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Executives

Carol Yancey – Senior Vice President Finance

Tom Gallagher - Chairman, President & Chief Executive Officer

Jerry Nix - Vice Chairman & Chief Financial Officer

Analysts

Matthew Fassler - Goldman Sachs

Scot Ciccarelli - RBC

Analyst for Tony Cristello - BB&T

Keith Hughes – SunTrust

Scott Stember - Sidoti

Analyst for Himanshu Patel – JP Morgan

Brian Sponheimer - Gabelli & Co.

Tim Culler – Barrow Hanley

Bill Selesky – Argus Research

Genuine Parts Company (GPC) Q1 2010 Earnings Call April 16, 2010 11:00 AM ET

Operator

Welcome everyone to the Genuine Parts first quarter earnings release conference call. (Operator Instructions) At this time I will turn the call over to our host, Ms. Carol Yancey, Senior Vice President of Finance. Ma’am, please go ahead.

Carol Yancey

Thank you. Good morning and thank you for joining us today for the Genuine Parts first quarter 2010 earnings call to discuss earnings results and the 2010 outlook. 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 the statements regarding the company and its business.

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

We will begin this morning with 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 with us this morning. As we customarily do, Jerry Nix, our Vice Chairman and Chief Financial Officer and I will split the duties on this call and once we have concluded our remarks, we will look forward to answering any questions that you may have.

Earlier this morning, we released our first quarter 2010 results and hopefully you have had an opportunity to review them. For those who may not have seen the numbers as of yet a quick recap shows sales for the quarter were $2.602 billion which was up 6%. Net income was $100.6 million which was up 13% and earnings per share were $0.63 this year compared to $0.56 in the first quarter of 2009 and EPS increase was 13%.

After the challenges that we encountered throughout 2009 we are pleased to report a positive quarter on the revenue quarter and pleased also to follow our 13% earnings increase in the fourth quarter of last year with another 13% increase this quarter. Admittedly we were going up against a very soft first quarter in 2009 but we think our results this year demonstrate continued sequential improvement and we are glad to start 2010 off with a respectable first quarter.

In looking at the individual segment results, our two manufacturing sector related businesses, industrial and electrical electronic showed very nice recoveries in the first quarter. Our industrial segment was up 9% in revenue and they generated positive sales results across most of their product categories and throughout the majority of their customer segments as well. It has been a number of quarters since we have been able to make that statement and we are encouraged by the broad base of their sales improvement.

As you will recall this is quite a contrast to what we experienced throughout 2009 and we feel it is the result of several factors. Certainly the comparisons are easier but additionally we feel it is partly attributable to individual growth initiatives within our industrial business that are showing nice results. These initiatives are product specific focused and target customer category focused and these efforts should have a positive impact throughout 2010.

Acquisitions helped as well, adding about four points to the overall revenue growth, another factor is the improving trends we have been seeing in the industrial production and capacity utilization figures. These are good barometers of activity levels within the manufacturing sector of the economy which is our customer base and historically these indices have been fairly reliable 6-9 month leading indicators for our industrial business. As reported in our prior two calls the indices bottomed out around mid-year last year and they have been showing a gradual improvement since. This improvement in our end market conditions appears to be fairly stable right now and is a positive indicator for our industrial business in the quarters ahead.

Before leaving this segment we do want to point out that we did complete the previously announced acquisition of BC Bearing on March 1. This is a well run, $140 million per year business and this acquisition strengthens our position in Western Canada and the northwestern part of the U.S. and we are pleased to have the BC Bearing organization now part of our industrial group.

Moving on to the electrical electronics segment this business was up 16% in the quarter. As with our industrial business we had easier comps to go up against and we also had some incremental revenue that came from a small acquisition that was completed January 1. Additionally the escalation in copper pricing was a factor. However, on a comparative basis our underlying business was still up mid single digits which we feel shows a respectable recovery in this segment.

We are encouraged by the fact the Purchasing Manager’s Index, which is a leading indicator for us, has shown steady improvement for eight consecutive months now creating a more favorable end market and this combined with the internal growth initiatives should enable our electrical electronics segment to perform well over the remainder of the year.

