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Executives

Carol Yancey - Senior Vice President of Finance & Corporate Secretary

Tom Gallagher - Chairman, President & Chief Executive Officer

Jerry Nix - Vice Chairman & Chief Financial Officer

Analysts

John Murphy - Merrill Lynch

Keith Hughes - SunTrust

Ryan Brinkman - JP Morgan

Brian Sponheimer - Gabelli & Company

Genuine Parts Company (GPC) Q2 2009 Earnings Call July 16, 2009 11:00 AM ET

Operator

Good morning. My name is Morris and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2009 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Ms. Carol Yancey, you may now begin your conference.

Carol Yancey

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

Before we begin this morning, please be advised that this call may involve forward-looking statements such as projections of revenue, earnings, capital structure and other financial items, statements on the plans and objectives of the company or its management, statements of future economic performance and assumptions underlying these statements regarding the company and its business.

The company’s actual results could differ materially from any forward-looking statements made due to several important factors described in the company’s latest SEC filings. The company assumes no obligation to update any forward-looking statements made during this call.

We will begin this morning with remarks from Tom Gallagher, our Chairman, President and CEO. Tom.

Tom Gallagher

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

Now earlier this morning we released our second quarter 2009 results and hopefully you’ve had an opportunity to review them, but for those who may not have seen the numbers as yet, a quick recap shows sales for the quarter were $2,535,000,000 which was down 12%. Net income was $103.6 million, which was down 22% and earnings per share were $0.65 this year, compared to $0.81 in the second quarter of 2008 and the EPS decrease was 20%.

In looking at the individual results by business segment, our automotive revenues were down 5%. This follows a 7% decrease in the first quarter, so while we still have a good bit of work to do within our automotive operations, we were encouraged to be able to show some improvement over the first quarter results.

Additionally, unfavorable currency exchange accounted for 3% of the second quarter decrease as well as 3% of our year-to-date decrease. Interestingly, our automotive performance improved on a monthly basis as the quarter progressed, which we were pleased to see and we feel that this is a result of some of the initiatives implemented earlier in the quarter.

Examples of actions that were taken in the quarter will be in the areas of pricing where adjustments were made to certain product categories where needed to meet market pricing, a heightened emphasis on the sale of specific product categories, friction, undercar and parts for imports would be examples and an increased focus on Napa Autocare and major accounts as well as all of our priority accounts with improved service and inventory availability.

We had positive results in each of these areas during the second quarter and we think that we will see residual benefit from these efforts over the remainder of the year. In our company-owned store group, our cash or retail business continued to outperform our wholesale or commercial business in the quarter as was the case in the first quarter.

However, we were pleased with the improved results in most segments of our wholesale business, primarily as a result of the initiatives mentioned a moment ago. The one segment of our wholesale business that continues to struggle is the fleet category. This would include customers ranging from contractor and landscape companies, all the way to large trucking companies.

As we pointed out in our last call, the fleet segment is an important part of our wholesale business, representing 20% to 25% and we were down low double-digits once again in the quarter. This category of customer has been especially hard hit by the economic slowdown but we do expect a bit of improvement over the next several quarters.

Our two largest wholesale programs of NAPA Autocare a major accounts and each of these important customer segments showed nice improvement during the quarter and we look to build upon this over the remainder of the year. So summarizing our comments on automotive, we’re not pleased with where we find ourselves at mid year which is down 6%.

However, we feel that we did make some progress during the second quarter in a number of areas and as we said in our last call, our expectation is to see a gradual and steady improvement in the results from our automotive operations in the quarters ahead. Moving on to industrial, it was another difficult quarter for these operations. After experiencing a challenging first quarter when we were down 16%, we saw a continued decline in customer demand and we ended the second quarter down 22% and we are now down 19% year-to-date.

The effects of the recession on the manufacturing segment of the economy, our customer base are widespread as evidenced in the industrial production and capacity utilization indices. The impact can be seen in our sales results by product category as well as customer segments. 11 of our 12 major product categories are down year-to-date and some substantially.

Most customer segments are down as well with automotive, iron and steel, equipment and machinery, and the housing and construction related segment all experiencing the steepest declines. We did see growth in food processing, beverage and some energy related segments, however.

