Genuine Parts Company (GPC) Q4 2011 Earnings Report, Transcript and Summary

Good morning. My name is Jodie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Genuine Parts Company Fourth Quarter and Year-End Earnings Release Conference Call. [Operator Instructions] I would now like to turn the conference over to Ms. Carol Yancey, Senior Vice President of Finance. Please go ahead.

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 2012. 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 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 normally do, Jerry Nix, our Vice Chairman and Chief Financial Officer, and I will share the duties today. And once we've concluded our planned comments, we will look forward to answering any questions that you may have. And we're pleased to tell you that we look forward to having Paul Donahue, GPC's recently-elected President, joining us on our April conference call. Now earlier this morning, we released our fourth quarter and year-end 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 that sales for the quarter were $3,014,000,000, which was up 7%. Net income was $135 million, which was up 14%, and earnings per share were $0.86 this year compared to $0.75 in the fourth quarter of 2010, and the EPS increase was 15%. And this enabled us to end 2011 with sales of $12,459,000,000, which was up 11%. Net income was $565.1 million, which was up 19%, and earnings per share were $3.58 this year compared to $3 last year, and that's an EPS increase of 19%. Now we did see some moderation on our fourth quarter revenue growth and our 7% increase in the quarter was our lowest of the year. However, it is in line with the guidance that we provided at the end of Q3, and it is also on top of a 14% increase in the fourth quarter of 2010, which was our strongest quarterly performance of 2010. It's important to say that we continue to feel good about the progress that we're making on the revenue side. And then we were pleased to be up 15% in earnings per share in the quarter, especially on top of a 21% EPS increase in the fourth quarter of 2010. These are solid results in our opinion and as the full year -- as are the full year increases, and our 2011 results follow a very similar performance in 2010 when sales were up 11%, net income was up 19% and earnings per share were up 20%. So back-to-back good years from our perspective, and we entered 2012 with some positive momentum. A review of the revenue results by business segment shows that our industrial-related businesses continue to produce the strongest performances. Motion Industries, our industrial distribution group; and EIS, our Electrical/Electronic business, were up 13% and 10%, respectively, in the quarter, and they were up 19% and 24%, respectively, for the year. In Motion's case, the 19% increase for the year follows a 22% increase in 2010. Acquisitions added 2% to the quarterly increase and 3% to the year-to-date results, so you can see that the underlying industrial business remains solid. And as has been the case for some time now, these strong results are widespread across the business as evidenced by the fact that every geographic area was up double digits for the year. Additionally, our top 10 product categories had double-digit increases. Our top 10 industry segments were up strong double digits as a group, and our top 20 customers were up over 20% on a combined basis. So the good results were broad-based, and they were quite consistent from a product, customer, industry segment and geographic perspective, and we're pleased with the overall sales strength and the balance that we see in our industrial business. Moving onto the Electrical/Electronic segment, at plus 24% for the year, they obviously turned in another strong sales performance. Acquisitions added 7% to the quarterly increase and 11% for the year. And similar to the industrial operations, EIS enjoyed strong results in a number of different areas as evidenced by the fact that their top 25 customers were up over 20% for the year, and they were up 19% with their top 20 vendors. Additionally, every geographic area posted a double-digit increase. So both Motion and EIS turned in strong results this past year, and at the current levels of industrial production and manufacturing capacity utilization indices, as well as the ISM Purchasing Managers Index, we are entering 2012 under generally favorable conditions for each of these businesses. Moving on to Office Products. This is the one part of our business that continues to face the most challenging situation. Office Products revenues were down 1% in the fourth quarter. This follows 4 consecutive quarters of increases, but in looking back over the year, we did experience a decelerating sales pattern as the year progressed. After being up 5% in the first quarter, we were up 4% in the second, 3% in the third and then down 1% in the fourth. Now we were pleased to end the year up 3%. But in looking at industry-wide results, it's clear that overall demand has softened pretty significantly over the latter part of the year. And looking a bit deeper into the numbers, our business with the independent office products resellers was flat in the fourth quarter, but we were pleased to see this group end the year with a bit single-digit increase. Our Mega Channel business was down again in Q4, and it was down low-double digits for the full year. On the product side, office supplies, technology products and furniture had modest declines in the fourth quarter. But for the year, technology products and office supplies had low-single digit increases, while furniture was flat. Cleaning and break room supplies enjoyed low-double digit increases, both in the quarter and for the year, so good progress continues to be made in this category. But from an overall perspective, conditions in the office products industry remain challenging, and we expect demand to remain subdued for the foreseeable future. And finally, a few comments on Automotive. This is our largest segment, and they ended the fourth quarter up 6%. This follows 4 consecutive quarters of 9% increases, so our Automotive operations have been performing well for us for a period of time now, and they were up 8% for the full year. It's interesting to note that these quarterly and full year results are essentially same-store sales increases, which we feel demonstrates the solid progress being made by our Automotive management team. And looking a little deeper into the results of our company-owned store group, we see that our commercial business continues to outperform our retail business, and this has been the case all year long. In looking at our retail business first, we find that our average ticket value is actually up over the prior year, but the number of retail tickets is down, and we ended the quarter and the year with retail being up 1%. On the commercial side, both ticket counts and ticket values were up, and we ended the quarter up 6% and up 8% for the year, with both NAPA AutoCare and major accounts each finishing the year up low-double digits. This is back-to-back double digit increases in these 2 important commercial initiatives, which shows the good steady progress being made in each of these areas. Our fleet business was up 4% in the quarter and up 5% for the year. So when we put it all together, we feel good about the progress being made by our Automotive management team. We recognize that we have some work to do yet on the retail side of the business, but the commercial results remain solid. And following the Automotive segment's 7% increase in 2010, we feel that the 8% increase in 2011 demonstrates the good job being done by the Automotive managers, and we enter 2012 with a degree of optimism about their prospects in the year ahead. And then one final comment on the Automotive segment is that we did complete our investment in Exego on January 1. You will recall that Exego was the leading automotive distribution company in Australia and New Zealand, with revenues of just over $1 billion. We paid approximately $150 million for a 30% ownership position, with the option to purchase the remaining 70% at one point in the next 2 to 3 years. We feel that this is a significant strategic move for us, and we will account for the 30% ownership position as minority interest on our income statement. So that's a quick overview of the revenue performance by business segment. And at this time, we'll ask Jerry to cover the financial results. 