Genuine Parts Company (GPC) Q2 2012 Earnings Report, Transcript and Summary

Carol B. Yancey - Senior Vice President of Finance and Corporate Secretary Thomas C. Gallagher - Chairman, Chief Executive Officer and Chairman of Executive Committee Paul D. Donahue - President and President of The U S Automotive Parts Group Jerry W. Nix - Vice Chairman, Chief Financial Officer, Principal Accounting Officer, Executive Vice President of Finance, Director and Member of Executive Committee

Christopher Horvers - JP Morgan Chase & Co, Research Division Mario Joseph Gabelli - GAMCO Investors, Inc. Elizabeth Lane - BofA Merrill Lynch, Research Division Matthew J. Fassler - Goldman Sachs Group Inc., Research Division Michael Montani - ISI Group Inc., Research Division Brian Sponheimer - Gabelli & Company, Inc. Gregory S. Melich - ISI Group Inc., Research Division Scot Ciccarelli - RBC Capital Markets, LLC, Research Division Bret David Jordan - BB&T Capital Markets, Research Division Brent D. Rakers - Wunderlich Securities Inc., Research Division Richard J. Hilgert - Morningstar Inc., Research Division Judy Merrick

Good morning. My name is Amy, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2012 Earnings Call. [Operator Instructions] Ms. Carol Yancey, Senior Vice President of Finance, you may begin your conference.

Thank you. Good morning, and thank you for joining us today for the Genuine Parts Company Second Quarter Earnings Conference Call, where we will discuss our results and the outlook for the remainder of 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. Jerry Nix, our Vice Chairman and Chief Financial Officer; Paul Donahue, our President; and I will each handle a portion of today's call. And once we have concluded our remarks, we will look forward to addressing any specific questions that you may have. Earlier this morning, we released our second quarter 2012 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 $3,338,000,000, which was up 5%. Net income was $168.6 million, which was up 11%. And earnings per share were $1.08 this year compared to $0.96 last year, and the EPS increase was 12.5%. So although we did see some moderation in the rate of revenue growth from the first to second quarters, which we will discuss more in a few minutes, we think that our team did a good job on the operating side of the business in leveraging the 5% sales increase to an 11% increase in net income, and we're pleased to report another solid quarter. A review of the results by business segment shows that our strongest sales results continue to come from our Industrial and Electrical/Electronic segments. Motion Industries is our industrial distribution company, and they were up 8% in the quarter. This follows a 12% increase in Q1, so we did see some deceleration in the growth rate. But as a point of information, the 8% increase this quarter is on top of a 19% increase in the second quarter of last year, making for a challenging comparison. But in our opinion, they handled it well, and they came through the quarter in good shape. A review of the Industrial results in a bit more detail shows that the top 12 product categories were up 11% in the quarter and then the top 10 industry segments were up 8%, and the top 20 customers had a combined 15% increase. So from a product category, industry segment and customer perspective, the results continue to show good balance in the quarter with solid contributions from each of these 3 areas. Through the first 6 months of the year, our Industrial sales are running 10% ahead, and we feel good about their prospects for the second half. While we did see some moderation in the May industrial production and capacity utilization indices, the June figures released earlier this week showed some improvement and the individual indices remain at historically healthy levels. This, combined with some strong internal growth initiatives, caused us to remain optimistic about our Industrial business for the remainder of the year. Moving on to the Electrical/Electronic segment, EIS was up 9% in the quarter. This follows a 5% increase in the first quarter, so we did see some nice sequential improvement in this business, which is encouraging. Our wire and cable segment is enjoying the strongest growth, while the Electrical and Electronics segments are more challenged. Our biggest revenue issues in the Electrical and Electronic businesses are with sales into the solar and electronic contract manufacturing customer segments. Both of these industries have experienced significant slowdowns over the past several quarters. But even with that said, our top 25 Electrical and Electronic customers were up 9% in the quarter. This would indicate healthy conditions in other customer segments, which was a big help to our overall results. Through midyear, our Electrical/Electronic business is running 7% ahead, and we feel good about the progress that they're making. With that said, however, the June Institute for Supply Management Purchasing Managers' Index fell below 50 for the first time in 3 years, signaling a slowdown in the overall activity in the industry, and we will be watching this closely in the coming months while at the same time working hard toward gaining additional market share going into the second half of the year. Our Office Products business was down 1% in the quarter. This follows a 2% decrease in the first quarter, so it's been a challenging first half for our Office Products team. And looking at the results in a bit more detail, we were pleased to see that our business with the Mega Channel was up 3% in the quarter, following a 1% increase in the first quarter. But then this was offset by a 2% decrease in the quarter with the independent office products resellers group. On the product side, the cleaning and break room supplies category grew at high-single digits, and we continue to make good progress in this area. Furniture was flat, and then the office supplies and technology categories reached down low-single digits in the quarter. So clearly, conditions in the office products industry remain challenging, and were down just over 1% through the first 6 months of the year. And then looking ahead, we don't expect any material change in the overall industry conditions in the second half of the year, but we do feel that our office products team is in a position to show modest improvements in their results over the final 2 quarters. So that's a quick overview of the non-automotive segments. And at this point, we'll ask Paul to comment on the automotive operations. Paul?

