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Executives

Carol Yancey - SVP of Finance

Tom Gallagher - Chairman, President and CEO

Jerry Nix - Vice Chairman and CFO

Analysts

Tony Cristello - BB&T Capital Markets

Jonathan Steinmetz - Morgan Stanley

Keith Hughes - SunTrust

Michael Ward - Soleil

Genuine Parts Company (GPC) Q4 2007 Earnings Call February 19, 2008 11:00 AM ET

Operator

Good morning. My name is Carrie and I will be your conference operator today. At this time, I would like to welcome everyone to the Genuine Parts Company quarterly earnings call. (Operator Instructions).

Thank you. I would now like to turn the conference over to Carol Yancey, Senior Vice President of Finance. Ms. Yancey, you may begin your conference.

Carol Yancey

Thank you. Good morning and thank you for joining us today for the Genuine Parts fourth quarter and year-end conference call to discuss our earnings results and the outlook for 2008.

Before we begin today, 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 the statements regarding the company and its businesses. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during this call.

We will begin this morning with 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 fourth quarter and year-end 2007 results and hopefully you had an opportunity to see them. But for those who may not have seen the numbers as yet, a quick recap shows sales for the quarter were $2.627 billion which was up 3%.

Net income was $126.1 million, which was up 6% and earnings per share were $0.75 this year compared to $0.70 in the final quarter of 2006 and EPS increase was 7%. So, while we did see a slight softening on the revenue side from the first three quarters, we were pleased to still be able to get some operating leverage with net income up 6% on the 3% sales increase.

For the year, our sales were $10.843 billion, up 4%. Net income was $560.3 million, which was up 7%, and we earned $2.98 per share this year compared to $2.76 in 2006 and the increase in EPS was 8%.

So it turned out to be another record year in sales, net income and EPS for our company and we are proud of the job that was done by the GPC team.

Looking at the results by segment, the Industrial and Electrical operations continue to produce the strongest results. Industrial sales were up 7% in the quarter and they were up 8% for the year. You may recall that this follows three consecutive years of 11% growth from our Industrial group. So, the Industrial business has been strong for sometime now and we are pleased with the ongoing strength in their performance.

Geographically, we had some differences in growth rates with the West, Southwest and Canada turning in the biggest increases, but all parts of our country experienced positive results. And the same can be said by major product category. Some growing at a faster rate than others, but progress was made across each of the product groups. And as far as customer segments are concerned, we saw a solid growth in areas like equipment, machinery, food products, food processing, chemicals, energy which offset softer results and segments like automotive, pulp and paper and housing-related segments.

When we put it all together, we are pleased with the Industrial group's performance and we feel that they are positioned to turn in another solid year in 2008.

The Electrical segment's results closely track Industrial. They were up 6% in revenue in the fourth quarter and they ended the year up 7%.

As with Industrial, this was the fourth consecutive year of good results from the Electrical operations and they experienced consistent growth geographically as well as across their key customer base. And we are optimistic about their prospects for 2008. External industry factors remain favorable for our Electrical group and their internal growth initiatives were generating positive results. So, we are looking for another solid year from this team in the year ahead.

Moving onto Office Products, 2007 was a challenging year for these operations. After starting the year with a 3% decrease in the first quarter, they were able to finish just slightly on the plus side in the second and third quarters, but then experienced a 1% decrease in the final quarter and they ended the year down 1%.

Following three solid years from the Office Products' teams in 2004, '05 and '06, the 2007 results were not up to expectation, but they are reflective of the overall slowdown experienced throughout the office products industry. And looking across their customer base, we were pleased to see a 4% increase from their independent office products resellers, which is encouraging. But this was offset by a 9% decrease with the mega channel customers.

On the product side, core office supplies and cleaning and brake room supplies had positive results for the year, while tech products and office furniture experienced low-single-digit decreases.

So, 2007 turned out to be a challenging year for our Office Products' team, but they have solid plans and initiatives in place for 2008 and despite the ongoing softness in the industry, we are anticipating somewhat improved results as 2008 progresses.

