Genuine Parts Company (GPC) Q3 2011 Earnings Report, Transcript and Summary

Good morning. My name is Brooke, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Genuine Parts Third Quarter 2011 Earnings Conference Call. [Operator Instructions] I will now turn the conference call over to Carol Yancey, Senior Vice President, Finance and Corporate Secretary. Thank you. Ms. Yancey, you may begin your conference.

Thank you. Good morning, and thank you for joining us today for the Genuine Parts third quarter conference call to discuss our earnings results and our outlook for the remainder of 2011. Before we begin this morning, please be advised that this call may involve forward-looking 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 third quarter 2011 results, and hopefully, you've had an opportunity to review them. But for those who may not have seen the numbers as yet, a quick recap shows sales for the quarter were $3,286,000,000 which was up 11%. Operating profit was $276.8 million, and that represents a 19% increase. Net income was $151.8 million, which was up 15%, and earnings per share were $0.97 this year compared to $0.83 in the third quarter of 2010, and the EPS increase was 17%. These were all record results for us. So we feel we had another good quarter. It was solid contributions from all 4 of our business segments, and we're proud of the job that is being done by the GPC team. Through their continued efforts, we feel that we are positioned to have another good year in 2011. A review of the third quarter results by business segment shows that our Industrial and Electrical operations continue to produce the largest sales increases. Motion Industries, our Industrial Distribution business, was up 18% in the quarter on top of the 29% increase in the third quarter of last year and then went over $1 billion in quarterly sales for the second consecutive quarter. So our Industrial operations continue to perform well. Acquisitions added about 3% to the Industrial increase in the quarter, but importantly, the ongoing operations generated a very healthy 15% increase. So the underlying Industrial business continues to generate strong results. And as we look a bit more closely at the sales detail, we continue to be encouraged by the solid performance that we see across a broad base of the Industrial business as evidenced by the fact that all 10 of the top product categories were up double digit in the quarter, and as a group, they were up over 20%. And then 9 of the top 10 industry segments had double-digit increases in the third quarter, and as a group, they were up over 20% also. A review of the top 20 customers shows a combined purchase increase of over 20% for this group, and one final point is that every geographic region was up double digits in the quarter. These are consistent results and as you can see, the Industrial business remains quite strong and healthy, and they're running up just over 20% year-to-date. And with the Industrial production and capacity utilization indices each continuing to look favorable, we remain optimistic about the prospects for our Industrial business over the final quarter of the year and on into the early part of 2012. Moving on to the Electrical segment. EIS had another strong performance with sales being up 22%, which is on top of a 31% increase in the third quarter of 2010. Acquisition revenue added 11 points to the quarterly increase and represents sales from Seacoast Electric acquired in August of 2010 and Cobra Wire & Cable, which we acquired on September 1 of this year. We expect Cobra to generate annual revenues of approximately $43 million, and we are pleased with this strategic addition to the EIS business. In addition to the acquisition boost that we got on revenue, copper pricing had a positive sales impact of 3%, which means that the ongoing EIS operations were up 8% in the quarter, which we feel is a solid performance. As with our Industrial business, the increases across the EIS product categories and customer segments were broad-based and consistent, which is indicative of a healthy end market, as well as a good job being done by the EIS team. Through 3 quarters, they're up 30% and with the Institute for Supply Management Purchasing Managers Index remaining above 50 through September, we're encouraged about EIS' prospects in the months ahead. Office Products was up 3% in the quarter. This follows a 5% increase in the first quarter and a 4% increase in the second quarter. So we have seen a modest deceleration in our growth rates as the year has progressed. As has been the case for a number of quarters now, our sales to the independent Office Products channel have outpaced our sales to the Mega Channel. The independent business was up 6% in the quarter, and they're up 7% year-to-date, so steady progress is being made with this customer segment. But then this is being offset by continued decreases with the Mega Channel, which was down 12% in the quarter and is down 11% for the year. On the product side, we had positive results in 3 of the 4 main product categories: office supplies; technology products; and cleaning and break room; and then we were down just slightly in the furniture category in the quarter. On a year-to-date basis, each of the 4 product categories is positive and our Office Products company is up 4%. While not up to our historical results, we do feel that S.P. Richards is performing in line or perhaps just a bit above the overall Office Products industry, and we feel that it will take a more robust overall jobs recovery for demand in the industry to show material improvement. And finally, a few comments about Automotive. We're pleased to report another 9% increase for this segment. This is the fourth consecutive quarter of 9% increases, and we feel that it is indicative of the good job that our Automotive team has been doing. Within our company-owned store group, our same-store sales were up 6.9%, and this was driven by continued solid results on the commercial side of the business where we're up 8% in the quarter. We did see a little improvement on the retail side ending the quarter at 2% after being essentially flat in the second quarter. Within the Commercial segment, we saw continued good growth in our NAPA AutoCare and major account initiatives. They combined for a 10% increase in the quarter, and they're up 10% on a year-to-date basis as well. So the results from these 2 important programs remain strong. Our fleet business was up 5% in the quarter, following 5% increases in each of the first 2 quarters, so a steady and consistent performance in this category. And then our non-fleet Commercial business, which includes AutoCare and major accounts, was up low double digits in the quarter, as well as year-to-date, again, showing a steady and consistent picture. When we put it all together, we're pleased to be able to report another 9% increase for our Automotive operations, and we feel good about their prospects over the remainder of the year. Now before turning the call over to Jerry, it is perhaps appropriate to make a few comments about our recently announced plans to take a 30% ownership position in Exego group, the leading automotive distributor in Australia and New Zealand. Exego has annual revenues of just over $1 billion, and they go to market through 430 company-owned locations in Australia and New Zealand. This investment represents an important strategic initiative on our part, which we believe positions the company for significant long-term growth opportunities in Australia and New Zealand, as well as the potential for targeted growth in Asia. The regulatory approvals required in Australia and New Zealand are well underway and should be completed within another 45 days or so. We don't anticipate any issues and expect to close on the agreement on or about December 1. As a result, we do not expect this investment to have any real impact on our business in the current year. Exego's leading market position and long and successful history, serving both the DIFM and the DIY markets, makes them a valuable partner to us. In addition, we've had the opportunity to study each other's businesses over the years, and our fundamental values and commitment to the automotive aftermarket align very well. We're also fortunate that the structure of the investment allows us to enter these new markets in a disciplined manner. Genuine Parts Company has the option to acquire the remaining shares of Exego once it has met certain earnings thresholds, which we anticipate to be several years away. While a minority owner, we intend to fully support Exego's growth strategies and learn even more about the future growth opportunities in Australia and New Zealand and the surrounding markets. As a 30% stakeholder, the return on our investment will be accounted for as minority interest income on our income statement. For 2012, we estimate an earnings contribution of approximately $0.04 to $0.05. We think this is a conservative expectation, and we expect it to grow in each subsequent year. So that's our update for today. We're excited about this growth opportunity for our Automotive business, and we will be happy to answer additional questions in the Q&A portion of the call. But first, we'd like to ask Jerry to give you an update on our third quarter and 9-month financial performance. Jerry?

