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Executives

Carol Yancey- Vice President and Corporate Secretary

Thomas Gallagher-Chairman, President and Chief Executive Officer

Jerry Nix-Vice Chairman and Chief Financial Officer

Analysts

Alan - BB&T Capital Markets

[Chip Ruey - Clymer]

Matthew Fassler - Goldman Sachs

[Jonathon Stimets] -Morgan Stanley

Keith Hughes-Suntrust

Richard Weinhart-BMO Capital Markets

Genuine Parts Company (GPC) Q1 2008 Earnings Call April 17, 2008 11:00 AM ET

Operator

At this time I want to welcome everyone to the Genuine Parts Company First Quarter 2008 Earnings Conference Call. (Operator Instructions

Carol Yancey

Good morning and welcome to the Genuine Parts Company First Quarter Conference Call. We appreciate you joining us today, where we will discuss our earnings results and the 2008 outlook. 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 or 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 SCC 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.

Thomas 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. Now earlier this morning we released our first quarter results and hopefully you’ve 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 billion, $739 million which was up 3%. Net income was 123.5 million which was up 2% and earnings per share were $0.75 this year, compared to $0.71 in the first quarter of 2007 and the EPS increase was 6%. The 3% sales increase is similar to our fourth quarter 2007 increase and in line with our overall expectation for the quarter. The net income of +2% shows that we were not able to get as much leverage as we would like on the 3% sales increase; however we did have over $5 million worth of charges in the quarter related to the sale of the final three Johnson Industry operations as well as to the costs associated with the consolidation of one of our remanufacturing plants. With out these charges, our net income would have been up 4.5% and while the charges had a negative impact on the quarter, both of these decisions are positive steps for the future and Jerry will cover this in a bit more detail in a few moments. On the earnings per share side, we were pleased to show the 6% increase for the quarter.

Looking at the results by segment, our strongest revenue increases continue to be generated by the industrial and electrical operations. Industrial sales were up 6% for the quarter, which we feel is a solid start to the year. Our biggest increases geographically for the quarter came from the Western, Southwest and Canadian operations, but we were pleased to see positive growth in all parts of the country. Looking at it by customer segment, our largest increases came from customers in the iron and steel, pulp and paper, and food products industries and these helped to off set softer results in automotive, lumber and wood products and other housing related segments. When we put it all together, we’re pleased with the industrial groups first quarter performance and based upon the continued strength in the industrial production and capacity utilization figures through March, as well as due to their internal growth initiatives, we feel that the industrial operations will turn in another solid performance in 2008.

The electrical segment results are pretty similar to industrials. They were up 7% in the quarter and that’s on top of a 12% increase in the first quarter of 2007, so it wasn’t an easy comparison and the electrical operations continued to do a fine job for us. Now we have seen a slight moderation in the Institute for Supply Management Purchasing Managers Index over the first quarter, but at 48.6 in March, this is in line with December 2007 and it still remains at a healthy level and we feel that this is a positive indicator for our business in the months ahead.

Additionally, EIS will be closing on an acquisition on May 1 with annual revenues of approximately $15 million, which will be a nice compliment to their existing electrical business and it will help to sustain EISs growth rates over the remainder of the year.

Moving on to office products, this team continues to encounter a challenging environment and they ended the quarter down 21% and while the sales sluggishness is more pronounced in the Southeast and Western part of the country, primarily California and Arizona, the results in the remaining operations, while better, were not enough to get us on the plus side for the quarter. Sales to independent office products resellers were flat for the quarter, while sales to the mega channel customers were down 6%. So it was a difficult quarter for our office products group and not up to expectations, but we do feel that they will show improvement over the remainder of the year. They have several sales initiatives that will kick in during the second quarter, as well as some new business that comes on stream in May. Additionally, they completed the acquisition of the small regional office products wholesaler as of April 1 and this should add about $2 million per month of incremental revenue. So despite the continued industry wide sluggishness, we do feel that office products will perform a bit better in the quarters ahead.

Finally, automotive; sales for this group was up 4% for the quarter, which is an improvement over the 2% increase in the fourth quarter of last year as well as for the full year 2007. Now as far as some additional insight into our Napa results, we opened 37 net new stores in the quarter. This off sets the -12 that we had in 2007 and it’s the best quarter that we’ve had for new distribution in some time and it will drive additional sales over the remainder of the year. Commercial sales in our company store group were up 3% in the quarter, but our cash of DIY business was down 2% which we think is reflective of current consumer sentiment and a slowing retail sales environment. Our major account sales were up a healthy 7% in the quarter. This follows a 5% increase in major account business over the second half of 2007, so positive trends in this segment of our automotive business, which we think bodes well for the quarters ahead. Our auto care business was not quite as good and in fact was down 2% in the quarter; this is our largest wholesale program, so we think we have some work to do here to get this on the plus side as quickly as possible.