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, and then we'll open the call up for your questions. A review of the income statement shows the following: our sales results were strong throughout 2011, and total sales for the fourth quarter were up 7% to $3.0 billion. For the full year, we produced record revenues of $12.5 billion, which represents an 11% increase from 2010. We're proud of this accomplishment and especially pleased that all 4 of our business segments contributed to our growth for the year. Additionally, 2011 marked our 60th year of sales increases over the last 62 years. This is the kind of steady and consistent growth we look for in our businesses, and we're excited about the opportunity to improve on this record again in 2012 and beyond. Gross profit in the fourth quarter is 29.6% of sales. That's up sequentially from 28.9% in the third quarter and up 50 basis points from 29.1% in the fourth quarter of the prior year. For the full year, gross margin was also flat at 28.9% compared to 29.0% in 2010. Achieving this level of gross margin for the year reflects pretty solid progress over the last few quarters. As we turn to 2012, we'll continue to execute our ongoing buy- and sell-side initiatives to effectively manage supply chain costs, increase distribution efficiencies and maximize our pricing potential. This will be necessary to offset the impact of continued competitive pricing pressures and changes in product and customer sales mix across our businesses. Regardless, further progress in this area remains a high priority for us again for 2012, and our management team is very aware of and focused on this goal. For the year, our cumulative price, which represents vendor supplier increases to us, we were plus 2.6% in Automotive, plus 4.1% in Industrial, plus 1.6% in Office Products and plus 5.3% in Electrical. Turning to SG&A. Total expenses of $682 million were up 8.2% in the fourth quarter and were relatively flat at 22.6% of sales versus 22.5% in 2010 due to our solid operating performance in the quarter. We're facing a very tough comp on this line in the fourth quarter, and in addition, our cost of incentive-based compensation and related benefits were higher than originally forecasted due to our better-than-expected results. For the full year, SG&A of $2.7 billion was 21.8% of sales. That's a 40 basis point improvement from 22.2% in the prior year. We're pleased to show continued improvement in controlling our expenses as a percentage of sales again in 2011, as we had made tremendous improvement in this area in 2010. We attribute this progress to the combined benefits of greater leverage associated with our sales growth and ongoing measures to control costs. For the last few years, we benefited from cost-saving initiatives in areas such as freight, utilities, and warehouse and infrastructure costs, among others. We estimate that savings in these areas added to slightly more than $30 million in 2011. In addition, after reducing our headcount by approximately 12% in '08 and '09, we've added back just 2% of our labor force, including acquisitions, over the last 2 years. This is a pretty good testament to the hard work of our entire organization to effectively control costs, as well as the positive impact of our investments in technology over the last several years. These efforts have been meaningful to our overall results, and we understand that we must remain focused in these areas as we move forward in 2012. Now let's discuss the results by segment. Automotive had revenue in the fourth quarter of $1,460,200,000, that's up 6%, and had operating profit of $89.9 million, up 9%, so nice margin expansion from 6.0% to 6.2% of revenue. The Industrial Group had sales in the quarter of $1,032,700,000, that's up 13%, and had operating profit of $89.1 million, up 21%, so very strong margin expansion from 8.1% to 8.6%. Office Products had revenue in the quarter of $391.4 million. That's down 1%. Operating profit of $38.1 million was flat, so they had slight margin enhancement to 9.7% from 9.6%. Electrical Group had revenue in the quarter of $137.6 million, and that's up 10%. Operating profit of $10.3 million, up 17.5%, so nice expansion there from 7.0% to 7.5%. Looking at the full year. Automotive had revenue of $6.1 billion, and that represents 49% of the total and an increase of 8%, had operating profit for the year, $467.8 million, up 11%, so again, nice margin improvement of 7.5% to 7.7%. Industrial Group had revenue for the full year of $4.2 billion, representing 33% of the total. That was up 18.5%. It had operating profit of $337.6 million, up 32%, so very strong margin expansion from 7.3% to 8.1% of revenue. Office Products had revenue for the full year of $1.7 billion, representing 14% of the total, up 3%. Operating profit of $134.1 million, up 2%. So we had slight decline in margin, but still very strong at 7.9%. Electrical Group for the year had revenue of $557.5 million, represents 4% of the total, and that's up 24%. Operating profit of $40.7 million, up 32%, so very strong margin expansion of 6.9% to 7.3%. Total operating profit increased by 12% in the fourth quarter, and operating profit margin improved 30 basis points to 7.5% from 7.2% in the fourth quarter of 2010. This increase was driven primarily by the improvement in our gross margin for the quarter. For the year, total operating profit increased 17%. Operating margin was up 40 basis points to 7.9%. The solid progress we made in 2011 is due to improved expense leverage associated with our sales growth, as well as our measures to control costs noted earlier. We're encouraged by this level of progress and optimistic for further improvement in 2012. We had net interest expense, $5.6 million in the fourth quarter, $24.6 million for the year, and both are down slightly from 2010 due to our new debt agreement, which was signed in November and carried a lower interest rate. We'll discuss our debt position later, but we expect our net interest expense to decrease to approximately $20 million to $22 million for 2012. Other category, which includes corporate expense, amortization of intangibles and noncontrolling interest, was an $11.6-million expense in the fourth quarter and $64.8 million for the year. The $1.9-million increase in the fourth quarter reflects the higher expenses for incentive-based compensation and related benefits that were discussed earlier, as well as certain other items such as insurance, legal and professional costs. As we look ahead to 2012, we currently project the total other category to remain in the $60-million to $70-million range. This assumes consistent levels of incentive-based compensation, which we would expect to incur with normalized levels of growth. For the fourth quarter, our tax rate was approximately 35.8% compared to 36.3% in the fourth quarter in 2010. For the year, tax