Thank you, Tom. Good morning. We appreciate you joining us on the call today. We'll first review the third quarter 9-month income statements and segment information then touch on a few key balance sheet and other financial items. Tom will come back to wrap it up, and then we'll open the call up to your questions. A review of the income statement shows the following. Total sales reached another record high of $3.3 billion for the third quarter, up 11% from last year and our sixth conservative quarter of double-digit sales growth. For the 9 months, total sales are $9.4 billion, up 12% from 2010. And if you look ahead to the fourth quarter, we remain encouraged by the continued positive sales momentum across our businesses. Gross profit for the third quarter was 28.87%, up slightly from our margin in the second quarter this year and in line with the 28.91% achieved in the third quarter last year. This is significant as it shows that we met our objective of improving gross margin to an even run rate with the prior year a quarter earlier than we expected. As for the 9 months, gross margin at 28.7% compared to 29.0% last year, down 30 basis points. We're encouraged by the steady progress on this line, and over the past few periods, we expect and we expect our fourth quarter gross margin to hold at no less than our rate for the fourth quarter last year. Going forward, we would expect to show gradual improvement in our gross margins in 2012. To accomplish this goal, we'll continue to execute our ongoing buy and sell side initiatives to reduce supply chain costs, increased distribution efficiencies and maximize pricing potential. These initiatives are necessary to account the impact of factors such as competitive pricing pressures, changes in product mix and a growing mix of sales to national accounts in most of our businesses, which generally come to lower margin, but higher sales volumes. As we work towards further improving our gross margin, we'll also continue to focus on our cost-saving initiatives and overall improvement in operating expenses. For the year, our cumulative pricing through 9 months, which represents supply increases to us was plus 2.4% in Automotive, 3.3% increase in Industrial, plus 1.6% in Office Products and plus 4.8% in Electrical. Turning to SG&A. Expenses are $701 million were up 9.5% from $641 million for the same period in 2010, and as a percent of sales improved by 40 basis points to 21.4% versus 21.7% last year. For the 9 months in 2011, SG&A stands at $2.0 billion, a 9.3% increase from the same period in 2010 and at 21.5% of sales, which is a 60 basis point improvement from 22.1% of sales last year. We're encouraged by the continued improvement in our expenses as a percentage of sales, and we attribute this progress to the combined benefits of greater leverage associated with our sales growth and ongoing measures to control costs. In addition to the favorable impact of prior year expense reduction initiatives, which included a 12% headcount reduction in '08 and '09, our ongoing cost initiatives have produced further savings of approximately $30 million through September this year. We've also added back just 3% of our labor force, including acquisitions since the beginning of 2010. These initiatives continue to positively impact our costs in several areas including freight, utilities, warehouse and infrastructure cost. And in the current period serve to partially offset a $6 million expense associated with our third quarter retirement plan valuation adjustment, which we had not anticipated at the time of our last earnings call. We're pleased with our progress in effectively controlling costs thus far in 2011, and our management team remains focused in this area. Tightly managing our expenses remains a top priority, and we'll continue to assess the proper cost structure of our businesses as revenue growth continues. Now I'll discussed the segment results. For the quarter, Automotive had revenue in the third quarter of $1,611,300,000 that was up 9%. It had operating profit $141.2 million, up 14%. So nice operating profit margin expansion from 8.4% to 8.8%. The Industrial Group for the quarter had revenue of $1,089,800,000, up 18% and our operating profit is $97.2 million, up 33% so very strong margin expansion from 7.9% to 8.9%. Office Products had revenue in the quarter $447.3 million, that's up 3%. Operating profit of $27.2 million, up 2% with margin staying flat at 6.1%. The Electrical Group had revenue in the quarter $143.3 million, up 22%. Operating profit $11.1 million, up 33%. So nice margin expansion from 7.2% in the third quarter last year to 7.8% third quarter this year. Looking at sales by segment. For the full 9 months, automotive had revenue of $4,601,300,000, that represents 49% of the total. That's up 9%, and it had operating profit of $377.9 million, up 11.5%. So margins expanded 20 basis points to 8.2%. Industrial Group had revenue for the 9 months $3,140,900,000 representing 33% of the total and that's up 20.5%. With the operating profit $248.5 million, up 37%. So again, strong margin expansion for the 9 months, as well as the third quarter going from 7.0% to 7.9%. Office Products had revenue for the 9 months $1,298,000,000. That represents 14% of the total, up 4% with operating profit of $96.0 million, up 2.5%. So margins down slightly from 7.5% to 7.4%. The Electrical Group had revenue for the 9 months of $420.0 million. That's 4% of the total, up 29.5% with operating profit $30.4 million, up 37%. Again, nice margin expansion from 6.8% to 7.2% of revenue. So on a consolidated basis, total operating profit increased by 19% in the third quarter. Operating profit margin improved 50 basis points to 8.4% from 7.9% in the third quarter 2010. For the 9 months, total operating profit increased 18%, and operating margin of 8.8% is up 40 basis points from last year. Now this is solid progress for both the quarter and the year, driven by the improved expense leverage associated with our sales growth and our cost management efforts noted earlier. We had net interest expense of $6.2 million and $19.0 million for the third quarter and 9 months, respectively, which is down slightly from 2010. We continue to expect our net interest for the full year to be approximately $25 million to $26 million. The other category, which includes corporate expense, amortization of intangibles and noncontrolling interest was a $23.4 million expense in the quarter and is $53.2 million for the 9 months through September. This quarter's expenses up approximately $10.5 million from the third quarter last year and primarily reflects the difference in a $3 million favorable retirement plan valuation adjustment recorded in 2010 and a $6 million expense recorded in the third quarter this year as mentioned earlier. With the exception of this line item, the expenses in other are relatively in line with last year subject to slight increases in expenses like incentive-based comps, such as bonuses and stock options. We currently project the total other category to be approximately $60 million for the full year. Tax rate for the quarter was approximately 38.6% compared to 38.0% for the third quarter in 2010. Increase in the rate was due to the nondeductible status of the retirement plan adjustment just discussed. For the 9 months, our 36.8% effective tax rate compares favorably to the 38.0% for the same period last year, with the decrease in the rate due to the favorable adjustment in the first quarter of this year associated with the expiration of the stature of limitation related to international taxes. We expect the tax rate for the full year in 2011 to be in the range of 36.5% to 37%. Net income for the quarter, $151.8 million, was up 15%. EPS, a record $0.97 compared to $0.83 last year, up 17%. For the year, net income is $430.2 million, up 21%. EPS $2.72 compared to $2.25 in the prior year, which is also up 21%. Now let's touch base on a few key balance sheet items. Cash at September 30 of $535 million is up slightly from September 30 last year and remains strong. We built our cash position from increased earnings, effective asset management and cost reductions, and we continue to use our cash to fund several ongoing priorities such as the increase in the dividend, capital expenditures, acquisitions and share repurchases. We'll discuss each of these areas in more detail later. We'd also add that in the third quarter, we used $43 million in cash to fund our pension plan, which is required from time to time. We expect to continue to generate consistently strong cash flows through the balance of the year. Accounts receivable, $1.53 billion, increased 10% from September 30, 2010, on an 11% increase in sales for the third quarter. This is an improvement from where we were last quarter and is in line with our company goal of growing receivables at a rate less than revenue growth. So good to see some progress in this area, and we also remain very satisfied with the quality of our receivables. Inventory at 9/30 was $2.25 billion, up 1% from December 31, 2010, and up 3% or $68 million from September 30 last year. In consideration of our double-digit sales growth, we believe the management team continues to manage this key investment very well, and we remain focused on further improving our inventory results over the balance of 2011. We improved our accounts payable position again this quarter with trade payables increase in the $1.59 billion, up 16% from September 30 in the prior year. Our progress in trade payables primarily reflects the impact of increased inventory purchases associated with our higher sales volume, as well as extended payment terms and other payable initiatives with our vendors. With the improvement in our accounts payable position, our DPO continues to improve as well, and we remain very pleased with the positive direction of this working capital account. Working capital of $2.4 billion at September 30 is down 10% from last year and for comparison purposes, when we add back the $250 million current portion of debt at September 30, 2011, working capital is basically unchanged from September 30 of last year. We're encouraged with our ongoing progress in managing working capital and our balance sheet remains in excellent condition. Total debt at September 30 remains unchanged at $500 million. The first $250 million credit facility matures in November this year and is accounted for in current liabilities. We have a new signed agreement extending this debt at 3.35% interest rate for another 5 years, and we'll reclassify the debt to long term upon funding in the fourth quarter. Second, $250 million in debt is due in November 2013. Total debt to total capitalization at September 30 were 14.7%, and we're comfortable with our capital structure at this time. While our several consecutive years of strong cash flow, we expect to generate strong cash flows for the full year and continue to estimate cash from operations of approximately $700 million for the year. At this level, free cash flow after deducting capital expenditures and dividends should be more than $300 million, which is in line with last year. We are pleased with the continued strength of our cash flows and remain committed to our ongoing priorities for the use of the cash. As noted before, these priorities are our first to dividend, which we paid every year since going public in 1948 and raised for 55 consecutive years. Our 2011 annual dividend of $1.80 per share represents a 10% increase from $1.64 in 2010 and represents a payout of approximately 60% of our 2010 earnings per share. Currently, the dividend is yielding approximately 3.3% and historically, had ranged from 3% to 4%. Additional priorities for cash include the ongoing reinvestment in each of the 4 businesses, strategic acquisitions where appropriate and share repurchases. Our investment and capital expenditures was $22.2 million for the third quarter, down from $31.0 million invested in the third quarter last year. For the 9 months, CapEx is up slightly to $63.9 million for 2011 compared to $59.0 million in 2010. We continue to expect our CapEx spending to be in a range of $100 million to $110 million for the full year with the vast majority of these investments weighted toward productivity and enhancement projects, primarily in technology. Depreciation and amortization $21.5 million in the quarter and is $66.9 million for the 9 months, which is in line with the same periods in 2010. We expect D&A to hold relatively constant with last year at approximately $90 million for the full year. Strategic acquisitions continue to be an ongoing and important use of cash and are integral to our growth plans for the company. In the third quarter, our Electrical business completed the Cobra Wire & Cable acquisition on September 1 and our Industrial unit made a small acquisition in July. Combined with the Industrial's 2 acquisitions in the first quarter, annual revenues for the acquired companies add to approximately $125 million, and as Tom covered earlier, we also recently announced our investment in Exego, which is expected to close in the fourth quarter. So we continue to find opportunities to do acquisition and remain disciplined in our approach to this element of our growth strategy. We're excited about the growth potential of a large investments such as Exego, but we will continue to primarily target those bolt-on types of acquisitions with annual revenues in the $25 million to $150 million range. In the third quarter of 2011, we used our cash to repurchase approximately 1.2 million shares of our company's stock on the company's share repurchase program. Year-to-date, we purchased approximately 2.4 million shares and have another 13.5 million shares authorized and available for repurchase. We have no set pattern for these repurchases, but we expect to remain active in the program, as we continue to believe that our stock is an attractive investment and combined with the dividend provides the best return to our shareholders. We're very pleased with our third quarter operating results and must thank all of our dedicated GPC associates for doing such a great job. We achieved our goals through their hard work, and we just can't say enough about their commitment to the success of Genuine Parts Company. As always, we also want to thank our customers and suppliers. We sincerely appreciate their continued support. Looking ahead, we remain optimistic in our outlook for the fourth quarter of 2011 and look forward to reporting continued progress in growing our sales and earnings and further improving our margins and working capital position. We remain committed to producing steady and consistent growth for the company, and we believe we have the right people and the right strategy to do this. As always, we'll continue to support our growth plans with strong cash flow and a healthy balance sheet further maximizing our return to shareholders. Tom?