Similar comments can be made about our electrical division, which is also directly tied to the manufacturing segment of the economy. After being down 25% in the first quarter, our electrical business also experienced a further drop off in demand and ended the quarter down 34%.

As with our industrial operations, the declines are spread across the breadth of product and customer categories. One observation on the industrial and electrical operations is that despite the steep declines, we did see a bit more stability in their sales per day in the second quarter than we experienced in the first quarter.

After dropping sequentially for four consecutive months, sales per day in May and June held fairly steady with the April numbers. The declines are in the low 20s for industrial and mid 30s for electrical. Clearly, these are dramatic decreases, but hopefully our experience over the past few months indicates that we are at or near the bottom in these two businesses, but until the economy shows signs of strengthening, we remain cautious in our outlook for these two segments of our Company.

Finally, a few comments about office products. After being down 7% in the first quarter, we ended the second quarter down 6% and we’re down 6% year-to-date. So we’re steady to modestly improving picture here and in view the continued declining trend in office employment numbers, our feeling is that this is probably a reasonable performance in the current office products industry environment.

Looking a little deeper into the numbers, although still running decreases, we did see some slight improvement in both the independent and mega dealer customer categories. The independents were down 3% in the quarter and are down 4% year-to-date, while the [megas] were down 10% in the quarter and down 15% year-to-date.

From a product category standpoint, our core office supplies and cleaning and break room supplies are generating positive results while technology products an furniture continue to have decreases.

As mentioned earlier, one of the key demand drivers for office products is service sector job growth. After many years of expansion, we have seen this number contract for six consecutive quarters now and in 2009 we have lost 1.7 million service sector jobs through June. This will continue to be a headwind for our office products business as we work our way through the second half of the year, but our office products management team remains focused on initiatives that will help to position them and their customers for solid growth as the economy starts to recover.

So that’s a quick overview of the sales results and Jerry will now discuss the financial performance. Jerry.

Jerry Nix

Thank you, Tom. Good morning. We appreciate you joining us on the call today. We’ll first review the income statement and segment information, then touch on a few key balance sheet and other financial items. Tom will comeback on for a brief recap and then we’ll open the call up to your questions.

I’ll view of the income statement shows the following. Total sales for the second quarter in 2009 were down approximately 12% to $2.5 billion. This quarter sales reflect a slight sequential improvement for automotive and office products offset by further declines in industrial and electrical.

Gross profit in the quarter was down approximately 30 basis points at 29.4% of sales, compared to 29.7% in the second quarter last year. Our gross margin year-to-date of 29.7% is down slightly from last year. These decreases are primarily driven by reduced volume incentives earned, which was caused by lower levels of purchases.

Reduced incentives account for $20 million and $40 million in lost gross profit dollars for the quarter and the six months respectively. Offsetting the negative impact of incentives are the ongoing benefits of last year’s product inflation and results of some of the margin initiatives we put in place. For the year through June, our cumulative pricing which represents supplier increases to us were down 1.5% in automotive, plus 2.10% in industrial, plus 3.0% in office products, and plus 2.1% in the electrical segment.

Now let’s look at SG&A. For the second quarter, SG&A expenses were $579 million, compared to $637 million last year a decrease of $58 million. For the six months in 2009, SG&A stands at $1.2 billion, down approximately $98 million from $1.3 billion in 2008.

Improvements in SG&A expenses are driven by the initiatives we’ve been implementing to reduce our cost structure. These initiatives include a reduction in headcount as well as other cost reduction efforts related to personnel, which was mentioned in our last call, such as facility rationalization, salaried pay freezes, the deferral of additional stock option grants, travel limitations and reduced retirement benefits.

During the quarter, we reduced our headcount by another 200 employees, for a total workforce reduction of approximately 1400 employees, or 4% of our headcount thus far in 2009. Combined with our workforce reduction efforts in ‘08, our total employment has been reduced by over 9% from the beginning of 2008.

In addition, we continue to see some savings from improved fleet management and a decrease in fuel and energy costs due to both lower consumption and lower cost. We estimate that in total, high cost reduction efforts have resulted in savings of approximately $24 million and $35 million for the second quarter and six months respectively.

