and rotors side?

Brakes and rotors was a challenging category for us last year. We've put some playthings into place that we hope will see a rebound in 2013. But that was one of the categories that absolutely was impacted in 2012. And, Chris, you mentioned batteries and rotating electrical on the flip-side. Those were very strong for us in 2012, as were a few other categories like tool and equipment, for instance; and our filter business was good last year. So, we're hoping to see, and we plan to see, our brake business come back in 2013.

(Multiple speakers) Chris, sorry, I would just add to that, we did not see any material improvement in the brake and rotor business in January. And our expectation is we'll start to see some improvement as we work our way through the year.

Perfect. And then on the EBIT margin side in Automotive, could you delve into that a little more closely in terms of what drove that expansion? Was that Quaker synergies? Was that vendor allowances? Certainly there was some upside surprise there, so just wanted to get some details.

Chris, this is Jerry. We had favorable inventory gains in the fourth quarter. And you'll see where that's where most of that margin improvement over -- they were up 50 basis points through the nine months. They also had significant cost reduction initiatives that have taken place. And they took $20 million, $25 million of costs out.

So, between -- and there were [some myriad write-backs] we accrued bad debt expense based on a percent of sales. And our bad debt expense, when we got down to an actual write-off, was less than it was the prior year. So, those were the three major contributors to that improvement.

And how should we think about EBIT margin expansion going forward? Or how much of that is sustainable?

Well, look, the cost reductions that they took out are sustainable, and they also have additional cost reductions in place now. I'm certain that we're not going to show that kind of improvement in our bad debt expense coming off. But we should see another 10, 20 basis points of operating margin improvement. That's always what we look for.

Perfect. Thanks very much.

Greg Melich, ISI Group.

Hi, thanks. And, Jerry, again -- congrats, and thanks for everything.

Thanks, Greg. I appreciate it.

[Cathy], you mentioned inventory was up 2% when you adjust the balance sheet for acquisitions. Could you give us the payables and receivables, as well, adjusted for acquisitions?

The impact on the payables was not as significant. It's about $50 million on the payables line. And on receivables, it was about $30 million on the receivables line; but, clearly, the bigger number was on the inventory line. Most of our receivables improvement was really as a result of some of our improved terms with our vendors, that we talked about. That really drove the bulk of that increase.

On the payables.

On the payables.

And then, Paul, a little bit on the sales trends you saw in the fourth quarter. If I remember, there were some nuances of a day shift in terms of sales I thought we might get back in the fourth quarter. And it seems like we didn't, if we look at the comp store sales. Could you help us understand that flattish comp versus up a little bit in the third quarter? What really drove that sequential decline?

Yes, Greg, good question. And, you're right, there was an extra billing day in the quarter. What I think we may have underestimated a bit was how the holidays fell this year versus last year, with Christmas falling on a Tuesday versus a Sunday, prior-year. We may have given back a portion of or all of that extra day that we got in the quarter. So I think we underestimated that a bit.

December was soft for us. There is no doubt. And when we reported last, we were coming out of the month of September. And we saw a nice increase in the month of September. And, certainly, we are hopeful that that was going to carry on into Q4; but, certainly, that wasn't the case. And, again, I think that the initiatives that our team has in place going into 2013, we're optimistic about -- cautiously optimistic about getting our sales back in line in 2013.

Great. And, lastly, on inflation/deflation (technical difficulty), in Auto in particular, the negative 0.3, that was the same as the third quarter. Could you give us some insight as to where you think that will play out this year? Will it go back to a little bit of inflation in Auto Parts?

Greg, this is Tom. I'll try to answer that. At this point, I would say that we may get a little bit more inflation across each of the businesses in 2013. Automotive, we are seeing some discussion about price increases as we work our way a little deeper into the year. So I would expect that we will have modest inflation in Automotive, but not materially so.

That's great. Thanks a lot.

John Lovallo, Bank of America.

Hi, guys. Thanks for taking the call. Jerry, best of luck to you.

Thanks again, John.