Putting it all together, we think that the 4% automotive increase is a decent performance in the current environment. In fact this is our best increase since the second quarter of 2006, which is encouraging and we feel that our automotive operations are beginning to benefit from some of the steps taken over the past 12 to 18 months, and they have started off 2008 in a positive way.

So that’s a quick over view of the first quarter results. Jerry will now take a few moments to discuss the financials in more detail. Jerry?

Jerry Nix

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

The review of the income statement shows the following: total sales for the first quarter were up 3% to $2.7 billion; this is pretty consistent with our growth rate over the last several quarters, but still not at the level we’d like to see over the long term. We will remain optimistic about the opportunities for solid growth over the balance of 2008. Gross profit in the quarter was 29.91% to sales compared to 29.82 in the first quarter last year, so we show some improvement on this line to start 2008. We look to show additional progress in this area going forward and we’ll continue to focus on the best product and customer mix as well as expanded global sourcing opportunities to drive this progress.

For the year, through March, came to a price in which represents supply increases to us is up 8/10% in automotive, 2.1% in industrial, 1.8% in office products and 2.0 in electrical.

Now let’s look at the SG&A. For the first quarter SG&A was 22.92 % of sales, up approximately 50 basis points from the first quarter in 2007. Although nearly half of this increase, approximately 22 basis points relates to the cost associated with the sale of Johnson Industries and the consolidation efforts in our remanufacturing operations. We lost some additional ground on this line due to lack of leverage on 3% sales growth. So we have much work to do here and we’ll absolutely take the necessary steps to achieve a fifth consecutive year of improved SG&A costs as a percent to sales. These steps have already begun. Furthermore, the sale of Johnson and the consolidation of our remanufacturing operation should improve the profitability of our automotive segment and the total company going forward.

For the quarter our tax rate was approximately 35.6% which is down from 38.0 for the first quarter in 2007. This is due mainly to the favorable impact of the sale of Johnson Industries during the quarter and we expect that tax rate for the full year to be around 38.0, which was what our full rate was in 2007.

Net income of 123.5 million is up 2%, earning per share of 75 compared to 71 last year is up 6%.

Now let’s discuss the results by segment.

Automotive had revenue in the quarter of $1 billion, 305.9 million represents 48% of the total, and they were up 3.5%. Operating profit of 98.6 million down 5% so it adds some margin degradation there from a 7.6 to 6.9%. The industrial group had revenue of $881.2 million representing 32% of the total, up 6%, operating profit of 69.0 million, up 7%, operating margin stayed strong at 7.8%.

Office products : revenue in the quarter of 442.4 million represents 16% of the total, that was down 2%, operating profit of 43.9 million was down 9% while the operating margins are very strong at 9.9%, the trend is down from 10.75 in the first quarter of ’07.

Electrical group: had revenue in the quarter of $114.3 million representing 4% of the total, up 7%. Operating profit of 9.0 million up 25%, so this management team continued to do an outstanding job in converting their sales to profit and margins up, moving from 6.8% in ’07 to 7.9% in 2008.

In summary, with total sales up 3%, operating profit down 1.5, our consolidated operating margin slipped approximately 30 basis points to 7.8%. Continued progress in industrial and electrical was off set by the circumstances we faced in automotive and office products. The 70 basis point decrease in automotive is explained by the sale of Johnson Industries and the remanufacturing consolidation. These are both 1x calls which account for 40 basis points of the decline and the remainder relates to lack of expense leverage on low single-digit sales growth. We attribute the margin contracts in the office products to the slight decrease in revenue. So despite providing the highest margin among our businesses, we need to show progress with our office products margins and we’re optimistic that our sales plans for the balance of 2008 can help accomplish this. We had net interest expense of $7.2 million for the quarter, up $400,00, up 7% from last year due to decreased interest income. We currently expect that net interest to be approximately 27 or 28 million in 2008. Other categories, which includes corporate expense, amortization of intangibles and minority interest, was 13.7 million in the first quarter compared to 13.1 million in the first quarter last year. The majority of the increase is due to the increase in amortization of intangibles, but corporate expense was also up slightly due to the modest increase in personnel and related benefit costs. For the year we continue to expect this category to approximate our expense in 2007, somewhere in the range of 40 to $50 million.

Now let’s touch base on a few key balance sheet items.

