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Genuine Parts Company (NYSE:GPC)

Q3 2010 Earnings Call

October 15, 2010 11:00 AM ET

Executives

Carol Yancey – Senior Vice President, Finance

Tom Gallagher – Chairman, President and CEO

Jerry Nix – Vice Chairman and CFO

Analysts

Tony Cristello – BB&T Capital Markets

Matthew Fassler – Goldman Sachs

Austin Paul – RBC Capital Markets

Elizabeth Lane – Bank of America

Gregory Melich – ISI Group

Scott Stember – Sidoti & Company

Keith Hughes – SunTrust

Brian Sponheimer – Gabelli & Company

Bill Selesky – Argus Research

Operator

Good morning. My name is Teresa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Genuine Parts Third Quarter 2010 Earnings Release. 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. I would now like to turn the call over to Ms. Carol Yancey, Senior Vice President of Finance.

Carol Yancey

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

Before we begin, please be advised that this call may involve forward-looking statements such as projections of revenue, earnings, capital structure and other financial items, statements on the plans and objectives of the company and 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 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’ve concluded our remarks we will look forward to answering any questions that you may have.

Earlier this morning we released our third quarter 2010 results and hopefully, you’ve had an opportunity to review them, but for those who may not have yet seen the numbers, a quick recap shows that sales for the quarter were $2,951 billion, which was up 13%. Net income was $131.8 million, which was up 22% and earnings per share were $0.83 this year, compared to $0.67 in the third quarter of 2009, and EPS increase was 24%.

So from our perspective we had another solid performance in the quarter and that now puts us up 11% in revenue through the nine months plus 19% in net income and earnings per share are up 20%. We are proud of the job that has been done by the GPC team through the nine months and as a result, we feel that we are well positioned as we enter the final quarter of the year.

In looking at the third quarter results by business segment, our two industrial related businesses continue to generate the biggest increases. Motion Industries, our Industrial distribution company was up 29% in the quarter and EIS, our Electrical distribution business was up 31%.

In the case of Motion Industries, they were up 9% in the first quarter then plus 26% in Q2 and now up 29% in Q3, so the year’s got progressively stronger for them. Certainly, the acquisition of BC Bearing earlier in the year has had a nice impact on the second and third quarter results.

However, when we back out the impact of the BC Bearing acquisition, the ongoing Industrial operations were up 23% in the quarter and this follows an 18% increase from these operations in the second quarter. So the underlying business remained strong and we continue to be encouraged by the composition and the distribution of the business.

A review of our top 12 product categories shows that all 12 were up double digits in the quarter and our top 10 industry groups had a combined increase of over 25% and each of our geographic regions had strong performances as well. So we continue to feel good about our Industrial operations and with the external indices like industrial production and capacity utilization continuing to look favorable at the current levels, we feel that they are position and turn in another solid quarter over the final three months of the year.

Our Electrical results were positively impacted by the acquisition of Seacoast wire and cable that was completed as of September 1st. Seacoast distributes specialty wire and cable primarily into the marine and land-based oil and gas exploration industries. It has annual revenues of just over $40 million and they will make a nice addition to our Electrical business.

Acquisitions added about 9% to our third quarter Electrical sales and increase in copper pricing added another 3%, which means that the underlying business was up 19% in the quarter, and as with industrial, the increase is broad based from a customer, product and geographic perspective. As a result, we continue to feel good about the job that’s being done by the EIS team and their outlook for continued progress in the months ahead is favorable.

Moving on to Automotive, we are pleased to report another solid quarter for this group. Our Automotive operations were up 7% in the quarter and this follows a 7% increase in the second quarter, and 6% increases in the first quarter of this year and the fourth quarter of last year. So we like the trend of consistency and stability that has been established over the past four quarters by our automotive team and our expectation is the more of the same in the quarters ahead.

Continuing a pattern that we reported in the second quarter, we were pleased to see both our company owned store group and the independently owned NAPA stores each grew at comparable rates in the quarter, indicating a good balance in our overall sales. Within our company store group, our commercial and wholesale business was up 9% in the quarter and you may recall that this follows a 9% increase in the second quarter, so we continue to make good progress in this important segment.

Retail business was up 5% in the quarter for our company store group and we’re showing steady improvement in growing our retail business. Within the commercial segment, our NAPA AutoCare and major account businesses were each up double digits, continuing a similar pattern from the second quarter and they were up double digits year-to-date as well. So we’re seeing nice growth in these two important segments of our commercial business.

Our fleet category, which includes the smaller independent contractors on up to the large over the road trucking companies was up mid-single digits and we are encouraged by the gradual sequential improvement that we have seen with these customers over the first three quarters of the year and based upon the increase in the truck tonnage statistics over the past few quarters, we think that this is sustainable in the months ahead.