Okay, to start off, from the industrial customers -- from your industrial customers, do you get a sense that the uncertainty that they're talking about is really attributable to government policy and uncertainty around that? Or is it really more core to the business environment?

I think it's more the former than the latter. There is a heightened sense of concern with the unknown at this point. And it might be helpful to you to know that on our project work, we've not seen any cancellations to this point, but we have seen these be pushed out a quarter or two; which I think, again, underscores the uncertainty. I think people are saying until we get a little more clarity, we are just going to be very cautious in how we spend money. So, the fact that we are being pushed out could eventually lead to some cancellations. But at this point, we've not been notified of any.

That's helpful. And then, given that there could be some topline pressure in industrial and EIS, at least in the first couple of quarters, is there anything you can do from a cost structure basis to offset that?

Well, yes. And I think our teams have done a good job over the last couple of years in helping to reduce their cost structure. And when we see periods like this, where things seem to slow up a bit, then they tighten up on the cost side a bit as well. So, there are some actions already underway to try to keep costs more in line with where the revenue is going to be.

Great. And then, one last one, on the interest expense guidance. I missed that. Would you mind repeating that, please?

Well, we currently estimate interest expense to be around $20 million for 2013, with the two $250 million tranches we talked about.

Great. Thanks very much, guys.

Scot Ciccarelli, RBC Capital Markets.

Hey, guys. Scot Ciccarelli. I know you said there was a sizable difference between, let's call it traditional cold-weather markets and the rest of the business for Auto. Can you get any more specific than that?

Scott, this is Paul. The impact in Q4 was about 300 basis points' impact.

So that's a more narrow gap than what we've seen over the last couple of quarters, correct?

Well, actually, it's fairly consistent. We were running down, in those three divisions, I'm talking about the impact on the overall business. So those three divisions of our Company were running mid-single-digit down in Q4, versus a slight uptick in the balance of our business.

I see, I see, I see. Okay, understood.

But you understand the overall impact?

Yes, okay. That's what I was trying to get to. Okay. And then, also, regarding -- I know we talked about the Auto EBIT margins a little bit. We did see the EBIT margins for industrial compress a little bit. What's the right way to think about that going forward? Is that another (technical difficulty) improvement like (technical difficulty) in Auto? Or will the current revenue trends may be prevent that from occurring this year?

Scott, this is Tom. I would say that, first of all, our expectation is that the revenue trends will improve somewhat as the year progresses. But I think in terms of modeling, I would look for a 10 to 20 basis point improvement in the industrial margins for the full year.

And is that because that's going to be natural leverage? Is that because you guys are trying to take costs out, like you took out of Auto? Just trying to figure out what are the various moving pieces there, Tom.

Well, we're counting on a little bit stronger revenue growth. Not so much in the first quarter or two, but more so in the second half of the year. There are ongoing cost containment, cost reduction initiatives that are taking place there. There's a fair amount of work that's being done on the margins side of the business, the gross margin side of the business. So hopefully we'll see a little bit of improvement in that through the course of the year.

So there are a number of levers that are being pulled on simultaneously to try to ensure that we can show margin improvement. I think if you go back and look at the industrial performance sequentially over the course of the year, Q1 and Q2 we were running pretty strong revenue increases, 12 and 8, respectively. And then we saw really good margin improvement through the first half of the year. And then we gave that back and then a little bit more, as we got to the back half of the year; but our expectation is maybe the inverse for 2013.

Understood. All right, thanks a lot, guys.

Matthew Fassler, Goldman Sachs.

Thanks a lot. Good morning. And, Jerry, I will miss you very much. It was a pleasure working with you over the years.

Thank you, Matt. You're the man.

Thanks. So, first of all, on Automotive; obviously we've picked this sector over a bit already this morning. But if you look at the differences in DIY or retail and the traditional commercial business, anything related to car age and the target customer -- the target car, that is -- within those segments, as you look at the numbers and the stagnancy in retail -- that you think might be attributable, something structural like that?