Our office products group ended the quarter down 1%. While still running a decrease the first quarter results continue a trend of gradual sequential improvement and our expectation is office products revenues will turn slightly positive in the next quarter or two. As far as the composition of our quarterly sales on the customer side the independent dealers were even with the prior-year in the quarter and the mega dealers were down 5 and both are improvements over the 2009 results where we saw our independent business down 5% for the year and the mega customers were down 10%.

On the product side we had increases in three of the four product categories; technology products, furniture and cleaning and break room supplies had quarterly increases ranging from 2% to 10% while the office product category which represents almost 50% of total business was down 5% in the quarter. So we have some work to do yet in this category but from an overall perspective while not yet back to where we need to be we do see signs of continuing gradual improvement within the office products results and as mentioned earlier our expectation is that their sales results will turn modestly positive over the next quarter or two.

Finally, automotive. After closing out 2009 with a 6% increase in the fourth quarter we are pleased to be able to report another 6% improvement in the first quarter of this year. Our favorable currency exchange added about 2% to our Q4 results and then 3% in the first quarter of this year. After struggling over the first half of 2009 we think we started to turn the quarter in the third quarter of last year and we feel we are positioned for solid growth in the quarters to come.

In looking a little bit deeper into the details, we were pleased to see that our company store group and our independently owned NAPA stores grew at comparable rates in the quarter which we feel indicates a good balance in our overall growth rates. Additionally every region in the country was positive again showing a broad performance base in the overall results which is encouraging. Within our company owned store group our commercial or wholesale business was up 8% in the quarter with our two most significant wholesale programs, NAPA Auto Care and major accounts both contributing nicely. Auto Care was up 7% and major accounts were up 9%.

Our fleet business which had been running double digit decreases throughout 2009 ended the quarter even with the prior year and hopefully this important customer segment is starting to stabilize for us. The cash or retail business in our company store group was only up 1% in the quarter. However, our cash business actually improved as the quarter progressed. After being down mid single digits in January we saw good sequential improvement in our cash business in February and March and hopefully this will carry over into the second quarter.

So putting it all together we are encouraged by our automotive results in the first quarter and we feel they are off to a good start to what we think will be a solid year for automotive in 2010.

That is a quick overview of our first quarter sales results. At this point we will ask Jerry to take a few minutes to comment on the financial performance.

Jerry Nix

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

A review of the income statement shows the following; total sales for the first quarter are up 6% to $2.6 billion. We are pleased to start the year with some positive sales momentum especially in industrial and electrical which show tremendous improvement following a very difficult year in 2009. Gross profit in the quarter decreased 70 basis points to 29.2% of sales compared to 29.9% in the first quarter last year. This decrease primarily reflects the pricing actions we took in our automotive segment the second half of last year as well as competitive pricing pressures in the office product segment which we see impacting our gross margin for the foreseeable future.

Despite this impact on our margin we are doing a much better job appropriately adjusting our pricing to remain competitive in the markets which is clearly helping our top line growth. We are making up for the decline on the gross margin line with cost savings and an overall improvement in operating expenses. So we remain focused on continued gross margin improvement in the long-term but expect this line to remain under some pressure over the next few quarters.

For the year through March our cumulative pricing which represents [the prior] increases to us was positive 0.2% in automotive, a positive 0.1% in industrial, negative 0.2% in office products and plus 1.0% in electrical.

Now let’s look at SG&A. For the first quarter SG&A expenses of $598 million were up 2% from $588 million in the same period in 2009. As a percent of sales this was down 103 basis points to 23.0 versus 24.03 last year. This decrease in expenses as a percent of sales is due to the benefit of greater leverage associated with our sales growth combined with our cost reduction efforts over the last few years. You may recall in total for 2008 and 2009 we reduced our headcount by approximately 3,900 employees or 13% of our total workforce. Thus far in 2010 our total employee count of approximately 29,000 is relatively consistent to December 31, 2009 even with our recent sales growth.

Our management teams remain focused on the ongoing assessment of appropriate cost structure in our businesses and the need for the future cost reductions while maintaining our high standard for excellent customer service. We recognize tightly managing our expenses again in 2010 remains absolutely essential.