Putting all together, we feel that automotive team has performed well through the nine months of the year and with the encouraging trends that we see in many parts of the business we would expect this to continue on into the fourth quarter.

And finally, a few comments about Office Products. This is the one segment of our overall company that is encountering the most challenging environment right now. S. P. Richards our Office Products Company was down four-tenths of 1% in the quarter and they’re down 1% year-to-date.

Our business with the independent Office Products resellers was up low-single digits once again in the quarter, continuing a very gradual sequential improvement that we have seen over the past few quarters, which is a bit encouraging. But this was offset by another double-digit decrease in our major accounts segment.

On the product side, office supplies and technology products had low single-digit decreases, while the cleaning and breakroom and furniture categories continued to show growth for us. The major issue facing the industry and S. P. Richards right now is office worker employment. There has been a significant contraction in the number of office workers over the past two years and this has resulted in a drop in consumption of office products across the industry. So it’s a challenging environment for our Office Products team but we continue to feel that they should turn modestly positive in the fourth quarter.

So that’s a quick review of the revenue picture for the quarter. At this point, we’ll ask Jerry to take a few minutes to review the financials. 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 come back for a quick recap and guidance update, and then we’ll open the call up to your questions.

(Inaudible) income statement shows the following, total sales were up 13% to $2.95 billion for the third quarter and as Tom mentioned, this follows a 12% increase for the second quarter. We’re encouraged to be able to continue our positive sales momentum this quarter particularly in our Industrial, Electrical and Automotive businesses.

For the nine months ended in September our sales now stand at $8.4 billion up 11% from 2009. Gross profit in the third quarter decreased 45 basis points to 28.9% of sales, compared to 29.4% in the third quarter last year, although down, this decline reflects a sequential improvement in our year-over-year comparisons.

For the year, gross margin $29.0 is now down approximately 56 basis points from $29.56 for the nine months through September last year. We’ve got work to do to improve our gross margins and our management teams are very aware of and focused on this challenge.

Overall, we believe there is opportunity for growth -- for future gross margin expansion. But that said, we are up against a very strong gross margin achieved in the first -- fourth quarter of ‘09, so to clarify, we did not expect to realize gross margin expansion in this year’s fourth quarter relative to last year. We do however believe that we’ll show sequential gross margin improvement from the third quarter.

For the year through September, our accounting pricing, which represents supplier increases to us was plus four-tenths of 1% in the Automotive, plus 2.1% in the Industrial, plus three-tenths of 1% in Office Products and plus 3.6% in Electrical.

Now let’s look at SG&A, for the third quarter SG&A expenses of $641 million were up 7.7% from $595 million for the same period in 2009. As a percent to sales this marked 110 basis point improvement to 21.7% versus 22.8% last year.

For the nine months in 2010, SG&A stands at $1.9 billion, 5.7% increase from the same period in ‘09 and a 22.1% of sales, which is 106 basis point improvement from last year. Decrease in expenses as a percentage of sales for the quarter and nine months is largely 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 that in the recessionary period of 2009, we eliminated over $75 million in operating costs. We feel we’ve done a pretty good job of keeping these costs out thus far in 2010 even with our strong sales growth. For example, over the course of 2008 and 2009, we reduced our employee headcount by approximately 12% and this was significant for us as payroll and related benefits running about 60% of our total SG&A line. This year through September, we’ve added back less than 1% of that headcount on 11% sales increase. So our deposition and control in this expense has been meaningful.

In the third quarter we also benefited from approximately $8 million in favorable adjustments associated with our pension and retirement plans, which we had not anticipated. Our July 1st actuarial review to re-measure our pension liability resulted in a $5 million benefit, while our quarterly retirement plan valuation adjustment produced a $3 million gain. We’re pleased with our progress in controlling costs thus far in 2010 and our management team remains focused on tightly managing our expenses going forward.

Now let’s look at segment information, Automotive had revenue in the quarter $1,481.3 billion, representing 50% of the total and that was an increase of 7%. They had operating profit of $124.1 million, an increase of 15%, so solid operating margin improvement from 7.8% to 8.4%.

The Industrial Group had revenue in the quarter of $921.2 million, represents 31% of the total and that was up 29%, operating profit of $72.9 million up 100%, so outstanding margin expansion there from 5.1% in ‘09 to 7.9% for this quarter.

Office Products, revenue in the quarter $434.5 million, representing 15% of the total and that was down four-tenths of 1%, and operating profit of $26.7 million, which was flat. So they did a good job on the slight decrease in sales, maintaining operating margin 6.1%.

Electrical Group had revenue in the quarter of $117.3 million, representing 4% of the total that was up 31%, operating profit of $8.4 million up 23%, so that margin still very healthy at 7.2% of sales.