rate is 36.6% compared to 37.6% for the prior year. Decrease in the rate for the year is primarily related to favorable adjustments recorded in the first quarter of 2011 that were associated with the expiration of the statute of limitations related to international taxes. Currently, we expect a tax rate for 2012 of approximately 36.5% to 37.0%. Net income for the quarter, $135.0 million. That's up 14%, and EPS grew 15% to $0.86 compared to $0.75 last year. For the year, net income, $565 million, up 19%; EPS of $3.58 compared to $3 in 2010, and that's also an increase of 19%. We're very proud of our associates at Genuine Parts Company for helping us achieve record earnings in 2011. Now let's touch base on a few key balance sheet items. Cash at December 31 of $525 million is relatively consistent with cash at December 31, 2010. Our strong cash position was supported by the increase in earnings, effective asset management and cost reductions. We continue to use our cash to fund several ongoing priorities such as the increase in the dividend, capital expenditures, acquisitions and share repurchases, which we'll discuss in more detail later. We also used $58 million in 2011 to fund our pension plans as required from time to time. Accounts receivable, $1.46 billion at December 31, increased 7% from 2010, which is relatively in line with our sales increase for the fourth quarter. Our goal at GPC remains to grow receivables at a rate less than revenue growth, and we feel we made good progress toward this goal over the last half of 2011. We'll continue to emphasize improvement in this area, and we remain satisfied with the quality of our receivables. Inventory at 12/31/2011 was $2.26 billion, and that's up less than 2% or approximately $37 million from December 31, 2010. In consideration of our 11% sales growth for the year, as well as inventory from acquisitions, we believe our management team managed this key investment very well again in 2011. We remain focused on further improving our inventory levels in 2012. Accounts payable balance at December 31, $1.44 billion, which is up 5% from December 31 in the prior year. Primarily, the increase in trade payables in 2011 reflects the impact of increased inventory purchases associated with our higher sales volume. In addition, you may recall we have successfully negotiated extended payment terms and implemented other payable initiatives with our vendors to improve our payables position over the last couple of years. As a result, our DPO improved in each of the last few years, and we remain pleased with the positive direction of this working capital category. As reported, working capital of $2.8 billion at December 31 is up 13% from 2010. But after adding back the $250-million current portion of the debt at December 31, 2010, the comparable increase is only 3%. So working capital is relatively consistent with the prior year, and we are encouraged with our ongoing progress in managing our working capital in 2011. Our balance sheet remains in excellent condition as we move forward into the new year. Total debt at December 31, 2011, remains unchanged at $500 million, although it's certainly worth noting that we signed a new agreement in 2011 extending the $250-million credit facility, which matured in November of 2011. The new 5-year debt agreement carried a 3.35% interest rate and is now classified as long-term on the December 31 balance sheet. The second $250 million in debt is due in November of 2013. Total debt to total capitalization at December 31, 15.2%, and we're comfortable with our capital structure at the current time. We generated solid cash flows again in 2011, with cash from operations totaling approximately $625 million and free cash flow after deducting CapEx and dividends of approximately $245 million. Although slightly below the level we had projected for the year, we are pleased with the continued strength of our cash flows and remain committed to our ongoing priorities for the use of our cash, which we believe serve to maximize shareholder value. These priorities are: first, the dividend, which we'd paid every year since going public in 1948, we've raised now for 56 consecutive years. Effectively, yesterday's board approval of a 10% increase in the company's annual dividend for 2012 to $1.98 per share from $1.80 per share paid in 2011. The new dividend represents approximately 55% of our 2011 earnings per share and currently yields about 3%. This is our second consecutive year to raise the dividend by 10%, and over the last 5 years, we've grown the dividend by a compounded annual growth rate of 6.3%. Our other priorities for cash include the ongoing reinvestment in each of the 4 businesses, strategic acquisitions where appropriate and share repurchases. Our investment in capital expenditures were $39 million for the fourth quarter, up from $26 million invested in the fourth quarter of the prior year. For the full year, CapEx was $103 million compared to $85 million in 2010. Increase in our CapEx spending was in line with our investment plans for 2011, and we currently expect our CapEx spending to increase further in 2012 to approximately $110 million to $125 million for the full year. The vast majority of these investments will continue to be weighted toward productivity-enhancing projects, primarily in technology. Depreciation, amortization, $22 million in the quarter and $89 million for the year, is consistent with this expense in 2010. We expect D&A to be approximately $90 million to $100 million in 2012. Strategic acquisitions continue to be an ongoing important use of our cash and are integral to our growth plans for the company. In 2011, we completed 3 acquisitions at Motion Industries, including Dayton Tool & Supply (sic) [Dayton Supply & Tool] and D.P. Brown in January, Terin [ph] Hydraulics in July. At EIS, we acquired Cobra Wire & Cable in September. Combined annual revenues for these acquired companies totaled approximately $125 million. These new businesses had a positive impact on the Industrial and Electrical segments in 2011, and we believe they will contribute nicely to our results in 2012 as well. You can see that between these strategic bolt-on type acquisitions and the investment in Australia's Exego, as Tom mentioned earlier, which was effective January 1 of 2012, we continue to find opportunities for acquisitions. We anticipate additional opportunities for acquisitions in 2012, and we'll remain disciplined in our approach to this element of our growth strategy, generally targeting those bolt-on types of acquisitions with annual revenues in the $25-million to $125-million range, although we've proven there are certainly exceptions to this rule. In the fourth quarter of 2011, we used our cash to repurchase approximately 175,000 shares of our company's stock on the company share repurchase program. For the year, we purchased approximately 2.4 million shares, and today, we have approximately 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. In closing, I want to thank all of the dedicated GPC associates for their hard work and dedication to the success of the company. We are very pleased with our fourth quarter and full year performance. 2011 was highlighted by double-digit sales and earnings growth, which were also record sales and earnings. We enter the new year committed to growing sales and earnings, generating solid cash flows and maintaining a strong balance sheet. We're very proud of the many good things going on throughout our organization and also optimistic that we can carry our positive momentum into 2012 and beyond. And that concludes the financial review, so I'll turn it back to Tom.