Now let’s discuss the results by segment. Automotive had revenue in the quarter of $1,290,400,000 representing 49% of the total, an increase of 6%. It had operating profit of $88.9 million, up 2% so we had margin slippage from 7.2% to 6.9% of sales. The industrial group had revenue in the quarter of $803.3 million representing 31% of the total and was up 9%. Operating profit of $48.8 million up 43% so very strong margin improvement from 4.6% to 6.1%. Office products revenue in the quarter of $410.5 million, 16% of the total. They were down 0.5%. Operating profit of $36.6 million was down 6% so while operating margin remained strong at 8.9% they are down from 9.4% the prior year. Electrical group had revenue of $100.3 million, 4% of the total. Up 16% in the quarter. Operating profit $6.8 million, up 20% so a nice margin expansion to 6.8% from 6.6% the prior year.

We thought it would be worthwhile to note that in addition to our segment results just discussed total net sales benefited from the other sales line which was a much lower deduction from sales this quarter when compared to the first quarter last year. This line represents a net effect of discounts, incentives and freight bills and with freight up this quarter due to improved sales volume and discounted incentives being down we have the lower deduction to sales.

Total operating profit margin for the first quarter improved 20 basis points to 7.0% from 6.8% in the first quarter of 2009. The improved expense leverage associated with our sales increase particularly in our industrial businesses drove the increase in operating margins. We had net interest expense of $6.7 million which is down slightly from the first quarter in 2009 and we continue to expect net interest to be approximately $26-28 million for 2010.

Other category which includes corporate expense, amortization of intangibles and minority or non-controlling interest was $12.3 million expense in the first quarter, down approximately $2 million from the same period last year. The improvement on this relates to a $1.8 million favorable retirement plan valuation adjustment recorded this quarter compared to $3 million expense in the first quarter last year. The $4.8 million net valuation benefit was offset by the increase in incentive based compensation which we expected with improved results as well as higher legal and professional costs. Looking ahead we continue to project the other category to be in the $40-50 million range for 2010.

For the quarter our tax rate was approximately 37.9% which compares to 38.4% for the first quarter in 2009. The decrease from last year mainly relates to nondeductible expense associated with retirement plan valuation adjustments in 2009 that we just mentioned. Currently we expect the tax rate for the full-year to be approximately 38%. Net income for the quarter was $100.6 million, up 13%. Earnings per share of $0.63 compared to $0.56 last year was also up 13%.

Let’s touch base on a few key balance sheet items. Cash at March 31 increased to $334 million from $133 million at March 31 last year and remains consistent with our cash at December 31, 2009. As you may know we took a conservative approach in managing our cash in 2009. This approach has allowed us ample funding for ongoing acquisitions which totaled $66 million in the first quarter this year as well as dividends and capital expenditures. We expect to continue to generate consistently strong cash flows and expect our cash position to remain sound.

Accounts receivable of $1.3 billion increased 9% from last year including acquisitions on a 6% increase from sales in the first quarter and with March being the strongest sales month at a plus 11% on average daily sales. We continue to feel good about the level and quality of our receivables and remain diligent in monitoring the financial condition of our customers and their ability to pay thus limiting our exposure to write offs and ensuring the adequacy of our reserves for bad debts. At March 31, 2010 we are confident the company is properly reserved. Our goal at GPC remains to grow our receivables at a rate less than revenue growth.

Inventory at March 31, 2010 was $2.2 billion including acquisitions and is down 2% or $42 million from March last year. Compared to December 31, inventory is down slightly including acquisitions but down $23 million before those acquisitions which we believe reflects continued progress thus far in 2010. We will continue to manage this key investment tightly and show more progress over the balance of the year.

We were also able to improve our accounts payable again this quarter with payables increasing to $1.2 billion, an 8% increase from December 31, and up 23% from this time last year. Our progress this quarter was primarily due to increase inventory purchases associated with our higher sales volume for the quarter especially when compared to last March when volume was down and purchases especially low. With this improvement our days payable have improved to 56 days and we remain pleased with the positive direction of this working capital category.

Our progress in key areas of receivables, inventory and payables, working capital of $2.6 billion at March 31 is up 3% from March 31 last year and is consistent with working capital at December 31, 2009. We are encouraged with our progress in managing working capital and the balance sheet remains in excellent condition. We are continuing to generate solid cash flows and as mentioned earlier our strong cash position provides us with the financial flexibility to consider many investment opportunities.