Now looking at the nine months, Automotive had sales for the nine months $4,231.4 billion up 7%, operating profit of $339.0 million up 8%, so margins going from 7.9% to 8.0% for the nine months.

The Industrial Group, revenue for nine months $2,606.7 billion up 21%, operating profit $181.8 million up 78% and margins just 7.0%.

Office Products, revenue in the quarter, I mean, sorry for the nine months, $1,247 billion that was down 1%, operating profit was $93.7 million down 5% and operating margins for the nine months of 7.5%.

The Electrical Group, nine months revenue $324.2 million up 27%, operating profit of $22.2 million up 26% and operating margins just 6.8% for the nine months.

I want to mention again this quarter that in addition to our segment results just discussed, total net sales benefited from other sales line, which remains a much lower deduction from sales when compared to 2009. This line represents a net effect of discounts, incentives and freight billed and as freight expense increases with improved sales volume we have a lower deduction to sales. We continue to view this as a more normal range for this line similar to our deduction in 2008 and 2007.

Total operating profit margin for the third quarter improved 110 basis points from 7.9 -- to 7.9% from 6.8% in the third quarter of ‘09. For the nine months, our operating margin is up 60 basis points to 7.6% from 7.0% last year. Improved expense leverage associated with our sales increase well as our cost reduction efforts have driven the increase in operating margin for both the quarter and the year, and we are encouraged by this progress.

A net interest expense of $6.6 million and $20.0 million for the quarter and nine months, respectively, which is down slightly from same periods in 2009. We continue to expect our net interest to be $26 to $28 million for 2010.

The other category which includes corporate expense, amortization of intangibles and minority or non-controlling interest was $12.9 million expense in the third quarter and is $41.2 million for the nine months through September. This quarter expenses up approximately $13 million from the third quarter last year, primarily due to higher expenses for incentive based comp, such as bonuses and options, recorded in association with our improved earnings results. In addition, we are up against a $4 million gain on the buyout of leased assets recorded in the third quarter last year, as well as less favorable retirement plan valuation adjustment this quarter versus 2009.

For the full year, we currently project a total other category be in the $45 to $50 million range. For the quarter, tax rate was approximately 38.0%, which is consistent with last quarter and up from 36.9% in the third quarter last year. Increase in the tax rate from last year is due to the higher state income taxes and less favorable retirement plan adjustment just mentioned. Currently we expect the tax rate for 2010 to remain at approximately 38.0%.

Net income for the quarter was $131.8 million that was up 22%, EPS of $0.83 compared to $0.67 last year up 24%. For the year, net income $356.9 million up 19%, EPS is $2.25 compared to $1.88 in ‘09, which is up 20%.

Now let’s touch base on a few key balance sheet items. Cash at September 30th increased to $532 million, which is up $169 million from September 30th last year. We continue to build our cash position from increased earnings and an improved working capital position and as we’ll discuss in more detail later, we have used our cash to fund several ongoing priorities such as the dividend, capital expenditures, acquisitions and share repurchases. We add that in the third quarter we also used $27 million in cash to fund our pension plan as is actuarially required from time to time.

Accounts receivable of $1.39 billion increased 12% from last year on a 13% increase in sales for the third quarter. We’re pleased with the level and quality of our receivables and we remain diligent in monitoring the finance condition of our customers and their ability to pay. Thus limiting our exposure to write-offs and ensuring the adequacy of our reserve for bad debts. Our goal at GPC remains to grow receivables at a rate less than revenue growth.

Inventory at September 30, was $2.18 billion including $35 million in acquisitions but is down slightly from September 30th last year and down 1.4% or approximately $32 million from December 31st last year. We continue to manage this key investment tightly as we believe there’s more room for improvement.

Also able to improve our accounts payable position again this quarter with payables increasing to $1.37 billion, a 22% increase from this time last year and is up 25% from December 31st.

Our progress thus far in 2010 reflects the impact of increased inventory purchases associated with our higher sales volume this year, as well as extended terms and other payable initiatives with our vendors. Improvement in our accounts payable position, our based payable continued to improve and we remain pleased with the positive direction of this working capital category.

With our progress in the key areas of receivables, inventory and accounts payable, working capital of $2.67 billion at September 30th is up 3% from September 30th last year and is up 2% from working capital at December 31, ‘09, encouraged with our progress in managing working capital and our balance sheet remains in excellent condition.

We continue to generate solid cash flows, as I mentioned earlier our strong cash position provides us with the financial flexibility to consider many investment opportunities. After record year for cash flows in ‘09 we’re projecting another strong year in 2010 and currently estimate cash from operations of approximately $750 million and free cash flow after deducting CapEx and dividends of approximately $400 million. We are encouraged by the continued strength of our cash flows and remain committed to the priorities for the use of our cash.