And finally a few comments about our largest segment, Automotive. Sales for this group were up 2% for the fourth quarter and Automotive was up 2% for the year. Core NAPA operations were up 3% for the quarter, as well as being up 3% for the year, with the difference being due to the continued downsizing of Johnson Industries.

And this might be an appropriate time to give you an update on the status of Johnson. As of February 1st, we completed the transaction to sell two of the three remaining JI locations, which we are pleased to get done. This leaves us with one remaining operation and it is our expectation that we will sell this last one during the second quarter. It is the long process, but we are pleased to be nearing the end and while we will incur some first quarter expenses relating to the sale, we will see benefits from these transactions as the year progresses.

Now as far as some additional insight into the NAPA results, our company-owned store group grew about 1% faster than our independently-owned stores and company-owned stores represent approximately 37% of the total volume. Cash, business and commercial, each grew at 3% for the year and we are pleased to see the balance in these results. Our major account business was up 3% for the year and this important customer segment was actually up 5% over the second half of the year. So, we saw some acceleration in the growth rate in the second half and we look for continued growth in the major account segment at 2008. Our Auto Care business was off 1% in 2007, but we did see positive growth from this important customer segment in the fourth quarter, which we feel will carryon throughout 2008.

Now, one area that we did not do as well this year was new distribution. Although, we did open a number of new stores throughout the year, we actually experienced a net reduction in stores over the second half of the year due to consolidations and closures. And we ended 2007 with 12 fewer stores. Certainly, not up to expectations and this is something that the Automotive team has committed to correct in 2008, and we were encouraged by the 10 new stores that were opened in January.

2007 was an interesting and challenging year for the automotive aftermarket in general, due to industry-wide demand moderation that was evident throughout the entire year. And as evidenced by our 3% growth in our core Automotive operations, we were impacted as well. However, we are not satisfied with the 3% sales increase. We are a bit encouraged by the relative consistency of our automotive increases on a quarterly basis in 2007, and we think that effective execution of our key growth strategies will yield improved results in 2008.

Before concluding my remarks, I would like to give you a quick comment on our Heavy Duty Truck Parts and Import Parts initiatives. You may recall that we stared the Heavy Duty business in the first quarter of 2007, and over the remainder of the year, we worked our way through the normal start up initiatives and challenges. We are pleased with our current situation in 2008. It will be an exciting year for our Heavy Duty team.

On the Import Part side, late in 2005, we acquired a royalty interest in [Altrum], a Western Canada based distributor of parts for Asia and European vehicles. We have been pleased with our experience with this business to date, and as of the first of the year, we acquired the remaining ownership of [Altrum], as with it the heavy duty business, we see significant growth opportunities here and over the course of 2008, we will complete the [Altrum] program roll-out across the NAPA system.

Strong growth from the heavy duty truck parts and import parts initiatives will help offset much of the loss of the Johnson Industries revenue in 2008, and they will be significant contributors to our overall automotive growth in 2009 and beyond.

At this point, I'll turn it over Jerry to cover 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. We'll be brief and then open the call up to your questions. View of the income statement shows the following: Total sales for the fourth quarter were 3% to $2.6 billion and we finish the year up 4% at $10.8 billion.

Our fourth quarter was not too different from the circumstances we experienced throughout the year, so our results were pretty consistent from quarter-to-quarter in 2007. Not growing at the rate we like to see over the long-term but still this was another record sales year for us, and we remained optimistic about the opportunities we have to continue to show solid growth in 2008.

We are very proud of the GPC team for their accomplishments and continued commitment to sales growth. At December 31, the company reclassified certain warehousing, distribution and handling cost from operating expenses to cost of goods sold.

You may have noted this disclosure on our income statement in today's press release, and we will present a five year historical schedule of adjusted cost of goods sold and operating expenses, as well as the 2006, 2007 quarterly reclassification in our 2007 annual report.

We can also send this schedule to you in advance of the annual report, and if you like just let us know. For '07 and '06 these costs amounted to $176 million and $171 million, respectively. And we are $43 and $41 million in the fourth quarter of 2007 and 2006, respectively. Our comments regarding gross margin and operating expense will reflect these changes.

It should be noted, however, the sales, operating margins, net income and EPS were not affected by this reclassification. Gross profit in the quarter was 29.62% to sales, compared to 30.46% in the fourth quarter last year.