Thank you, Jerry. Well, that pretty much concludes our review of the third quarter and 9-month results. And with sales up 12% year-to-date and earnings per share up 21%, we think that our folks have done a good job, thus far in 2011. Now as far as the outlook for the final quarter of the year, we continue to feel good about our overall prospects. The underlying fundamentals in the Automotive aftermarket remain generally favorable, and gasoline prices have moderated somewhat over the past few weeks. Industrial production, capacity utilization and the purchasing managers index are each at healthy levels, creating a favorable end market climate for our Industrial and Electrical, Electronic businesses. The outlier for us is the Office Product segment, where we anticipate continued sluggish demand across the industry for a while yet. So the external conditions remain favorable in 3 of our 4 business segments currently. However, at the same time, we are aware of the overall uncertainty in the outlook for the general economic climate and its potential impact on end market demand. With all of that said, our fourth quarter expectations are for our Automotive operations to be up 7% to 9%, Industrial and Electrical to be up 10% to 12% each, Office Products to be up 2% to 4%. And this would combine for a 7% to 9% increase for GPC for the fourth quarter and will put us up 11% to 12% for the year. And with revenue increases in this range, we would expect earnings per share to be $3.51 to $3.55 for the full year, which is an increase from our prior guidance of $3.40 to $3.50, and it would put us up 17% to 18% for the year. From our perspective, an 11% to 12% revenue increase this year on top of last year's 11% increase and an EPS increase of 17% to 18% this year following last year's 20% improvement would represent another good performance from the GPC team. And as said earlier, we're proud of the job that they're doing. At this point, we'd like to try to answer any questions that you may have, and we'll turn the call back over to Brooke.