These priorities, first, the dividend in which we paid every year since going public in 1948 and raised for 54 consecutive years. Our 2010 annual dividend were $1.64 per share was increased from $1.60 per share paid in 2009. Additionally, we continue to use our cash towards the ongoing reinvestment in each of our businesses, strategic acquisitions where appropriate and share repurchases.

Capital expenditures, $31 million for the third quarter is up from the $12 million invested in the third quarter last year. For the nine months in 2010 CapEx is $59 million, compared to $49 million in ‘09. We anticipate our CapEx spend to pick up over the second half of the year, so we’re on target with our planned investments. Currently we expect CapEx spending to be in the range of $85 to $95 million for the full year, vast majority of these investments relate to productivity enhancing projects primarily in technology.

Related depreciation and amortization $22.1 million in the quarter and $67.4 million for the nine months, which are both in line with the same periods in 2009, for the year D&A will likely hold fairly steady with ‘09 in the $85 to $95 million range.

Strategic acquisitions continue to be an ongoing and important use of cash and integral to our growth plans for the company. Seacoast acquisition mentioned by Tom marked our third acquisition for the year and we continue to evaluate additional acquisition opportunities as they present themselves.

We remain disciplined in our approach to this element of our growth strategy and generally target both to all types of acquisitions with annual revenues in the $25 to $100 million range, although there are certainly exceptions such as the BC Bearing acquisition earlier this year. We intend to follow a similar pattern of strategic acquisitions in the future and would add that we’re currently evaluating several opportunities.

In the third quarter of 2010 we used our cash to repurchase approximately 152,000 shares of our company’s stock under the company’s stock repurchase program. Year-to-date, we purchased approximately 1.8 million shares and today we have approximately 16.1 million shares authorized and available for repurchase. We’ve got no set pattern for these repurchases but we expect to remain active in the program because 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 September 30, 2010 remains unchanged at $500 million and includes $250 million, which matures in November 2011 and $250 million due in November of 2013. Total debt to total capitalization September 30th 15.3% and we’re comfortable with our capital structure at this time.

In closing, we are highly encouraged by the recent strength of our operations and we move forward in the final quarter of 2010 with great confidence in our growth strategies and the positive fundamentals of each of our businesses. While our comparisons get slightly more difficult in the fourth quarter following three consecutive periods of solid growth, we’re confident in our ability to drive continued improvement in sales and earnings in the fourth quarter and into 2011. We’ll continue to support our growth with a strong and healthy balance sheet, sound cash flows, further maximizing our return to shareholders.

This concludes our financial review. I’ll conclude my comments by expressing our appreciation to all of our dedicated GPC associates. Their hard work remains the foundation of our success and we’re very proud of this group. Also want to thank our customers and suppliers. We also appreciate their continued support. Tom?

Tom Gallagher

Thank you, Jerry. Well, that recaps our third quarter and nine month results and with the year-to-date sales up 11% and earnings up 20%, we feel that the GPC team has done a good job both on the operating side, as well as on the balance sheet side over the first three quarters of the year and we’re proud of their efforts.

Now, as far as the final quarter of the year is concerned, we would expect fourth quarter revenues to be up in the 9% to 11% range and that would put us up 10% to 11% for the year, which is an increase from our prior guidance. At the same time, we need to raise our full year earnings guidance going from $2.70 to $2.80 that was given at the end of the second quarter to $2.90 to $2.95 and we think this is more appropriate now. At the $2.90 to $2.95 level this would put us up 16% to 18% for the year, which we think would represent a pretty good performance by the GPC team.

At this point, we’d like to open up the call to your individual questions and we’ll turn it back over to Teresa.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Tony Cristello with BB&T Capital Markets.

Tony Cristello – BB&T Capital Markets

Thank you. Good morning, gentlemen.

Tom Gallagher

Good morning, Tony.

Jerry Nix

Good morning.

Tony Cristello – BB&T Capital Markets

I wanted to start off and Tom maybe this is a little bit bigger picture question, but when you look at your businesses today, it’s clear the adjustments you’ve made in auto are working. The late cycle Industrial business that you have continues to be quite impressive from a growth standpoint and I guess, the lag remains sort of the office side of the business for obvious reasons.

Are there any specific levers or initiatives that you can discuss in more detail that you may have underway that allow for an acceleration in growth in this segment, in spite of unemployment and some of the other macro factors we’re seeing today?

Tom Gallagher

Tony, I would say that we do think as I mentioned in my comments that we’ll turn modestly positive over the final three months of the year and at this point, our expectation is for low to mid single-digit growth in Office Products next year. We don’t expect significant improvement from the employment picture at least until the latter part of next year anyway and it’s going to be driven the growth that we do get, is going to be driven by some of the initiatives that are underway. I’d prefer not to get into the detail of those for competitive reasons.