We’ll remain diligent in managing our expenses and believe that we’re now on track to achieve cost savings of $55 million to $65 million for the full year, which is up slightly from our previous estimates. Additionally, we recognize one time cost savings of approximately $9 million in the second quarter, due to the curtailment of the company pension plan.

The workforce reduction has resulted in a corresponding reduction in retirement benefits for 2009. We expect to recognize an additional curtailment benefit of approximately $10 million over second half of the year and this is on top of the estimated annual expense reduction of $55 million to $65 million mentioned earlier.

As a percent of sales, SG&A increased 68 basis points to 22.8%, versus 22.1% in the second quarter of ‘08 and for the six month period SG&A is up 90 basis points to 23.4% compared to 22.5% last year. Increase for the quarter and year-to-date is due the loss of expense leverage on lower sales, which remains a challenge for us, despite our continued progress in reducing our cost structure.

Now let’s discuss the results by segment. Automotive had revenue in the quarter of $1,000,000,360.0 million, representing 53% of the total and that’s down 5%. Had operating profit of $117.8 million, that’s up 2% so we had nice margin expansion there from 8.1% to 8.7% of sales. The industrial group had revenue the quarter of $701.2 million, representing 28% of the total down 22%, operating profit 31.4% and operating profit decrease of 59%, so we had margin degradation, 4.5% of sales.

Office products had revenue in the quarter, $406.1 million, representing 16% of the total down 6%. They had operating profit, $33.7 million, down 10%, so slight margin deterioration there but still very strong at 8.3% to sales. The electrical group revenue in the quarter of $80.6 million representing 3% of the total down 34% and operating profit $5.1 million down 48%, margin still strong for that segment but down from 8.1% to 6.3%.

The six month information on the segments revenue and operating profit was in the press release that we sent out so we’re not going to cover that at this time, but if you have any questions on it, we’ll be happy to address that during the Q-and-A session. So in summary, our consolidated operating margin for the second quarter fell approximately 90 basis points to 7.4% from 8.3% in the second quarter of ‘08.

For the six months our 7.1% operating margin is down 100 basis points from last year. Decrease in operating margin is primarily the results of the deleveraging of SG&A expenses, particularly in our industrial and electrical businesses. We had net interest expense of $6.8 million in the quarter and $13.8 for the six months, which is down slightly from the same periods in ‘08.

We continue to expect that net interest expense to be in the range of $25 million to $30 million for the full year. The other category which includes corporate expense, amortization of intangibles and minority interest was $15.2 million in the second quarter, and $29.4 million through June. These costs are down from their respective periods last year due primarily to the positive impact of our cost reduction the efforts.

This line also reflects a favorable $3 million retirement plan valuation adjustment recorded in the second quarter, which basically reverses $3 million charge required for expand in the first quarter. This gain however would roughly offset by certain costs associated with termination of our construction and lease agreements, which we will discuss in a moment.

Through mid year, we continue to project a total other category to be in the $50 million to $60 million range for ‘09, which is improved from last year. For the quarter our tax rate was approximately 37.6% which is down from last year’s second quarter and the rate in the first quarter of 2009. This is due to favorable tax treatment on a $3 million retirement valuation adjustment noted above.

For the six months our tax rate’s approximately 38.0 which is up from last year, due the favorable tax impact on the sale of Johnson Industries during the first quarter in ‘08. We expect our tax rate for the full year ‘09 to be in the range of 38.0% to 38.3%. Net income for the quarter, $103.6 million, is down 22%. Earnings per share $0.65 compared to $0.81 last year was down 20%. For the year, net income, $192.8 million, is down 25%, EPS of $1.21 compared to $1.56 last year is down 22%.

Now let’s move on to discuss our balance sheet which remains very strong. We’ve been conservative in managing our cash thus far in 2009 and cash at June 30 increased to $239 million compared to $136 million in June last year and $68 million at December 31, ‘08. Our cash position remains strong and has allowed us ample funding for ongoing acquisitions, dividends and capital expenditures, as well as the company required pension contribution of $53 million made in the first quarter of this year.

With consistently strong cash generation even in this declining sales environment, we expect our cash position to remain sound over the balance of the year, although it could vary based on the timing of the investment opportunities that may arise. Accounts receivable decreased 8% from last year on a 12% decrease in sales for the quarter. Although we see room to show more improvement in receivables over the remainder of the year, we continue to feel good about the level and the quality of our receivables.