Thank you, Jerry. Well, that's an overview of our fourth quarter and 2011 results, and we're proud of the job that was done by the GPC team this past year, and we thank them for their efforts. As we turn our attention to 2012, we're cautiously optimistic. We are pleased to be coming off 2 good years in 2010 and 2011, and we feel that we have a bit of positive momentum. And the underlying fundamentals continue to be encouraging in 3 of our 4 businesses. At the same time, however, we see that gasoline prices remain at near historical highs, with the threat of going higher in the months ahead. This could have a direct effect on our Automotive business. Additionally, the higher fuel costs could impact consumer spending, which will indirectly affect end market demand in our Industrial and Electrical businesses. And as mentioned earlier, our expectation is for sluggish demand in Office Products for several quarters yet. So with all of that said, our preliminary expectations are for 2012 revenue growth in the 6% to 8% range, with Automotive being up 5% to 7%, Industrial up 8% to 10%, Electrical/Electronic up 8% to 10% and Office Products up 1% to 3%. And with top line growth at these levels, we would anticipate earnings growth of 8% to 12%, which would give us an earnings per share range of $3.85 to $4, and we look forward to refining these numbers further as we progress through the year. So that will conclude our planned comments this morning. And at this point, we'll turn the call back to Jodie and then take your questions.

[Operator Instructions] Your first question comes from the line of Christopher Horvers from JPMorgan. Christopher Horvers - JP Morgan Chase & Co, Research Division: Can you -- first on the Auto side, there has been talk of some weather impact in December, and it sounds like some of your peers saw some acceleration to start the year, as perhaps they lapped some tough weather trends from January of a year ago. Is that something that you are seeing in your business as well?

