Good morning. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the Genuine Parts Company Second Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. Carol Yancey. Ma'am, you may begin your conference.

Thank you. Good morning, and thank you for joining us today for the Genuine Parts' second quarter conference call to discuss our earnings results and the outlook for 2011. Before we begin this morning, please be advised that this call may involve forward-looking statements 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 our company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. We will begin this morning with comments from Tom Gallagher, our Chairman, President and CEO. Tom?

Thank you, Carol. And I would like to add my welcome to each of you on the call today and to say that we appreciate you taking the time to be with us this morning. As we customarily do, Jerry Nix, our Vice Chairman and Chief Financial Officer, and I will split the duties on this call. And once we have concluded our remarks, we will look forward to answering any questions that you may have. Earlier this morning, we released our second quarter 2010 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 $3,185,000,000, which was up 12%. Net income was $151.8 million, and this was up 22%. And earnings per share were $0.96 this year, compared to $0.78 in the second quarter of 2010 and EPS increase was 23%. These are all record results for us, so we feel that we had another good quarter with solid contributions from all 4 of our business segments, and we're proud of the job that is being done by the GPC team. Through their continued efforts, we feel that we're positioned to have another good year in 2011. A review of the second quarter results by business segment shows that our Industrial and Electrical operations continue to produce the largest sales increases. Motion Industries, our Industrial distribution business, was up 19% in the quarter, and they went over $1 billion in quarterly sales for the first time. Acquisitions added about 3% to the Industrial increase in the quarter, but importantly, the ongoing operations generated a very healthy 16% increase, so the underlying Industrial business continues to perform well. And as we look a bit more closely at the…

Thank you, Tom. Good morning. We appreciate you joining us on the call today. We'll first review the second quarter and 6-month 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 to your questions. A review of the income statement shows the following. Total sales reached another record high $3.2 billion for the second quarter, up 12% from last year and our fifth consecutive quarter of double-digit sales growth. For the 6 months, total sales of $6.2 billion, up 13% from 2010, and as we head into the half, last half of the year, we remain optimistic about the continued positive sales momentum in all 4 of our business units. Gross profit for the second quarter was 28.76%, up 22 basis points from our margin in the first quarter this year while down only 12 basis points from 28.88% in the second quarter last year. For the 6 months, gross margin is now at 28.65%, which is down 40 basis points from 29.05% for the same period last year. This area has been a challenge for us for several periods now, so we're pleased to see the sequential improvement to the overall gross margin and to also narrow the gap in the year-over-year comparison. We had told you last quarter, we're working hard to stabilize our gross margin by the end of 2011 and expect it to be operating on a relatively even run rate with the prior year, so it's good to see us move in that direction this quarter. As that said, we have more work ahead of us, so we continue to address ongoing competitive pricing pressures, changes in product mix and a growing…

Thank you, Jerry. Well, that concludes our review of the second quarter and first half results. And as mentioned earlier, we're proud of the job that has been done by the GPC team thus far in 2011. Now as far as the rest of the year is concerned, we continue to be optimistic about our prospects in each of our 4 businesses over the remainder of the year. End market conditions are generally favorable in each case, and the growth initiatives for each of the businesses are well-defined. Our current expectations are for the full year revenue growth of 9% to 11%, which is in line with our prior guidance, and this implies revenue growth of 6% to 9% over the remainder of the year, with Automotive being up 6% to 8% over the remainder of the year, Industrial, 8% to 10%; Office Products, 3% to 5%; and Electrical/Electronic, up 10% to 12%. And we recognize that our second half growth expectations are tempered down from where we are through June, but some uncertainties remain which are beyond our control, including the ongoing impact of the higher gasoline prices on miles driven and consumer spending, the high level of unemployment and suboptimal job creation and the general fragility yet of the economic recovery. Additionally, our comparisons get even more challenging in the second half of the year, with last year's revenues being up 13.5% over the final 6 months and earnings per share up 22%. On the earnings side, we feel that a range of $3.40 to $3.50 is appropriate at this time. And this is up from our prior guidance of $3.32 to $3.42. At the $3.40 to $3.50 range, this would represent an EPS increase of 13% to 17% for the full year. And with revenues up 9% to 11% for the year and EPS up 13% to 17% following the 11% revenue and 20% EPS increases in 2010, we would consider that a solid performance by the Genuine Parts team. At this time, we'd now like to try to address your questions, and we'll turn the call back over to David. David?