We also remain diligent in monitoring the financial condition of our customers and their abilities to pay. For 2009, our goal at GPC remains for our change in receivables to be favorable to our change in revenue, thus improving day sales outstanding. Inventory, 6/30/09 was $2.2 billion, that’s down 4% or approximately $100 million from the second quarter last year and down the same amount from December 31, ‘08.

We’ve shown steady improvement in our inventory levels for several consecutive years. We’ll continue to manage this tightly and expect to show more improvement on this line as the year progresses. Accounts payable was relatively unchanged from June last year and is up $54 million or 5% from December 31, ‘08. All days in tables was improved 55 days from 47 days last year.

Although the purchases are down in accordance with our lower sales and inventory levels, our ongoing negotiations to improve our payment terms with certain suppliers as well as the expansion of our procurement card program is proving successful and should enable us to maintain our days in payables for the full year. We’ll continue to make progress managing our working capital which was $2.5 billion at June 30, up approximately 1% from June 30 last year and down 3% from December 31, ‘08.

Increase from the second quarter last year reflects accounting for $250 million in debt as current liabilities at June 30, ‘08. As this debt agreement expired and was renewed at favorable rates last November, the $250 million was reclassified to long term debt in the fourth quarter so on a comparable basis, working capital June 30, ‘09 is down 8% from June of ‘08. So as you can see, our balance sheet remains in excellent condition. We continue to generate solid cash flows in our strong cash position provides us with financial flexibility to explore many opportunities.

After very good second quarter from a cash perspective, we currently expect our cash from operations to reach over $600 million in 2009, which is a significant increase from ‘08. After deducting capital expenditures and dividends, free cash flow should exceed $200 million, which would also be improved from our 2008 cash flow, even with a decline in sales that we’ve been experiencing.

Priorities for the cash remain first the dividend which we’ve increased for 53 consecutive years, represents a strong track record of consistent growth and dependability of an above average dividend yield which is currently 4.5% to 5%. The continued strength of our cash flow provides us utmost confidence in our ability to sustain our dividend record. Other priorities for cash include the ongoing reinvestment in each of the businesses, share repurchases and where appropriate strategic types of acquisitions in each of our business segment.

Capital expenditures for the second quarter excluding the purchase of assets under our construction lease agreement in June were consistent with last year’s second quarter at $22.1 million. For the six months of ‘09 CapEx of $37.0 million compared to $44.3 in ‘08. Related depreciation and amortization was $22.4 million in the quarter, $44.9 million for six months.

For the full year, we continue to expect our CapEx spending, before the construction lease transaction, to be in the range of $65 million to $70 million and we expect our D&A to remain relatively steady with ‘08 in $85 million to $95 million range. On June 26 of this year, the company’s construction and lease agreement expired and the lesser was notified of our intent to purchase the properties in this agreement for approximately $73 million.

At June 30, this purchase is accounted for on the balance sheet in net property plant and equipment and other current liabilities, as the amount due on the back was paid in cash in July after quarter end. Due to the non-cash nature of this transaction as of June 30, the purchase is not accounted for on a six month cash flow statement, but will be included in vesting activities next quarter. Strategic acquisitions also an ongoing and important use of cash and are integral to our growth plans for the company.

We closed on one heavy duty automotive acquisition in the first quarter and additional four bolt on type acquisitions this quarter. With two each in our automotive and industrial businesses, we expect these new operations to be accretive to our earnings, although any accretion would be minimal in 2009. We intend to follow a similar pattern with strategic acquisitions over the second half of the year. We remain disciplined in our approach to this growth strategy and we look forward to more success in this area.

Another priority for us, dating back to 1994, has been opportunistic share repurchases and although we’ve not made any share repurchases thus far in ‘09 we invested $273 million to purchase approximately 6.8 million shares of our company stock during 2008.

Today, we continue to have approximately 18.5 million shares authorized for repurchase. We have no set pattern for the repurchasing, but we expect to remain active in the program as we continue to believe that an investment in GPC stock along with a dividend provides the best return to our shareholders.

It’s probably important to point out here that thus far in 2009 we’ve been more focused on cash conservation as well as acquisition opportunities. With the economic uncertainties and historically low business valuation levels, we feel this is best way to manage our cash at this time. Balance in these considerations against share repurchases is an ongoing process we absolute believe that our stock is an attractive investment.