[Operator Instructions] Your first question comes from John Murphy with Bank of America.

Tom, just a question that is sort of a more macro question. In all of your businesses, you guys are doing well and seen big increases. Sounds like you're pretty encouraged about the fourth quarter. Yet there's this constant fear among investors and obviously, in sort of the popular press and sort of everywhere you look these days, that there's another shoe about to drop. I mean, what gives you the comfort that you're going to see this strength in the fourth quarter? And do you believe that in your segments, you're really gaining market share? Because it seems like there's partially some outperformance that's going on here as well because of market share gains.

Well, John, we're very much aware of what's being reported in the media. We read the same periodicals and hear the same news reports, and certainly, the overall economy is not enjoying robust growth. At the same time, however, what we're experiencing in the marketplace is better than what the overall economic indicators would lead us to suspect. And in talking with our customer sets across all of the businesses, the anecdotal information that we get is that everybody's aware of potential slowdown, but for right now, they don't see it in the day-to-day activity. As far as market share, I'd say that our numbers would suggest that we're holding our own in a minimum and perhaps taking a little bit in some cases.

Okay. And then just a second question on the pricing environment. I mean, you indicated that there were some pockets of competitive pricing. I'm just curious in the 4 segments what you're seeing as far as pricing and if you're able to take prices, your input costs rise.