Thank you, Tom. Good morning, and I'd like to add my welcome to each of you. I'm pleased to have the opportunity to review the second quarter performance of our Automotive business. As most of you know, this is our largest segment, and we ended the second quarter with sales up 4%. Our recent acquisition, Quaker City Motor Parts, contributed approximately 3% growth while our same-store sales added approximately 2%, while currency exchange cost us 1%. This follows a 6% sales increase in the first quarter of this year. For the 6 months ended June 30, our Automotive business is up 5% over the same period in 2011. So we remain encouraged by the underlying long-term fundamentals in the automotive aftermarket, and we feel we'll continue to benefit from the solid growth opportunities well into the future. The aging vehicle population now reported to be on average 11 years old and specifically, the growth in the number of older vehicles bodes well for all of us in the industry. We believe we are well positioned to capture our share of the increase in demand generated by this positive trend. So as we take a look and further analyze our second quarter results, we clearly experienced a deceleration in business over the last few months. As several of our competitors have already reported, April sales appeared to slow due to the mild winter temperatures and the possible pull forward of demand into March. In hindsight, this may help explain the strong 6% retail sales increase we reported in the first quarter. The slowdown in sales continued into the month of May before it's showing some improvement in June. So we experienced a challenging couple of months, and we were very pleased to see a more positive sales trend in June. Turning to Quaker City, we are very excited about our acquisition of Quaker City Motor Parts and its accretive impact to our overall automotive results. Just as a reminder, Quaker City Motor Parts is a long-standing NAPA distributor and was the last non-GPC NAPA member prior to the acquisition. They're headquartered in Middletown, Delaware and service approximately 270 NAPA auto parts stores, primarily in the mid-Atlantic region of the U.S. Their second quarter sales contribution was in line with our expectations, and we remain very encouraged by the opportunities that Quaker City will continue to provide to us in the future. Turning to the results for our company-owned store group. In the quarter, our commercial business outperformed our retail business although both businesses experienced softer sales in the second quarter compared to the first quarter. Turning to our retail business first, the quarter ended down 2%, and this follows a 6% increase in the first quarter. Our average dollar value per invoice was up for the quarter, but the total number of retail tickets was actually down. As I mentioned earlier, the overall sales decline likely reflects the pull forward of revenues into the first quarter. However, we would also say that we are not immune to the overall slowdown in U.S. retail sales as reported earlier this week. We had experienced 1% retail growth in 2011. And at this point, it would appear we should expect to see similar growth throughout the balance of this year. Now let's take a look at our commercial business. Sales in our company-owned store group ended up the quarter at plus 3%. Our wholesale dollars per invoice were up, but our overall ticket count was flat. So the slowing in April and May impacted both our retail and commercial business, and this is reflected in both our NAPA AutoCare and major account business. We had consistently reported double-digit sales growth for the past several years in these 2 important commercial initiatives, and sales for these 2 customer groups were up mid-single digits in the second quarter, still solid growth but slower than what we have seen in recent periods. Turning to our fleet business. We were up 1% in the second quarter, which is down from mid-single digit growth in the first quarter and the trends we saw throughout 2011. So in summary, demand in the automotive aftermarket slowed in April and May but then began to show some improvement in June. We expect the June trend combined with our ongoing initiatives and the underlying positive factors for the automotive aftermarket to support continued growth for our Automotive business over the balance of 2012. So that completes our overview of the Automotive business in the second quarter. And at this time, I'll hand it over to Jerry for a review of the financial results. Jerry?