Matt, this is Tom. I don't think there's anything that's changed significantly enough to cause any material change in the performance over a short span of time. Paul mentioned in his comments on the commercial side of the business -- if we move fleet aside for a moment, and I'll come back to fleet in a moment -- but if we move that to the side, in the quarter our non-fleet-related commercial business was actually up mid-single-digit, which I think in the current environment is a pretty good performance.

But what we've seen on that side of the business is that we see that our ticket value has increased some. But the ticket count is actually flattish. So that would indicate to us that it's somewhat driven by consumer discretionary spending habit at this point. If we go over to the fleet side of the business, the fleet side of the business actually had started to show signs of moderating as we got deep into the second quarter of the year. And then, quarters three and four, the fleet business actually had a little bit of deceleration. And that's consistent with what we see across the industry. And it's consistent with what we see in some of the indices.

If you look at the Transportation Service Index, you'll see that that decelerated sequentially as the year progressed, and actually went into negative territory in the latter part of the year. So I don't think, at this point, we've seen any material change structurally in the business. I think it may be more driven by consumer spending. And I think that may continue for another quarter or two, as we continue to digest the effect that maybe some higher fuel prices and also the increased payroll tax that people are adjusting to.

Tom, either for you or for Paul, to the extent that you've seen some recovery in cold-weather markets and cold-weather products, is that happening evenly across both retail and commercial? Or is it biased towards one of those segments?

Matt, this is Paul. At this point in time -- and it's early -- but at this point in time, it's certainly more on the commercial side than the retail side.

I'm curious, functionally, given that everyone's cars do the same thing, is it because of the kinds of transactions that are driven by cold weather, perhaps failure, tend to show themselves more at commercial? Or would there be some other reason for that?

I think that's part of the reason, Matt. But the other thing is, I think the commercial is a bit stronger in the areas that we're talking about. And the retail may be a bit stronger in more of the Sunbelt-related areas.

Great. And just a final cleanup question on the guidance side. The $4.30 to $4.40 of 2013 EPS, is there a buyback assumption embedded in that number, please?

No. Our buyback plan, Matt, just to further amplify, at a minimum we want to buy back the number of shares that we issued under our long-term incentive grants. We want to avoid any dilution there. So I think you could model something along the lines of 1.2 million, 1.3 million, in line with what we did this year.

But there is no embedded share count reduction above and beyond in that number?

No.

Okay. Thank you very much.

Brian Sponheimer, Gabelli & Company.

Good morning. Jerry, again, congratulations and best wishes.

Thanks again, Brian.

Just want to talk about Exego for a couple minutes here. For a point of clarification, that is now on the other line, as far as when you're breaking out your operating segments, correct?

Yes.

All right. First of all, how are we trending on Exego as far as hitting your targets for profitability, where you consider rolling up the business?

They are actually ahead of plan. And if we go back to our original expectations, we thought that they would get to the level some time late 2013 or early 2014. They are actually going to get there a little bit sooner. And it will be at that point that we'll have a decision to make. And, just so you understand, from the point that they actually hit the threshold, we've got up to six months to exercise our right.

All right, terrific. And then -- most of my questions have been answered -- but there is speculation about two of your major customers in the Office Product side potentially getting together. If this were to be the case, do you think you'd see some pricing pressure within the Office Products division that could potentially hurt your margins?

Well, that's speculative at this point. I'd say, first of all, this has been something that has been long been speculated; and it appears that there is some substance to it right now. Looking at the medium- to long-term, if there is excess capacity in the industry and it gets taken out, I think that's fundamentally healthy for the industry. In terms of three competitors going down to two, that might lead to a bit more rational competition among those three. How it plays out and how it backs up on us, I can't answer that at this point. But our general sense is that if it's something that's fundamentally good for the overall business and the industry, then eventually it's going to be good for us.

All right. Thank you very much.

David Gober, Morgan Stanley.

Good morning, guys. Thanks for taking the question. Just a quick one on gross margins. Just wanted to try to parse out where you saw a little bit of the gross margin compression in the quarter. Obviously, Industrial and EIS were the two segments that saw overall margin compression. Is that where gross was under pressure as well? And if so, what was the key driver? Was it just fixed cost de-leverage, or something else in those segments?

