Genuine Parts Company Earnings Call Insights: Capital Expenditures and Deferred Maintenance

Genuine Parts Company (NYSE:GPC) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Capital Expenditures

John Murphy – Bank of America Merrill Lynch: I was just curious, when we look the CapEx for the first quarter was relatively low versus the run rate you were looking at for the full year, and $140 million, $160 million might be a little bit higher than we were modeling. I’m just curious is that a step-up that could step down in the coming years? I’m just trying to understand where that might be in out years?

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Carol B. Yancey – SVP of Finance and Corporate Secretary: Well, with our business we do look at stepping that number down if we need to, and we were going to have an increase even without Exego this year, because we do have several technology projects that are helping our distribution centers and our stores being more productive. So, originally, we had stepped that number up from about $100 million to $115 million to $130 million, and then with Exego we stepped it up just a little bit more. So, that’s probably a pretty good run rate, but again we can adjust that number as need be, but we will continue to reinvest in our businesses with technology.

John Murphy – Bank of America Merrill Lynch: And then second question, it looks like autos is performing pretty well, but if we look at the other three segments, I know we are looking at some tough comps, but as we progress through the year, you clearly have some sort of comfort and confidence that things are going to improve. I’m just curious if there is anything you are seeing in the market right now or what you saw in January and February that made March an aberration that makes you comfortable sticking with your current guidance of some small improvements through the course of the year?

Thomas C. Gallagher – Chairman and CEO: John, we do in fact see some improvements. It’s early in April yet, but the midmonth figures are more in line on a per day basis with what we saw in January and February, and as I said, it is early, but we are hoping that what we saw in March truly was an aberration. And with that said also, each of our management teams has got some very specific and focused initiatives to try to continue to drive revenue improvements.

John Murphy – Bank of America Merrill Lynch: And then lastly, as we look at pricing and your ability to pass through price increases and pricing sort of in the end market, just wondering if you could comment on that in the first quarter and what you are expecting through the remainder of the year?

Thomas C. Gallagher – Chairman and CEO: Well, we saw – as Carol mentioned, we saw some deflation in the automotive side of the business in the first quarter. We saw very modest inflation in both Office Products and in Industrial, and we saw just over 1% in the Electrical side as far as our ability to pass them on. You may recall that in automotive when we get a price increase, we implement a price increase in the case of industrial, we do have some contractual arrangements where we have pricing windows where we can implement those price increases, but I think as a general statement, it will be fair to say that we are comfortable with the fact that we can pass any price increase along as long as we adhere to those pricing windows that are contractually negotiated. As far as the remainder of the year, our outlook right now would be for very modest price increases over the remainder of the year. We don’t see any indication at this point that there is going to be a significant push for price increases from our vendor community across each of the businesses and certainly we are not going to take one if we don’t feel we can maintain our competitive positioning in the marketplace.

John Murphy – Bank of America Merrill Lynch: Then, truly just the last question. Carol, as we look at the balance sheet, I mean 25% debt-to-cap as you indicated, it’d be, once Exego is fully closed and consolidated, really does not appear that that aggressive at all and still fairly conservative. But it sounds like you still kind of want to step back on a debt-to-cap number over time. I mean, is your philosophy going to be as a CFO and TOM obviously is a CEO, you’re weighing on this too, of course. But that you could potentially run with a little bit more debt than you have historically or do you want to get back to sort of that mid-teens debt-to-cap number, is that sort of your target? I’m just trying to understand sort of your thought process on the debt that you’re taking on here.

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Thomas C. Gallagher – Chairman and CEO: Well, John, I’ll take the first stab at that and then Carol can help me out. But I would say that, keep in mind, that at one point, we were in the low-to-mid 30s with debt to total cap, and while we’re not uncomfortable at that level, we found that it made more sense for us to pay that down and to use the cash to remove that debt. As we go forward, we’ll pay the debt down unless we find a higher and better use of the money for shareholder value creation. So, we’re not adverse to carrying more debt than we have in the last few years, but at the same time, we think it has to make good long-term sense for the shareholders of Genuine Parts Company.