Thank you, Paul. Good morning. We appreciate you joining us on the call today. We'll first review the second quarter and 6-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. Review of the income statement shows the following: Total sales had a record half $3.3 billion for the second quarter, an increase of 5% from last year. For the 6 months, total sales $6.5 billion, up 6% from 2011. We're proud of our team for reaching this new sales level, especially in a tough sales environment we experienced in the quarter. And we remain focused on achieving continued steady and consistent sales growth over the balance of this year and beyond. Gross profit for the second quarter 29.1% of sales, that's up from 28.8% in the second quarter of 2011. And for the 6 months, gross margin 29.0% is up from 28.7% for the same period last year. We've made solid progress on improving our gross margin over the last few quarters and attribute this improvement to our ongoing initiatives to effectively manage supply chain cost, increase distribution efficiencies and maximizing our pricing potential. Our gross margins have also benefited from incremental sales at incremental levels of vendor incentives over the last several periods, and we expect to generate continued gross margin expansion on a year-over-year basis for the remaining 2 quarters of this year. Our management teams across all of our businesses are committed to this effort. For the year, our cumulative pricing, which represents supplier changes to us, as Automotive is flat through 6 months, Industrial is up 0.7%, Office Products up 2.6%, and the Electrical Group is a negative 0.2%. Turning to SG&A. Total expenses $705 million in the second quarter, that's up 4.5% from 2011 and at 21.1% of sales versus 21.2% in the second quarter last year. And for the 6 months, total SG&A expenses are $1.4 billion, and that's up 4.8% at 21.4% of total sales compared to 21.6% for the same 6 months in 2011. Throughout our organization, we're very focused on controlling our expenses and attribute our steady improvement in this area to the combined benefits of greater leverage associated with our sales growth and ongoing measures to control cost. For the last few years, we've benefited from cost-saving initiatives in several areas, including warehouse and infrastructure, freight and utilities among others, and our cost savings also reflect the positive impact of our investments in technology over the last several years. Our management teams understand that tightly controlling our expenses is an ongoing priority for us and we'll continue to assess the proper cost structure of our businesses as we move through the year. Now let's discuss the results by segment. Automotive had revenue in the quarter of $1,644,900,000, representing 49% of the total, up 4%. They had operating profit of $153.0 million, up 10%, so a very strong margin expansion there from 8.8% to 9.3%. The Industrial Group had revenue in the quarter of $1,138,700,000, representing 34% of the total and up 8%. They had operating profit of $95.1 million, up 11%, so a nice margin improvement from 8.1% to 8.3%. The Office Products Group had revenue in the quarter of $413.3 million. That represents 12% of the total and is down 1%. They had operating profit of $30.6 million and down 2%, so a good job there on the negative 1% sales to hold margins at 7.4%. The Electrical group had revenue in the quarter of $149.4 million, 5% of the total and up 9%. They had operating profit of $12.9 million, up 41%, so outstanding margin expansion there going from 6.7% to 8.7%. For the 6 months, Automotive had revenue 3.138 -- $3,138,400,000, up 5%; operating profit $267.5 million, up 13%. So as mentioned earlier, March is very strong at 8.5%. Industrial Group had revenue for the 6 months $2,259,900,000. That's up 10%. Operating profit $179.4 million and that's up 19%, so a nice 50-basis point improvement there to 7.9% operating margin. Office Products had revenue for the 6 months $839.5 million, down 1%. Operating profit of $68.1 million, also down 1%, so a good job of maintaining their margins at 8.1%. The Electrical Group had revenue for the 6 months $296.6 million, and that's up 7%. Operating profit $24.9 million, up 29%, so again, for the 6 months adjusted for the quarter, outstanding margin improvement to 8.4%. Total operating profit increased by 10% in the second quarter, and operating profit margin improved 40 basis points to 8.7% from 8.3% in the second quarter of last year. This brought us a 70-basis point improvement in total operating margin in the first quarter this year. And for the 6 months, total operating margin of 8.3% is up 60 basis points from 7.7% last year. We're very pleased with this level of margin expansion and expect to show continued year-over-year operating margin expansion over the following 2 quarters of the year. That growth in our operating earnings was driven by the sales growth, higher gross margins and positive expense leverage. We had net interest expense of $5.0 million and $9.7 million for the second quarter and 6 months, respectively. This expense is down from 2011 due mainly to the low interest rate on our $250 million debt facility that we refunded that was renegotiated in November of last year. We'll discuss our debt position later, but we currently expect that net interest expense to be approximately $20 million to $22 million for the year. Other category, which includes corporate expense, amortization of intangibles and non-controlling interest, was $19.3 million expense in the quarter and is $34.7 million for the 6 months through June. This was up from last year for both the quarter and year due primarily to the increase in amortization expense and increased cost for legal and professional services. We continue to project the total other category to be in the $60 million to $70 million range, which will be consistent with the prior year. For the quarter, tax rate approximately 36.9%, which is slightly favorable to the second quarter in 2011. Now for the 6 months, the 36.5% rate compares to 35.8% for the same period last year. Primarily the increase in the 6 months rate is related to a favorable adjustment recorded in the first quarter of 2011 that was associated with the expiration of the statute of limitations related to international taxes. We continue to expect our full year tax rate for 2012 to be approximately 36.5% to 37.0%. Net income for the quarter $168.6 million, up 11%; EPS $1.08 compared to $0.96 last year, up 12.5%. For the year through June, net income $314.9 million, up 13%, and EPS of $2.01 compared to $1.76 last year, up 14%. Second quarter was a record level of earnings for us, and we want to recognize all of our associates at Genuine Parts Company for working hard every day to achieve this milestone. We're proud of their accomplishment. Now let's touch base on a few key balance sheet items. Cash at June 30, $172 million and it remains strong although it's down from over $500 million in June last year and December 31, 2011. Decrease in cash primarily reflects the more than $500 million used for several investing activities this year, including the January 1 investment in Exego, a leading automotive distribution company in Australia and New Zealand; the Electrical Group's Light Fab acquisition on February 1; and Automotive's Quaker City acquisition that closed on May 1. In addition, cash was used in the first half of the year to pay for the 10% increase in dividend, capital expenditures and share repurchases. These significant uses of cash were partially offset by the increase in earnings, effective asset management and cost reductions. And we're comfortable with our cash position at June 30. Accounts receivable $1.61 billion at June 30 increased 2.5% from June 30 last year on a 5% sales increase for the second quarter, which is in line with our goal of growing receivables at a rate less than revenue growth. We also remain satisfied with the quality of our receivables and will continue to emphasize this level of performance over the balance of the year. Inventory at 6/30 was $2.33 billion, an increase of approximately 4% compared to June 30 last year and up 3% from December 31. This increase is attributable to the impact of our acquisitions thus far in 2012, and inventory is actually down slightly from both June and December when you break out the acquisitions. We continue to believe that our team is doing an excellent job of managing our inventory levels. We'll remain focused on this key investment as we move through 2012. Accounts payable balance June 30 was $1.60 billion, and that's up 7% from June 30 last year and up 11% from December 31. Increase in trade payables reflects the impact of extended payment terms and other payable initiatives negotiated with our vendors. Improving our payables position has been a priority for us over the last few years and has had a positive impact on our DPO. We remain pleased with our progress in managing this important working capital account. Working capital $2.45 billion at June 30 is down 3% from June 30 last year as reported and is down 12% after adding back the $250 million in current debt at June 30, 2011, which was converted and reclassified to long-term data in the fourth quarter of last year. Effectively managing our accounts receivable and inventory and payables is very important to us and our ongoing progress with these accounts has had a tremendous impact on improving our working capital position, and our balance sheet remains in excellent condition. Total debt at June 30, 2012, remains unchanged at $500 million. First $250 million in debt is due in November of 2013, and the debt for the agreement that was signed in November last year is due in November of 2016. Total debt to total capitalization at June 30 is 14.6%, and we're comfortable with our capital structure at this time. We continue to generate solid cash flow and expect another a very strong year in 2012. We currently estimate cash from operations of approximately $750 million to $800 million for the year. And at this level, free cash flow after you deduct capital expenditures and dividends should be approximately $350 million to $400 million. We're very pleased by the continuous strength of our cash flows and remain committed to several ongoing priorities for the use of our cash, which we believe serve to maximize shareholder value. Our first priority is the dividend, which we've paid every year since going public in 1948 and have increased for 56 consecutive years. The company's 2012 annual dividend of $1.98 per share represents a 10% increase from $1.80 paid in 2011 and represents a payout ratio of approximately 55% of our 2011 EPS. Our goal would be to maintain this level of payout ratio going forward. 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, $34.5 million for the second quarter, is up from $27.2 million invested in the second quarter last year. And for the 6 months, CapEx totaled $51.4 million compared to $41.7 million for the same period in 2011. We had planned for this level of increase and continue to expect that CapEx spending for the full year to be in a range of $110 million to $125 million. The vast majority of these investments will continue to be weighted towards productivity enhancing projects, primarily in technology. Depreciation and amortization, $24.7 million in the quarter and $47.7 million for the 6 months. Both the quarter and the 6-month numbers are up slightly, and we expect D&A to be approximately $100 million to $110 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. Thus far, in 2012, Automotive's investment in Exego and the Quaker City acquisition, as well as the small acquisition in the Electrical business as previously mentioned, are performing as planned and contributing nicely to our results. Looking forward, we anticipate additional opportunities for acquisitions over the balance of 2012, and we remain disciplined in our approach to this element of our growth strategy. Generally, we target those bolt-on types of acquisitions with annual revenues in the $25 million to $125 million range. Finally, in the second quarter, we used our cash to purchase just over 900,000 shares of our common stock under the company share repurchase program and have another 12.6 million shares authorized and available for repurchase today. I have no set pattern for these repurchases but expect to be active in the program over the balance 2012 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, we want to once again thank all of our GPC associates for their hard work and dedication. We're extremely proud of the company's record-setting sales and earnings achieved in the second quarter, and we look forward to reporting more growth in the quarters ahead. Despite some uncertainty in the economy, which we expect to persist for most of this year, we remain encouraged by the many positive initiatives in place throughout our organization that will help support our ongoing growth. And that concludes our financial review, so I'll turn it back to Tom.