Fortunately, we had improved our gross margins in each of the first three quarter of the year. So, year-to-date gross profit was relatively consistent for last year 29.67%. We are pleased to maintain our gross margin but believe we can be doing a better job here and see opportunities to show additional progress on this line going forward.

We continue to focus on the multitude of factors impact in these margins, including product and customer mix, as well as, our global sourcing initiatives. For the year, our cumulative pricing which represents a prior increases to us is up 1.6% in automotive, 4.7% in industrial, 3.0% in office products, and 5.1% in electrical.

Now let's look at SG&A. For the fourth quarter, SG&A the percent of sales were relatively constant with the same period in '06, at 21.88%. And for the full 12 months in 2007, was 22.14% down 17 basis points from the prior year.

We feel very good about our progress on this line. We would add that many of our cost in areas of insurance and benefits seem to stabilize in 2007, something we are very pleased to see. So, with our '07 results, we have now reduced our SG&A the percent of sales for four consecutive years. We'll continue to intensely manage all the costs in our businesses, and look to extend this positive trend into 2008.

For the quarter, and for the full year, our tax rate was approximately 38.0%, which is down from 38.3% and 38.4% for the fourth quarter and full year in 2006. This is due mainly to the lower state taxes, favorable tax rate changes in Canada, as well as foreign tax credits.

The tax rate for 2008 should be about the same as 2007, but can change on quarterly basis. Net income for the quarter of $126.1 million, was up 6%. Earnings per share of $0.75 compared to $0.70 last year, up 7%. For the year, net income of $506 million was up 7%, earnings per share of $2.98 compared to $2.76 in 2006, up 8%. This represents another record level of earnings for the company and relative to our 4% top-line growth, we feel pretty good about this conversion.

Now, let's discuss the results by segment. For the fourth quarter, automotive had revenue $1,274.3 million; that was up 2%. Operating profit, $87.5 million, up 11%; so margin expansion there to 6.9%. For the full year, automotive had revenue of $5,311.9 million, representing 49% of the total, it was up 2%. Operating profit up 3% at $413.2 million, so margin expansion only here from 7.7% to 7.8%.

The industrial sector for the quarter, had revenue of $828.3 million, that was up 7%. Operating profit down 1% at $77.4 million a degradation from 10.2% to 9.3%, I would point out that last year in the fourth quarter the industrial sector was up 27% and the difference between now and at that time the industrial group had reduced the inventory about $50 million in '04, '05, and '06. And we got into the LIFO (inaudible) and picked up income there. And so, the impact of that inventory gains in LIFO was about $8 million in the quarter. So, that would explain the decrease there in the fourth quarter operating profit.

Now, for the year, the industrial group had revenue of $3,351.0 million representing 31% of the total, up 8% operating profit of $281.8 million and that's up 10%, so their margin has expanded from 8.3% to 8.4% for the year.

Office products, fourth quarter revenue $422.1 million that was down 1%. Operating profit of $37.7 million, down 16%, so that margin decreased from 10.5% to 8.9%, since we did not reduce our expenses quickly enough. And for the full year, office products had revenue of $1,765.1 million, down 1%. Operating profit of $156.8 million, down 6%, so their margin did decreased from 9.4% to 8.9% for the full year, but I would point after that 8.9% operating margin is still outstanding.

Electrical group had revenue in the quarter of $106.9 million that was up 6%, and had operating profit of $7.2 million, up 32%. So, good margin expansions to 6.7% for the quarter. For the full year, the electrical group had revenue of $436.3 million representing 4% of the total they were up 7% and revenue, operating profit of 35% at $30.4 million, so outstanding margin enhancements that are going from 5.5% in '06 to 7.0% in '07.

So in summary, operating profit for the fourth quarter grew 1% on a 3% sales increase resulting in operating margin of 8.0% for the total company, which is down slightly from the fourth quarter in 2006.

Looking to the year, with the exception of office products, each of our businesses show margin improvement, and we closed with an 8.1% operating margin for 2007 which is consistent with our 2006 margin.