Total debt remains unchanged, $500 million although as mentioned earlier, the $250 million of current debt in the second quarter of ‘08 which expired in November of last year was renewed on favorable terms another five years and reclassified as long term debt during the fourth quarter of ‘08. Our $500 million in long term debt at June 30, ‘09 includes $250 million which matures in November of 2011 and $250 million maturing in 2013.

Total debt to total capitalization June 30, ‘09, 17.1% and we’re comfortable with our capital structure at this time.

Our balance sheet is strong and provides us the ability to take advantage of growth opportunities even in the midst of the current economic climate. Since our last report to you, we’ve remained intensely focused on the proper execution of our short and long term growth plans so that we can most effectively perform through this difficult economic cycle.

Although our overall results for the second quarter reflect the realities of cyclical industrial and electrical marketplace, we were able to show slight sequential improvement in our Automotive and Office Products businesses, and realize a sizable reduction in our expenses.

Going forward, we remain focused on those areas of our businesses that we have control of. We’ll support our cost reduction and growth initiative with a strong and healthy balance sheet and sound cash flows, further maximizing our return to shareholders. We’re absolutely confident in the positive fundamentals of all of our businesses and believe we will be a stronger company when the economy begins to turn. We want to express our appreciation to all our GPC associates for their efforts and to our customers and suppliers for they continued support.

Tom, back to you.

Tom Gallagher

Thank you, Jerry. So that recaps our second quarter and first half results. We said back in our February conference call, that we expected the first half of the year to be challenging and with sales down 11% year-to-date and earnings per share down 22% that is certainly proven to be the case.

As far as the remainder of the year is concerned, we anticipate that our automotive revenues will improve somewhat over the final two quarters of the year and we look for automotive to get back into positive territory in the second half. As mentioned earlier, we’re encouraged by the early results from some of the initiatives implemented in the second quarter and there are several more actions being taken in the third quarter that will help the automotive results.

Additionally, as most of you probably know, we’ve just named Paul Donohue he was the new President of the Automotive Parts Group. Paul is an extremely talented Executive who has capably handled increasing responsibilities since joining GPC in 2003, and he will keep the focus clear and the energy level high within our automotive operations. We’re pleased to have him in his new position. Now, as far as office products is concerned, we feel that their results will remain about the same as they have been through mid-year for the next few quarters. However, our expectations for industrial and electrical are a bit more cautious.

In our prior full year guidance of revenues, we said we would be down 5% to 8% and we had anticipated a bit of improvement in industrial and electrical as we approached the latter part of the year, but at this point, we think that it may take a little longer for these two businesses to start to rebound and with this in mind we feel that a full year revenue expectation of down 7% to down 10% would be more realistic at the time and as a result of this revenue revision, we would also want to narrow the range on the earnings side from prior guidance of $2.25 to $2.75, to $2.25 to $2.50, which is more in line with how we see things right now.

So that concludes our comments and at this point we’d like to take your questions and we’ll turn the call back over to Morris. Morris?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Murphy - Merrill Lynch.

John Murphy - Merrill Lynch

The auto operating margins were obviously a lot better than we were expecting and pretty impressive in the quarter given that the weakness. I was just wondering if you could break out, I mean actually, I look back and they haven’t been this good since the second quarter of 2004.

If you could sort of just breakout how much of this is cost cutting, how much of it is pricing and how much of it may be sort of a reemphasis your relationships with accounts and maybe product positioning. If you could just kind of bucket the magnitude between those three factors. I just really trying to understand if this is a sustainable level going forward.

Jerry Nix

John, this is Jerry. I’ll take that. The Automotive Group’s got started cutting their expenses earlier than the other businesses because their revenue was slowing prior to the slowdown in the industrial and the electrical side. So some of that is they had taken some severance and all that earlier than the others.

Another part of that is we sold our rotating electrical business last year in the second half of the year and that was a lower margin business, benefits thus the reason for getting out of it and so it’s a combination of those factors, but we have always been in the automotive sector, been able to operate much more efficiently there and slowdown revenue and I think this is just a reflection of that.

