Genuine Parts Company (GPC) Q4 2010 Earnings Report, Transcript and Summary

Good morning, my name is Christa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Genuine Parts Company Fourth Quarter 2010 Results Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. Carol Yancey, Senior Vice President of Finance. Ms. Yancey, you may begin the conference.

Thank you. Good morning, and thank you for joining us today for the Genuine Parts Fourth Quarter Conference Call to discuss our earnings results and the outlook for 2011. Before we begin this morning, please be advised that this call may involve forward-looking statements, such as projections of revenue, earnings, capital structure or other financial items, statements on the plans and objectives of the company and its management, statements of future economic performance and assumptions underlying those 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 comments from Tom Gallagher, our Chairman, President and CEO. Tom?

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 2010 results and hopefully, you've had an enough opportunity to review them. But for those who may not have seen the numbers as yet, a quick recap shows that sales for the quarter were $2,808,000,000, which was up 14%. Net income was $118.7 million, which was up 20%, and earnings per share was $0.75 this year compared to $0.62 in the fourth quarter of 2010 and EPS (earnings per share) increase was 21%. For the full year, sales were $11,208,000,000, which was up 11%. Net income was $475.5 million, which was up 19%, and earnings per share were $3 per share compared to $2.50 last year, and that's an EPS increase of 20%. So we feel that 2010 turned out to be a good year for us, and we were pleased with the way that the year developed sequentially. On the revenue side, we were up 6% in the first quarter, followed by a 12% increase in the second quarter, 13% in Q3 and 14% in Q4. On the EPS side, we're up 13% in the first quarter, 20% in the second, 24% in the third, and 21% in the fourth. So a fairly steady and consistent picture all year long. And looking at the revenue results by business segment, as has been the case all year, our two industrial-related businesses, Motion Industries and EIS, generated the strongest increases for us. Motion was up 24% in the quarter and EIS was up 40%. Acquisitions completed during 2010 helped augment the numbers in each case, but the underlying business remains strong. Motion was plus 18% without acquisition impact and EIS was plus 17%, and both of these show the good progress being made in growing the core business. For the full year, Motion was up 22% and EIS was up 30%, and organic growth or growth without acquisitions for both motion and EIS, was plus 16%. And looking a bit deeper into the Motion results for the full year, it's interesting to note that we had double-digit increases in every one of our top 12 product categories. Additionally, our top 10 industry groups were up 20% in total with automotive, equipment and machinery and iron and steel having the biggest increases, and then the construction-related industries having the smallest increases. And then our top 25 customers were up 25% as a group. So the good results were broad-based from a product, customer and geographic perspective as well, and we were pleased with the overall sales strength and the balance in our industrial business. And the comments on the Electrical business are very much the same. Our top 25 customers were up 20% in total for the year, and this drove a similar increase for us with our top 20 suppliers. Additionally, we saw consistent results across our product categories and geographically as well. So both Motion and EIS turned in strong and well-balanced performances for us, and based upon the encouraging external indices like industrial production, manufacture capacity utilization and the ISM Purchasing Managers Index combined with the solid internal growth initiatives, we look for continued good results from each of these businesses in the quarters ahead. Now before leaving the industrial-related businesses, we do want to mention that Motion did complete two smaller complementary type acquisitions as of January 31 of this year: Dayton Supply & Tool Company is a distributor of industrial supplies with three locations in Ohio, and D.P. Brown is a bearing, belting, and power transmission distributor with three locations in Michigan and one in Ohio. Both of these companies fit nicely into Motion's existing business platform and combined revenues are just over $60 million per year. Turning to Automotive. They ended the year up 7%. And it's interesting to look at the Automotive results over the course of the year. Revenues in the first quarter were up 6%, followed by 7% increases in the second and third quarters, and then a 9% increase in the fourth quarter. So the results continued to strengthen as the year progressed, and the 9% increase in the fourth quarter was our best quarterly performance in quite some time. Additionally, the 9% increase is a comp store number, which shows good progress and sales productivity from our ongoing store base. Company-owned and independently-owned stores grew at comparable rates for the year, indicating a good balance in the results. And within the company-owned store group, our cash or retail business was up 8% in the quarter and 5% for the year. The commercial business was up 10% for the quarter and 9% for the year. And both of which we feel indicate a solid performance for the full year. Within the Commercial segment, our fleet business continued to make a very gradual recovery. You will recall that in this category, we have the multi-vehicle, landscape and contractor business on up to the class six, seven and eight over the road trucking operations. This business was up 2% in the first half of the year followed by 5% increases in each of the third and fourth quarters, which is a bit encouraging, and we anticipate continual gradual improvement in the fleet category in 2011. The remainder of our commercial business, which is basically our sales to installer customers, was up low double-digits for the year, with our two major commercial customer categories each showing good growth. Both NAPA AutoCare and major accounts posted double-digit increases for the year, and we continue to be pleased with the progress that is being made in these two important parts of our commercial business. So when we put it all together, we feel that our automotive team did a good job for us this past year. And based upon the sequential improvement that we saw in our results as the year progressed, we feel that we go into 2011 well positioned to turn in another solid performance. And finally, a few comments about Office Products. As you know, this is one segment of our business that has been the most challenged. After a number of quarters of being down slightly to even in any given quarter, we are pleased to report that Office Products was up 3% in the final quarter, and this enabled them to end the year even with 2009. A look at the Office Products detail shows that our business with the independent dealer community was up 5% in the fourth quarter, and it was up 3% for the year. And encouragingly, this business actually improved a bit over the course of the year. After being basically flat in the first quarter, we're up 2% in Q2, 3% in Q3, and then 5% in Q4. This is a nice progression, but the growth in the independent channel was offset by continued declines in the Mega Channel, which was down high single-digits in the fourth quarter, and was down low double-digits for the year. On the product side, our furniture, office supplies and technology segments, each had single-digit increases in the quarter. The cleaning and break room supplies category was down in the quarter, but after adjusting for the one-time impact of the H1N1-related products that were sold in Q4 2009, the remaining cleaning and break room products were actually up high single-digits. So the underlying cleaning and break room supply business is healthy. And on a go-forward basis, with the H1N1 distortions now behind us, we expect solid growth in the CBS category in 2011. Allowing for the adjustment in the cleaning and break room, we are encouraged by the positive growth that was generated in all four of the major product categories in the final quarter. It has been a while since we could say that, and it gives us a bit of optimism about our ability to generate positive low single-digit growth in the Office Products segment in 2011 despite the continued headwinds of lower office worker employment. So that's a quick overview of the operating side of the business. And at this point, we'll ask Jerry to cover the financials. Jerry?