Well, we were affected to a degree by the weather in the fourth quarter. And as we've said many times before, we don't like to use that as any excuse for performance. We're proud of the job that was done by our team in the fourth quarter even with the weather consideration. We would expect our first quarter revenues to be up at least in line with fourth quarter revenue or maybe just a little bit better. Christopher Horvers - JP Morgan Chase & Co, Research Division: Got you. And then, also on the top line side, in the Industrial business, is there a change in the complexion of the types of products that are being bought? It sounded like, previously, perhaps it was more a maintenance product that people are buying for production purposes. Are you seeing more of a capital-type investment from your customers? Or is it the same?

I think the project work, which is driven by the CapEx through our customer segment -- the project work is pretty consistent and has been for the last few quarters, so we're pleased with that. We use that as a little bit of an internal leading indicator. So at this point, we think the project work will stay relatively steady through the first half of the year, and we're optimistic about what the Industrial Group can do over the first half of this year. Christopher Horvers - JP Morgan Chase & Co, Research Division: And then finally on the gross margin side, did vendor or catalog allowances come into play in the fourth quarter? I know last year you had, actually, had a tough compare on the allowance side. So I was just curious how that set up and if that ended up helping your gross margin overall.

Chris, we did see a slight improvement in the incentives that we got versus the prior year. We didn't get as much in the LIFO as we had gotten in the prior year, so it was a number of factors that go into the improvement in the gross margin in the fourth quarter. I would be misleading you if I were to attribute all of that to higher volume incentives. They're just a number -- we've got some pricing software we're using as well as parsing better, I think, so -- but yes, we saw some slight improvement in the vendor incentives. We've gotten those incentives back up to about where they were prior to the recession.

Your next question comes from the line of John Murphy from Bank of America.

First question. As we think about the mix within each of your 4 business lines, Industrial, Office, EIS and Auto, and as the economy theoretically recovers over the next year to 3 years here and your business sort of naturally has some lifting, I'm just curious. Traditionally, have you seen sort of a richening of mix, meaning the products that you're selling into that kind of economic recovery might carry higher margins? Or is it something that's pretty consistent and you just get good operating leverage off the higher sales base? I'm just trying to understand mix versus operating leverage as the economy hopefully recovers here.

John, I think that we might see some incremental benefit from product mix going forward. One of the things that we've seen for the past few years has been the downward pressure on pricing, and it's caused people to move down the value chain in terms of the products they're selecting. And it's also had an impact on related sales, and we're not selling as many of the related items in some of the businesses that we might sell in an improving economy. So I think we potentially could benefit from that if the economy stays healthy going forward.

And I'm sorry, Tom, that would be most acute in the Auto business? Or would that be across all businesses?

It's more -- I think it'd be more pronounced in Automotive and in Office Products, and to a lesser degree in the other 2 industrial-related businesses.

Okay. And then just a second question. You alluded to pricing a number of times here. I'm just curious what you're seeing from a competitive set there versus what you're seeing on the cost side, because it sounds like you're getting some cost increases from your vendors, but it doesn't sound like the pass-through has been that great. I'm just curious what the competitive environment is for pricing that you're seeing in the 4 segments, if it's continuing to get tougher. It sounds like it.

No, I wouldn't suggest it's getting tougher, but I would say it's been pretty consistent for a period of time now. It's competitive in all 4 of the businesses. I don't think it's any more pronounced today than it has been, and we don't expect it to get any better, at least in the near term. We are having some benefit on the purchase side of it, the buy side of it, and the margin improvement we're getting is somewhat attributable to buy-side improvement, but also attributable to just doing a little better job ourselves in how we're setting resale prices.

Okay. And then just lastly, as we look at the op margin improvement, it's been pretty good in the last 2 years, but it's still light versus where you guys have been historically, at sort of 9% to 10% on op margin. I mean, is there anything structurally that, as we step forward over the next couple of years, that you think would limit your ability to get back to that 9% to 10% range? Or is this really a function of where we are in the business cycle?

John, I think it's more of a function of where we are in the business cycle, but I would also tell you that our target is continue to get 10 to 20 basis points improvement in our operating margin each year, but that's going to be driven a lot by this gross margin issue that we talked about earlier, and we seem to have turned the corner there in the last couple of quarters, so we'll have to continue to show a gross margin expansion. If we do that, then we'll continue to show some improvement. But the marketplace, as Tom mentioned, remains very competitive, and for us to get back to those operating margins 10 years or so ago is probably not in the works.