John Murphy - Merrill Lynch

When we think as the pricing adjustments that are being made in that segment, where is that? I remember in the last call, you were seeing some pricing pressure from competition in some larger items like rotors and stuff like that. Is that the still the case? The pricing adjustment that you've made, have you seen any type of competitive response there?

Tom Gallagher

I’ll try to answer that one John. Rotors was one example, ride control is another where we made some adjustments. Chassis products is another, some chemical product as well as some temperature control and what we've seen in terms of the results is that our unit sales on these product categories are now starting to really pickup and to get up to some pretty impressive levels.

We implemented ride control at the end of April and our June unit sales were up in the mid teens. We did chassis at the end of May and we saw impressive results in our June unit sales for chassis and the same can be said for the other two, the temp control and the chemical.

We've got a few more to do. We've got a couple of other actions that are slated for the third quarter. So, we always see competitive prices in the marketplace, but when we started to look at this, we found that we were a little too far out of line and we needed to do something about it and I think we're on the right track.

John Murphy - Merrill Lynch

Just lastly, maybe just staying on pricing throughout all segments, what is the pricing environment that you're seeing going forward? Are you seeing in the other segments more pricing competition and what are you seeing from sort of the supply side of the equation? Are you seeing prices ease as the environment remains tough and you're able to sort of take advantage of that spread? What's really going on with sort of your pricing versus your retail pricing?

Tom Gallagher

Well, in the non-automotive businesses, I wouldn't suggest that the pricing pressures are any more intense than what they are in automotive. I think automotive is very, very intense, but I would also say that we see more pricing pressure in those businesses today than we might have seen at certain times in the past and I think that's reflective of declining marketplaces in those other businesses and everybody's trying to do what they can to capture some market share.

As far as what we're seeing from our vendors, it varies by vendor. In some cases, we're able to work with vendors and find ways to lower the cost to handle the account and exchange that for some additional discounts. In other cases, we have to do it on our own until we can find a way to bring our purchase prices down, but it's pretty competitive in all four of the businesses.

John Murphy - Merrill Lynch

This is actually the last question. When we look at the cost savings that you're putting in place right now, assuming that the environment improves going forward in 2010 and 2011. How much of these cost saves, do you think you'll be able to capture in the next year or two or will there be some rehiring going on as demand hopefully really across the board for all your products starts to pickup?

Tom Gallagher

There will have to be some additions back to the headcount as volumes pickup for sure, but we think that will be lag somewhat the revenue improvement and then other things that we've done on the cost side or things like facility rationalizations, and transportation optimization and some other things along those lines that will in fact stay with us over the long term. So, we're mighty proud of the job that our folks have done, quite honestly. They reacted to this thing quite well and I think they've done in automobile job on the cost side with a few more things to come yet.

Operator

Your next question comes from Marc Andre - Goldman Sachs.

Marc Andre - Goldman Sachs

This is actually Marc Andre filling in for Matt. I just had a quick question. Is it possible for you to disaggregate the drivers of automotive, more specifically giving the detail behind the fleet pricing, Canada, Mexico, currency, selling versus sell-through in terms of contribution to the growth rate?

Jerry Nix

What are you looking for us? I didn't understand the question. Will you repeat that for us?

Marc Andre - Goldman Sachs

Yes, basically asking for the contribution to the automotive decline rate by segment, in terms of fleet, pricing, Canada…

Jerry Nix

We got it now.

Tom Gallagher

I got it now we apologize for not clearly grasping the question, but we mentioned earlier that currency accounted for 3% of the difference. The fleet side is between 2% and 3% impact on the revenue. Pricing is a point to a point and-a-half, so they would be the major contributors.

Marc Andre - Goldman Sachs

What the underlying international growth was, do you have an idea in terms of Canada, Mexico, ex currency?

Tom Gallagher

No, I don’t have that in front of me.

Jerry Nix

They’re doing a little bit better in Canada and about the same in Mexico in local currency, but we don’t have the opportunity to report that local currency.

Operator

Your next question comes from Scott Ciccarelli - RBC Capital Markets.

Ivan – RBC Capital Markets

Hey, good morning guys. This is actually Ivan sitting in for Scott. I just kind of wanted to touch on NAPA first off, if you don’t mind. Could you tell us beyond the comments you’ve already made what change changes would we expect to see from the management changes you made there. Just we saw that you had, as you mentioned putted a new President. Are there any other details we should be aware of, just from that perspective on NAPA?