But, we’re encouraged by the work that’s being done in a number of different areas by the Office Products team and actually feel like we put the worst behind us in that industry and while the recovery will be gradual, we are optimistic about a recovery in 2011.

Tony Cristello – BB&T Capital Markets

Okay. And when you look then at your other businesses, do you -- would you say that the recovery and the progression you’ve seen to date now is pretty much in line with where you would have expected or would you maybe think you are a little bit ahead or perhaps a little behind in any of the segments?

Tom Gallagher

I think in the case of the Industrial related businesses, we’re a little bit above where we would have thought, that -- both businesses, Industrial and Electrical have performed even above our expectations and we’re really proud of the job that those teams have done.

With that said, we’re optimistic that they’ll continue to perform well for us over the remaining months of this year and on into next but our comps get a good bit more difficult as we get into the second quarter of next year, but we’re optimistic about continued strong performance from both of those right now.

As far as Automotive, I think the team has done a really nice job of coming back from where we found ourselves about 18 months ago and our expectation is that they’re performing in line with where they thought they would be and will continue to perform about where we are right now, we think for the quarters ahead.

Tony Cristello – BB&T Capital Markets

Okay. And maybe one last question and maybe for Jerry, when you look at -- you talked about the headcount and SG&A up only modestly even as we alluded to (inaudible) the Q&A on your prepared remarks about growth of the business. And at what point do you see you having to maybe add back a little bit more aggressively on the SG&A front or have some of the changes or costs that you’ve taken out, are they more permanent in nature?

Jerry Nix

Difficult question to answer, Tony, some of it is permanent in nature because the rationalization of facilities and so forth. I don’t see us aggressively adding back. We’re going to resist adding back and we’ll add back as we have to if we see that we have service levels and so forth. But I know our folks out running these businesses are very cognizant of that and expense great and we talk about that at each of our meetings.

So I would not expect to see a big pick back up in our SG&A. I think that from a percent of sales basis, we will continue to show improvement, $75million last year that we took out, we thought that we might add maybe $20 to $25 of that back this year. But that we didn’t project the revenue growth being as strong in Industrial and Electrical as it is. So it may be a little north of that but at this point, I think we’ll continue to resist adding any of those expenses back and only put them back in when we have to.

Tony Cristello – BB&T Capital Markets

Okay. Great. Thank you very much guys.

Tom Gallagher

Thank you.

Operator

Our next question comes from Matthew Fassler with Goldman Sachs.

Matthew Fassler – Goldman Sachs

Thanks a lot. Good morning and congratulations on your strong results.

Tom Gallagher

Thanks.

Matthew Fassler – Goldman Sachs

The first question I’d like to ask, just follow-up on the Industrial business and the volume rebate story, obviously, this was a deficit for you in 2009. Can you talk about the degree to which you’ve been able to reclaim some of these and to what degree that’s worked into your 2010 outlook, please?

Jerry Nix

Matt, it is built in, we’re assuring, we are projecting some increase because business is up but we’re continuing to decrease the inventory in the Industrial sector at the same time. I would say if you look at the improvement in the Industrial profits that probably a third of their improvements has come from the improved incentives, a third of them from just pure leverage and a third of them from those permanent cost reductions that we talked about.

So we will have some lift in the incentives for the year, simply because of stronger revenue growth but I can’t quantify that for you at this time. I would say a third, a third, a third is probably a pretty good breakdown if you look at that profit improvement.

Matthew Fassler – Goldman Sachs

And Jerry, I know that your inventory has been lean all year in all of your businesses and I guess it was flat year-to-year despite the sales increases, what did your inventory look like year-on-year in Industrial?

Jerry Nix

We could be down probably $40 to $50 million there in Industrial and in Office Products maybe flat to up a little bit, Automotive maybe flat to up or down a little bit. So in total, we’ll still have an inventory decrease for the year but the significant decrease will be in the Industrial sector.

Matthew Fassler – Goldman Sachs

Got it. I guess the second question I have relates to Automotive, specifically you’re now starting to cycle some price cuts that commenced a year ago. Can you talk about how that’s flowed through your topline, how it’s flowed through your margin line and whether we’re now done essentially netting those into the numbers?

Jerry Nix

Well, as far as the known adjustments, Matt, I’d say we’re done but, you know, we found ourselves not being on the top of our game when we got into this a little over a year ago. So our folks are very, very vigilant right now, just watching what’s going on. I don’t know of anything currently that is in need of any adjustments. So I’d say that we’ve cycled the ones that we knew we had to do and what we’re seeing now is pretty much a comp performance year-over-year.