Carol B. Yancey – SVP of Finance and Corporate Secretary: And I guess, we’re going to continue as we continue to support our priorities for cash as we talked about. Our cash flows have been just really strong lately and we still see some improvement there. So, if we can continue to support our dividend, share repurchases, strategic bolt-on acquisitions and our CapEx and then still be able to work on paying down that debt, then that’s what we plan to do.

Deferred Maintenance

Chris Horvers – JPMorgan: To focus on the auto side of the house, can you just clarify how you think about ex the day shift what the trend looked in January, February, and March? You mentioned that April was better. Do you think within northern regions and some of the cold weather categories, I mean do you think that could simply be in anniversary of easier compares or do you think that some of the fundamentals are improving as well?

Paul D. Donahue – President: Chris, I’ll take a shot at it. This is Paul and I’ll start with your last question first. When you talk about our northern divisions which for us is comprised pretty much of the Eastern, the Central, and the Midwestern. We have seen improvement in the first quarter of about 300 basis points from where they were tracking in Q3 and Q4. So we are pleased to see some progress with those groups and we’re seeing it even hold as we go into April as well. So we’re feeling better about that group. And then you asked Chris about the average daily sales or one less day, certainly that had an impact in the first quarter as did how the Easter holiday fell coming into March this year versus April of a year ago. And as we look forward, Chris, we – certainly it’s earlier yet in April – but we are seeing a bit of a lift. We’re hoping for a bit normalization of weather at some point, which we all talk a good bit about, but certainly hoping for a bit of normalization on the weather side and the comps do get easier, no doubt, but there’s an awful lot of – still an awful lot of deferred maintenance that’s sitting out there that at some point has to come into the market.

Chris Horvers – JPMorgan: And so that when you say it’s better enabler, that’s average daily sales right, because you would have had Easter shift being I guess a positive in April.

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Thomas C. Gallagher – Chairman and CEO: That’s correct.

Chris Horvers – JPMorgan: So, if the northern areas or the cold weather regions improved 300 basis points sequentially in the quarter, given that the comp stayed flat, does that suggest that the other areas of the country actually slowed down?

Thomas C. Gallagher – Chairman and CEO: No. It doesn’t. I think what Paul is talking about is the delta between the northern operations and the rest of the operation. So, the northern operations are still trailing the performance of the remaining operations, but the degree of change has narrowed in the first quarter, if that helps explain that.

Chris Horvers – JPMorgan: I think it does. I guess so if the north improves sequentially on a relative basis, but if the comps remain flat, doesn’t that mean that the – the total remained flat doesn’t mean that the other areas have actually slowed down?

Thomas C. Gallagher – Chairman and CEO: No. They haven’t. What’s happened is if we go back to the third and fourth quarters of last year, the relative difference between the northern operations and the southern operations and the remaining operations, the difference in performance would have been 500 to 600 basis points. In the first quarter, the difference in performance was closer to 300 basis points. I guess, the point we are trying to make is that we see the northern operations narrowing the gap with remaining operations, and if that continues, we would think that that will continue to enhance the overall performance of the automotive operations.

Chris Horvers – JPMorgan: Is there any way to think about how much maybe the spring pull-forward, I mean, I would assume on DIY side of the business that the pull-forward last year because of the weather, how much that impacted comps, maybe to the positive in 1Q last year and to the detriment in the second quarter?

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Thomas C. Gallagher – Chairman and CEO: That’s a hard number to get to and we wouldn’t hazard a guess on that. We do know it was a positive influence in the first quarter results last year, and we saw evidence that as we get into the second quarter and perhaps that’s a possible contributor to the fact that we are seeing the comps improve in April back to more what they were in January and February.

Chris Horvers – JPMorgan: Then last one just on that sort of sequential improvement, is that on the DIY side of the business as well?

Thomas C. Gallagher – Chairman and CEO: Improving, but the DIY is still the weakest part of our business.

A Closer Look: Genuine Parts Company Earnings Cheat Sheet>>

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