Tom Gallagher

Well, the impact of Paul Donohue’s naming to the President’s position, we think will be very positive. As I mentioned, Paul is a highly energetic, highly focused individual and he will bring those same qualities to the team on the NAPA side.

You may know that in the interim, I have actually been working more closely with the NAPA side of the business and there are some other things that I’ve got responsibility for as well, so I’ve not been able to give 100% of my attention to the NAPA side. With Paul on the job now, he will be focused 100% and that we’ll see the benefit of that as the next two quarters unfold.

Ivan – RBC Capital Markets

Just a next question, if you don’t mind just a quick follow up. With regards to motion, have you seen any kind of stabilization in that particular business segment? Could you give a bit more color kind of on your outlook for the rest of the year?

Tom Gallagher

Sure, what we said in our comments is that after dropping on a monthly basis for four consecutive months, we saw the May and June results come in somewhat similar to the April results and that’s the first time we’ve seen that stability in quite some time.

Admittedly, these are at a very steep declines, we’ve seen low-20s for industrial and mid-30s for electrical, but our hope is that that’s indicative that we’re at or near the bottom and that we won’t drop significantly in the months ahead and we’ll look forward to hopefully having a chance as we get deeper into the year to maybe reduce the level of decrease.

We don’t see any significant change in the end markets in either case. Demand seems to be a bit more stable, but we don’t see yet any pickup in demand in industrial or in the electrical side.

Ivan – RBC Capital Markets

Understood, stabilization just kind of in summary stabilization perhaps at lower levels and somewhat slower growth going forward.

Tom Gallagher

That’s our sense right now and we’ll just have to see how the third quarter plays out.

Jerry Nix

Keep in mind; they were down 16% in the first quarter and down 22% in the second and there’s still so much uncertainty out there right now, you have to do just as Tom said. We think maybe 22, hopefully is the bottom.

Operator

Your next question is from Keith Hughes - SunTrust.

Keith Hughes - SunTrust

A question on the acquisitions you referred to earlier like about $100 million you spent on those, could you just give a little more detail on the revenue and what kind of businesses they were?

Jerry Nix

Keith, this is Jerry. Looking at the cash flow, where it shows $100 million, in that number, we have a company that we’ve owned for quite some time, above as repackage, and the other Napa member on the portion of that so we had minority interest. If you look, we had a much larger minority interest on your balance sheet in the past. We purchased their minority interest in June and that’s about $60 million of that number and the remainder would be for the acquisitions.

Keith Hughes - SunTrust

Okay. What kind of businesses were they?

Jerry Nix

We have one of them in the both automotive, are groups of stores and in the industrial side, in the industrial supply side of the business, so two industrial, two automotive.

Keith Hughes - SunTrust

Okay and the minority interest you purchased for $60 million, it's a repackage or is that what you said?

Jerry Nix

Yes, it's a company. We've owned that company and over the years all the other NAPA members owned it as well and we bought it from each one as we bought them, but they are still and NAPA member out there that we don’t know and they had a minority ownership and Balkamp. They decided, they wanted to sell it and we purchased it. That's an accretive deal for us.

Keith Hughes - SunTrust

Final question, automotive you’re talking about business perhaps turning backup in the second half of the year. Would margins, I assume raise from this level that we've seen in the last six months with a little bit of increased volume. Is there anything there that would detract from that?

Jerry Nix

I don't see it detracting. One of the things that, I should have mentioned when the question came up from John Murphy earlier about the improvement in the automotive margin. We had a pickup of about $9 million in the second quarter from this pension curtailment and we pushed that back to the individual operations and about half of that goes back to automotive. So, that's one reason for the significant improvement.

Certainly as revenue comes back, they will be able to expand their margins, but as Tom mentioned earlier, as revenue comes back we may have to start back adding some headcount, with part timers and so forth to service the customers and so I can't tell you that it's going to jump up. It's certainly not going to jump up because that's not the nature of the company, but we should see some improvement.

Operator

Your next question comes from Ryan Brinkman - JP Morgan.