After a record year for cash flows in 2009 we fully expect another strong year in 2010 and currently estimate cash from operations of approximately $650 million and free cash flow after deducting CapEx and dividends of approximately $300 million. We are pleased with the continued strength of our cash flows and also feel good about the priorities for the use of our cash. These priorities remain first the dividend which we have paid every year since going public in 1948 and raised for 54 consecutive years. As you may recall, at our February board meeting our directors authorized the increase in our 2010 annual dividend to $1.64 per share from $1.60 per share in 2009. Additionally, we will continue to use our cash towards the ongoing reinvestment in each of our businesses, strategic acquisitions where appropriate and share repurchases.

Capital expenditures were $9.9 million for the first quarter down from $14.1 million in the first quarter last year. We add however that this decrease relates more to timing than anything else as we have a growing number of projects that will be placed in service over the balance of the year. Currently we expect our CapEx spending to increase for the full-year to approximately $85-95 million with the vast majority of these investments associated with the productivity enhancement projects primarily in technology.

Related depreciation and amortization was $22.1 million in the quarter, down slightly from last year. For the year, D&A will likely hold pretty steady with 2009 in the $85-95 million range. Strategic acquisitions continue to be an ongoing important use of cash and are integral to our growth plans for the company. As Tom mentioned earlier we made two acquisitions thus far in 2010 and we expect these new operations to be slightly accretive to our earnings in 2010 although only minimally.

Acquisition opportunities continue to present themselves and we remain disciplined in our approach to this element of our growth strategy. We have generally targeted those bolt-on types of acquisitions with annual revenues in the $25-100 million range and although there are exceptions such as the BC Bearing acquisition we intend to follow a similar pattern in the future.

In the first quarter of 2010 we used our cash to repurchase approximately 242,000 shares of our company stock on our share repurchase program and today we have approximately 17.5 million in shares authorized and available for repurchase. Opportunistic share repurchases continue to be a priority for us but without a set pattern for repurchases and the tendency to buy on weakness, the recent movement in our stock price has slowed our repurchases thus far in 2010. Looking ahead we expect to remain active in this program as we continue to believe that our stock is an attractive investment and combined with the dividend provides the best return to our shareholders.

Total debt at March 31, 2010 remains unchanged at $500 million and includes $250 million which matures in November 2011 and $250 million due in November 2013. Total debt to total capitalization at March 31 was 15.7% and we are comfortable with our capital structure at this time. The company is stable, our balance sheet is strong and that provides us the ability to take advantage of growth opportunities in any economic environment.

In closing, we entered 2010 from a position of strength and with great confidence in our growth strategies and the positive fundamentals in each of our businesses. We believe we got off to a good start with a solid first quarter and are confident in our ability to drive sales and earnings growth this year. We will continue to support our growth with a strong and healthy balance sheet and sound cash flows further maximizing our return to shareholders.

This concludes the financial review and I will wrap it up by expressing our utmost appreciation to all of our dedicated GPC associates. We are very proud of this group and their efforts to help us perform through a very difficult year in 2009. We also want to thank our customers and suppliers. We appreciate their ongoing support.

Tom back to you.

Tom Gallagher

Thank you Jerry. That concludes our comments on the first quarter. We are pleased to get 2010 started off on solid footing. As far as the remainder of the year is concerned we feel it is still a bit too early for us to be making any significant changes to the full-year guidance provided in our February call. However, based upon the first quarter results it might be appropriate to increase the full-year revenue range from plus 2% to plus 4% to plus 3-5% largely driven by the improved performance in industrial and electrical and then to narrow the earnings range somewhat from the $2.52-2.70 provided in our last call to $2.55-2.70 and we will look forward to refining the range a bit more as we get another quarter or so under our belt.

That concludes our planned remarks. At this time we would like to open the call up to your individual questions. We will turn the call back over to the Operator.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Matthew Fassler - Goldman Sachs.

Matthew Fassler - Goldman Sachs

You alluded I believe to average daily sales in March being up about 11%. If you could share with us, that is obviously substantially stronger than the quarter overall up 6%. You intimated that automotive was somewhat better as the quarter progressed. If you could share with us the source of that strength and whether you feel it is indicative of what the quarter could look like.