Thank you, Jerry and Paul. So that's a recap of our second quarter results. And as said at the outset, although we did see some deceleration in our overall revenue growth, we feel that our team operated well with sales up 5%, net income up 11%, operating profit up 10% and operating margin improvement of 40 basis points. And as Jerry just covered, good work was done on the balance sheet side as well in the areas of inventory, accounts receivable, payables and working capital. So from an overall perspective, we feel that we had a reasonably good performance in the second quarter. And with revenue up 6% for the first half and earnings per share up 14%, we're positioned to have another good year in 2012. Now as far as the full year outlook is concerned, our expectation at this time for the full year is that Automotive will end the year with 5% to 7% revenue increase, Industrial will be up 8% to 10%, Office Products will be between down 1% and up 1% and the Electrical/Electronic will be up 6% to 8%. And in total, this would give GPC a combined revenue increase of 6% to 8% for the year. On the earnings side, our prior guidance was for earnings per share to be in the $3.93 to $4.05 range. At this point, we feel that an expectation of $4 to $4.10 is appropriate. This includes the recently completed Quaker City acquisition, and it would give us an EPS increase of 12% to 15% for the year. So that will conclude our prepared remarks. And at this point, we'd like to address your questions, and we'll turn the call back over to Amy.

[Operator Instructions] Your first question comes from the line of Chris Horvers with JPMorgan. Christopher Horvers - JP Morgan Chase & Co, Research Division: Just want to dig in on the Auto business a little bit more. Is it fair to say that the -- and the x Quaker sales were up in the 2% to 3% range in June, and there's been a lot of discussion around the heat here in July. Have you seen any further acceleration due potentially to parts failure due to the heatwave?

Chris, I'll try to answer that. The June results were the strongest in the quarter, as Paul mentioned, and I think your range is close. As far as any impact from the heat, we did see a little bit in the very end of the month of June, and then we think we see some further impact in the early reports in July. I might also tell you anecdotally that in talking with a number of our really good commercial accounts, they saw the same pattern in the quarter that we saw in the early part of July. The indication we're getting from them is that the big account is stronger, and they're seeing a little bit of a pickup in their business, which I think is probably reflected in our business as well. Christopher Horvers - JP Morgan Chase & Co, Research Division: I don't know if there is a good way for you to answer this but any thoughts you have would be appreciated. O'Reilly talked about weakness in June, and that's different from how you describe the pattern to your quarter. Is there something about maybe the quarter end or geographic that would account for that?

I don't think we can really answer that. I think we'll just -- we'll all have to look at what happens over the next 90 days or so. Christopher Horvers - JP Morgan Chase & Co, Research Division: Okay. And then in terms of guidance, Quaker for the back half will add about, what, maybe 400 basis points to revenue growth in the Auto division?