[Operator Instructions] And your first question comes from the line of Christopher Horvers of JPMorgan. Christopher Horvers - JP Morgan Chase & Co: So a couple of questions. First, just from a top line perspective. Clearly, there are reasons to be cautious given the environment and the compares. But I guess, Thomas, is it fair to say that you're not necessarily seeing anything right now that would cause that concern?

Well, that's fair and true. The first half of July, things look about like they did through the second quarter. Christopher Horvers - JP Morgan Chase & Co: Okay. And then as you think about the retail slowdown to up slightly in the auto business, how much of that is just kind of April's weather? And I guess, the other way to ask that is, did you see a -- did retail rebound later in the quarter, if you have that information available?

No. Our results actually were fairly consistent through the quarter. We did not see any spikes or any big peaks or valleys. We just think, in looking at the outbound sales flow, that it is more tied to consumer spending and to discretionary items. Christopher Horvers - JP Morgan Chase & Co: And on the commercial side, it looks like again you'll post, I guess, industry-leading sales growth on the commercial side of the business. So I mean, is it simply your initiatives are -- you lagged in '09, you had a good '10 on the commercial side. Is '11 you recapturing that market share that you temporarily gave away in 2009? Is that how we should think about it?

I think to a degree, yes. We actually feel that we started to recapture some of the market share in 2010. And I just think our people have done a really good job in executing the strategies that they have to continue to have a strong presence on the commercial side of the business. I think our execution is quite good right now. Christopher Horvers - JP Morgan Chase & Co: Is there any competitive set that you would say that one more that you're being more successful taking share from one competitor versus the other?

No, I wouldn't say that. Christopher Horvers - JP Morgan Chase & Co: Yes, I just tried. And then really the biggest question on the margin side is the Industrial margins. And from a modeling perspective, that was a substantial surprise. So I was just curious as how sustainable is that? And then underneath that, was there anything with vendor allowance dollars in this quarter or LIFO that would make that expansion more one-time in nature to this quarter?

Chris, this is Jerry. No, the latter part of that question, no LIFO in that second quarter number. There certainly is some impact on the vendor rebates. We expect, and just because revenue is better, that we'll have a better year overall in rebates and so -- or up slightly in rebates in the second half. How sustainable is that? Longer-term, we've stated that our goal is to get the operating margins for the Industrial back to the 8%, 8.5% range. And with the sales strength that they've had in the last 18 months, we think we can achieve that this year, unless something falls off dramatically here in the second half. But we feel good about what we're seeing in the Industrial side at this point. Christopher Horvers - JP Morgan Chase & Co: So is that -- I guess, as you look at kind of the trend in the Industrial margins back out to the year, you had about an 8%. The second quarter, you did an 8.1% here. So was 1Q the anomaly? Is there some seasonality that we should think about that just...

No, a combination of both. There are some seasonality, but one the first quarter was a phenomenal -- phenomena, as you call it. And I think we're going to be in the 8% to 8.5% range. But as things continue to improve in the Industrial side, we won't tell them to stop at 8.5%. If we continue to show strong revenue and get the rebate levels back to where they were, then we can sustain that so.

Chris, one additional comment. The first quarter in the Industrial business is generally a lower operating margin quarter. Last year in the first quarter, we were at 6.1%, this year, 6.6% and then sequentially, the quarters get a little bit stronger as the year progresses. So the main thing for us and the focus of the management team is to keep the revenue line strong and continue to show quarter-over-quarter operating margin improvement.

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

This is Elizabeth Lane on for John. I just had a couple of questions. You mentioned that the Automotive segment was fairly consistent throughout the quarter. Was that the case for the other segments as well? Or were there particular months that stood out?

No. In fact, we had a lot of consistency in all 4 of the businesses through the quarter. And in fact, the overall company, on a per day basis, we were up 12% in April, we were up 11% in May and we're up 12% in June, so quite stable.

Okay. And second, miles driven started to decline in the spring, which is generally a negative indicator for demand for replacement parts and tires. But the last data point that the FHWA has is April. Do you have any sense of what travel trends have been like so far in the summer? And does it still look like that could be a little weak?

No, we're still operating off of the same data point that you are, so we don't have anything more current than that. And the only thing we can look at, at this point is, like on the retail side, we can see the slowdown in the discretionary items. And we know anecdotally in talking to our commercial customers that the consumer is getting the absolute needed repairs. But they're trying to defer as much as they can at the time or currently. But that's about as much as we know at this moment.