Tom Gallagher

The quarter got a little bit stronger as we progressed through. We were impacted across all of our businesses by the weather we experienced in the early and mid part of the quarters and that had an impact on the January/February results but March was clearly the strongest performance in the quarter. The April results thus far in the month are in line with the March results so they are pretty encouraging as well.

Matthew Fassler - Goldman Sachs

On the gross margin if you could shed a little more light on some of the items you discussed? I am particularly interested in why if the automotive price cuts are one of the impediments to margin you didn’t seem to experience that kind of pressure in the second half. At least it wasn’t as visible as the second half of last year on the automotive operating income there might have been other things masking it, but if you could shed some light that it would be terrific.

Tom Gallagher

I will try to answer that. First of all the pricing adjustments that were done starting really in the second quarter of last year were done sequentially as the year progressed. So all price adjustments were not done in Q2 and Q3 last year. They were done over a period of time. What we have seen is that the ones that were done first are getting the kinds of results we had hoped to achieve and frankly what we needed to achieve.

If we look at our under car product category, for instance, that is where we took the first steps and some of the product categories that would be in the under car group would be things like brake rotors, brake drums, ride control, all of those lines are performing well and they are not a drag on the margin at this point.

Some of the lines that came later in the cycle and under hood might be an example where we adjusted more recently, ignition pricing we adjusted things like wire sets, our unit increases are up and are moving in the right direction but we don’t have the velocity yet that offsets the gross profit drag and that is where we are still facing a little bit of an impact. What will happen in our opinion is we think this will moderate as we progress through the months ahead. We think as we get towards mid-year and on into the third and fourth quarters this will not be a headwind and we should be stabilized from what we see now. The bulk of the adjustments that needed to be made have been made. There may be a little bit left but they are not as significant as the ones we have already adjusted.

Matthew Fassler - Goldman Sachs

You had some pressure associated with vendor rebates in the industrial business last year. Your industrial business seems to be, if anything, ahead of plan today. At what point can you start to recapture some of that gross profit margin in the industrial business?

Jerry Nix

We will have to judge that towards the end of the year. I can tell you that for planning purposes we are assuming the same rebates we earned last year in 2009. Your question earlier about the gross margin in the fourth quarter there were some unusual items. If you recall we picked up a significant amount from our LIFO [inaudible] in the fourth quarter last year due to the inventory reductions and we are not assuming that at this point this year but we are assuming the same rebates in industrial for 2010 that we took in 2009.

Matthew Fassler - Goldman Sachs

Is that based on the sales that you are tracking today? I would think those rebates are materially lower than what you had experienced really in any year prior to last year. So is there the potential you have some catch up in the industrial business if business remains good?

Tom Gallagher

There is the potential. We are not planning for it. If it happens that is great. The other side of it is we continue to work hard on the inventory levels and we continue to bring those down and that mitigates some of the revenue growth we are seeing in the industrial business.

Operator

The next question comes from the line of Scot Ciccarelli – RBC.

Scot Ciccarelli - RBC

Can you help clear up something regarding BC Bearing? I guess I don’t know the seasonality of that business but I would have assumed, just assuming a general run rate you would have about $12-15 million of revenue from BC in the quarter but if it was four points of growth it had to be closer to $30 million. Can you help clarify that?

Jerry Nix

There are two things. It is not just BC Bearing. We acquired a company called General Tool on May 1 of last year and that number is in that 4 point acquisition growth as well. Our numbers for BC Bearing were a little bit less than what you referenced but not materially so. It was more a matter of the General Tool and BC Bearing combined.

Scot Ciccarelli - RBC

A follow-up on Matt’s question just in terms of the industrial profits. They are down fairly materially in terms of the margins from what we saw say two years ago. I understand you are doing your inventory reductions but I would also think with all of the cost cuts there would be a lot of leverage in that particular segment without changing guidance obviously at this point. Can you just talk about the leverage potential in that segment that this point?

Tom Gallagher

I think the quarterly results demonstrate the kind of leverage we can get. They were up 9% in revenue and up 43% in operating profit so I think they got some pretty extraordinary leverage on that 9% sales number. We don’t…

Scot Ciccarelli - RBC

Is there any reason you should drop off from the current margin rate or should we expect it to kind of expand or at least stay the same or expand if we are to see kind of the same sales run rate we have seen?