No, that's high. That's high. It will be closer to 250 to 300 basis points. Christopher Horvers - JP Morgan Chase & Co, Research Division: Wasn't it about 3% for this quarter. I mean, you only had 2 months of the quarter.

Yes, it will be closer to 300 basis point for the second half, we think. Christopher Horvers - JP Morgan Chase & Co, Research Division: Okay, fair enough. And then final question. In terms of Industrial, the deceleration from 1Q to 2Q, can you speak to any inter-quarter trends or maybe July trends that you see there?

In terms of the quarterly trends, the numbers were pretty consistent on a per day basis as we worked our way through the quarter, so we didn't see much fluctuation at all. Yes, we did have deceleration but we also -- as I mentioned in the comments, we were going up against a very strong quarter last year, when we were up 19%. So at this point, we guided to 8% to 10% for the full year. And I think we're pretty comfortable with that guidance, which would indicate that our revenues will hold pretty steady over the remainder of the year. And keep in mind, we were up 19% in revenue in this business last year as well, so the comps continue to be challenging.

Our next question comes from the line of Mario Gabelli with Gabelli & Company.

Those previous questions were right on the Quaker state so I understand this. What are the revenues from the day you acquired for the first 12 months, so make my life easier, Jerry?

Well, they've gone -- they average about $300 million on an annual basis.

And secondly, what date did it close again?

May 1.

And how much cash was out for that because I don't have the Q?

No, Mario, we haven't given that out.

All right, that's fine. I'll figure it out, Jerry...

I know you will but...

No, the analyst, Colin [ph], is on vacation so -- actually, Brian is. How many actual shares are outstanding when I get the Q on the cover?

156...

156.8 million.

So that's higher than the average? No, I got you. 156.8 million was the weighted average for the 6 months. I'm just looking at actual...

We will get back later with that when we find that.

No, no problem. When you say legal and professionals fees were stepped up during the quarter, is that aborted deal fees or is that just looking at other acquisitions that didn't get capitalized or how does that ...

It's a combination of those -- our legal fees in some of the claims are there, but if there's a lot of these legal fees that are associated with these acquisitions and some other acquisitions we may have looked at and not done. And so there's nothing to set up.

Yes, okay. Got you. Now ...

Mario, going back -- excuse me, Mario, but going back to your prior question, there are 155.1 million shares outstanding currently.

Actual.

Tom, you and I are getting to have to report back to individuals, so I have to do that. One minor philosophical question. Both Romney, that's running for President, and what's the guy's name -- Obama are both talking about a decline in the corporate tax rate. Jerry, you gave a tax rate. Is that the same as your cash tax rate, the 36.5%, 37%?

Yes. In our case, it's pretty close.

So if they were talking about a decline in the corporate cash tax rate down to 25%, 28%, at some point, I got to look at what the givebacks are in the proposal. So that would have an incremental increase. Are there any other elements in your deferred tax account or anything else that we're doing that I should be sensitive about and looking at what if, in fact, they implement this program?

Not that I'm aware of. Now keep in mind, one of the proposals at one point was that they do away with LIFO.

Yes, that would be nice. That would help your earnings.

Yes, but it will also cost us some cash.

Such is life. And they also did MAP-21. And I don't want to get into MAP-21 on this call, so I'll do it off-line on that in terms of the implications for your pension expense in cash, okay, defined benefits and whatever.

Your next question comes from the line of John Murphy with Merrill Lynch.

This is Liz Lane on for John Murphy. You guys had a very strong operating margin in the Automotive segment, and it looks like it was the highest it's been since about 2002. Can you go through what some of the factors at work were and should we expect that kind of strength to continue?

Yes. I don't know that we can expect that strength to continue, but there are a number of things that happened there. And we've taken a lot of costs out of our Automotive operations back during the recession. Those costs have not been added back in as revenue has grown. And we also -- a part of that is we picked up some profit from the Quaker City sales that were not in the prior year numbers. I would tell you though that the Exego acquisition that we have is not included in our Automotive numbers. It's included in corporate, that minority interest, the 30% that we pick up there. So it's not in the Automotive number, but just basically a good job of operating to get those back up to 9.3% in the second quarter. But I think more realistic number would be the 8.5% that we have achieved for the 6 months.

Okay, great. And actually you touched on something I was going to ask about too, which was on Exego. Can you give an update on how it's been performing relative to your benchmarks and does that income from -- so it doesn't -- does that income from Exego get baked into your $60 million to $70 million estimates on the other net line in 2012 or does that estimate exclude the minority interest?

I'll take them in reverse order. It is baked into the $60 million to $70 million. And then in terms of their performance, they're performing pretty much as they said they would and in line with our expectations, so we're pleased with what's happening there right now.

Okay, great. And I just have one more, which is on Office Products. I mean, it looks that segment is still struggling from both a volume and margin perspective. Are there any initiatives that you can discuss that, that company is taking internally to try to boost that business or is it just at the mercy of the economic environment and high unemployment rate for the near term?

Well, we would not discuss specific initiatives on the call, but we can tell you that there are certain actions that are being taken to try to capture additional share in what is really a very challenging marketplace. We are dependent upon job creation, reduction in office vacancies and just the general overall improvement in the economy. But we have some very specific revenue initiatives that we hope will give us a little tiny bit of lift as we work our way through the remainder of the year.

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

I'd like to start off by just asking about the guidance and any changes from Q1 to Q2. Just to clarify when you guided both overall EPS and revenue at the end of Q1, did that include the Quaker acquisition?