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 to wrap it up, then we'll open the call up to your questions. A view of the income statement shows the following: total sales were up 14% to $2.81 billion for the fourth quarter, and this follows increases of 6%, 12%, and 13% in the first, second and third quarter, respectively. We were encouraged to show positive sales momentum in all four of our business units this quarter and for the year. For the year, sales finished at $11.2 billion, up 11% from '09. This marks 59 years of sales increases in the last 61 years. We look forward to improving this record in 2011 and beyond. Gross profit in the fourth quarter, 29.1%, which is up sequentially from 28.9% in the third quarter, but down 200 basis points from 31.1% in the fourth quarter last year. You may recall that in the fourth quarter of '09, we said our gross margin included approximately $20 million in LIFO (last in, first out) benefits. This compares to $2 million to $3 million benefit in the fourth quarter of 2010 and accounts for approximately half of our decrease. In evaluating the balance of the decline, we found that competitive pricing pressures and changes in product mix in our Automotive and Office businesses contributed to the decrease. And although less material, the escalating copper pricing in electrical was also a factor. For the year, gross margin, 29.0% compared to 29.9% in 2009, and that's down 90 basis points. Improving our gross margin is a high priority for us in 2011, and our management teams are well aware of and focused on this goal. We absolutely remain confident there's opportunity for gross margin expansion. Our strategy includes an emphasis in both buy and sell side initiatives, such as efforts to reduce supply chain costs and increase distribution efficiencies and maximizing pricing potential. For the year, our cumulative price, in which represents supply increases to us, was a positive 0.6% in Automotive, 2.5% in Industrial, positive 0.4% in Office Products and 3.6% in Electrical. Turning to SG&A. Expenses of $631 million were up 4.3% from $605 million for the same period in 2009, and at percent-to-sales, this marks a 200 basis points improvement to 22.5% versus 24.5% last year. For the full year, SG&A of $2.5 billion is up 5.3% from '09, and is 22.2% of sales compared to 23.5% in the prior year, reflecting 130 basis point improvement. Decrease in expenses as a percentage of sales for the quarter and for the year is largely due to the benefit of greater leverage associated with our 14% and 11% sales growth for the quarter and the year, respectively. In addition, we benefited from our cost reduction efforts in the last few years. As you may recall, in the recessionary period of 2009, we eliminated approximately $75 million in operating expenses, and we feel that throughout 2010, we did a pretty good job preventing these costs from creeping back into our businesses, even with our strong sales growth. We already said that around $55 million of these savings should be permanent and that's proved to be a reasonable estimate. A big part of our cost savings came from our 12% employee headcount reduction in '08 and '09. This was significant for us as payroll and related benefits run at about 60% of our total SG&A line. We consolidated some facilities and eliminated some freight routes, thus, in 2010, we only added back about 1% of that headcount including acquisitions. So we're pleased with our discipline on controlling this expense. It's certainly been meaningful to our overall results, and our management team understands we must remain focused in this area. We'll continue to assess the proper cost structure of our businesses as revenue growth continues. Tightly managing our expenses continues to be a top priority for us. Now let's discuss the results by segment. We'll cover the fourth quarter first and then we'll review the full year results. Automotive had revenue in the quarter $1,376,700,000. That was up 9%. And they had operating profit, $82.1 million, up 9.5%, so their margin expanded slightly from 5.9% to 6.0%. The Industrial Group had revenue in the quarter of $915.2 million. That was up 24%. It had operating profit of $73.8 million, up 23%. So their margin slipped just slightly from 8.2% to 8.1% for the quarter. Office Products had revenue in the quarter, $395.0 million. That was up 3%. They had operating profit of $38.1 million, that was up 41%. So excellent margin expansion there from 7.0% to 9.6% in the quarter. The Electrical Group had revenue for the fourth quarter of $125.6 million, up 40%, and operating profit of $8.8 million, up 14%. So their margin slipped to 7.0% for the fourth quarter of 2010. Now looking at the full year. Automotive had revenue for the year of $5,608,100,000. That was up 7%, and it represents 50% of the total. They had operating profit of $421.1 million, up 9%. So their margins expanded for the year 7.4% in '09 to 7.5% in 2010. The Industrial Group had revenue for the year of $3,521,900,000, 22% increase representing 31% of the total. They had operating profit, $255.6 million, and that was up 57%. So strong margin expansion from the Industrial Group from 5.6% in 2009 to 7.3% in 2010. Office Products had revenue for the full year, $1,642,000,000. That's up 0.2% and it represents 15% of the total. They had operating profit of $131.7 million, up 4%, so their margins ended the 2010 at 8.0%, up from 7.7% in '09. The Electrical Group had revenue for the year, $449.8 million. That was up 30%. It represents 4% of the total. And they had operating profit of $30.9 million that was up 22%, and their operating margin was 6.9% for the year, down from 7.3% in 2009. Total operating profit margin for the fourth quarter improved 30 basis points to 7.2% from 6.9% in the fourth quarter of '09. For the year, operating margin's up 50 basis points to 7 1/2% from 7.0% in 2009. Improved expense leverage associated with our sales increased, as well as our cost reduction efforts have driven the increase in operating margin for both the quarter and the year. We're encouraged by this progress and we're optimistic for further improvement in 2011. We had net interest expense of $6.6 million in the quarter and $26.6 million for the year, which is down slightly from 2009. We expect our net interest to be approximately $26 million to $27 million for 2011. The Other category, which includes corporate expense, amortization of intangibles and non-controlling interest, was $9.8 million expense in the fourth quarter and $51.0 million for the year. Increase on this line from the prior year is primarily due to higher expenses for incentive-based compensation such as bonuses and stock options recorded in association with our improved earning results for the year. As we look ahead to 2011, we currently project the total Other category to be in the $45 million to $55 million range. Now this assumes consistent levels of incentive-based compensation, which we would expect to incur with normalized levels of growth. For the quarter, the tax rate was approximately 36.3% compared to 39.1% for the fourth quarter in 2009. Decrease in the tax rate from last year is due to favorable foreign income taxes and a larger a time or plan valuation adjustment relative to the same period the prior year. For the year, the tax rate, 37.6% compared to 38.0%, with a decrease related to favorable foreign income taxes that we just mentioned. Currently, we expect the tax rate for 2011 to be within the range of 37.0% to 37.5%. Net income for the quarter, $118.7 million, up 20%. EPS was $0.75 compared to $0.62 last year, up 21%. For the year, net income, $476 million, up 19%. EPS of $3 compared to $2.50 in '09, which is up 20%. We're very proud of all of our associates at Genuine Parts Company for helping us achieve record or EPS numbers in 2010. Let's touch base on a few key balance sheet items. Cash at December 31 of $530 million is up $191 million from $337 million at December 31, '09. We continue to build our cash position from increased earnings and an improved working capital position. And we use our cash to fund several ongoing priorities such as the dividend, capital expenditures, acquisitions and share repurchases, which we'll discuss in more detail later. We also funded our pension plan as required from time to time with contributions of approximately $50 million in the fourth quarter and a total of $91 million for the year. Accounts receivable of $1.4 billion increased 15% from 2009, only 14% sales increase in the fourth quarter, which is not up to our standards. We do have or remain satisfied with the quality of our receivables, and we remain diligent in monitoring our exposure to write-offs and ensuring the adequacy of our reserve for bad debt. At December 31, 2010, we're confident that the company is properly reserved. Our goal at GPC remains to grow receivables at a rate less than revenue growth, which we failed to achieve in the fourth quarter. Our January comparison for trade receivables have already shown some improvement, however, and we would expect to achieve this goal each quarter in 2011. Inventory at year end was $2.2 billion, up less than 1% or approximately $11 million from December 31, 2009. Considering our sales growth for the year as well as inventory from acquisitions, we believe our management team managed this key investment very well in 2010, and we'll remain focused on further improving our inventory levels in 2011. Our accounts payable balance at December 31, $1.4 billion, is up 26% from December 31 in the prior year. Primarily, our privacy and trade payables reflects the impact of increased inventory purchases associated with our higher sales volume this year, as well