Matthew Fassler – Goldman Sachs

Great. And then my final question relates to cash deployment. Your cash flow generation is stellar. Your cash balance is way above where we thought it would be, part of that is working capital, part of it also was the relatively small buyback in the third quarter. And you have been pretty astute buyers of your stock, pretty consistently. What is your thinking about buybacks versus other uses of capital, given the cash flow is strong and the tone of business seems strong?

Jerry Nix

Matt, we will still be acquiring our stock. We have a couple of acquisitions that we hope may come to fruition between now and the end of the year or the first part of 2011. Our position has always been that we try to buy on weakness and our stock has moved up here in the second -- in the third quarter. So we didn’t jump in and buy a lot of it.

But if the stock stabilizes at a certain price and then it starts to back off. And our pattern has been that we’ll go back in and then buy off the weakness of that higher level. But we continued to view the stock as favorable and, frankly, if you look at the cash that we have and what we are earning on cash today with a dividend yield of about 3.5, 4%, then that’s a proper thing to do. But we’re being deliberate and trying to balance that against acquisitions.

Matthew Fassler – Goldman Sachs

Got it. Thank you so very much.

Jerry Nix

Bye. Thanks.

Tom Gallagher

Thank you, Matt.

Operator

Our next question comes from Scot Ciccarelli with RBC Capital Markets.

Austin Paul – RBC Capital Markets

Good morning, guys. This is Austin on for Scot today.

Tom Gallagher

Good morning.

Jerry Nix

Good morning.

Austin Paul – RBC Capital Markets

In the Automotive business, you provided some figures on the retail versus the commercial side and also on fleet. I was wondering if there was any additional color you could provide on retail versus commercial trends and also trends on the fleet side?

Tom Gallagher

Well, maybe we’ll take them in reverse order. In terms of the fleet, our fleet business really suffered last year as you may recall and we started to see a little bit of improvement in the first quarter. And then we saw sequentially further improvement in the second and on into the third quarter. We’re still only growing at mid single digits but certainly much better than what we experienced last year.

We look at different indices but one of the things we track is truck tonnage and truck tonnage last year was down 8%. We saw it finish the year in the fourth quarter flat then it was up about 4.5% in the first quarter and then through mid year it was up about 9.1% in the second quarter. So we see that as a positive and what we hear anecdotally from our people is that that should continue at least to be in a modest growth pattern for us over the remainder of the year.

Retail business in the second and third quarters was better than what it was in the first quarter. And we like some of the things we see with some of the initiatives that our merchandising team is doing right now. So we think that one will continue to perform at a reasonable level for us.

The commercial business has actually gotten progressively stronger as the year has gone on and that’s especially true in our two primary commercial programs, NAPA AutoCare and major account. And we just couldn’t be any proud of the job that our people are doing on the commercial side of the business. We were up 9% in both the second and third quarter. And we think that’s pretty good growth on the base that we have in the commercial business. And we’re optimistic that we can stay in and around that number going forward.

Austin Paul – RBC Capital Markets

Great. Thanks very much.

Tom Gallagher

Thank you.

Jerry Nix

Thank you.

Operator

Our next question comes from John Murphy with Bank of America.

Elizabeth Lane – Bank of America

Good morning, guys. This is Elizabeth Lane on for John.

Tom Gallagher

Good morning.

Elizabeth Lane – Bank of America

I just have a couple of quick questions for you. One is about margins, particularly for Auto and Industrial. And Auto margins have historically been as high as 8.5 to 11% even and in Industrial around nine. And I was wondering if you think we can get back to those levels any time in the next few years or if the competitive landscape seems to be such that it’s more unlikely to get back to that kind of range?

Jerry Nix

Elizabeth, it’s not in the cards for us to get Automotive margins back to 11 to 11.5%. Those were different times and it was different makeup of our Automotive sector. And also we had different competition at that time. I think we’ve shown improvement in the Automotive margins thus far this year. We’ll continue, I think to do that. Long range, our target for Automotive operating margins is to get them back to the 8 to 8.5% range.

Elizabeth Lane – Bank of America

Okay. Great. And my other question is because you’ve often given some expectations on growth for each segment broken out. And I was wondering if you have an update for those expectations?

Tom Gallagher

I can handle that, Elizabeth.

Elizabeth Lane – Bank of America

Thank you.

Tom Gallagher

For Automotive for the quarter, fourth quarter, we’re talking or thinking 6 to 8%. For the Industrial business, we’re thinking 18 to 22%. For the Office Products, flat to just up a bit, couple of points and then for the Electrical business, we’re thinking 25 to 30%.

Elizabeth Lane – Bank of America

Great. Thanks very much.

Tom Gallagher

Thank you.

Jerry Nix

Thank you.