Cash at March 31 was 162 million, down 89 million from March 31 last year. Despite the decrease, our cash position continues to grow stronger from increased income and improvements in working capital. In the first quarter this year we spent $95 million for share repurchases compared to 20 million in the first quarter of ’07 and we spend another 50 million for acquisitions. These investment opportunities explain the decrease in cash of last year, but our cash position remains strong.

Accounts receivable increased les than 1% from last year, or a 3% sales increase for the quarter, so we’re very pleased with our level of receivables and feel good about the cost of our receivables. Our goal at GPC remains to grow receivables at a rate less than sales growth. Inventory was up approximately 5% from the first quarter last year, but down 21 million or nearly 1% from year-end. As any accounts receivable, our goals is to grow inventory to a lower rate than sales growth so we didn’t do as well here as we’d like to see. That said, at least part of our increase related to acquisitions and expansion initiatives, such as imports and heavy-duty parts. We’ll continue to focus on our inventory management initiatives and show more improvement on this line as the year progresses.

Accounts payable increased 3% from last year, reflecting increased purchases relate to sales growth as well as extended terms and other payable initiative established with our vendors. We’re pleased with our improvement here this quarter, but believe we have room for more progress in the remainder of 2008.

Working capital was $2.5 billion at March 31, down approximately 8% from March 31 last year. We would remind you that this accounts for the reclassification of 250 million in debt due November of ’08 to current liabilities. Before the re-class working capital is up just 1% from 2007, so we’re pleased with our progress in managing working capital and have improved our working capital as a percentage of sales by at least one penny in each of the last four years. We expect to continue this positive trend in 2008. We also emphasize here that our balance sheet remains in excellent financial condition. We continue to generate consistent and strong cash flows and our strong cash position provides the company many opportunities. For 2008 we currently expect to generate cash flows in line with ’07, which was an especially strong year. Cash from operations is likely to exceed $600 million in free cash flow, of which deducts CapEx and dividends should be greater than 250 million. Our priorities for the cash remaining, first to dividend, which was as announced our last call, we increased this year by another 7% to $1.56 per share, representing our 52nd consecutive year of increased dividends paid to shareholders. Other priorities for the cash include the on going reinvestment in each of the businesses, share repurchases and where appropriate, strategic types of acquisitions in each of our business segments.

Capital expenditure: 21.8 million for the quarter, down slightly from 23.7 million in the first quarter last year. Related depreciation, amortization was 22.7 million in the quarter, compared to 20.7 million last year. We continue to expect our CapEx spending to be in the 110, $120 million range for ’08 and we would expect our D&A to be approximately 90 to 100 million. We feel good about our level of reinvestment in our businesses.

Another priority for us has been opportunistic share repurchases and as part of our repurchase program we purchased over 2.4 million of shares of our company’s stock thus far in 2008. This compares to just over 400,000 shares purchased through this time last year and follows the purchase of approximately 5 million shares for all of 2007. Today we have an additional 7.9 million shares authorized for repurchase. We also have no set pattern for repurchase, but remain active in the program as we continue to believe that investment in GPC stock, along with the dividend, provides the best return to our shareholders.

Regarding acquisitions: we were pleased to increase our investment in Awesome America and Awesome Canada to 100% effective January 1, 2008. Our relationship with Awesome dates back to 2005 when we made our initial minority investment in the company. As you may know, this group represents our OEM parts initiative and is significant to our automotive sales strategy. In addition our industrial group acquired male supply and power transmission at Barings Company effective March 1 of 2008. Earlier Tom mentioned our acquisitions for the second quarter in the office products group and the electrical group, so as you can sees strategic acquisitions continue to be an important use of cash and are integral to our growth plans for the company. We feel good about our priorities for the cash as we move forward and continue to believe that the use of cash in there area’s serves to maximize the total return to shareholders.

Finally, we’d add our total debt remains unchanged at 500 million, although beginning December 31, 2007, a $250 million credit for sales maturing in November of 2008 was reclassified from long-term debt to current liabilities. The second 250 million is due in November 2011 and any prepayment of this debt is cost prohibitive due to make whole provisions included in the debt agreements.

Total debt to total capitalization of March 31, ’08 was 15.8% compared to 16.1% last year. We’re comfortable with our capital structure at this level. We consider the first quarter a very challenging one for Genuine Parts Company. We clearly have room for improvement in our businesses, but especially in automotive and office products. The challenge seems to be in overcoming our uncertain macro economic and industry conditions. We know we can overcome this due to superior execution of effective growth strategies.

For 2008 our goals remain to show continued improvement in growing sales, controlling costs and improving our operating margins. We’ll support these initiatives with 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.

Tom, I’ll turn it back to you.