I will add here that our pre-tax profit margin with total operating expenses including corporate expense, as well as interest improved again in 2007 up 16 basis points to 7.53% of sales. This is a fourth consecutive year of improved per-tax margins, which we are pleased to report.

We had net interest expense of $4.5 million for the quarter, and for the full year our net interest expense was $21.1 million down 20%. We would expect that net interest to increase approximately $26 million to $27 million in '08, and we are projecting lower interest income for the year due to lower interest rates.

The other category which includes corporate expense, amortization of intangibles and minority interest was $1.9 million in the fourth quarter compared to $7.2 million last year. The benefit of favorable insurance reserve adjustments, as well as the gain on sale of assets in the quarter contributes to the decrease in expense from last year. For the year, this category was $44.4 million compared to $48.8 million in '06, and we currently project this experience to again be in a $40 million or $50 million range in '08.

Now, let's touch base on a few key balance sheet items. Cash at December 31 was $232 million up $96 million in December of '06. Our cash position grew stronger in 2007, as we improved cash flow with increased income; working capital gains and $56 million in proceeds from sale lease-back transaction closed in the fourth quarter, which we discussed in our last conference call.

We expect that cash position remains strong in the year ahead, but we also look for our cash balance if they are based on investments opportunities that may arise in the year such as acquisition and share repurchase.

Accounts receivable decreased 1% from last year a 3% sales increase for the fourth quarter. So, we are very pleased with our level of receivables and feel good about the quality of our receivables.

Look into 2008 our goal at GPC remains to grow receivables at a rate less than sales growth. Inventory 12/31/07 was $2.3 billion that's up approximately 4% from last year and inline with our sales growth for the quarter and the year.

We have shown steady improvement in our inventory levels for several consecutive years now, and we will continue to manage this key investment and show more progress in the year ahead. Accounts payable also showed significant improvement in '07 increasing 9% from last year to $990 million.

Increased purchases related to sales growth, extended terms for certain suppliers, and the increased utilization of procurement card during 2007 have driven the increase on this line. We will expect to show additional progress here in 2008.

Working capital was $2.5 billion at December 31, that's down approximately 5% from December 31, '06. We would add that this accounts for the reclassification of $250 million in debt due November of '08, the current liabilities. We have improved our working capital as a percentage of sales our working capital efficiency by at least a penny in each of the last four year, and currently stand at $0.23 on a sales dollar versus $0.25 in '06.

We are pleased with our progress in managing working capital. I would also emphasize that our balance sheet remains in excellent financial condition. We continue to generate consistent and strong cash flows in 2007 was an especially strong year for us. Cash from operations was approximately $641 million for the year, which was up from $434 million in '06. Free cash flow which deducts capital expenditures and dividends from cash from operations was $283 million for 2007. We are very pleased with our improved cash flows in '07 and feel our strong cash position provides the company many opportunities.

As we transition at 2008, our priorities for the cash remain first dividend. We paid a dividend every year, since going public in 1948, and yesterday, the Board approved a 7% increase in annual dividend for 2008 to $1.56 per share. This follows an 8% increase in the prior two years and represents 52% of 2007 earnings.

In addition, our 2008 dividend marks the 52nd consecutive year of increased dividends paid to shareholders. Other priorities for the cash include the ongoing reinvestment in each of the businesses, share repurchases and where appropriate, strategic types of acquisitions in each of our business segments.

Capital expenditures $31.9 million for the fourth quarter, that’s down slightly from $32.9 million in the fourth quarter last year, and for the full year CapEx $115.6 million that's down from 126.0 in '06.

Looking into 2008, we should see our CapEx spending in again $20 million range. We continue to make the necessary reinvestment in our businesses. Depreciation and amortization of $23.7 million in the quarter, $87.7 million for the year. This is up from 2006, and directly relates to an increased level of capital expenditure over the last two years. Likewise, we expect depreciation and amortization to increase again in '08 to approximately $90 to $100 million.

Another priority for us has been opportunistic share repurchases and as part of our repurchased program we did purchased approximately 5 million shares of our company stock during 2007. This follows a purchase of 2.8 million shares, 2.9 million in '05 and '06 respectively. Year-to-date in 2008, we've repurchased another 850,000 shares; leaving us with 9.5 million shares available for repurchase today.