as extended payment terms and other payable initiatives with our vendors. With improvement in our accounts payable position, our DPO continued to improve and we remain pleased with the positive direction of this working capital category. With our progress in the key areas of cash receivable, inventory and payables, working capital of $2.7 billion at December 31 after adding back the $250 million current portion of debt, is up approximately 3% from 2009. We're encouraged with our progress in managing working capital in 2010, and our balance sheet remains in excellent condition as we move forward into 2011. After a record year for cash flows in 2009, we had another strong year in 2010 with cash from operations totaling approximately $679 million and free cash flow after deducting CapEx and dividends of approximately $335 million. We're encouraged by the continued strength of our cash flows and remain committed to our ongoing priorities for use of our cash. These priorities are: first, the dividend, which we pay every year since going public in 1948, and we've raised it now for 55 consecutive years, effective with yesterday's board approval of a 10% increase in the company's annual dividend for 2011 to $1.80 per share from $1.64 per share in 2010. The new dividend represents approximately 60% of our 2010 earnings per share and currently yields about 3% to 3.5%. Our other priorities for cash include the ongoing reinvestment in each of the four businesses, strategic acquisitions, where appropriate, and share repurchases. Capital expenditures were $26 million for the fourth quarter, up from $20 million invested in the fourth quarter of the prior year. For the full year, CapEx at $85 million compared to $69 million in '09. We had planned for an increased level of CapEx spending in 2010 relative to '09 and turning to 2011, we expect our CapEx spending to be in the range of $100 million to $110 million for the full year. Vast majority of these investments will continue to be weighted towards productivity-enhancing projects, primarily in technology. Depreciation and amortization, $22 million, in the quarter and $89 million for the year, in line with the same periods in '09. We expect D&A to be approximately $90 million again in 2011. Strategic acquisitions continue to be an ongoing important use of cash and are integral to our growth plans for the company. After closing on six acquisitions in 2009, we completed another three in 2010, and we continue to evaluate additional acquisition opportunities as they present themselves. Thus far, in 2011, we've made two additional acquisitions, which Tom mentioned earlier, and we anticipate additional opportunities to buy acquisitions over the balance of the year. We remain disciplined in our approach to this element of our growth strategy, and generally target those both on tax and acquisitions with annual revenues in at $25 million to $125 million range, although there are certain exceptions to this rule. Fourth quarter of 2010, we used our cash to repurchase approximately 120,000 shares of our stock on a company share repurchase program. For the year, we purchased approximately 1.85 million shares and today, we have approximately 16 million shares authorized and available for repurchase. We have no set pattern for these repurchases but we expect to remain active in the program, and we continue to believe that our stock's an attractive investment and combined with the dividend, provides the best return to our shareholders. Total debt at December 31, 2010, remains unchanged at $500 million, although the $250 million credit facility maturing in November 2011 was reclassified from long-term debt to current liabilities. The second $250 million in debt is due in November 2013. At this point, we made no final decision regarding our plans for the debt as it comes due. Total debt to total capitalization at December 31, 15.1%, and we are comfortable with our capital structure at the current time. Due to the hard work of our GPC team members, we made great strides in 2010, and we are optimistic that we can build on this year's performance and show more progress in 2011 and beyond. Steady and consistent growth has defined Genuine Parts Company for much of our rich history, and we remain committed to these fine qualities. We'll continue to support this growth with a strong and healthy balance sheet and sound cash flows, further maximizing our return to shareholders. And that concludes our financial review, and I'll conclude my comments by expressing our appreciation to all of our dedicated GPC associates. We are truly proud of this group and their efforts to achieve a strong year in 2010 were tremendous. We also want to thank our customers and suppliers. We appreciate their continued support. We look forward to building on these results in 2011. And Tom, I will turn it back to you.