Well, if we look across each of the 4 businesses, price increases year-to-date in Office Products have been 1.6%, in Automotive 2.4%, in Industrial they're 3.3% and Electrical/Electronic, they're 4.8%. So we have seen some price increases, and we have been able to move them forward. You've heard us say before that we do have some contractual agreements with certain customers, primarily in the Industrial and Electrical/Electronic business. And in those cases, we have some pricing windows that we need to adhere to. So there may be a little bit of lag in the implementation of some price increases in certain cases. But by and large, we are able to move the prices through. The overall pricing environment across all 4 of the businesses remains as it has been. It's been pretty competitive, but I think our teams have done a very good job of adjusting and making whatever changes they need to make in order to enable us to continue to move ahead.

Okay. And Jerry, just on the financing, doing the $250 billion at 3, I think you said 3.35% for the next 5 years. I mean, is there a possibility that you would consider taking on some more debt here, just 14.7% debt to cap. Your stock looks inexpensive. I mean, would you consider sort of a potential slight levering up and recapitalization to maybe get more aggressive on share buybacks or potentially acquisitions?

John, I don't believe we would leverage the company to do a share repurchase program. We've been doing share repurchases since 1994, and if something dramatic were to happen in our stock to cause a major weakness, certainly that would be an option. But we would be willing to leverage the balance sheet up to make more acquisitions and support the company's growth that way. But I don't think you're going to see us leveraging the balance sheet to increase the share repurchase program.

Okay. And then just lastly on Exego, I mean, you guys mentioned that might be a foray into growth overseas, particularly in Southeast Asia. Just curious if we need to wait for you to make the acquisition with the other 70% or as you're going through that earn out process, could you actually do that, execute on that growth before you own the remaining 70%?

The first priority, John, will be to work with the Exego folks in driving their growth, and frankly, we're already underway with that. And we like what we see in the very, very early days. So priority one will be further penetrating the current markets of Australia and New Zealand. Priority 2 would be to move potentially into some of the surrounding markets. And if, in fact, it made sense for the entity, for Exego to do that, then we would be very supportive of that. But I think first and foremost, we'll continue to follow the plan that's been laid out for driving the growth in their home markets.

Your next question comes from Christopher Horvers with JPMorgan. Mark A. Becks - JP Morgan Chase & Co, Research Division: It's actually Mark Becks on for Chris. Focusing on the Automotive side that remains strong, can you speak to some of the initiatives that you're implementing to drive market share? And also you mentioned the Retail business acceleration. Can you talk to what's driving that? And was the improvement steady throughout the quarter?

Well, on the overall Automotive performance, the main initiatives we would comment on are the same ones we mentioned in our prepared remarks and that would be our AutoCare and major account initiatives. These are our 2 primary programs on the commercial side of the business, and they continue to perform really well there. So we just continue to pay a lot of attention to those and do what we can to drive the performance in each of those. We would not want to get too specific in terms of the individual initiatives that we have there. But we are pleased with our results thus far. The retail side of it, it was improvement, but modest improvement. We were up 3/10 of 1% in Q2 and we were up 2% in Q3. So we wouldn't consider that a major comeback. We're pleased to see a bit of a turnaround, but we'd like to get a couple of more quarters under our belt with increased improvement on the retail side before we think that we've really made the turn there. We continue to see a lot of discipline on the part of the consumer in their spending patterns. And anything that's discretionary is being pushed off for the most part, and it's only the critical parts that are needed that we're really seeing reasonable growth with at this point. Mark A. Becks - JP Morgan Chase & Co, Research Division: Okay. I know it's a little bit early, but just looking at the aftermarket for 2012, do you think the same dynamics that we're seeing now, such as industry sales exceeding kind of the historical growth rate of 2% to 4% and then also the commercial side of the business outpacing the retail, do you think those dynamics continue?

Well, we think there's a good possibility that they will. That the number of vehicles is relatively constant, but the age of the vehicles continues to increase and even with miles driven being down modestly, the wear and tear on those older vehicles has an incremental impact on parts demand. So we do think that there is a possibility that we'll continue to see good demand in the market. And then as far as the DIFM versus the retail, again, our expectation would be that, that will continue to grow at a rate a bit in excess of the overall Retail business because of the complexity of vehicles and whatnot. So we continue to be optimistic about the aftermarket for the foreseeable future. Mark A. Becks - JP Morgan Chase & Co, Research Division: Okay. And just switching over to Industrial. Obviously, those end markets remain strong. If the ISM or capacity utilization, some of the metrics say you're looking at do slow, what kind of reasonable growth rates should we be thinking about for that business?

Depends upon how much they slow. If they slow modestly, I think that we can look for mid to high single-digit growth in that business. If we see dramatic drop off as we did in the fourth quarter of 2008 and on into the early part of 2009, then I think we're going to be battling hard to keep our head above water. But right now, both of those indices look favorable. They both improved as you probably know in the recent round of reports that came out. So if we see gradual moderation, we think we'll be able to show a pretty good growth. But if we see major deceleration, then we're going to be impacted like everybody else. Mark A. Becks - JP Morgan Chase & Co, Research Division: Got you. And then just one final question for me. Can you speak to really what's driving the EBIT margin improvement in Industrial? Did vendor allowances help out at all this quarter versus 3Q of last year? And then now just looking at the margin structure that side of the business, you're bouncing up against kind of your target of 8%, 8.5% EBIT margins. Is there maybe your thoughts on that number?