No set pattern for these repurchases. But we remained active in the program, as we continue to believe that investment in GPC stock along with the dividend provides a best return to our shareholders.

We feel good about our priorities for cash as we moved into 2008. We continue to believe that the use of cash in these areas serves to maximize the total return to shareholders.

Finally, I want to update you on our debt position at December 31. Total debt remains unchanged at $500 million but the $250 million credit facility maturing in November 2008 will reclassify to long-term to current liabilities.

The second, $250 million is due in 2011 and prepayment of this debt is cost prohibitive due to may hold provisions included in the debt agreements.

At this point, we've made no decision regarding our plans for the debt as it comes due. Total debt to total capitalization December 31, '07 was 15.5% and we are comfortable with our capital structure at this time.

Despite the uncertainty in the markets we serve, we were pleased to see progress in our overall operations for the fourth quarter and the year. It's impaired such as that they were amounted a balance created by the diversification of our businesses. With another record year behind us we'd now increase sales in 57 in the last 58 years, increase profit in 45 and the last 47 years.

We are proud to this record and we feel it reflects our on-ending commitment to steady and consistent growth at Genuine Parts Company. As we turned our focus to 2008 our goal remains continue to improvement on growing sales, controlling cost and improving our operating margins. We will support these initiatives; it was a strong and healthy balance sheet.

Operator

(Operator Instructions). Please go ahead.

Jerry Nix

We hope everyone to stay with us on the conference call. We apologize for that, we just talked about how good our strong cash flow was. We didn't pay our power bill because we had a brief power out is there we shut the call down for a moment.

But hopefully, we got the fact that we [will turn to] '07 and return our focus to 2008 our goal remain to show continued improvement on growing sales, controlling cost and improving our operating margins.

To support these initiatives we have a strong and healthy balance sheet and continued strong cash flows further maximizing our return to shareholders. We feel good about our businesses their strategic plans and their prospects for long-term growth.

We are proud about dedicated employees and their efforts this is especially true when external business conditions present additional challenges for us. We are very pleased with our efforts in making Genuine Parts Company the great company, than we believe it to be.

And now we have the right people in place to make it an even pioneer company in the years ahead. Tom, it will turn it back to you.

Tom Gallagher

Thank you, Jerry. We will have recaps our performance for the fourth quarter and year end 2007. As we look back over the year, we feel good about the results in industrial and electrical electronic with an 8% sales increase industrial also is going to improve their margin 10 basis points, electrical was up 7, they improved their operating margin 130 basis points.

Automotive while only up 2% and revenue was able to show 10 basis points margin improvement for the year, which we are pleased to see. Only office products progressed on is being down 1% in sales and all 50 basis points in operating margin but we do anticipate improved results from office products in 2008. Putting altogether with sales up 4%, net up 7%, and EPS up 8%. We are pleased to be able to report another record year in all three areas as well as to be able to show continued improvements in asset management, working capital efficiencies and maintaining strong cash flows. So, progress was made in a number of important areas and we are proud of the job that was done by the GPC team.

Now, as far as 2008 is concerned, we ended the year feeling good about the specific plans in place in each of the four business segments. At the same time, however, we recognized the additional challenges that we will face due to a slower economy. And with that in mind we are a bit more cautious in our expectations for 2008.

Generally speaking, we feel that the second half of the year will be a bit stronger than the first half and full year revenue expectations for each of the segments will be as follows: In Industrial and the Electrical Electronic, we are looking for 5% to 8% revenue increases; in Automotive, 2% to 5% and in Office Products, 1% to 4%, giving total GPC, 3% to 6% on the revenue side. And with revenue growth in this range we would expect net income to be up 4% to 7% and earnings per share of $3.12 to $3.22, which will be up 5% to 8%.

At this point, we will ask Carrie to go ahead and open up the calls to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your 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.

Tony Cristello - BB&T Capital Markets

I guess, one question given the environment that we are in right now, you have been working a lot on the cost side of things for the last year, even longer and always tried to maintain a lean operating infrastructure, and I am just wondering with level of sales now, are you positioned to continue to take even more out on a cost basis? Or do you run the risk of being perhaps too thin to sort of sustain levels of growth that you might need once the operating environment improves?