Thomas Gallagher

Thank you, Jerry. Well that recaps our first quarter results.

On the revenue side, back in February we said that we expected full year increases of 2 to 5% in our automotive operations and we came in at 4% for the quarter. Industrial we said 5 to 8%, we came in at 6%. Electrical we said 5 to 8% and they came in at 7% and office products we said 1 to 4% and they ended the quarter down 2%. So all but office products ended the quarter well within the ranges given and we expect improved performance from office products over the remainder of the year. In February we said that we expected total GPC revenue to be up 3% to 6% for the full year, with the second half being a bit stronger and at this point our guidance remains the same. On the earnings side, we previously gave an earnings per share range of 312 to 322 per share, which will be up 5 to 8% and we continue to be comfortable with these numbers.

So that is a recap of the first quarter and our view on the outlook for the remainder of the year and through out the company our management teams are focused on five key areas: hitting the revenue growth targets, generating earnings growth in excess of revenue growth, showing improved operating margin expansion and continuing to show improvement in our asset management and working capital efficiency initiatives; all of which will enable us to report a solid year for Genuine Parts Company.

At this point, we’d like to address your questions and we’ll turn the call back over to Sim.

Question-and-Answer Session

Operator

(Operator Instructions) We will pause for just a moment to compile the Q&A roster. Our first question comes from the line of John Murphy with Merrill Lynch

John Murphy-Merrill Lynch

Good morning, guys. Just first if you could talk a little bit on pricing and expand on your earlier comments. Could you just talk a little bit about what you’re seeing from your suppliers on the parts item, what you’re able to pass through your distribution in and even at the retail level.

Thomas Gallagher

Well John we said that through the first quarter, price increases were 8/10 of 1% in the automotive parts group. As far as what we’re seeing prospectively, we do think that the pricing increases will be a bit more as we work our way through the course of the year and as far as what we’re able to pass on in the automotive side of the business, we don’t take a price increase unless we can pass a price increase through; so we would expect that to just float through as the increases come.

Jerry Nix

John, I would point out, last year in the automotive for the full year we had 1.6% pricing and we would expect it probably again to be in that 1 to 2% range in ’08.

John Murphy-Merrill Lynch

Do these price increases have any impact on your inventory, I would imagine that they are driving your inventory up higher. So I mean that might be part of the reason that there is a little bit of inventory creep in that quarter, is that correct?

Jerry Nix

Well, we’re on lipo [ph] so that would be offset with that.

Thomas Gallagher

Inventory increase John is largely attributable to some of the new businesses, the build up in businesses for our import parts company, where we acquired 100%. We also saw an increased inventory in the heavy duty parts group as they continue to build their business and then we completed the acquisition as Jerry mentioned, the mill supply was a $34 million a year company, we completed that in March, so their inventory shows up in the quarter end as well.

John Murphy-Merrill Lynch

Okay and what do you think about miles driven and there is starting to be some decline in miles driven for the first time in awhile. I was just wondering if you can comment on how that’s potentially impacting the auto business going forward and if you guys can continue giving your experience here.

Jerry Nix

Well as you know, historically miles driven has increased 1 to 2% a year, in 2006 they were up 9/10 of 1%, but then in ’07 we saw that they dropped 4/10 of a percent and the last figure that I’ve seen is through January and it was down 1.7% in the month of January, so there is no doubt that the higher gasoline prices are reflected in the reduction in miles driven and we think that’s part of the pressure that’s on the overall revenue growth within the industry in total right now. This thing will revert back at one point. We do think that later in the year we might see some moderation in some of the gasoline pricing and we’re hoping that we’ll see some increase in miles driven at that point as well.

John Murphy-Merrill Lynch

Then just lastly on the acquisition process, I was just wondering if you could talk about when you do these smaller bolt on acquisitions, really the integration process, if it’s fairly easy without a lot of hiccups, which it has been in the past and if what you see the pipeline on these acquisitions being going forward.

Thomas Gallagher

Well as far as the integration process, we would expect that the ones that we’ve outlined today will be integrated in a similar fashion to the ones that we’ve done over the last couple years; these are not large acquisitions, they are more easily integrated and they do, in fact, compliment the existing businesses that we’re in. As far as acquisitions going forward, we continue to look for acquisitions in each of the businesses. We think the environment that we’re in right now might present some additional opportunities for us and we’re on the look out for anything that we think makes good sense and actually is accretive for the shareholders at Genuine Parts Company. So we’ve got an ongoing and acquisition process in all of the businesses that we’re in.

John Murphy-Merrill Lynch

Just lastly on the debt that’s coming due this year, the 250 million, have you looked at refinancing that and sort of looked to make sure he’s given that, you know, the tough credit markets right now?