Mark, I'll take that. Yes, it did impact our business. We were up slightly in the rebates and allowances in the third quarter compared to third quarter last year. It had an impact in gross margin maybe 10 to 20 basis points, and some of that converged on down to the EBIT margin. As far as your question about us achieving our goal of 8% to 8.5%, you're right, we are getting closer to that goal but that doesn't mean we can't change the goal after we get there, we'll just raise it. And that's just the nature of the beast here, but we certainly want to make sure that we can achieve that 8% to 8.5% operating margin target that we set.

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

This is Patrick Palfrey sitting in for Scott today. I guess last quarter, you had mentioned that in terms of within auto, commercial customers were starting to get the absolute needed repairs and foregoing as much as possible. As gas prices have started to come back from $4 in May, are you seeing that starting to change or is that still continuing?

No, I think that's continuing. I think what needs to be done is getting done, but not much more than that quite honestly. Average ticket prices at repair facilities are up over what they might have been historically, but the incidence of repair is flat to what it had been. And then there's the tendency to look for lower-priced product or just the repair work that has to be done at that moment.

Next question comes from Tony Cristello with BB&T Capital Markets. Anthony F. Cristello - BB&T Capital Markets, Research Division: One question related to the gross margin side. You talked about some initiatives. You talked about gross margin next year possibly being up some. Is there any more clarity or color you can shed on some of the potential initiatives you may be putting in place that will help you offset some of the competitive pressures and some of the other things you talked about?

I don't think we can give you too much color on that, Tony. The initiatives are grouped into a couple of areas. You got the buy side, which we're working hard across all of the businesses, and then you got the sell side. And on the sell side, you've got price, and we've been working hard to elevate our level of pricing sophistication. And then you got sell side mix, which we are working on as well. So there are basically 3 levers that we're trying to pull simultaneously, and I think at this point, we've got a degree of confidence that our team is getting a bit of traction in those areas, and we feel that we should, in fact, stabilize as we get into the fourth quarter and then move a bit ahead as we go forward. Anthony F. Cristello - BB&T Capital Markets, Research Division: Do you think what you've just gone through in this cycle and what you're continuing to go through in terms of your growth here of late has certainly, I believe, outpaced sort of what our expectations would have been and certainly held up well. Do you think there's a widening of the gap between you and some of the smaller independents in the marketplace and sort of how you're viewed via your customers in general?

Well, we don't have hard data to support what I'm about to say, but our feeling is that the larger companies perhaps are performing a bit better than some of the smaller companies. And we think that, that perhaps is going to continue as we work our way forward into 2012. And frankly, we think it's going to be kind of the environment we're going to be in for a period longer than that. Anthony F. Cristello - BB&T Capital Markets, Research Division: Is that a function of capital or balance sheet strength more than anything? Or is it just your ability to integrate your technology and sort of deliver a level of customer service that some of the smaller guys aren't able to do right now?

I think it's a combination of all of those things and more. I think it's just a confluence of things that are coming together currently, and our feeling is that if we'll just continue to do the things that we know are important to drive our business that we should be able to perform in line with the market and hopefully just a little bit better than what the market performance is. Anthony F. Cristello - BB&T Capital Markets, Research Division: Okay. And maybe one last question. When you talked about the SG&A that you've taken out, 12% or so in 2008, 2009, and when you added back about 3% of labor since 2010, if we assume that the overall economy grows at a modest pace in the next few years, are you at a level from an infrastructure standpoint that you would only have to add back minimal labor? And could you just remind me again where the majority of those labor cuts or 12% reduction took place via a segment breakdown?

Well, we don't have it by segment breakdown, but it was pretty consistent across all of the businesses. Going back to your first point, we do think if we have modest growth, any incremental headcount addition will be less than the growth that we're experiencing. And we continue to invest, as Jerry mentioned earlier, we continue to invest in technological initiatives that we think enable us to do a better job without adding the incremental people that we might have had to in the past or they give us better information to manage the business. So they're the primary investments that we're making today quite honestly.

Your next question comes from Ryan Brinkman with Goldman Sachs.

Regarding the top line at Industrial, obviously, the trend has also been very strong. Last week, Fastidol [ph] also reported strong 3Q sales, but mentioned too, that they were starting to see more recently some anecdotal signs of slowing. And I know that you're encouraged by some of the macro indicators, but is there anything -- I'm curious, that you're seeing on the ground, which could suggest to you that the strong sales growth could start to slow perhaps near term?

Our expectation, Ryan, near term is that it should be more of the same. And we based that on what our operators are telling us, and they're getting it from what they're seeing in the customers' places of business. Additionally, we're just trying to talk with major customers and key suppliers to see what they're experiencing in the current environment. And at this point, we would just feel like it should continue at or about the pace we've seen in the most recent quarter. So there's nothing yet that says that there's a drop-off. That's not to say that it won't be there, but we don't see it as yet.

Okay. Great. And I think this is a frequently asked question on your calls, but I'm always interested in your answer and how it changes over time. I know that dividend growth is the highest priority for capital allocation, but how are you thinking right now about the balance between acquisitions and share repurchases? And does the Exego acquisition have any impact on the amount of capital you might allocate to North American acquisitions going forward or is that somehow separate?