Thank you, Jerry. Well, that's a recap of the fourth quarter and full year of our 2010 results. From our perspective, we came through the year in good shape and we're proud of the job that was done by the entire GPC team. Thanks to their efforts, we were able to report record sales and earnings per share in 2010, and we entered 2011 with a bit of momentum and a sense that it should be another good year for our company. As we look toward 2011, the prime areas of emphasis across each of our businesses fall into four main categories. The first is generating an acceptable level of revenue growth, and our estimates at this time for 2011 are Automotive to be up 6% to 8%, Industrial and Electrical to each be up 8% to 10%, and Office Products to be up 2% to 4%. That would give us a combined 6% to 8% increase for GPC. Now with that said, our expectation is that the first quarter revenue results will probably be at the high end to perhaps just a bit above this range based upon what we have seen for the first six weeks of the quarter. Also keeping in mind that the first quarter 2010 gives us our easiest comparison, we were up 6% in Q1 last year, but then quarters two through four get a bit more challenging with 2010 increases of 12%, 13% and 14%, respectively. So the comps get a bit more difficult as the year progresses, but full year revenue growth of 6% to 8% will enable us to meet our second objective, which is to show continued operating margin improvement. And our full year guidance currently would be for an earnings per share range of $3.22 to $3.32, which would be up 7% to 11%. The third corporate-wide focus is in the areas of asset management and working capital efficiency. We feel that our team has done a good job in these two areas over the past few years, and building on that in 2011 will enable us to continue to generate solid cash flow. And the final area of focus for each of our businesses is to maintain and enhance our strong balance sheet. Doing so enables us to continue to invest for the future and to further increase shareholder value. So that completes our comments this morning. And at this point, we'd like to take your questions. So we'll turn the call back over to Christa. Christa?