Jerry Nix

Yes, John we have and I believe we’ve locked in a rate at this point that we’re not able to discuss at the current time, but I think you can expect to see us extend that debt for another five years.

John Murphy-Merrill Lynch

Great, thank you very much.

Jerry Nix

Thank you.

Operator

Your next question comes from the line of Matthew Fassler with Goldman Sachs

Matthew Fassler - Goldman Sachs

Thanks a lot and good morning to you.

Thomas Gallagher

Morning, Matt.

Matthew Fassler - Goldman Sachs

I wanted to focus first on automotive. Did you have any charges related to Johnson Industries a year ago?

Thomas Gallagher

No, not in the quarter we didn’t, we did for the year, but not in the first quarter.

Jerry Nix

Matt, I want to tell you they lost money but there weren’t any charges associated with it.

Matthew Fassler - Goldman Sachs

Okay that’s fair. You talked about some off sets to the Johnson Industries right off, I guess, on the tax line. So if you were to look at the net income impact or EPS impact of those divestitures to the piano [ph] what would that look like?

Jerry Nix

I can tell you we picked up $0.03 a share due to the tax benefit from it and the 3.5 million or so hit that we took was pre-tax, so I don’t know exactly what the net impact of that would be, but it did hurt us in the SG&A side, but we were able to gain some benefit from it in the tax side.

Matthew Fassler - Goldman Sachs

So $0.03 is the loss and then the $0.03 pick up on taxes is essentially the, is that just essentially tax effective, that loss or is there additional tax benefits?

Jerry Nix

No, the loss is for the loss on the sale of the stock of Johnson energies and that was accumulated over a period of time. The charges in the pre-tax number are just for the current quarter.

Matthew Fassler - Goldman Sachs

Okay, so if that’s, call it 3.5 million, 2.5 million after taxes, it sounds like it was actually for the quarter and the aggregate, the tax more than offset the operating income impact.

Jerry Nix

That’s correct.

Matthew Fassler - Goldman Sachs

Okay, also in automotive, any comment on the trajectory through the quarter?

Thomas Gallagher

I will answer that, Matt. We wound up getting the year off on a per day basis, we had a pretty good January, it moderated a bit in February and then March came back a bit, not to the January level, but it did come back a bit and thus far in April, we’re encouraged by what we see.

Matthew Fassler - Goldman Sachs

That would essentially be, you talked to my last question, on automotive, which is sort of a same store sales kind of number. You talked about having a few more company owned stores opened, that they probably didn’t move that much, but it sound like the same store sales number or the equivalent thereof probably accelerated from the fourth quarter of ’07 into the first quarter of ’08, if I heard you right?

Thomas Gallagher

I think that’s right.

Matthew Fassler - Goldman Sachs

Okay great. My other questions relate to office products. You know looking at your comments from the fourth quarter, it looks like the mega’s actually were down here in Q1, down six versus down nine, where as the independents lost a little bit of ground flat versus up four. I’m interested, I guess, in both. What do you make of the moderated decline for the mega's, is that, so far as you can tell a reflection of channel sell through of less de-stocking, what would you attribute that too? Then the independents, I would think that would relate to the broader environment, but any color you have there is great.

Thomas Gallagher

Well I would say that I think the moderation in decline with the mega’s is more a matter of mix than it is of anything specific with the group. I had been to a meeting earlier this week, an office products industry meeting and basically what I heard there is that the industry overall, the results are pretty reflective of what we just gave you for our office products company. But here again, I would say that we see a slight improvement in April and we hope that it will sustain itself through the month and on through the quarter. We’re some what optimistic that we can improve these results as the year progresses and that, as I said earlier, we’re still saying that office products will be up for the year and that 1 to 4% range.

Matthew Fassler - Goldman Sachs

Then finally, just one question on the relationships between office products and industrials; as we look at the macro factors that you attribute performance to, they’re some what similar in those two sectors. Are you surprised at the divergence of performance between the two as industrials have been quite consistent for you and office products less so and that’s been true of the industry as well?

Thomas Gallagher

Well, we can see clearly why industrial is performing as well as it is and electrical also for that matter, because the demographics continue to look very favorably. Industrial production, capacity utilization figures continue to look good there. What we see different in office products is that for the first time in quite some time, we’re seeing a decrease in the number of white collar jobs across the country today, which has a direct impact on the demand for office supplies. So we are a bit pleasantly surprised with how well industrial and electrical are holding up and we’re a bit disappointed in how difficult we find the office products business to be currently and again, that ‘s reflective of what’s happening in the industry.