No. First of all, I wouldn't focus too much on the quarter. I'd suggest that maybe we focus on the full year. And we were able to show some gross profit improvement for the full year, 9 basis points. Not an overwhelming improvement, but after two years of modest decline, I think the team generally did a pretty good job of stabilizing the gross margin and then bringing it back.

In Jerry's comments, he mentioned that one of the contributing factors in the quarter was that we did not have the volume incentive rebates to the degree that we had them in the Industrial segment, so we didn't have the benefit of that. And we also didn't use the balance sheet to prop up the income statement, because we didn't go out and make big buys at the end of the year to try to capture some of those.

Carol referenced in her comments that without the Quaker City acquisitions, our inventories were up 2%. So I think as a general statement, our folks did a good job of keeping the inventories under control. And we probably gave up opportunities on a little bit of gross profit enhancement. But we felt it was prudent to operate the way we did operate in the fourth quarter.

And I'd say that, in terms of modeling, you might model in that gross profits will be at least equal to what they were this past year. And, frankly, we're planning on a modest improvement again in gross profit in 2013.

That's very helpful. And not to beat a dead horse on the Auto Parts business -- but, Paul, I was wondering if you could walk us through maybe what you're seeing on the DIY part of the business, in terms of the decline in the fourth quarter by category? Are you seeing -- is it the discretionary categories that are weak? Or is it really more of the weather-related categories that are maybe different because of regional concentrations?

Yes, Dave, it is more of the discretionary. And our retail business, as I stated in my opening comments, we are certainly not pleased with our retail results. I do believe they are fairly consistent, both across our industry, as well as retail in general, has been under a bit of pressure. But I will tell you that we have a number of initiatives in place as we go into 2013. And I would hope that some of the things that we put in place would begin to move the needle back in a positive direction for us.

David, I would just add that -- Paul mentioned that in his earlier comments -- and that is that the average ticket size is actually up a little bit on the retail side, which is very encouraging to us. But we have seen a modest decline in ticket count. I think the challenge for us is to generate a bit more foot traffic. And that in itself will help the overall retail business.

And just to follow up to that, David -- we are certainly optimistic. We launched a new advertising campaign, post-Super Bowl, that we fully expect will drive some traffic, and will follow-up with an additional ad campaign starting as NASCAR kicks off this Sunday at Daytona.

Great. Look forward to it. Thanks.

Bret Jordan, BB&T Capital Markets.

Good morning. This one may be for Carol. But as you talk about working capital management, extending payables, do you have an initial target where you are thinking you are taking the AP to inventory ratio to in 2013?

We don't really have a target. We look for continued improvement on that line. Maybe not all that we had this year, but we certainly expect to have continued improvement on that line; but no specific target.

Okay, thanks. And then shifting back to the last question that was just asked, on the DIY side of the business -- do you have of feeling, market share wise, is your performance regionally -- are you getting the feeling it's in line with peers? Or is there aggressive pricing coming out of some of the competitors in the market, either to maintain or enhance their DIY share, that may be limiting some of your comp store sales regionally?

Bret, this is Paul. I think pricing is -- with our peer group -- has been fairly rational this year. We don't see it in any particular market being any more difficult than another particular market. Again, I think retail in general and the retail consumer is under a bit of stress. Certainly, as Tom mentioned earlier, the payroll tax -- that 2% is going to have an impact on some of that walk-in traffic. But, again, we've taken on as our responsibility in a tough environment, we got to go out, be aggressive and take some market share, and that's our plan.

Okay, great. Thank you.

Keith Hughes, SunTrust.

Most of my questions have been answered. But just quickly, can you tell me how much acquisitions contributed in the Industrial and Electrical segments in the quarter?

Well, Industrial didn't have any acquisitions in the quarter. And Electrical had that small acquisition, Light Fab, that we talked about earlier.

Almost immaterial.

It's really immaterial. Certainly on the balance sheet, and there was just some incremental revenue and earnings, as well.

Okay, thank you.

Richard Hilgert, Morningstar.