Tom Gallagher

Tony, I don't think we run the risk of being too thin, that’s an area that we are very sensitive to. We would not reduce cost of the expense of revenue growth, but I do think that we have opportunity to further refine some of the cost structures we have in the businesses. And as we said in our closing comments, we think that we can continue to look for margin improvement as well as EPS improvement in 2008 at the level of sales that we’ve described across each of the businesses.

Jerry Nix

Tony, I would also point out that our CapEx numbers have been up the last two to three years and the reason for that is productivity enhancement and investments in the IT side of our business that aid us and getting our cost down without affecting the service. It actually improves the service to our customer.

Tony Cristello - BB&T Capital Markets

Have you started to receive the benefit side of the capital spend yet on those processes or is this something that may take quarter, two quarters, six quarters to finally get through where you are at the level of meeting of more than offsetting the investment?

Tom Gallagher

I think we are seeing some of the benefit from some of the initiatives that were put in place last year and the year before. I think that's evidenced by the 10 basis points improvement in operating margin and automotive as well as industrial, 150 in the electrical electronic. So, I think we are seeing the benefit and we get projects that will pay further dividends to us in 2008.

Tony Cristello - BB&T Capital Markets

Okay. And looking at Q4 and as well as 2007. Shifting gears, I am just wondering what was the organic growth of revenue versus how much revenue did you actually end up acquiring for the year.

Tom Gallagher

Well, the majority of the revenue was all organic. We had less than 1% contribution from acquisitions in quarter end and in the year.

Tony Cristello - BB&T Capital Markets

Okay. And in this environment what is your strategy, or thought on acquisitions. Is there opportunity to perhaps be a bit more aggressive when others are struggling?

Tom Gallagher

Well, I think that that's probable, I might mention here, that we have two recent announcements on smaller acquisitions on the industrial side as of March 1st, we'll have a regional bearing and PT distributor that will join Motion Industries, they have about $32 million in revenue. And then as of April 1st they we are going to be including a regional office products distributor, and with the office products group and they have annualized revenue of about $30 million.

So we see those two as enhancements for 2008, and we have discussions at various stages with other companies across the businesses, and we're hopeful that we can go ahead and tell you about those in our next call or two.

Tony Cristello - BB&T Capital Markets

Okay. And just one last question with respect to NAPA, what is the plan for growth, I mean typically it would have been about a 100 short of the target or the goal, and as we look into 2008 given the soft operating environment on automotive, can you give some thought as to how you plan to invest into the business and grow the business given what's going on from a sort of a headwind?

Tom Gallagher

Sure. Certainly the new distribution will play a role we have said many times in the past that we would like to open a 100 net new stores a year. This past year we fell way short of that, but as I mentioned we did open 10 in January, and I think that we will have a positive result on net new stores if pressed for a response as to how many, I would say 50 to 60 net new stores for 2008.

We're going to look to continue to roll-out the all term import products initiative across the remainder of the NAPA organization on the US side. So that will be an enhancement to our growth. The heavy duty initiative we'll continue to invest in that. And we have got some specific initiatives in other areas that will continue to push in the year ahead.

Tony Cristello - BB&T Capital Markets

Okay, great. Thank you guys.

Tom Gallagher

Thank you, Tony.

Operator

Your next question comes from Jonathan Steinmetz with Morgan Stanley.

Jonathan Steinmetz - Morgan Stanley

Good morning everyone.

Tom Gallagher

Good morning, Jonathan.

Jonathan Steinmetz - Morgan Stanley

A few questions here, first a couple on the weeds and then maybe a bigger picture. I think, Jerry you've talked about some potential Johnson Industries exit cost in the first quarter, and then a benefit in the second and fourth quarter. Can you just be specific on what we should expect for the first quarter. And then was it actually a loss making operation in the second to fourth quarter and could you so comment on what we should see as a benefit?

Jerry Nix

I think in the first quarter it's going to be about a penny per share, because of some exit cost and so forth, but beyond that it should be a margin enhancement this year for us, but even if they were making profit, it was a much lower margin than of this is. So we should be positive and I can't quantify the positive in a third for last three quarters. But in the first quarter it should cost us about a penny a share.