Matthew Fassler - Goldman Sachs

Great and then finally, Jerry on the tax rate; you talked about a tax rate in the 38s, you started off in the 35s for Q1, so should we expect a tax rate that exceeds 38% for the rest of the year to get you to that annual average?

Jerry Nix

Yes, I think 38 2, 38 3 and to get it back to the 38 for the full year is probably reasonable.

Matthew Fassler - Goldman Sachs

Thank you so much, guys.

Thomas Gallagher

Thank you, Matt.

Operator

Your next question comes from the line of Jonathon Stimets with Morgan Stanley

[Jonathon Stimets] -Morgan Stanley

Great, thanks. Good morning everyone, can you hear me?

Thomas Gallagher

We can hear you find Jonathon. Good morning.

[Jonathon Stimets] -Morgan Stanley

Okay great. Just a few questions; first starting on the auto side, I missed a little bit. Did you break out what the revamp, I think you mentioned something on the revamp side, what that cost you in the quarter?

Jerry Nix

No, we didn’t Jonathon it was about $2 million.

Thomas Gallagher

$2.1 million. The total of the two is right at $5 million.

[Jonathon Stimets] -Morgan Stanley

Okay and how long does this revamp, it seems like it’s been a slow drip for a long time. How long does that continue to persist do you think?

Thomas Gallagher

Well we’ve consolidated two plants over the last 14 months or so, that’s the end of the consolidation. This gets us to where we want to be and we think we’re positioned now to benefit from the positive results of that consolidation.

[Jonathon Stimets] -Morgan Stanley

So the business itself has low margin, but we shouldn’t have the sort loss making charges relate to that?

Jerry Nix

No that makes the remaining plants more profitable as the capacity utilization moves up in them. That was the reason for the consolidation of the two.

[Jonathon Stimets] -Morgan Stanley

Okay and do you do anything differently, when you think out over the next two or three years on the auto side? I’m thinking John Murphy had a question related to miles driven going down. It doesn’t seem like when we lag that over the next two or three years that the auto side may be as robust. Does it make you think differently about how you want to run the business from either a head count perspective or a number of warehouse perspective or anything when you look at the auto margin that makes you want to make some more significant changes?

Thomas Gallagher

Well the key word that you just used was significant. I think what we see is that on the revenue side some of the initiatives that we embarked upon in the last 18 months or so will help us we think, perform at a reasonable level. The import parts initiative, we continue to expand that and we continue to be encouraged by what we see with that. The heavy duty truck parts initiative will play a bigger role for us as we go forward, so those two will be key for us in the next 12-24 months. As far as the cost structure of the business, we always look at cost structure on an ongoing basis, but yes, we’re saying that we’re going to have to continue to find ways to streamline operations, to be more productive in existing operations and to take our SG&A down as a percent to sales in the automotive operations and we’ve got initiatives underway in all of those areas to help us get there.

Jerry Nix

Since you mentioned the miles driven and macro issue, there is also a positive macro issue and that’s that aging fleet in that 6 to 12-year-old age group, and the mix of that would be more in light trucks and SUVs. It’s yet to be seen what impact that would have, but there may be enough positive impact there to off set the slowing in the miles driven.

[Jonathon Stimets] -Morgan Stanley

Okay and I guess my last question then relates to fuel costs. Do you have a number at all or an estimate as to what that might have hurt you buy, and I guess you try to recoup some of it with surcharges and that sort of thing. But do you know, company wide, what that’s hurting you by and I imagine that that would go up as we move into summer here?

Thomas Gallagher

Well we can’t answer that specifically. We can tell you that it has had a double digit increase. Our fuel costs have gone up double digit across all of the businesses thus far this year. How we recover those varies by different business units, but we are seeing a net increase in fuel costs for sure.

[Jonathon Stimets] -Morgan Stanley

You say double-digit, but how should we think about what percentage of your cost of goods sold relates to fuel?

Thomas Gallagher

We’ll have to get back to you on that Jonathon, I don’t have that…

Jerry Nix

I can tell you that we don’t include freight in the cost of goods sold, that’s in SG&A.

[Jonathon Stimets] -Morgan Stanley

SG&A, okay, thank you.

Thomas Gallagher

Okay, thanks.

Operator

Your next question comes from the line of Keith Hughes with Suntrust

Keith Hughes-Suntrust

Thank you. Within the electrical segment, given some of the raw material of inflation that has and probably will occur, have you seen any kind of pre-buying ahead of price increases from customers?

Thomas Gallagher

No we haven’t really at this point. Some of the products that you may be referring to, there is actually some shortage on some of that product, so the industry, overall, is not in a position to do too much pre-buying.