Ryan Brinkman - JP Morgan

This is Ryan Brinkman for Himanshu. Could you please talk a little bit about what your sense is with regard to automotive segment market share trending? This seems to be an area of strong management focus coming out of the last quarter.

Also with regard to the naming of the new automotive division leader, should we take this as a sign of intensifying focus on automotive market share and if so, are there any specific strategies that you're ready to share that are being pursued or any kind of directional guidance you can give us in terms of how the think about your competitive position in the automotive business going forward?

Tom Gallagher

If we look back over several quarters, we would acknowledge that we have probably lost a little bit of share over the last three or four quarters. Prior to that, we were performing as well as or maybe better than some of our peer group companies, but the last couple of quarters we would say that we did lose a little bit of share.

I think that the second quarter results would indicate to us that we're moving in the right direction, but we still have a further way to go. We need to continue to push some of the initiatives that we put in place in the second quarter and to launch some of the ones that I referenced will come in the third quarter.

As far as naming Paul Donohue to the President's position, yes it is recognition of the significance and importance of the automotive business to Genuine Parts Company, it's 53% of our total company revenue.

Paul as I said, he’s one of our very best executives and fortunately he's had a chance to work around the automotive business for the last two years and we've taken the best we have and put him in charge of the automotive parts group in expectation that we will continue to make the progress that we think we started to make in the second quarter. As far as specific strategies, I don't think we would want to get into the detail of those on this call.

Ryan Brinkman - JP Morgan

Just secondly, if you could talk just very briefly about the potential impact if any that you see of a government scrapping incentive program for new light vehicles on the automotive business going forward. Generally, we've tended to think that any impact would be seemingly negligible, given that the decrease in age of the vehicle parts would be potentially in [Inaudible] context of 250 million cars parked out there on the road. Are we directionally correct thinking about that? Is that how you guys are approaching this?

Tom Gallagher

Absolutely, any study that we've seen shows that it will be very, very small in terms of impact, because of the size of the fleet, as you referenced, 251 million vehicles. It's also interesting to see that while it has had some impact in the short term in Europe. It has not had the effect longer term that the European governments were hoping for. So, this will be very, very minor in terms of impact in our opinion.

Operator

Your next question comes from Brian Sponheimer - Gabelli & Company.

Brian Sponheimer - Gabelli & Company

Can you give us a breakdown of what you experienced regionally in automotive, Northeast, Southeast, West, Southwest.

Tom Gallagher

Sure, the strongest areas for us would be the Northeast, the Midwest, the mountain states; the Northwest and the ones that continue to have the most difficult time would be the Southeastern area and out into California, Arizona, Nevada and those areas there. We see a little bit of slowdown in the Southwest, we think mostly driven by the decline in energy prices, but the biggest impact would be in the Southeast and California.

Brian Sponheimer - Gabelli & Company

Are you seeing any pricing pressure from competitors there that would exacerbate any weakness?

Tom Gallagher

No, none beyond what we see in most places.

Brian Sponheimer - Gabelli & Company

Okay. Moving along just what opportunity exists on picking up parts distribution to dealers either becoming used car dealers or service shops, basically stranded dealers from GM or Chrysler. Have you seen any stranded dealers looking to Napa to source parts?

Tom Gallagher

The opportunity we think is real and many of these dealers have decided that they’re going to stay in the used car business and that they’re going to run a full-fledged multi-brand service facility and yes, we have seen a number of these dealers have an interest in aligning themselves with Napa and we also see some of the existing vehicle dealers that have expressed an interest in owning some Napa stores, so we think this is a net positive for us.

Brian Sponheimer - Gabelli & Company

Okay and one last question, on the office and industrial side are you getting any sense that inventory adjustments are complete with your customers and like auto production, there maybe a sequential pickup, however small just simply on right-sizing inventory?

Tom Gallagher

We do think that the inventories are pretty lean as we go out the supply chain and we do think that with an increase in demand, there should be a very, very near term pickup in outbound sales for us.

Carol Yancey

This is all the time that we have questions for. We appreciate all of you joining us today. We will look forward to talking to you in the future and we appreciate your ongoing and continued support of Genuine Parts Company.

Operator

And this does conclude today’s conference call. You may now disconnect.

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Source: Genuine Parts Company Q2 2009 Earnings Call Transcript
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