I think what we said, Matt, is we gave you 2 sets of numbers, one without and one with. I believe that's right. And what we're trying to do is clear up any confusion. So what guidance we've given you this time of $4 to $4.10 would include Quaker and going forward, we'll only give you one set of numbers.

Got it. And the 5% to 7% Automotive, was that inclusive of Quaker prior to today?

It's inclusive of Quaker as of today. I'm not -- I don't recall what we said the last quarter.

No, it was not in the 5% to 7%. So we're trying to accommodate the slowing that everyone is seeing in the automotive aftermarket by including this in the new 5% to 7%.

Got it. So sort of the underlying, if Quaker is going to add 3-ish percent on the year, the underlying is sort of 2% to 4% more or less, if that's about the right call. And I guess year-to-date on an organic basis, you're 6% and then you were 2% so you're running roughly 4%. Is that the way of looking at your organic number? Because we try to model organic plus Quaker, and I want to make sure we're thinking about it the right way.

I think you're right. The only thing I'd like to have Sid get back to you on is the year-to-date because Quaker started to flow through May 1. So I think we'd like to double check and balance with you subsequent to the call.

That would be helpful. And then also on Automotive, you said currency was about a 1 percentage point impact here in Q2 for Automotive. Do you remember what that number was for Q1?

Basically, it was a neutral number in Q1. I'll tell you that overall, the impact on Automotive sales were a little more than 1% in the quarter due to currency. And in our whole company, it was just under 1% impact due to currency. So currency was a factor. We don't bring that up normally, and we didn't bring it up. That play was helping us last year and the year before and we just prefer not to bring it up this time, but we have to explain the slowness that we saw there.

No, I agree that it's material. And on pricing being flat at Automotive, what would you say -- and I frankly don't recall the number that you stated at the end of Q1. What would you say the trends are as they relate to inflation impact on petrol-driven goods and also, I guess, the metal component and any other factors? I'm not sure if it's all commodity prices or if there's any competitive dynamic at play.

Matt, I'm not sure that I can get into particular product categories with you. But in total, at the end of the first quarter, we had a negative 0.2% in automotive, and then so we had a positive 0.2% in the second quarter to be flat for the 6 months.

Got it, so price is moving in the right direction. And then finally, on office supply, it's interesting that your business is improving with the Megas. And I guess my question relates to the break room business. Obviously, they're all very focused on that business. Do you over index with the Megas in break room? It's a new business for them. Maybe their vendor relationships aren't as developed and they're depending more on you to fund that business or back them up in that business, if you will, than they would in their traditional businesses. I'm wondering if that might be part of the -- that might be part of what's helping to improve the business there.

I think there may be a little bit of that, Matt, but the folks are largely buying that product category direct ...

Got it. So you're just riding their growth in that space?

To some degree, but I think our growth with the independent resellers is very healthy right now.

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

This is Mike Montani on for Greg. I just had a few questions. The first one was on the Office side actually. I apologize if I had missed this, but did you break out this quarter how the core business did versus the businesses that are paper and related categories?

No, we didn't break that out. But I can tell you that if we look at the core office supplies and we break out the impact of the decline in paper, our core office supplies would have been modestly positive.

Okay, great. That's helpful. And then was wondering just given the MAP-21 change and the pension accounting, is there anything you can do to update the full year outlook for potential cash contributions to pension? I had been thinking of like a $40 million to $60 million range. Is that roughly about right or is there any update you can share?

Mike, I don't think that's right. We'll have clear guidance on that in our third quarter conference call. But at this point, we're not looking to make any contribution in the remainder of this year to the pension plan, and we're trying to evaluate what the contribution for the first part of 2013 would be.

Okay, fair enough. And just quickly a follow-up on Exego and the accretion there. I guess our thought had been that, that could add somewhere around $10 million to $12 million for the year, so maybe a run rate of $3 million to $4 million a quarter. Is that reasonable or have I taken the margin assumptions too far?

No.

I think you're a little bit high there. I think in a prior call, we had guided of $0.03 to $0.05 accretive for the year. I think that was either in our year-end call in February or in our April call.

Got you. Okay, and just the last question I had was on outlook for pricing. You were good enough to share obviously where we were this quarter. But if you look at Automotive sort of flattish to slightly up and Office up 2.6%, should we anticipate during the year that Auto may strengthen to up 1 to 2 and maybe Office moderates a bit towards 1? Or how do you see that playing out for Industrial, Auto and Office?

At this point, I think we'd just say that we think we'll see some modest increase in the pricing as the year progresses, but we're not in a position to really give you a more precise number. I don't -- Paul, if you have a better feel for it.

Mike, I would just say that at this point, we saw a couple of increases come through in the first half on some significant product categories. But right now, there's really nothing pending and nothing that we're expecting in terms of additional price increases coming our way.

Your next question comes from the line of Brian Sponheimer with Gabelli. Brian Sponheimer - Gabelli & Company, Inc.: I wanted to talk -- you got a major automotive aftermarket supplier in JCI this morning saying that battery shipments were sluggish in the quarter and there's still some inventory overhang. Presumably given a more seasonal element with battery, there are others within the space, where there potentially is some inventory overhang that could lead to some pricing deterioration in the back half of the year? Are you guys seeing this at all or am I getting too far with the extrapolation?