Jonathan Steinmetz - Morgan Stanley

Okay. And I think you also mentioned in this quarter you had a gain on a sale on some maybe insurance reserve type unwinds. Can you first of all is that correct, and second can you give some amounts attached to that?

Jerry Nix

Well, the reserves were adjusted it may have been, I don’t know what the specific number, well I had to check that and give to you. We had a gain, we sold some property, we also had a portion that had gain on sale and leased back that fell in the fourth quarter. So it was more slanted in an area of the gain on the sale of assets than it was on the insurance reserves.

Jonathan Steinmetz - Morgan Stanley

Okay and what was that gain, do you remember?

Jerry Nix

No, I don’t. I think it is $2 million to $3 million.

Jonathan Steinmetz - Morgan Stanley

Okay, and lastly maybe for Tom. There are a lot of companies in the S&P 500 who are growing earnings more rapidly than you guys not so much, because they have better domestic in North American operations, but because they have so much more international exposure. When you think about acquisitions going forward, do you want a broader international footprint or would you just prefer a focus domestically?

Tom Gallagher

Our footprints would be to be a North American company and currently 90% or so of our revenue comes from the US, about 9% from Canada, and about 1% in Mexico. We see ample growth opportunity in all three of those markets, that would not preclude us from looking at something other, but our priority would be to do it in North America and to leverage the strength of the management team and the infrastructure that we have in place in each of the businesses.

Jonathan Steinmetz - Morgan Stanley

Okay, thank you, guys.

Tom Gallagher

Thank you.

Jerry Nix

Thank you.

Operator

Your next question comes from Keith Hughes with SunTrust.

Keith Hughes - SunTrust

Thanks, I just wanted to follow-up a little bit on your guidance specifically around the industrial electrical revenue. The guidance at least to the top end will be basically a repeat of what we saw last year. You are talking about a couple or one small acquisition you are doing, but does that number include more acquisitions as you contemplate 2008?

Tom Gallagher

Well, it does include the expectation that we will benefit from the one that we just mentioned that closes March 1. We are very comfortable with the range we gave you and if another opportunity comes and we can exceed the ranges that we've given out, then we'll be thrilled to be able to do that.

Keith Hughes - SunTrust

And how much would price play a factor in that number?

Tom Gallagher

Well, price in the industrial sector right now is a little over 4%, I think it's about 4.7% currently.

Jerry Nix

And also I would say Keith, while everyone is expecting the industrial sector has slow the industrial production numbers have been up in the last two months. And then our folks have been talking to our customers, you would think that the cycle will slow some, but at this point there is no evidence of it.

Keith Hughes - SunTrust

Okay. And final question, Jerry, you had talked about interest expense being higher and always on the fourth quarter. Is the drag you are talking about the difference of what you are earning on the cash, and what you're paying on the $500 million of borrowing?

Jerry Nix

Yes, that's correct.

Keith Hughes - SunTrust

That's what I was talking about. Okay. Thank you

Jerry Nix

Thanks.

Operator

Your next question comes from Michael Ward with Soleil.

Michael Ward - Soleil

Good morning

Tom Gallagher

Hi, Mike.

Michael Ward - Soleil

Two questions. First of all do you have the store count for the company owned as well as the total on the automotive side? Are you there. Hello.

Operator

Ladies and gentleman this is the operator, we apologize for the delay. However, today's conference is experiencing technical difficulties. Your line will be place on silent mode until the conference resume. Miss Yancey, please go ahead.

Michael Ward - Soleil

Hi, are you there?

Jerry Nix

We are back Mike.

Tom Gallagher

We are sorry about that.

Jerry Nix

We apologize, at least we know our generator is working.

Michael Ward - Soleil

Alright. Just repeat the question, do you have the store count for year end, and if you have a breakdown between the company owned and independent?

Tom Gallagher

We will get that for you just a minute Mike.

Michael Ward - Soleil

Okay. The second thing is, the share repurchase you mentioned, you had 9.5 million shares. So was the share repurchase a dollar amount or is it a share amount?