Keith Hughes-Suntrust

What kind of products are you seeing shortages on?

Thomas Gallagher

Well some of the fabrication material that we use in our Fabrico business at EIS for instance, we’re on allocation and have been. There is just an inordinate worldwide demand right now, so the manufacturers are really working hard to keep up with demand. But, we’re not in a position to build product demand in those product categories.

Keith Hughes-Suntrust

All right, thank you.

Thomas Gallagher

Thanks.

Operator

Your next question comes from the line of Richard Weinhart with BMO Capital Markets

Richard Weinhart-BMO Capital Markets

Hi, good morning, gentlemen.

Thomas Gallagher

Good morning, Rick.

Richard Weinhart-BMO Capital Markets

A couple questions on the auto parts business; the auto care center you said was down a couple of percents which I think is kind of unusual for that business. Is there anything unusual going on there or can you just give us a little color on what happened?

Thomas Gallagher

I don’t think there’s anything unusual going on, I think the auto care group in total is experiencing much the same as all repair operations are experiencing. We did say they were down 2% for the quarter. We also said that our major account business was up 7% for the quarter, but in that case we’ve taken perhaps more share with the major account segment. Some of the surveying we do on outbound sales would indicate that the repair business in total is flat to up modestly right now and I think that’s more what’s happening with the auto care business than anything else.

Richard Weinhart-BMO Capital Markets

Okay and that was my second question on the major accounts up 7%, strong number there. Is any of that stuff that occurred in this quarter or would you attribute that more to wins in the past that maybe you’re gaining some traction on?

Thomas Gallagher

I think it’s more a result of some things that happened in 2007. I mentioned earlier that we were up 5% in the last six months of ’07 and we’re up 7% through the first quarter and I think that ‘s just a result of some of the good work that was done last year.

Richard Weinhart-BMO Capital Markets

Okay and then just back to the auto care. My question was really based on, when I think of that business, I tend to think of that as more in your commercial bucket, which was up about 3% and then the auto care being down too. So maybe is there something in the mix there that caused that to be a little bit weaker than the rest of the commercial or maybe I’m not thinking about the mix right.

Thomas Gallagher

Well embedded in what we would call the whole sale business would be things like the major account business and there’s 7% increase that would off set some of that 2% decrease with the auto care customers.

Richard Weinhart-BMO Capital Markets

Okay, moving onto the fuel surcharges. I understand that your gross margin doesn’t have the cost embedded in there for distribution, but I’m wondering about parts delivery from the store out to your customers. Have you been able to, or are you trying to pass on fuel surcharges there?

Thomas Gallagher

That’s not something that we see evidence of in the industry. What we are trying to do there is we’re trying to be more sophisticated in our delivery management systems. We’re trying to get more revenue per delivery run, we’re just trying to manage it from a different perspective.

Richard Weinhart-BMO Capital Markets

Okay and then my last question, if you have any comments on the O’Reilly, CSK merger there. I imagine that that doesn’t impact you or anything directly, but over the long term, how are you viewing that in general?

Thomas Gallagher

Well we see it’s a natural consolidation and it makes a lot of sense we think for O’Reilly’s and they’ll do a good job with it, once they get through the integration. They are a well run company and we have a lot of regard for that organization. What it does do, is it takes one player out of the industry. Had O’Reilly not done this, they would have eventually opened on the west coast and we would have had just one additional entrant there, so we have one less competitor than what we would have had. In the near term there may be some integration challenges or whatever that may open some opportunity, but it does, in some ways it clears the landscape for the future and we look forward to competing with O’Reilly’s on the west coast.

Richard Weinhart-BMO Capital Markets

Okay and just to follow up on that point, there does seem to be a bit more consolidation here now as we’re getting into ’08 starting off with that piece of business. Are you finding, I mean it would seem anyways, by what you’ve done so far this year, are you finding a greater number of opportunities are arising?

Thomas Gallagher

Well I would say that difficult times present additional opportunities and I think that’s evident in the automotive side of the business, so we’re out there working as diligently as we can to try to find things that make sense for Genuine Parts Company.

Richard Weinhart-BMO Capital Markets

Okay.

Jerry Nix

Too, you know on the automotive side, we run into obstacles; every one of these businesses has been so, we’ve looked at them. Our challenge is we already have operations and if we made it to acquisition we’d either have to close existing stores or close what we bought. So that’s the reason the acquisitions of larger ones don’t make sense for us in the automotive side.

Richard Weinhart-BMO Capital Markets

Right, but some of the smaller tuck in, bolt on acquisitions, those are still available right now right, opened the door for you?