Your next question comes from the line of Tony Cristello of BB&T Capital Markets. Anthony Cristello - BB&T Capital Markets: Tom, one of the questions I want to discuss is sort of the acquisition environment. And if the environment remains steady in the Industrial side and you continue to see progress results, can you talk about what that implies for your ability to continue to get acquisitions done? Are the acquisitions opportunities still there? Are they getting better? Are they getting worse? And how should we think about it on a go forward basis?

I'd say that for the past 6 to 9 months, the opportunities, I think, have been relatively constant. We have discussions going on. We've been able to do 2, get 2 completed thus far this year. We may or may not be able to get any more completed, but there are discussions that are going on. And we think the environment is going to remain about where it is or perhaps it might get a little bit better. Anthony Cristello - BB&T Capital Markets: When you then look at sort of the overall operating environment, you've posted very consistent results. Do you still look at the data in the Industrial production and those type of numbers that sort of your gauge for how you are predicting your guidance for the balance of the year and what things will look like? Because, I mean, obviously going back to when we were hitting the financial crisis and the recession, things seem to drop off quite materially. And I'm just wondering, has your visibility changed or the way you go about providing guidance any different than it was a few years ago?

No, not materially. We look at the same data points that we've looked at historically. We do try to stay in close communication with our customer base on a plant-by-plant basis to find out what their order backlogs look like and what their expectations are. The combination of those 2 would suggest to us right now that our business, the end market will remain quite healthy as we go through the remainder of this year. The government came out just this morning with the June industrial production and capacity utilization numbers, and they were very good and very steady. So we feel good about the second half of the year in the Industrial business. Anthony Cristello - BB&T Capital Markets: Okay. And the Office Products side, sort of a tale of 2 cities there. I mean, your independents are doing quite well. Do you think that, that is sustainable as long as nothing else changes from an economic perspective? Is there something that you've done that your peers haven't, to sort of capitalize on that piece of business?

No. I think the first part of the question: Is it is sustainable? We feel yes. We feel that the independent operators are cautiously optimistic about the outlook over the next couple of quarters. The main concern is job creation in the Office Products business, and we have seen some thus far this year, and that follows a pattern that we saw develop in 2010. And as long as that continues, I think that part of the business should remain in line with where it is currently. Anthony Cristello - BB&T Capital Markets: Okay, and one question on Automotive. You discussed sort of the sequential flattening, going from plus 4% in the first quarter. Are you doing anything different? I know over the past quarters, you discussed the interest in wanting to increase your exposure, increase your mix to the retail side in some emphasis there. Has there been anything from either an advertising standpoint or anything you've done differently that you would say has helped, even though it's flattening out, that you've seen your business improve, I mean, from a mix standpoint? Maybe I need to ask the question a different way, but do you kind of understand where I'm going with that question.

Well, I think our advertising over the past several quarters has been sharper and more effective than prior to that, so I give our team their high marks. I think our e-commerce initiatives, which we don't talk about too much, but I think that they've done quite good over the past couple of quarters. And our teams are working on story sets and new planograms and the things that we normally do on an ongoing basis. And I think we're pleased with what's been done. We don't think they're reflective -- we don't think our results are reflective of the good work that's been done in these areas. And hopefully, as things stabilize somewhat and we get a little bit more discretionary spending, then we'll see the results reflected in our retail business.

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

Scot Ciccarelli. I guess, my question is the Industrial's been very strong for a while. And in fact, it seems to be coming from various geographies and end markets are very broad-based. When you see -- historically, if you'd seen that kind of really broad-based strength, how quickly can that really change on you? In other words, does it start to kind of creep up on you? Or is there something that, on a dime, multiple businesses and end markets can really change?

Well, prior to the second week of October in 2009, we would've said it would be a very gradual -- or 2008, I should say, would be a very gradual change. But we saw in the fourth quarter of 2008, we saw a very quick drop-off, but that was during the financial crisis, as you’ll recall. Right now, we would think and expect that it will be more gradual and we'll have several points of indication as we go into a slower period. And we don't see any evidence of that right now.

Scot, historically, we have tracked the Industrial production and manufacturing capacity utilization numbers with a 6- to 9-month time lag. And that's been over numerous cycles into and out of slowdowns. So you do normally have -- with that one exception Tom mentioned, you do have some indication and some time that you can adjust.