But, John, I'd add to that, our near-term goals and objectives have been to get the operating margins back to 8% to 8.5%. We were up 50 basis points in 2010, 40 basis points in 2011 and operating margin of 7.9%. So we're approaching the bottom end of that target range. Our expectation is that we'll cross into the 8% to 8.5% in 2012, and then as Jerry said, we'll be looking for 10- to 20-basis-point improvement on a consistent basis going forward.

Okay. And just one just last question on the working capital, Jerry. You guys did a great job of growing working capital just 3%, I mean, less than half of what sales grew. I mean, is that something we should expect, is something on the working capital side that is a lot slower than what you're seeing on the sales line, which is a good thing, obviously?

Yes, I think so. That's a major initiative we have, and we've done a great job in a couple of categories in the last few years of payables and inventory. We haven't done as good a job in receivables as we should have, but we've got a number of initiatives going forward. So yes, I think you'll continue to see it growing at a rate less than sales certainly.

Your next question comes from the line of Greg Melich from ISI.

On the Office Products, the deceleration, Tom, that you mentioned through the course of the year, is that just a demand end-through or pull-through that you're seeing? Or are you seeing that some of the Mega guys in particular maybe bring some SKUs back to help run their warehouses a bit better? Or is that sort of a like-for-like?

No, I think it'd be more the former than the latter. And it seems, at this point, we're waiting, and over the next 2 weeks, we're going to get some additional insight as some of the other publicly traded companies report. But at this point, it does seem that demand decelerated really over the second half of the year more so than the first half. And it also seems that the public sector is where we saw more deceleration than in the private sector, quite honestly. So that -- and we're getting that anecdotally from our customer base, but that's where they're seeing more contraction in demand than in the rest of their customer set.

That's great, helpful. And then second, Jerry, the SG&A obviously had some nice control, and you went through some of the measures you've done the last 3 years to really get there. But in the fourth quarter, it did tick up quite a bit. Was there anything unusual about the fourth quarter? Or you think you've just sort of reached the point that sales end up growing at this sort of 7% rate, that it's just going to be impossible or near impossible to leverage SG&A?

Greg, you're starting to sound like one of our operators now. Certainly, that's not the case at 7% growth that we can't make SG&A improvement. It was really we had underestimated accrual for the compensation and the good year that we had overall, and there were a couple of benefit items that we had to catch up on in there as well. But no, we can continue to make improvement in the SG&A side.

And, Greg, I'd just add that I think the guidance we provided earlier would indicate that when we said that we thought the revenues will be up 6% to 8% but the earnings will be up 8% to 12%.

So SG&A is part of that. It's not just gross margin, bending gross margins, you would say.

Yes.

Great. And then lastly, in your guidance, you gave the price that you saw this year. And I guess as you go forward and think about 2012, what sort of inflation do you expect to see? Do you expect to see better, worse? And maybe by categories if you can.

We're a little bit early in the year to be making categorical statements. But at this point, our expectation is that price increases in each of the 4 businesses will be roughly in line with what we saw in 2011. We need a few more months to be able to tighten that up some. But Jerry gave those impacts earlier, and we're planning for about the same. There may be some variance from one to the other, but in total, they'll be pretty close.

Greg, just clarification, about the same increase, not the same level for pricing. But it's about the same percentage increase.

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

I know you've kind of given us an outline of expectations by segment, but when you kind of look at the business and kind of the structural drivers in each one, if you had to kind of pick a business that had the biggest upside and which one had the biggest risk, how should we think about that at this stage?

Well, I'd say the industrial-related businesses have some upside. At the same time, if we see something happen that is negatively impactful on the economy, there's some downside risk there, obviously. But I think there is some upside in the industrial-related businesses. And if we had to force rank them, we'd say that there's probably a little bit of downside risk in Office Products only because our expectation is that the first half of the year is going to be a little bit more challenging than the back half of the year. And we're hoping that our planning for the back half of the year comes to fruition and proves accurate.

Okay, that's helpful. And then it sounds like Motion is experiencing basically strength across the board as you indicated. Are there any verticals at all not humming along for those guys? Or is it really just every single major vertical that they're servicing that yet you're seeing very strong sales growth?

We still see sluggishness in anything that's related to construction. But all of the others remain very, very positive.

Okay. And then my last question regarding NAPA, and this is just kind of an industry question for your peers as well. But if we were to start to get a meaningful rebound in the SAAR like we've started to see in terms of new car sales, how do you think that impacts your NAPA business given your longevity in that industry and obviously, all the data you've collected over time?