We've not seen it, Brian. Our battery business is actually good. We don't see any evidence of any inventory build. We think that with our system, it's basically flow-through. So at this point, we feel pretty good about the progress to date and what the outlook is. And as long as the heat continues, it ought to continue to pull batteries all the way.

Brian, this is Paul. I would also just add on the battery business, our battery business is pretty good right now. And we have a major promotion going right now benefiting the Intrepid Wounded Warrior Fund that's out there in the marketplace, and we've gotten great playoff. And our battery business is pretty good right now. Brian Sponheimer - Gabelli & Company, Inc.: Okay, that's helpful. Going to Quaker City, $300 million puts it at more or less the higher end of some of the businesses that you've been interested in. How many other Quaker states are out there that could potentially be kind of in your wheelhouse down the road?

Well, this -- what interested us in Quaker City primarily is the fact that they were the last of the non-GPC owned NAPA member. So we've now completed the circuit, and there aren't any other NAPA distributors that would be out there for sale. There might be some other businesses that we could have an interest in prospectively, but they won't be in that range. They'll be smaller businesses if we find any that we think make sense for us.

Brian, I might clarify, I just want to go to a couple of questions come up in the past. We did not sell into Quaker City, and we did not compete against Quaker City. They had territory that we didn't sell into, and so that's just pure geographic expansion for us.

That's a good point.

Your next question comes from the line of Gregory Melich with ISI Group.

I just had one follow-up, which is on the gross margin. You mentioned that the vendor rebates were supportive this quarter and, I think, will be for the rest of the year. Could you give us a little more on the magnitude of that or perhaps, Jerry, is that why the Auto margin ran as strong as it did despite the weak volume in the second quarter?

No, I don't think it -- it doesn't have that major of an impact on the Automotive side. It looked like in total company, our volume incentive rebates were up about 2% for the 6 months. And I would say that, that's probably going to be what it's going to be for the full year. I mean that basically is how we do it. We're projecting for the full year, and we have to take a portion of those each quarter. So we had a 2% increase for the first 6 months.

Okay, great. And then as a follow-up on the top line, when you said that DIY was down 2 versus up 6 in the first quarter, it looks like the deceleration there a lot more than in the Do It For Me side. But the ticket was up. Is it fair to say that -- and ticket was down on the Do It For Me Side given that inflation was flat or was there something else going on with mix?

No, the ticket value was actually up a bit. The ticket count was basically flat for the DIFM side. So we had to -- we actually had increased ticket values on both the retail and the commercial side. We were basically flat in number of tickets on the commercial. We were down in number of tickets on retail.

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

Scot Ciccarelli, RBC. Because of all your businesses, you guys touch a lot of different parts of the economy. I guess I'm just kind of wondering kind of when you look at your business, where are the areas that you may be most optimistic? And on the flip side, where do you see the most risk at this stage?

I'll take a stab at it. We're very, very pleased with the performance of our industrial-related businesses. And with the industrial production capacity utilization numbers that came out a couple of days ago, we think that, that bodes well for the back half of the year. And we like the specific initiatives that each of the businesses has so we feel good about our ability to maintain share and perhaps even grow a little bit of share in those businesses. Our Automotive business was going along quite well through the first quarter, and then we did hit the industry-wide slowdown in the second quarter. We are hopeful based upon some of the anecdotal information we're getting from our commercial accounts that they're seeing a pickup in activity in July and that will be sustainable in the months ahead, so we continue to be optimistic about our Automotive business. And the underlying fundamentals, as Paul pointed out, are all favorable right now. So that one, we think, offers some reasonable growth for us in the second half of the year. The one business that's the most challenged is Office Products, and it's primarily related to the overall economic slowdown and then also related to some of the change in product demand. So anything that's basically paper-based is going to continue to go through some deceleration due to the tablets and the iPads and the things like that, that are causing contraction in demand. But other product categories are offering some attractive growth rates. We just have to continue to accelerate the growth of the categories that we think offer the best opportunities going forward. So does that answer your question?

Yes, I think it does. And then I guess as a follow-up would be, obviously, the Auto segment did slow quite a bit in the second quarter. I mean outside of weather, is there anything else you would attribute it to?

Well, you look at consumer sentiment and its decline for the past 4 months. If you look at overall retail sales, they've been softening for the past couple of months, and I think there's just a general uneasiness or malaise among the consumer right now that I think perhaps had an impact. We are somewhat encouraged by the reports coming out that say that they expect back-to-school to be reasonably good this year. And hopefully, that's going to translate into some increased purchasing of some of the things we sell as well as consumers start to move beyond the period we're in right now.

[Operator Instructions] Your next question comes from the line of Bret Jordan with BB&T Capital Markets. Bret David Jordan - BB&T Capital Markets, Research Division: A couple of quick questions. A lot of them have been hit, but talking about June and what seemed to be an improving trend as the quarter ended, which is -- hearing mixed signals from various participants. Do you see anything strategically in the market? Did you guys gain share? Was anything happening with major competitors in the space in that period that might have you a relative outperformer during that time period?

No, I don't think we can answer that specifically. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. And then I guess the comment earlier during the prepared remarks, you talked about expectations. I think you said retail was up 1% last year. You expected this year second half to be in line. Was that accurate that retail aftermarket might be up around 1%?

That is correct, Bret. That's what we're projecting. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. And then I guess one little follow-up on the July commentary. I think you said a little bit of pickup commentary from your service customers, and I think you also said a little bit in the very end of June you'd gotten on the weather. A sort of order of magnitude, was this acceleration from an improved June looking more like the volumes were doing in the first quarter or I'm just sort of trying to get a feeling for the magnitude and timing of that heat impact in the quarter?