Tom Gallagher

I think if the revenue numbers stay in line with what we saw in the first quarter then we can expect to have very, very strong profit improvement from the industrial business. Our issue right now is we are just pretty cautious in terms of what is going to happen in the manufacturing sector. What we are hearing from our customer base is they are optimistic about what they think could happen but they too are remaining very, very cautious and they are just not sure how long it is going to continue. The industrial production number and capacity utilization number that came out yesterday would give us some confidence it is going to continue for a few more months but we want to remain on the cautious side for right now.

Jerry Nix

I might also point out they had operating margin for the full-year in 2007 and 2008 of 8.4%. While that fell off dramatically last year to 5.6 we expect that to improve but keep in mind even with the sales improvement we are not back to the same sales volume they had back in 2008. It may not get back to the 8.4 this year but certainly it will trend back in that direction.

Operator

The next question comes from the line of Analyst for Tony Cristello - BB&T.

Analyst for Tony Cristello - BB&T

On the automotive business and the uptick in the cash portion as the quarter progressed, was there any particular product categories that surprised you in terms of the relative strength whether either in [inaudible audio]?

Tom Gallagher

I would say it is more in the hard part arena and I think the growth we had on the commercial side of the business would validate that. I mentioned our retail business and company store group was up only 1% for the quarter, sequentially improved from January through March but still was only up 1% for the quarter. So more in the hard part arena.

Analyst for Tony Cristello - BB&T

In terms of the wholesale business and the pick up there was the performance fairly balanced in terms of [inaudible audio] major accounts or was there one particular area that really [wasn’t] a strong contributor to that period?

Tom Gallagher

Our fleet business as we mentioned in our comments was flat for the quarter. We have to say we were pleased with that after running double digit decreases all of 2009. Seeing the fleet business come in even for the quarter gives us a little bit of encouragement. I would also add we see the truck tonnage numbers and they actually turned positive in December and then again in January for the first time in quite some time. We are hopeful that the fleet business has stabilized and perhaps we will even see a little bit of growth in that category as the year progresses.

As far as the other elements of our wholesale business our major account business was up 9%. Our Auto Care business was up 7% for the quarter. So we think pretty strong performances and they follow somewhat similar increases in the fourth quarter of last year so we like the trends we see in both of those categories.

Analyst for Tony Cristello - BB&T

In terms of the margin improvement in the fleet business do you have a sense of how much of that is coming from just greater utilization rates on your fleet customers or how much of that is just increasing confidence levels that are allowing them to become a bit more [inaudible].

Tom Gallagher

I don’t think I can answer that question. I don’t have enough detail to give you an intelligent answer.

Analyst for Tony Cristello - BB&T

On the degradation in auto margins year-over-year was that primarily a function of the accelerated rate in pricing resets as the year progressed or were there also any changes in product mix relative to last year that would impact that line item?

Tom Gallagher

It would be more the pricing adjustments that were taken than the mix. There was some element of mix but not a material impact. It was more the pricing adjustments.

Jerry Nix

On looking at this margin thing when we are talking about automotive keep in mind that in the first quarter last year we had very strong gross margins and the reason for that is we were coming off of historically high inflationary numbers coming out of 2008 in all four business segments. That is part of the reason for this gross margins fall off in the first quarter.

Operator

The next question comes from the line of Keith Hughes – SunTrust.

Keith Hughes – SunTrust

You talked earlier about the adjustments in pricing in automotive going on at various times last year. Are you planning any changes to that variety here in 2010?

Tom Gallagher

At this point nothing near the magnitude of what was done in 2009. If you remember back in the early part of last year we said we found we had allowed ourselves to get in a position where we were not as competitive as we needed to be and we had some things that needed to be done. We have pretty much accomplished the majority of that. So we will watch what happens in the marketplace and we monitor it on an ongoing basis and if we need to adjust we certainly will. I think the worst of the headwinds are behind us. As I mentioned earlier I think as we work our way through this quarter and on into the first part of Q3 I think we will see these things start to come back in line.

Operator

The next question comes from the line of Scott Stember – Sidoti.

Scott Stember - Sidoti

Did you give what the interest expense in the quarter was? I didn’t hear it.