Well first, we'd like to say that we hope we do see some rebound in the SAARs. We think that's long-term positive for the industry. We don't think there's any material near-term impact if we do, in fact, experience that. We've still got a long way to go, as you know, to get back to the 16 million, 17 million vehicles that were sold back a few years ago. It's an interesting thing right now. We're at a point in time where approaching 3/4 of the vehicles that are on the road today are out of warranty. And while we will see, let's say, 14 2, 14 5 in new vehicle sales this year, that's still going to leave a huge number of vehicles that are out of warranty and need to come into the aftermarket for repair, and they continue to age. The average age is 10.6 years today, and it's going to continue to go up from all projections we see for the foreseeable future. So we'd like to see new car sales rebound and continue to improve. But at the same time, we think the impact will be minimal, if anything at all. And the next couple of years -- if the economy holds, the next couple of years should be pretty good ones for the aftermarket.

Your next question comes from the line of Ryan Brinkman from Goldman Sachs.

On the Office Products side, you talked a little bit about some of the top line trends in that division, I think, public versus private customers. I was curious what perhaps you are seeing in terms of megas versus independents. And then also on Office, I noticed that the margins were the strongest in 4Q that they've been in several years despite the softer top line trend. Perhaps you could comment on that as well.

In terms of the difference between the megas and the independents, we ended the year up mid-single digits with the independent office products reseller, and they had a pretty good year over the course of the year. But if we look at it sequentially, they too experienced some moderation in growth as the year progressed, primarily in the last 2 quarters. If we look at the Mega Channel, we were down low-double digits for the full year. So these are fairly consistent with what we saw in 2010, and we haven't seen any material change over the last 2 years. As far as the margin, I think we did a good job on the SG&A. We did, in fact, have a little improvement in our gross profit there. And regrettably, they did not hit their objectives from an incentive-based pay standpoint, so the impact of them was not as favorable as it was on the rest of the business.

I'd also point out, Ryan, that Office Products' operating margins were over 9% leading up to the recession. And in '08 and '09, they started to decline, and it's a matter of getting their expenses under control with the top line growth that they have, but they had a nice fourth quarter from that perspective.

That's very helpful. Can I just ask 2 real quick about how you think about the operating margin performance of your different divisions as we head into 2012? For example, how do you think about incremental EBIT margins at your respective divisions? In 2011, the incremental margins at Industrial and at Electrical were significantly higher than the EBIT margin overall for those different divisions. I assume that's because of a lot of vendor rebate recapture. As we go into 2012 and you've guided to a little bit slower top line growth for those 2 different divisions, should we continue -- should we expect to see continued very strong EBIT incremental? Or do you think that those could moderate a little bit next year?

I'll try to answer that question in a couple of different ways. First of all, the margin improvement that we saw in Industrial was partly attributable to some incentives, but largely and primarily attributable to good top line growth; some gross profit management; and also, some really good SG&A work. So if we think about the 4 businesses going forward, we're actually planning on incremental margin improvement at all 4 of the businesses. The degree that we'll get in any one business is going to be somewhat driven by the level of revenue growth that we get. If, in fact, we had another strong double-digit increase in Industrial, then we'll get significantly more margin improvement there than if we have a low single-digit increase at Office Products. But for internal planning purposes, we're looking for all 4 of the businesses to give us some margin improvement in 2012.

Your next question comes from the line of Mario Gabelli from GAMCO Investors.

Just a question, Tom. As you're looking out 3 years from now and as we think about your acquisition in Australia, how big do you want the Automotive part of your business to be? Or how big could it be outside North America?

Well, assuming we go through with the option that we have for the remaining 70%, that's a business of just over $1 billion. And that company, we hope, will grow at high-single to low-double digit growth going forward. So that'll be our primary international initiative using Exego or Repco as our platform company in Southeast Asia. So we'd like to see it grow or outgrow or outperform the growth of our North American business, but we're also planning for some healthy growth in North America as well.

But it's more likely to have that business be a platform for use of the balance sheet than a fourth or fifth leg in the U.S.

I think that's right. I think that's a fair statement. We'd like to stay in the 4 businesses we're in, look for additional opportunities in North America, but also explore what we consider to be good opportunities internationally.

Jerry, this is just a tax question. Some of us are modeling in a lower tax rate because the President is going to propose it, not that, that means that the guys that own the dividends will be helped. But are you a full cash taxpayer U.S.?

Yes, we are.

So book and cash are almost equal.

That'd be correct.

. Your next question comes from the line of Tony Cristello from BB&T Capital Markets. Anthony F. Cristello - BB&T Capital Markets, Research Division: First question is when we look at sort of the Automotive side of the business, and I know over, let's say, the last 5-plus years, there's always sort of in that target of wanting to get some incremental growth on the company-owned store side, but maybe that never transpired to the extent that you wanted. Can you sort of update us on sort of your growth trajectory, where you ended the year on company-owned and how we might think about that business as we move forward?