Jerry Nix

It’s a share amount. And Mike the count of stores we had at the of the year was 4,743. We had company owned 1094 so we had a total stores of 5,837.

Michael Ward - Soleil

Okay. So the independents are down?

Jerry Nix

That's correct.

Tom Gallagher

Right, and the company owned are up I think nine for the year.

Michael Ward - Soleil

Okay. On the pricing side with automotive, what are you seeing there. Are you seeing anything at all on the pricing front. Has it changed at all?

Jerry Nix

Well, we have 1.6 in automotive for all of 2007. We don't have the results for this thus far in 2008. But in total that folks I think we'd probably be looking at another year of 1% to 2% of price increases and if you look back, we had 1.7 in '06 and we had 1.6 in '05, so it's been pretty steady at that level.

Michael Ward - Soleil

Sounds great. Thank you guys

Jerry Nix

Okay. Thank you

Tom Gallagher

Thank you Mike.

Operator

(Operator Instructions) Your next question comes from Rick Weinhart with BMO Capital Markets.

Rick Weinhart - BMO Capital Markets

Good morning, gentlemen.

Tom Gallagher

Good morning, Rick.

Rick Weinhart - BMO Capital Markets

Couple of questions on the automotives area, we had fewer competitors report recently that there was a pretty step changes and sales as we get to the end of the year. And I am wondering what kind of volatility you're seeing in that business sequentially and even maybe if there is any changes since the beginning of the year?

Tom Gallagher

Rick, we did see a change in the month of December. We had pretty steady and stable results in October, November and then we saw a drop off in December. Especially as we got towards the holiday seasons the second half of the month, we saw a change. We were pleased to see that the January numbers came back, and are more in line with what we saw earlier in the quarter, and through mid month February we're consistent with where we were in January.

Rick Weinhart - BMO Capital Markets

Okay. Good thank you. And one question on I believe it’s the Rayloc division, I had referred to others perhaps on the internal consolidation there. That's occurring in the first quarter I believe can you comment on that and perhaps talk about is there any impact to the P&L that we should know about?

Tom Gallagher

We are consolidating one of the plants that we have into the remaining facilities that we have in that remanufacturing business. That will be completed by the end of the quarter. We will have some expense associated with the consolidation. Jerry you may have the number…

Jerry Nix

It would be minimal, and it would be about to $2 million, $2 million to $3 million and that's not minimal, but relative the overall numbers it is impact wise.

Rick Weinhart - BMO Capital Markets

Okay. And that's obviously in your guidance am I right?

Jerry Nix

That's correct.

Rick Weinhart - BMO Capital Markets

Okay. And then my last question is on the office products business. Well, actually it's two for that business division. First, was there any impact from significant change in the vendor rebates at the end of the year. As I think we've heard from some of your competitors.

Tom Gallagher

Well in our case our purchases were not as strong as it might have been in some prior years. So we would have seen a difference in the dollar amount, but proportionately it would have been the same.

Rick Weinhart - BMO Capital Markets

Okay. And then the other question on office products. Have you seen any change in the trends for that business now that we've seen a lot of the megas kick down your inventories, or do we still think there is maybe more inventory adjustments going on at some of these places?

Tom Gallagher

Well I wouldn't answer specifically what's happening at a particular customer segment. But I would say that we saw a slightly improve performance in January it's our expectation that office products will have a positive year force, we told you, I think that we expect it to be up 1% to 4% for the year. I think everybody is looking at supply chain and how you can become more efficient, but we expect an improved performance from office products as the year progresses.

Rick Weinhart - BMO Capital Markets

Okay, thanks very much.

Tom Gallagher

Thank you.

Jerry Nix

Thank you, Rick.

Operator

At this time there are no further questions. Do you have any closing remarks?

Tom Gallagher

We just want to apologize to those of you who are listening. The inconvenience today was a power outage. We appreciate you sticking with us and we appreciate your continued interest in and support of Genuine Parts Company and we look forward to talking to you at a future call. Thank you for joining us.

Operator

This concludes today's conference. You may now disconnect.

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Source: Genuine Parts Company Q4 2007 Earnings Call Transcript
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