Thanks for taking my call this morning. And, Jerry, let me add my congratulations. And I hope you are blessed with many years of happy retirement.

Thank you very much, Richard.

Wanted to drill down a little bit more on the fleet business in Auto. You mentioned during the call that you saw that steadily declined as the year progressed. You also mentioned earlier in the call that some of the uncertainty surrounding government regulation and taxes is causing some reticence among businesses. I'm wondering if those two are related. And also, as time progresses and as these fleet vehicles age, are we going to see them catch up with repairs, first, before they start replacing vehicles in those fleets?

Well, taking the first part, I don't think we have any statistical data that can make a direct correlation between the uncertainty surrounding what's happening in Washington -- and maybe some of the freighter transportation indices -- but one would have to think that there is some interconnectivity between those two. If people are deferring or delaying certain purchases, eventually that has to result in some downward movement in the amount of product that's being shipped.

The TSI index, just as a point of information, includes over-the-road trucking; it includes rail; and it includes barge, and includes aviation. So it's a pretty comprehensive index. And it has been showing signs of deceleration as the year progressed.

The second part, in terms of the continued aging of the fleet, at some point those vehicles are going to need some level of repair. What we have seen over more recent times is that if it affects safety or drivability, we are seeing expenditures being made. But if it is at all something that is discretionary, we see more judgment coming in in terms of whether or not the repair is going to be made.

So, I think as long as those vehicles continue to age, it will continue to drive demand for replacement parts.

Okay. The second area I wanted to get a little bit more color on was in the Office Products group. An earlier question hinted a little bit at it, but it seems to me that pricing pressure is going to continue going forward. And that the OfficeMax and Office Depot combination -- if it were, in fact, to happen -- would happen because they're seeking to get obviously some efficiencies of scale, and be able to better compete in the industry. Because you've got Wal-Mart stores; Costco; you've got Amazon all entering into that space.

So, your comments earlier said that you saw -- I think you said it was a 2.7% increase in pricing in Office Products during the year. And I'm wondering, is that because you are focusing in areas outside of what the other players are doing? As you mentioned, you are in furniture, and you are in cleaning and breakroom. And I'm wondering if those other competitors might start looking at those areas.

Well, we'll try to take them, maybe, in reverse order. In terms of the product categories that we are in, all of these companies are in each of these categories to one degree or another. In terms of the 2.7% inflationary impact in office products, that's calculated based upon manufacture price increases to us, not necessarily our price increases out to our customer base. And then looking at the potential acquisition or combination of Office Depot and OfficeMax, obviously they see enormous potential for synergies.

And I think they run into a number of different categories. They are not just purchase price synergies. And I think they're going to wind up being perhaps even greater in the non-procurement side of the business, just because of the redundancy that exists today with the two freestanding companies.

Okay. But it's still reasonable to assume that, with a company like Amazon getting into this space, we're going to see more pricing competition because of online getting into it.

Well, it would seem so. But keep in mind that we already are a provider of product to online resellers. Many of our customers have online presence. Staples, I think, would be second only to Amazon in terms of their online business. So the fact that we have a new entrant does not mean it's new to the industry. This is something that's been around for a while. And I think it's reasonable to say that they will put some pricing pressure in the different channels, but we've already been competing. And our customer set has already been competing with very, very good e-tail companies that are out there today.

Okay, great. And just a last housekeeping item, the $23.5 million gain from the pension that is in the SG&A -- I was wondering, is that divided up amongst the segments? Or is that primarily in the Automotive segment operating income?

All of the pension curtailment gain, the $23.5 million, is in the Other line. So it is not in the segments.

Okay. Very good. Thank you very much.

And that's all of the allotted time that we have for questions. I will now turn the call back to management for closing remarks.

Well, thank you all very much. We appreciate you joining us on the call today. We look forward to giving you more of an update as we work our way through the first quarter.

And we'll close, again, by thanking Jerry Nix for 34 outstanding years, and wishing him the very, very best in the years going forward.

I thank each of you as well. It's been a great ride. And you've got a great stock that you are holding here, and we look forward to continuing to progress.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.