[Operator Instructions] Our first question comes from the line of John Murphy from Bank of [America] Merrill Lynch.

This is Elizabeth Lane on for John. It looks like Office Products had a pretty nice recovery. It finally turned positive on a year-over-year revenue growth basis and had a pretty healthy operating margin. In previous quarters, you'd mentioned company initiatives in the segments that were underway, but I don't think specifics were given at that time. So is there any more color you can give on these initiatives?

No, I don't think we would do that on the call. But we can tell you that we think that next year will be more in line with what we did in the fourth quarter of 2010.

And with regards to the Automotive segment, with new vehicle sales improving and theoretically, the average age of vehicles should start to correct somewhat from the very high levels we've bee seeing that would theoretically lead to less demand for aftermarket parts. Is that a statement that you would generally agree with? Or are you still anticipating strong demand for replacement parts, even if people start buying new vehicles rather than fixing up old ones?

Well, in the near term, I'd say it's more the latter part of your statement than the former part. We do expect demand to remain quite strong through the early part of this year, absent any dramatic increases in fuel prices. But it will take a couple of years of increased new car sales for that to materially impact the age of the vehicles.

Your next question comes from the line of Scot Ciccarelli from RBC Capital Markets.

The EPS guidance Tom just gave, does that assume any buyback activity? Or is that just kind of assuming the same share base?

That's assuming the same share base.

So any buyback would be incremental.

Yes, sir.

And then, Tom, I guess as a little bit of follow-up to the question you were just asked about the auto aftermarket industry. Obviously, it had a pretty good '09 in general, a bang up 2010. I guess the question I have is what is it that you're watching to identify to try and figure out when the industry sales trends might start to normalize to kind of what we've seen as a more historical growth rate?

Well, following up on what Elizabeth asked prior, we certainly, we follow the new car sales for sure. But more immediately, we're looking at the price of fuel, the miles driven. We're looking at what's happening with consumer spending and retail sales. As long as they remain at historic, reasonable levels, we think demand should be pretty good.

Was there something that happened in the Office Products category that pushed the margin up as high as it had gone? And I know it was a pretty significant increase, kind of showed up as a pretty significant change, I guess, to what we have seen as a run rate.

Scot, I'll take that. Yes, there was in the fourth quarter you saw where they had the real improvement. They were doing some inventory buys at the end of the year in anticipation of price increases that were going into effect in January. So they were able to get some incentives there at the end of the year, and that was about a third of that increase. They also had -- their expenses had been cut back, and when they had a 3% sales increase, that accounted for maybe another third of it. And some of those costs that they had taken out previously, that have -- all our business units' data have not come back in, would have counted for probably another third of that increase. But that was primarily what happened, and it was in the fourth quarter, and it was strong enough to impact the full year's margins as well.

So kind of walking forward, what's the best way to think about the margin expectations for the Office category then?

Well, we've been saying for some time, our longer plans for the operating margin for the Office Products Group's 8% to 8 1/2%. And I think that we should continue to look for 8% to 8 1/2%. If revenue continues to show some progress, then they'll achieve that. But if revenue falls back in on negative territory, then their margin's going to be under pressure.

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

It's Matt Fassler and Ryan Brinkman here at Goldman. Another question on Automotive. No one's asked this explicitly, but two of your aftermarket competitors have come out and talked about a slower start to the year based on weather and perhaps other factors. And you guided that business for the year to a level -- close to the level that you printed in the second half of this year, very strong numbers, and suggested that the first half should actually be somewhat better. So can you talk about the experience you've had in Automotive, quarter-to-date, given some of those competitor comments and some of the extraordinary weather that we've experienced?

Well, what we've seen is that we were impacted by the weather in January, and to a degree, to a lesser degree, the first part of February. But our Automotive business remains pretty good for us right now. And our expectation is that they'll be able to hit the guidance that we've provided earlier in the call. So the commercial side of the business is strong. And going back to the comments we made, we did have a good quarter on the retail side of the business in our company store group, and we think that, that will be pretty good as we work our way through the remainder of the quarter and the first half. That's the one that was hit a little bit more as a result of the weather than even the commercial business.