Jerry Nix

Interest expense for the quarter was $6.7 million.

Scott Stember - Sidoti

Could you expand upon some of the initiatives you talked about that are having favorable results in the industrial and electrical segments? Just give a little bit more fleshed out?

Jerry Nix

The actual growth in the margins is more driven by the leverage we are gaining off of the revenue that they reported. All of our business units last year if you recall we took about $70-75 million in costs out of our SG&A in 2009. Thus far we have not really added that cost back and particularly in the industrial and electrical as our revenue has come back. They are operating off a lower expense base now and that is the reason for the expansion in their margin.

Scott Stember - Sidoti

On the installer side could you maybe give some anecdotal stories you may be hearing on how dealership closures is increasing customer base coming through maybe even some of the NAPA auto shops?

Tom Gallagher

That has happened is we have benefited from the dealership closures and we have benefited directly and indirectly and probably more on an indirect basis where any dealership that closed they non-warranty repair work that was being done there the majority of that has gone into the independent after market. We have an opportunity to capture some of that.

As far as the dealers that have converted and gone full bore into the repair side of the business we have a number of those that have aligned themselves with NAPA Auto Care and that obviously is a direct benefit for us. We think that will continue to be a good program for us as we work our way through the remainder of the year.

Scott Stember - Sidoti

On the competitive side, one of your major competitors has [inaudible] commercial business out on the West Coast in California in particular. Can you talk about how your sales are faring in West Coast and California?

Tom Gallagher

One of the West Coast businesses at the high end of our performance range. I mentioned in my comments we are positive in every one of our eight geographic regions and if we look at top to bottom the West Coast would be up near the top for us. I think we are holding up pretty well there actually.

Operator

The next question comes from the line of Analyst for Himanshu Patel – JP Morgan.

Analyst for Himanshu Patel – JP Morgan

I think you suggested that adjusting for currency automotive sales were up maybe an underlying 3% or so during the quarter. I was wondering what is your sense as to how this performance varies versus the competition? I am thinking in terms of market share.

Tom Gallagher

You are right in terms of the underlying business being up 3% X currency exchange. If we look at our same store growth we were up about 4% in the quarter on same store performance. I think as we see it now I think that will hold up reasonably well in comparison to others. We did not have a net gain in stores in the quarter. We actually had a 12-store reduction in the quarter. We did some consolidation and combination of stores but on a same store comparison it was up 4% which I think is reasonably good in this environment.

Analyst for Himanshu Patel – JP Morgan

If I remember correctly on the fourth quarter conference call you had guided to office product sales plus 3% year-over-year in 2010. Then after the first quarter minus 0.5% year-over-year performance what is your assessment of where you stand now in terms of that full-year objective?

Tom Gallagher

I think if we look at what we gave as guidance we gave a range and we said flat to up 3% for the year for office products. We are down actually 0.5% through the first quarter. We still think flat to up 3% is a reasonable expectation for office products for the full-year. As I mentioned a little bit ago we think we still start to turn positive sometime in the next quarter or two and then remain positive over the remainder of the year.

Operator

The next question comes from the line of Brian Sponheimer - Gabelli & Co.

Brian Sponheimer - Gabelli & Co.

Staying in office I believe you had said during the quarter furniture was up slightly but overall office products declined. Given the weak white collar employment environment could you maybe talk a little bit about why the furniture number showed some improvement?

Tom Gallagher

I can give you what I think may have happened. First of all keep in mind that we are coming off of some significant decreases in the first quarter of last year in the furniture category so the comps are a whole lot easier. I think that the work that is being done by the folks involved with the furniture category in our office product company I think they have repositioned the product line. They have done some nice things with it and I think they have just gotten some pretty favorable market response as a result of the hard work that has been done there.

Brian Sponheimer - Gabelli & Co.

Repositioning the product line. Could you elaborate on that a little bit?

Tom Gallagher

We have done some price point repositioning but more contributing to it has been the fact that we have added some additional SKUs. We have expanded some of the product offerings. We have added some additional private label programs. We have enhanced some of the marketing programs that our dealer customers are able to use. When we put it all together I think they just got pretty good market response to some of the things that have been done.

Operator

The next question comes from the line of Tim Culler – Barrow Hanley.