Operator

Our next question comes from Gregory Melich with ISI Group.

Gregory Melich – ISI Group

Hi. Thanks guys. Couple questions. Wonder if you could just get into the gross margin a bit on the rebate issue and the mix. I mean, that’s the continuing to run down. Obviously, there was the repricing actions last year in Auto. Basically, if it wasn’t for the Industrial mix, would gross margins have been up if you look at the category level and was that basically driven by rebates?

Jerry Nix

No, Greg, rebates play a factor into that but our gross margin is under pressure in all of our businesses, Office Products and the Automotive and it’s driven by a lot of things, customer mix and competitive situations. You know, at the second quarter call, someone asked the question about how strong we were in the fourth quarter operating margin last year and that was a one-time large LIFO adjustment within the Industrial sector.

I think if you look forward, we made sequential improvement in our gross margin each quarter this year. We will not make that improvement in the fourth quarter. I think you can project out that we will be in 29.5 to 30% gross operating -- gross margin for the fourth quarter.

Gregory Melich – ISI Group

Great.

Jerry Nix

But it is not all rebate-driven. It’s a lot of factors that play into that.

Gregory Melich – ISI Group

Got you. And then the receivables were up 13%, was that basically Industrial or Auto? Where was -- what was driving that?

Jerry Nix

Actually, the receivables in total up, 12 on that 13% sales increase. But basically what happened is each one of them up a little bit in line with our revenue growth. You know, most of the time, receivables kind of play into whatever the last month’s sales growth was. And we had a strong sales month in September, so receivables are pretty much in line -- in each of the segments in line with the sales growth.

Gregory Melich – ISI Group

Okay. And which brings me to the last question which is can you help us on the quarterly -- monthly progression within the quarter in terms of sales?

Tom Gallagher

It was fairly consistent going through the quarter, Greg.

Gregory Melich – ISI Group

And that would have been true across the business lines or was there anything in auto that would have moved around at all?

Tom Gallagher

No. It was pretty consistent each month of the quarter.

Gregory Melich – ISI Group

Okay. Great. Thanks.

Tom Gallagher

All right. Thanks, Greg.

Jerry Nix

Thanks, Greg.

Operator

Our next question comes from Scott Stember with Sidoti & Company.

Scott Stember – Sidoti & Company

Good morning.

Tom Gallagher

Good morning.

Scott Stember – Sidoti & Company

Could you talk about on the Automotive side, were there any regions in the country that showed particular weakness or strength?

Tom Gallagher

No, not beyond the normal ranges that we see. You know, we have always got a couple that are a point or two above and a couple that are a point or two below the average. But no, it was a normal distribution for us.

Scott Stember – Sidoti & Company

And specifically, could you talk about California?

Tom Gallagher

Sure. California business is not bad.

Scott Stember – Sidoti & Company

Okay. And could you talk about maybe on the Auto side, how things have progressed so far into October?

Tom Gallagher

They are pretty much in line with what we saw through the third quarter on a monthly basis, so pretty consistent.

Scott Stember – Sidoti & Company

But the growth rates obviously get a little tougher?

Tom Gallagher

Well, the comparisons get tougher because we were up 6% in the fourth quarter last year and that was our best quarter of the year. That’s the quarter we started to make the turn. And as I said in my remarks, we went from -- we were up six in Q4, then six in Q1 and then seven in two and three of this year. The comparisons get a little tougher but as we also responded earlier in the Q&A, our expectation is to be up 6 to 8% in Automotive in the fourth quarter.

Scott Stember – Sidoti & Company

All right. And Jerry, you gave some initial, I guess, stab at what the office supplies would look like on a sales basis for next year. Could you provide the same thing for the Industrial segment?

Jerry Nix

Yeah. I think Tom did that. But yeah, I think we got -- you’re talking about going into 2011?

Scott Stember – Sidoti & Company

Yeah.

Jerry Nix

No. We don’t have any guidance to give out on 2011. We just now beginning our budgetary process and it will take some time to pull all that together. Frankly, we don’t see anything on the horizon right now that says it’s going to be any different other than the comparisons will be a little more difficult.

Scott Stember – Sidoti & Company

Okay. And last question on the office supplies, could you comment on the level of benefit that you saw last year from H1N1? And what kind of a headwind it created in the third quarter and maybe for the fourth quarter as well?

Tom Gallagher

I can’t give you the dollar amount but I can tell you that it clipped our, what we call our cleaning and breakroom supply category by 6 or 7% of growth that carried over last year into October and the early part of November. But the fourth quarter will be significantly less of a challenge than the second and third quarters were.

Scott Stember – Sidoti & Company

Great. That’s all I have. Thank you.

Tom Gallagher

All right. Thank you.