Second question relates to Industrial. In 2008, 2009, you had lost significant vendor rebate dollars as those volumes slowed. And there was some question as to whether you might reclaim some of those dollars as the business accelerated through 2010. It looks from the numbers like you probably did not, to any great degree, and perhaps that's why our Industrial margin number was a bit higher than it should have been. Are those dollars -- might those dollars come back at some time in the future? Are we kind of normalized at this point as it relates to vendor rebate money? Or is there still some opportunity?

Matt, this is Jerry. I'll take that. We did talk about that and we looked at -- in 2009, the Industrial Group put their inventory at $100 million. Not only did the sales slow, but they cut their inventory. That was a decision that we made. They also reduced the inventory another $40 million to $50 million in 2010. Now, they were able to offset that inventory reduction because business was so strong and those incentives are based on purchases. And so if business continues, as it has been, in 2011, then we're going to get those incentives again. I would say that the incentive level that we've seen in 2010 would be more normalized going forward, with increases depending on how strong the business is.

And the base line for the tone of business would be the guidance that you gave? Or it would be levels that are higher or lower than that? How should we think about that, kind of the threshold?

I think based upon the guidance that we've given, Matt -- and I guess the only thing I'd add to what Jerry said is that I do think that we will gradually increase the level of incentives. But we still feel like the industrial team, as with all of our businesses, they can continue to find ways to take a little inventory out here and there. So I think it will be a gradual build back. I don't think we'll see a spike in any one year.

And then final question relates to LIFO. Clearly, was a bit of an issue as it related to margin in the fourth quarter. If you could talk about, based on cost movements in your business, what your expectations are for LIFO year-on-year in 2011?

As we go into 2011, our expectations for LIFO, again, well, that will be very similar to what it was in 2010. They have normal pick-up in LIFO. The $20 million in 2009 was due to the heavy inventory reduction. And the Industrial Group picked about $2 million to $3 million this time instead of $20 million. And again, our inventories weren't down as much. But we will -- I'd say that's a normal level that you'll have on LIFO going forward. We know that we can continue to bring our inventories down to a certain degree, but at this point, we're not going to do it to the detriment of a service level that would impact our revenue.

Your next question comes from the line of Chris Horvers from JP Morgan. Christopher Horvers - JP Morgan Chase & Co: On the -- given your sales outlook for the year and your expectation in previous comments that you expect to see SG&A leverage going forward, are you expecting gross margins to be down this year? And what do you expect to be the drivers of that?

No, I don't think we're expecting gross margin to be down. As Jerry mentioned in his comments, that's an area of focus for us as an organization. And I would say that gross margins will be flat to perhaps up slightly, as we work our way through the year. The primary drivers are going to be continued good expense control, I think. And I think our team did a pretty good job this past year, and we have a number of initiatives underway to continue to work to contain our cost increases. So I think it'll be more of the leverage on the sales line than it will be the gross profit side. Christopher Horvers - JP Morgan Chase & Co: And a follow-up on the -- as it relates to Office and the vendor allowances that you were able to realize in the fourth quarter. Obviously, you have to sell through that inventory to be able to realize, as I understand it, to be able to realize those vendor allowances. So it's not necessarily held up in your inventory, given the fact that a lot of the big box office retailers saw some slower trends emerge in January and February. Do you expect that the sales would have slowed in the first quarter in that business? And will that have some sort of follow-on effect on the margin line in the first quarter?

I don't believe so. They're on FICO inventory accounting in our Office Products segment, and this was an investment in inventory in anticipation of those increases. So as the products sold, whether it'd be in the first quarter or the second quarter, we're going to benefit from bringing that product in at a lower-cost. Some of it may be passed on to the customer, and some of it may not. But that's just a part of the decisions that have to be made on a daily basis, Chris, in running the business. Christopher Horvers - JP Morgan Chase & Co: So it's not as if -- so even if you brought it in, it's not as if there was some sort of big ordering out of the majors or independents that. . .

No, no, not at all. Just that our suppliers had indicated to us that they would be coming through with price increases and then we bought ahead of that. Christopher Horvers - JP Morgan Chase & Co: And then finally, as it relates to the SG&A, SG&A grew about 6% year-over-year in the fourth quarter. That was a slowdown from what you saw in the prior quarter against a tougher compare. Can you talk about any particular drivers last year or this year that drove that? And how to thinking about SG&A dollar growth in 2011?