Thomas Gallagher

There is some of that out there and if we can find ones that make sense, we hope to participate in them.

Richard Weinhart-BMO Capital Markets

Right. Okay thanks very much.

Thomas Gallagher

Thank you.

Operator

Your next question comes from the line of Tony Cristello with BB&T Capital Markets

Alan-BB&T Capital Markets

Good morning, this is actually Alan for Tony. How are you?

Jerry Nix

Good morning, we’re doing fine. Thank you.

Alan-BB&T Capital Markets

First question, with respect to the automotive segment, did you witness any difference in sales trends on a regional basis, and did any flooding in the Midwest have any impact on business?

Thomas Gallagher

Well the answer to both questions is yes. We did see some of the continuation of regional trends that we’ve seen in the past. The more challenging areas for us would be in the southeast and primarily in Florida and then we see challenges in California and in Arizona and this is consistent with what we’ve seen for a little bit of time now and consistent with what we see in some of our other businesses as well. And then the flooding certainly had a moderating affect on the business during the time that those areas were impacted, without question.

Alan-BB&T Capital Markets

Okay, a bit of a follow up question. Would you be able to quantify the impact that raising your stake in Altrom from a minority interest to 10% ownership had on automotive sales during the quarter?

Thomas Gallagher

They actually had slightly reduced sales in Automotive. If we balanced the Altrom, the increased revenue with the heavy duty business against the loss of revenue for the sale of Johnson Industry’s, we would have been down just a little bit in the aggregate there.

Alan-BB&T Capital Markets

Is that on a year-over-year basis; am I understanding correctly?

Thomas Gallagher

That was year-to-year, quarter-over-quarter, comparing this year’s first quarter with the first quarter of last year.

Alan-BB&T Capital Markets

Okay, excellent. Thank you very much.

Thomas Gallagher

Thank you.

Operator

Your next question comes from [Chip Ruey - Clymer]

[Chip Ruey - Clymer]

Hey guys, I’m just following up again. Did you say your auto sales would have been down or the impact would have been down?

Thomas Gallagher

Thank you for clarifying that, Chip, no. There was a slight negative to our automotive growth when we look at…

[Chip Ruey - Clymer]

[indiscernible] Okay.

Thomas Gallagher

And can you quantify I think you said about 40 basis points was from Johnson, was that really the SG&A issue too in auto, like what was the dollar number there?

Jerry Nix

That was, it was like 3.5, 3.4 I guess it was in the Johnson case and 2.1 for the remanufacturing.

[Chip Ruey - Clymer]

Okay so the Johnson won’t repeat and the remanufacturing, just should dribble down over the next few quarters?

Jerry Nix

No those are one time costs in both cases. There as severance and all associated with the remanufacturing, and the Johnson thing is over.

[Chip Ruey - Clymer]

Okay. The repurchase, did you have a dollar figure attached to that, accorded 2.4 million shares?

Jerry Nix

Yes, Ill get that for you. It was $94 million.

Chip Ruey [ph] with Clymer

And can you talk about, I mean you’ve got 7.4 million left, you said you’d be aggressive. Can you put some color on that, are you aggressive here, how aggressive would you be on that on that 7-4 and if you can’t answer too much about that, can you talk about how you purchase shares though out the first quarter, like more skewed to where the stock is now?

Jerry Nix

Yes, but keep in mind we did 5 million shares last year and we’ve already done almost 50% of that in the first quarter this year. So I think we are more aggressive and we do try to buy on weakness and as you know our stock along with all the others have had weakness; so we’ll continue to be active in that. We don’t have a set target that we’re going to do 2.5 million shares a quarter or anything like that. We’re more active on certain days. We have not been in there because of a black out period for the last week and if the stock shows weakness, we go in on a daily basis and be more aggressive.

Chip Ruey [ph] with Clymer

Okay and last, you said you’d probably roll the debt that comes due this year. Do you have any idea on kind of what the spread could be or what rate you could roll now, have you kind of checked with banks? I’m just trying to figure out what sort of interest…

Jerry Nix

Well the rate is going to be a good bit lower than where we have. I just can’t give the details on it because of still we have some documents yet to complete, but the rate will be lower than it is at the current time, so..

Chip Ruey [ph] with Clymer

All right, guys, solid quarter, thanks a lot.

Jerry Nix

Thanks very much.

Operator

At this time there are no further questions.

Thomas Gallagher

Sam, thank you. We appreciate those of you joining us on the call today. We appreciate your continued interest in and support of Genuine Parts Company and we look forward to talking with you on the next conference call.

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Source: Genuine Parts Company Q1 2008 Earnings Call Transcript
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