Ryan, this is Jerry. I'll take that. No -- I'll answer your last question first. It doesn't really have any impact on our position as far as going forward and continuing to make the acquisitions in the categories that we talked about earlier. And yes, there's always an ongoing discussion and a balancing act between the capital of allocated acquisitions and the capital allocated to share repurchases. Our feeling is that we can do both. Our feeling is that doing both is the best way to maximize the shareholder value, and I think that we'll be able to be in a position to do so. But there comes a time sometimes that the Genuine Parts Company is the best acquisition we can make. So that's when we're more aggressive in the share repurchase program. And there's other times that we feel that for longer-term growth, we're going to have to invest in acquisitions and get 1% to 2% top line growth out of those acquisitions. So that's the target for us. I think we can do both. Our plans and structure is to continue to do both.

Your next question comes from Brian Sponheimer with Gabelli. Brian Sponheimer - Gabelli & Company, Inc.: So if I'm to understand this correctly, you're seeing average ticket price go up in auto, given the percentage of sales that's going to it and an older -- repairing an older vehicle, but number of or ticket count is relatively flat. If we're thinking about 2012 and let's say we get relatively flat gas prices and some sort of pure pickup in economic activity, what confidence is there that you continue to see an increase in trend on the average ticket, but you also have the boost from ticket count?

Brian, I'll take that. Just a point of clarification. That comment is specific to the repair side of the business, our customer base, and we don't know for sure. But what we feel will happen if there's a relatively tranquil market is that over time, people are going to have to get fixed some of the things that they haven't fixed here before. So we would hope and frankly, we would expect some increase in ticket count with no decrease in average value per ticket. Brian Sponheimer - Gabelli & Company, Inc.: Okay. And that's a potential major positive as you're looking to 2012?

We hope it plays out that way. Brian Sponheimer - Gabelli & Company, Inc.: On the cash outside, $43 million into the pension this quarter. How much of that was due to change in discount rate 2010 to 2011 from last December? And potentially, what -- how should we think about this directionally looking into 2012?

Brian, we take into consideration all the assumptions that you have to in making a contribution to the pension plan. It is our plans and our intent to keep that pension plan 90% fully funded and meet all of those obligations. We'll just have to wait and see where the market goes and what the assumptions that the actuaries come in with, but our expectation now is that we will make another contribution in 2012, a similar size. Brian Sponheimer - Gabelli & Company, Inc.: And sort of -- if I'm thinking about the $43 million, that's what you're basically going to be putting in for the entire year or should we assume another contribution in the fourth quarter here?

No. At this point, there shouldn't be another contribution in the fourth quarter. Brian Sponheimer - Gabelli & Company, Inc.: Okay. And if I may ask one more, you talked about the breadth of strength on the Industrial side. Any indication anecdotally that you won't necessarily see that 9 to 10 top industries performing at that same rate for the fourth quarter? Or should we just continue to see the same breadth across the industry?

Well, I think we'll see strength across all of the businesses. And by the way, the one industry that was not up double digit was up just over 9%, and I think we'll see some similar consistency across the industries. I don't know how long we can generate 20%-plus increases across top industries, top customers, top product categories. But we don't have any indication right now of any slowdown in demand for our Industrial business. One of the things that we try to stay abreast of our project work that our customers are planning to do. We get 2 types of demands. We get immediate demand when a piece of equipment is down and it needs a component to get it back up, and then we also get some planned preventive maintenance. And on those, usually the customer will confer with us in advance to make sure we'll have the appropriate items that they're going to need for that maintenance. And in terms of that project work, we haven't seen any moderation in the backlog on those to this point, and that gives us a little confidence as well that our business should hold up comparatively well as we work our way over the next quarter or 2.

Your next question comes from Michael Ward with Ticonderoga.

Just first off, I may have missed this, but did you give a breakdown on the performance on the Automotive side, the professional versus the cash?

If we look at the total commercial in our company store group, it was up 8%. AutoCare and major accounts combined for a little over 10% increase. Our fleet business was up 5%, and then if we look at our total commercial category, which would include fleet and include -- or if we take fleet out, I should say, it would include major account and AutoCare, as well as other accounts, they were up low double digit.

Double digit, okay. And the -- I'm sorry, did you say Retails business?

Retail was up 2% after being up 3/10 of 1% in the second quarter.

Okay. Just a follow on the Exego transaction, I'm just curious at what drove the transaction? Is it the structure of the market or is it the growth in Asia? I mean, historically, this is kind of your first investment outside of North America, is that right?

Well, no. If we go back to the mid-70s, we actually made an investment in Europe, but this would be the only thing we've done outside of that since the mid-70s. We've known the people at Exego and its predecessor company for over 20 years. About 2.5 years ago, the CEO of that company was going to be in the U.S. visiting with automotive companies, and they asked if he could come by and visit with Genuine Parts Company. We said certainly. And we had a chance to kind of reconnect with the company. We, even though we've known them for over 20 years, we've not had much contact prior to about 2.5 years ago, for maybe the 3 or 4 years prior. Since that initial visit, we've had several additional visits with the CEO. And then as things really started to look like there might be something that could be good for their shareholders and our shareholders, we've had teams of people meeting here and there, looking at opportunities and looking at what it could mean. So we see a lot of commonality in the 2 businesses. We see some growth opportunities in our home markets, and the projected growth rates for Australia and New Zealand are a bit stronger than the projected growth rates for North America. And then we also see the larger growth rates potentially in some of the Southeast Asian markets that Exego probably would be the right platform to use for expansion into those markets. This does not at all signal any less confidence than what we've had in our North American business, and we'll continue to, I think, do the kind of job that we have been doing. In fact, it's a vote of confidence for our Automotive management team that we feel that we can make this move and at the same time, count on our North American team to continue to do the good job they've been doing.

[indiscernible]

Does that explain it, Mike?