Well, certainly, we're going to grow our SG&A at a rate less than revenue growth, and there's not any one particular thing. We've been trying to get cost under control and down based on the lower revenue we had in '08 and '09. And as revenues come back, we kept $55 million of that $75 million we took out. We kept about $55 million out of that, but that doesn't mean that we're not going to continue to focus on other expenses and trying to reduce those even further. That's an ongoing battle that we fight. And we're putting these productivity-enhancing products in place, and we're investing in that and the CapEx situations so that as business accelerates, that we don't have to add back headcount and therefore, we gain leverage on that. But as far as a percent of increase in SG&A expenses, I don't know that we can give you that. I can just tell you that it's going to be less than what our revenue increase is.

Chris, just to add a little more color to what Jerry said, today, we've got a number of people in our building representing every business unit within Genuine Parts Company. And these are all our senior office leaders and logistics people, and they're here to update one another on where we are on our various cost-containment initiatives across the company. So we're working to share best practices, and also monitor the progress that's being made. So that's the kind of thing that we're going to continue to do throughout all of this year, and there are a number of, I think, some impactful initiatives that are underway. Christopher Horvers - JP Morgan Chase & Co: And just one quick follow up on the gross margin as well. I understand the $20 million FIFO -- was there pricing pressure that you saw in the Automotive division or any of the other divisions that caused some of this gross margin pressure in the fourth quarter?

Well, there's a normal pricing pressure in all four of the businesses. But there wasn't anything more pronounced or acute in the fourth quarter than what we've seen in prior quarters.

The next question comes from the line of Michael Montani from ISI Group.

On for Greg Melich from ISI. Just wanted to follow up on the revenue growth. So Auto, 6% to 8%; Industrial, 8% to 10%; and then Office, 2% to 4%. Can you share within that what your outlook is with respect to inflation? Obviously, you guys provided the updates and where we're running there, but is there a way to think about sort of volumes versus inflation that could be driving those?

Mike, I'll try to answer that. We're going to be a bit vague only because right now, we don't know exactly what's going to happen with price increases. I would say that we're having more conversations with vendors across all four of the businesses today about potential price increases. We haven't seen significant price increases through the first month of the year, but we do expect that there'll be a bit more as the year progresses because some of their input costs have gone up, and we do think that they're going to be put in a position where they do need to raise prices some. So at this point, I would say that I would expect price increases to be at least as much as what they were in 2010, and maybe a bit more in a couple of the businesses as the year progresses.

And then just to follow up on that, from the pricing surveys we've done, especially in automotive, it looks like you all have really narrowed the gap with competitors there. And I guess the question then comes to the point where if we look ahead and the price increases to you all would be similar next year, can you talk about where you feel you are competitively today, after the price adjustments you've made to be able to pass them through? Just given the guidance, it seems like you must feel pretty comfortable with that. But just want to ask you.

Well, as far as where we feel we are today, we think we're in reasonably good position as the market stands currently. We do monitor prices across the U.S. on a regular basis. And if we see the same type of stability that we currently see, then yes, we do feel pretty good about our position. If we see prices change, then we're going to react accordingly. We're not going to find ourselves in the position we found ourselves late in 2008 and early 2009. Our folks have worked too hard to recover from that. So we'll react more quickly, but we don't see anything out there today that suggests to us that, that's going to happen. As far as our ability to pass prices on, we pass price increases on the same day that they're effective to us in three of our four businesses. In our fourth business, which is Industrial, we do have some contractual business that only allows us to pass price increases at predetermined times during the length of the contract, and we will honor that. But then we'll go back to our vendors in order to get some pricing support for those particular accounts in order to try to keep it from influencing our margins.

There are no further questions in queue at this time. I'll turn the call back over to our presenters for any closing remarks.

Christa, thank you. We appreciate each of you joining us on the call today. We felt like we had a good quarter and a year. We, again, are very appreciative to all the Genuine Parts Company associates that contributed to that. We look forward to talking to you in April to discuss our first quarter results.

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