Operator

Our next question comes from Keith Hughes with SunTrust.

Keith Hughes – SunTrust

My question’s been answered. Thank you.

Operator

Next, we have a question from Brian Sponheimer with Gabelli & Company.

Brian Sponheimer – Gabelli & Company

Hi, good morning.

Tom Gallagher

Good morning, Brian.

Jerry Nix

Hi.

Brian Sponheimer – Gabelli & Company

Thank you again for the color regarding priority of cash deployment. I was curious as to what you’re seeing regarding behavior of targets from an acquisition standpoint, whether you’re seeing multiples potentially coming in or pricing becoming more attractive and that allowing you to become a little more aggressive in the coming quarters.

Tom Gallagher

Brian, I’ll try to answer that. I think we see opportunities within the valuation ranges that we think are appropriate for the shareholders of Genuine Parts Company. But we don’t see significant moderation in expectations. We see enough that we have got a few discussions that are going on that hopefully will lead to something positive.

On the other hand, we do see evidence of some private equity money coming back in. And we will have to wait a little bit to see what that does with valuations. But right now, we are optimistic about our ability to maybe get a couple of deals done over the next quarter or two. Keep in mind that the general range for our acquisitions would be 20, $25 million on up to $100 million. We’ll go above that but usually we’re in that lower range.

Brian Sponheimer – Gabelli & Company

Right. Understood. So in the absence, let’s say private equity money starts to tick up some of the multiples and make acquisitions too pricy, you will go immediately to the dividend or the share repurchase at 14 times here?

Tom Gallagher

That would be the normal thing, yeah.

Brian Sponheimer – Gabelli & Company

Okay. And then just one last, you gave pricing year-to-date. How did pricing compare in the quarter, Q2 or Q3 versus Q2?

Tom Gallagher

I can’t give it to you Q3 versus Q2 but I can give it to you for the year.

Brian Sponheimer – Gabelli & Company

And that would be great.

Jerry Nix

What we have, Brian, we had four-tenth of a percent in Automotive with one-tenth percent of that coming in Q3. Okay. Then in the Industrial side, we had 2.1 for the ninth months and 1.2% of that coming in the third quarter. And then Office Products was flat and at three-tenth of 1% and then the Electrical Group had 3.6 for the nine months with 1.3% of that coming in the third quarter.

Brian Sponheimer – Gabelli & Company

All right. That’s great. Thank you very much. Nice quarter.

Tom Gallagher

Thank you very much.

Jerry Nix

Thank you.

Operator

Our final question comes from Bill Selesky with Argus Research.

Bill Selesky – Argus Research

Well, thank you and congratulations on a strong quarter.

Tom Gallagher

Thank you.

Bill Selesky – Argus Research

I actually had two questions. The first being on vendor rebates during the quarter. I know vendor rebates normally affect you more in the Office Products and Industrial side of the business as opposed to Automotive. But can you just talk a bit about how things progressed during the quarter?

And my second question was on pension obligations. I think you made a voluntary payment in Q3. Could you tell me what you have left in 2010, if any and what the situation would be in 2011?

Jerry Nix

I’ll take that in reverse order. The pension, we don’t -- do not need to and will not make another contribution in 2010. The size of the contribution that we’ll be required to make in 2011, if any, will be dependent upon an actuarial calculation. And it frankly will be dependent upon a return of assets, the pension plan earned in 2010 and be dependent upon the discount rates that nobody knows where that will be at year end. So that one is low too much up in the air to give you an answer.

Bill Selesky – Argus Research

Okay.

Jerry Nix

So, we’ll make the required contributions whatever actuarially they come in and tell us that we need to make. And then your question about the incentives, just tell you how that works and what we do basically is we project out what we think the purchases of each of the business units are going to be for the full year. And then based upon the inventory turnover, how much of that would be required to be left into your -- in the value of the inventory. Then the difference there, we take that and we have to go through it and allocate out what we think will be an equal distribution for each of the four quarters.

We do the best we can there. And our audit firm comes in and reviews that behind us. But at the end of the day, that’s still an estimate. And so our folks that negotiate these plans with our suppliers based on percentages of what their purchases are and that’s all determined by how good business is and how we manage our inventory levels.

But I can’t really tell you each quarter how much that is or isn’t at this point. I hope that answered your question.

Bill Selesky – Argus Research

Yeah. That’s fine. I appreciate that. That’s very helpful. Thanks very much.

Jerry Nix

All right. Thank you.

Tom Gallagher

Thank you.

Jerry Nix

We appreciate all of you joining us on the call today. We appreciate your continued interest in and support of Genuine Parts Company. We look forward to talking to you when we have our year end and fourth quarter results. Have a good day.

Operator

This concludes today’s conference call. You may now disconnect.

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