Well, there was very little impact from the heat in June. We did get some benefit in the very last days. But any impact from the heat, I think, will be more evident in the July numbers. And then in terms of the comparative between June and the first quarter, June was still not as strong as the overall first quarter but it was the best month of the second quarter.

Your next question comes from the line of Brent Rakers with Wunderlich.

Wanted to follow up, if I could, a bit on Industrial. It sounds like from the direction of performance, you're really not seeing some of the same kind of deterioration in some of these sequential trends in May, June, July that some of your peers are. Would that be a correct observation?

Well, we didn't see any sequential change through the quarter. Our numbers were pretty consistent as we progressed through the quarter. But we did see the sequential change at quarter end, with first quarter being up 12% and second quarter being up 8%.

Okay. And as you move into July, you've talked a little bit about indications for the Auto side. What sort of kind of organic changes are you seeing on the Industrial side of things?

We think July should turn out to be fairly consistent with what we saw in the first quarter.

Okay. And then could you just remind me within that business when you talked about industrial production and the MCU earlier, can you talk about how you see that relationship to your business kind of working on a coincident basis or more of a lead indicator of your business there?

I want to go back and correct one thing. I misspoke when I said in line with what we saw in the first quarter. July is in line with what we saw in the second quarter. So I just want to clear that up. As far as the industrial production capacity utilization, that's usually a 6- to 9-month indicator for us -- leading indicator. And with what we saw earlier this week, historically, that would tend to indicate that the next 2 quarters should be pretty decent for us.

Okay. And then just last question regarding EIS, it seemed like you put up pretty good margins in that segment in the business. Just wanted to get a sense for how that might work in terms of is that a project-by-project basis and maybe that's pushing the margins up a little bit there or is that something we can extrapolate going forward?

You can't expect those kind of margins going forward. That's highest margins in their history. I think some place between -- and our target has been to get them up to 8%, and that probably is in your modeling going forward. But it's just blocking and tackling. There's not any silver bullet that's going to get out of -- get their operating margins up.

Your next question comes from the line of Richard Hilgert with Morningstar.

Just a couple of things I wanted to follow up on in the automotive space, where you're saying that you're experiencing some softer dynamics going on there. The Snap-on call just prior to yours, I was curious to know what their experience was in that group. They're saying that they're not seeing anything where consumers are trying to put off repairs or have worked on, on their vehicles. They're seeing that those aftermarket dynamics are still in place and sales in the tool business there were still real good. Now you're -- but you're saying that -- was the softness coming from the do-it-yourself side or was this coming from the garages? Where was it coming from?

Well, I think Paul covered in his comments that on the retail sales, we were down 2% in the quarter. On the commercial side, we were up 3% in the quarter. Both of which were softer than what we experienced in the first quarter. I think it's hard to try to compare Snap-on's results with our results in the sense that they're heavily concentrated on handheld diagnostic equipment, heavily concentrated with hand tools. And that's just a small part of our business. I will tell you that our tool and equipment business was good in the quarter. So we feel that the team made good progress there. But I don't think you can try to compare directly what happens with Snap-on and what happens with us. And by the way, we've got a very high regard for the job that they do. They're a good company, and they perform well.

Okay. No, that makes sense. So you would say then that the underlying fundamentals of the aftermarket might be eroding some but you expect it to be in line with your expectations for the rest of the year?

No, I don't think we'd go quite that far. I think what we would say is that we came through the first quarter and the prior 8 quarters with pretty good results. We saw deceleration in demand in the second quarter. It appears that, that's indicative of what happened in the overall industry. We think the underlying fundamentals are quite positive now frankly. We think perhaps some of the softness in the second quarter could be attributed to a milder winter, maybe we pulled some sales into the first quarter. And then also we think some of the softness might be attributed to what we've seen generally in retail sales moderating in the quarter and consumer sentiment moderating in the quarter. Our expectation is that the second half of the year should be relatively good for us, and we don't see any deterioration in the underlying fundamentals in the industry. We feel good about it.

Okay. Then also year-over-year, fuel costs, I would imagine, are a positive for you right now in terms of margin?

Well, our fuel costs would be down. So from an operating margin standpoint, that would be helpful. It's a recent phenomenon but it is, in fact, helping at this point.

And how do you record the fuel costs. I mean you've got a lot of delivery vehicles out there running milk routes every day. Do you -- is that in cost of goods sold or is that part of your selling?

It's in our operating expenses.

And Richard, let me -- this is Paul -- just a further comment on that. I just want to make sure that -- we haven't seen the kind of drops in diesel as we are in basic unleaded fuel at the consumer gas pump. So we're -- there's really 2 different measurements there.

Our final question comes from the line of Keith Hughes with SunTrust.

This is Judy in for Keith. Just to clarify on the Electrical for the monthly trends, with June, you did not see a pickup, kind of like the industry index that you referenced. And was there anything else that impacted your outlook for that segment?

For the Electrical side?

That's right.

Now the Electrical side are pretty steady throughout the entire month, the 3 months in the second quarter, running basically at 10%, 9%, 10% and so forth. So there wasn't any pickup in Electrical towards the end of the quarter.

We have no further questions at this time.

Well, Amy, thank you. And we thank each of you for joining us on the call today. We appreciate your continued interest in and support of Genuine Parts Company, and we look forward to talking to you in our third quarter conference call, if not before.

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