Tim Culler – Barrow Hanley

I want to clarify, [inaudible] on the pricing issues but I am a little confused. I thought Jerry said the pricing cuts at the auto and office were being essentially offset by cost reductions farther down the income statement. Then when Tom described it, it sounded as if he was saying the gross margin pressures would be offset as sales rebounded with a lag effect in response to the price cuts. So I am wondering did I misunderstand it? It seems to be one would essentially take care of itself and the other would require further efforts on SG&A and other to offset the margin pressure if the pricing continues to be soft for the foreseeable future as you said.

Jerry Nix

I think you heard both of us correct. I think Tom’s comments about making up for the gross margin thing on the volume side, hopefully that is going to happen. The other side is we are certainly going to try and continue to take costs out of our SG&A. So it is a combination of those things.

Tim Culler – Barrow Hanley

You expect the margins would hold if the pricing continues to be soft for the foreseeable future? You still expect to be able to offset it going forward? Is that correct?

Jerry Nix

That is correct.

Tim Culler – Barrow Hanley

I don’t know if I heard you correctly but did I hear you warming up to the idea of maybe doing more on the acquisition front than you have historically or am I just reading you the wrong way?

Tom Gallagher

We did a couple of acquisitions last year. We have completed two this year. One small acquisition in the electrical the first of the year. It is about a $9 million per year business. Then we referenced the BC Bearing acquisition that was completed the first of March at about $140 million. We have as part of our overall growth strategy we have an acquisition component and all four of our businesses are actively looking for things they think may make sense.

On an ongoing basis we are looking at different opportunities in the different businesses but we are fairly disciplined or at least we like to think we are in how we approach these and we will not consciously over-pay for anything. We have valuation formulas we stick pretty closely to and if we can find good, accretive, bolt-on type companies that we think make good fits for GPC then we will continue to try and add them to our portfolio of companies. I don’t think we are any more open minded. Certainly no less open minded about the acquisitions than what we have been.

We found last year for instance with them their valuations were still a little bit higher than what we thought were reasonable and they may be coming a little bit more in line with the range we think is reasonable in 2010 or at least we hope so.

Operator

The next question comes from the line of Bill Selesky – Argus Research.

Bill Selesky – Argus Research

On the gross margin line can you talk about the impact of incentives on the first quarter in particular?

Tom Gallagher

They were down slightly because of inventory reductions for the most part but they were a factor. Not a dramatic factor but they were a factor.

Bill Selesky – Argus Research

Secondly I just wanted to ask a question about the office products segment. You mentioned things should turn profitable next quarter or two. Can you tell me how pricing pressures relate to your feeling that things will get better over the next couple of quarters?

Tom Gallagher

I think we don’t see any evidence of pricing pressures intensifying. Our reasons for thinking that will turn slightly positive are based upon number one the comps are a whole lot easier compared to where we have been historically. Two, we see some stabilization in the white collar employment numbers. After declining over 2 million jobs per year in 2008 and 2009 we actually had a slight positive number for the first quarter of 2010 about 182,000 service sector jobs were added in the first quarter. So we don’t believe the downward pressures are going to be as great in the employment area as what they have been.

Lastly, some of the programs that the office products group has put together look encouraging to us. We talked a few minutes ago about what has happened in the furniture category. I think that should have a chance of continuing. A lot of good work is being done in the area of cleaning and break room supplies so we expect those numbers to hold up for us. Then I mentioned the core office supply category which is almost half of the business was off about 5% in the quarter and we think the team is working hard to find ways to bring that number back or at least get it slightly positive in the quarters ahead.

They are the reasons we think that business could get a little bit better for us but we are not looking for a dramatic turn. As I mentioned we are thinking still that flat to up 3% for the year is a reasonable expectation for that business and hopefully as we turn and get into 2011 we will get back to more historical growth rates.

Operator

At this time we will return the call over to the management team for closing remarks.

Jerry Nix

We appreciate those of you joining us on the call today. We also appreciate your ongoing and continued support of Genuine Parts Company. We look forward to talking to you in the future if something comes up. Otherwise we will be talking to you at our second quarter conference call. Thank you and have a good day.

Operator

Thank you for your participation in today’s conference call. You may now disconnect.

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Source: Genuine Parts Company Q1 2010 Earnings Call Transcript
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