Well, we don't break out company-owned and independently-owned specifically, Tony. But I would say that as we go forward, our expectation is that the company-owned may grow at a slightly faster rate than the independently-owned, and more so because of some expansion initiatives that we have underway. The last couple of years, we have done more consolidating of some stores and to really strengthen the performance of the individual stores. And I think our same-store sales growth would indicate that we've been reasonably successful in that venture. But I think, at this point, we're looking forward to more aggressive company store expansion, primarily in the markets we're already in, and filling in those existing markets and leveraging off of those management teams. And over the next couple of years, I think that's what we'll see. Anthony F. Cristello - BB&T Capital Markets, Research Division: On the strategy of trying to capture a bit more of the retail sales side, where do you think you are in that? And I know your business model is much more heavy on the sort of -- the "do it for me" or the commercial side.

Well, I'd say that, as you know, we're 70% to 75% commercial and 25% to 30% retail. At 20% to 25% of our total volume, we do a fair amount of retail business, but we think there's some upside there, and we've got a couple of initiatives underway that are very early but are somewhat encouraging. And we'd like to continue to grow the retail business, at a minimum, in line with what the overall retail segment is growing, but preferably at a rate slightly in excess of that in the years ahead. Anthony F. Cristello - BB&T Capital Markets, Research Division: Okay. And just one sort of housekeeping issue. And maybe, Jerry, when you look at sort of the retirement and other retirement benefit liabilities, that numbers appeared to sort of jump a bit. Is there anything in that number that -- again, if I missed your commentary in your prepared remarks, I apologize.

No, we didn't address it specifically, but we do have a concern about where we're going with our pension liability and the pension expense. That's driven by some assumptions that we really don't have any control over. We did make a contribution of $57 million to our pension plan last year. Right now, we're looking at a smaller contribution in 2012. But the pension expense, we're projecting an increase on that. So there is a lot going on in the pension liability, pension expense side, Tony. And yes, it is a concern, and we're going to review every option that we have available to us.

[Operator Instructions] Your next question comes from the line of Richard Hilgert from Morningstar.

Just a couple of minor things first. The depreciation and amortization is going up in 2012, which -- that seems logical given your additional investments in the business. But I would've expected it to rise a bit more in 2011 versus 2010 instead of declining. Was there something in there that I didn't catch in the call that -- when you were going through the numbers?

No. We would have probably had some projects that we were amortizing off that disappeared on us, and we also would have had some intangibles that would have been included in that number that were fully amortized. But it should increase, you're right, as we invest more. We did squeeze down our CapEx numbers back during the recessionary period, and we're building that back up to what we would consider normal maintenance CapEx of around $120 million a year. And if that's the case, then you're going to see our D&A be around $90 million to $100 million.

All right, okay. On the working capital, you have been doing a great job of keeping that to a minimum, especially relative to sales. The year-over-year change in working capital though, there again, I would've expected a bit more of a negative number given the receivables change and the investment in inventory. And when I add up the numbers on the balance sheet, I'm coming up with a much larger negative number than what's showing up there, just a negative of $25 million. Can you give us a little bit of detail about what's going on in that line?

I'm not sure, Richard, that I understand exactly where you're going with that, but our inventory was only up 2% on an 11% sales increase. So we did show progress there, and our receivables up 7% on a 7% fourth quarter. Our payables, we had an issue with payables. We were up 5% in payables, but we were up 26% in payables at 12/31/2010 because we had a number of vendors that we gave -- got extended terms from in 2010, and that's a onetime boost. It's a permanent boost, but it's onetime, and then we've got some others that we're looking to put on our vendor payable program here in 2012. So I'm not sure if that addresses what your specific question is, but we certainly can address that offline.

Yes, that'd be fine. I'm just -- I'm referring to the negative $26 million in the cash flow statement in 2011. When I look at the balance sheet items and sum them all together, I'm coming up with a much larger negative number, that's all.

Well, that negative in that changes in operating assets and liabilities, that's inventory payable and receivables, and the big swing, we had about a $200-million swing in our payables.

Right, yes, exactly. That's why I'm saying I was thinking it should have been a larger negative than what it turned out...

Well, we had improvement in the inventory, but we'll take it offline with you.

Very good. The last question I wanted to touch on was the long-term view in the Office Products business. As you mentioned earlier, prior to the great recession, you were running high 9% operating margins there. And we've seen the operating margins erode down into the 7%, 6% sometimes range on a quarterly basis. With the secular change that's going on in that business, I'm wondering, is pricing such that the cost structure of the business won't align with an operating margin to get to where you had been before? Or is this business, long term, one that we could see the margins get back into that 9% range?

I think it will be a while, if at all, that we get back in that 9% to 10% range. But in prior conversations or calls, we've said that we did feel that with reasonable top line growth, that we could get the operating margins back to the 8.5% range. So that's our near-term objective, is to get them back up to close to 8.5%.

There are no further questions at this time. I would now like to turn the conference back over to the presenters for their closing remarks.

Thank you, Jodie. We appreciate each of you joining us on the call today, and we appreciate your continued interest in and support of Genuine Parts Company. We look forward to talking to you in the future. If not sooner, then we'll be -- look forward to visiting with you on our first quarter conference call in April.

Thank you. That concludes today's conference call. You may now disconnect.