Yes, it does. I really appreciate that.

We have time for one last question. Your next question comes from Michael Montani with ISI Group.

I was going to ask about, obviously, the business is operating now with a lot of momentum. And just hoping that you could share some insight, Tom, when you go back to Q3 and Q4 of '08, it seems like a challenge where at that time in Q3, Industrial is running up 7 but then went flat in the fourth quarter and there's obviously some unique things that happened then. But if you think now about what you're hearing, maybe specifically be it from volumes or from order backlog standpoint, can you just provide sort of an update on how this is different?

Well, we don't see -- in the marketplace, we don't see any indication yet of any material slowdown. We don't see it in the data, and we don't see it in the marketplace. We started to see it in the data in the fourth quarter of '08, and we certainly were experiencing it in the marketplace. And it was, as I recall, the second week on October of 2008 that we saw a dramatic drop off in demand in the Industrial side. We don't see anything that would indicate that, that type of drop off is out there. And in fact, we don't see a drop-off at this point. So our sense is that we should be performing at reasonable levels at least through the end of this year and on into the early part of next year, and then we'll just have to moderate what's going on and see how we react to whatever may happen, but there's no indication of a slowdown at this point.

Got it. And then as it relates to municipalities and state budgets, we have had some concerns, more macro related to those areas. Can you speak at all to the trends you're seeing from those customer segments? And is there any color you can provide in terms of how significant they are? Obviously, in areas like office or fleet and auto, I would think there's some exposure there.

Well, if we look at what those customer sets are going through, obviously, they're under a lot of pressure. So they're going to be looking for the lowest viable cost for any of the product that they might buy from our Automotive business for sure, the heavy duty side of it as well with some of the fleets that they run. So we can see some downward pressure there. At the same time, there's some significant reductions in headcount that are being forced upon those customer sets, some of which may come in areas that we deal with, that might, in fact, moderate some of the downward pressure and maybe we can provide more service or better value for them rather than them doing it themselves. The offset is that they're reducing headcount across their offices as well, and that has an impact on our customer base. We don't sell to any of these people directly, but our customer set does, and demands for them would be off some. So I think it will be perhaps neutral for us on the Automotive side, but somewhat negative on the Office Products side.

Okay. That's helpful. And the last question that I had was just as it relates to price. With the guidance of sales as sort of 7% to 9% top line, is it fair to think of that as perhaps 2% to 3% of price and then volume 5% to 6% just given what we saw in this quarter or how would you frame that?

I think that's a fair assumption.

Okay. So perhaps we might have seen sort of a peak of inflationary cost into you at this point, or is that...

We don't see much happening in the fourth quarter, but we do know that in the first quarter of next year, we will see some more price increases across some of the businesses. But we don't think they're going to be extraordinarily high at this point.

Your next question comes from Richard Hilgert with Morningstar.

On the Industrial segment, are there any particular competitors that you're finding that you're displacing in any particular segments of that group?

No, those things ebb and flow. We win some, we lose some and sometimes we win from one and sometimes we lose to one. So I think it's fairly constant and fairly normal to what we've experienced in the past.

Okay. Are there any particular subsectors in Industrial that stand out in your mind as being stronger than others at this point?

Well, for sure, as we said, 9 of our top 10 industry categories are running up double digit. The one that's not double digit is up 9%, but we've got some really strong things happening in some of the energy-related businesses, some of the infrastructure-type businesses that we're seeing a little bit of positive right now. Anything related to housing is not very strong for us, but the remaining businesses, overall, are performing at a pretty high level historically.

Okay. So mostly energy and infrastructure comes to mind?

Some of it.

Okay. All right...

Anything -- I might mention anything, some of the original equipment manufacturers are doing quite well, and we're benefiting and enjoying some of that success as well. Automotive is good right now because it's coming back off of lower levels from prior years. So it's pretty much across the categories with the exception of housing.

Okay. Got it. On the acquisition of or future acquisition of Exego, the 3 players down there, Autobarn, Repco., which is owned by Exego and Supercheap. Repco has come from behind a little bit in terms of its customer satisfaction down there. Autobarn has consistently led the group. In the metrics that you're assuming or that are part of the deal for the rest of the acquisition of that group, is part of that based on CSI improvement? And if so, how do you think that they could go about gaining a little bit better on customer satisfaction?

Well, it's our future acquisition of the 70% will be indirectly tied to CSI improvement, because it's based on earnings. And earnings are going to be driven by improved revenue growth, and that's going to happen because of improved customer satisfaction, perhaps. I'd rather not get into the specifics as to what some of the initiatives are. But I would say to you that some of the things that collectively we and the Exego/Repco management team have talked about as areas of opportunity are being implemented now. And the early results would indicate that we're probably on the right path with some of the things that we're doing.

Is the way that the market works down there, is it similar to what you do up here in North America in terms of you have a delivery vehicle that goes out makes a milk run to various parts or garages, does that kind of delivery go on also in Australia? Does that kind of service level exist?

Yes. It's not a milk run though, it's hot shot delivery. We, here and there, you've got to able to get a part to your customer within 20 to 30 minutes or there are other options for them. So our emphasis is on making sure that we give that kind of delivery service consistently, day in and day out, week-after-week both here and there.

I will now turn the conference back over to management for closing remarks.

Thank you, Brooke. We thank each of you for joining us today. We appreciate that, and we appreciate your continued interest in and support of Genuine Parts Company. We look forward to talking to you in the future.

Thank you. This concludes the conference. You may now disconnect.