Okay. And I guess, I'm just curious on -- I'm asking in for an opinion here. I mean, it sounds like there's a disconnect between what you're seeing at the end markets, and obviously, June was a little bit better but some of the more broader macro data out there. What would you guys attribute that to?

We don't really know. We get asked this question a lot quite honestly, and we read and hear the same media reports that you do. There does seem to be a disconnect between what we read and hear and what we're experiencing in the marketplace. And we try to just keep our teams focused on the opportunities that we have in the marketplace and filter out some of the negative things that we continue to read and hear about. We don't want to be immune to them, but at the same time, there are plenty of opportunities yet before us in each of our 4 businesses. And for us, the key is just to continue to execute as well as we have been.

And your next question comes from the line of Keith Hughes of SunTrust.

The sequential gross margin progress, if we look at that by segment, was there any one segment that stood out as you moved from first to second?

Keith, I'll take that. No, there's not. And all of our business units have been under gross margin pressure, and they all need to improve and they all have individual and specific plans to improve. But no, you can't look at any one segment and say the improvement overall came from that segment.

Is this progress is going to be hampered, given the lower sales view you have for the second half of the year versus what we saw in the first half?

I don't think so. The initiative is the same regardless of the volume. And we would not expect to see it hampered. If it is, we'd be disappointed.

So this is more internal stuff, this...

That's correct.

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

I just wanted to engage you a bit on the pricing environment in the Automotive business, both what you're seeing broadly and some follow-up on the steps you're taking. You had done some work over the past number of years to increase your competitiveness there. Just interesting in how that's -- interested, that is, in how that's playing out in the current environment.

Well, the competitive environment is about as it has been, and it's probably the way it's going to be, and that it is it's a competitive industry and we just have to learn how to operate effectively in that environment. As far as our price positioning, I think that our price positioning is better than what it was back in 2009 and the early part of 2010. Our teams are very, very focused on watching what's happening in the marketplace and reacting on an ongoing basis to what's happening in the marketplace. But we don't see any material changes on the horizon, up or down. Our expectation is that it will continue to be as competitive as it has been.

Got it. And then as we think about the potential for operating leverage in that business, your results overall are quite good. The operating margins are up some. The incremental flow-through, I guess, on the incremental revenue isn't that far above the base operating margins. So as we think about the profit composition of the incremental sales, does that reflect the pricing posture? Or is there a mix factor that contributes to that? Just to make sure we understand that.

Well, there is a mix factor in there. There are certain product categories that have different gross profit contribution, and as we get more revenue growth from some of those categories, that has an impact on the overall gross profit. There are also customer categories that have different gross profit contribution. I think Jerry made a comment in his remarks that we're doing very good business with major accounts throughout all of our businesses. And generally speaking, the gross margins are a little lower on those, but the dollar volumes are significantly higher. So it's a combination of product category and customer category shifting.

And your next question comes from the line of Gregory Melich of ISI. [Technical Difficulty]

Your next question is from Michael Ward of Ticonderoga.

A couple of things. On the Automotive, the cash business is still roughly 25% to 30% of the total?

Yes, sir, that's right.

So that's suggesting professional mechanic is up somewhere around 12% or 13% again?

Well, I don't know. I just said low double-digit. We'll let you do the calculating.

Okay. No, for the professional markets, so in the major account is one of the big areas, I assume new car is still kind of low single-digits.

When you say new car, I'm not following you.

The new car dealers, I'm sorry.

Yes, that's not a -- that's a big business in total, but it's not a high percentage of our total volume.

Where are you seeing some of the strength? Is it any lines in particular or regions in particular? Are you selling more to older vehicles? Is the -- your content and the average age of the vehicle, has it gone up with this aging fleet? It seems like you're outpacing the industry. And so I'm just curious where the strength is coming from.

Well, I mentioned in my comments more broadly speaking that NAPA AutoCare and major accounts are both growing in low double-digits, and we're getting nice growth in those 2 important parts of our commercial business. And then as far as we are selling, it's more car parts, it's more critical components. As these vehicles continue to age, they're experiencing higher frequency and also a greater demand for repair parts, and I think we're benefiting some from that.

So are you getting the second and third generation on some of these components?

In some cases, yes, we would. In some cases.

Jerry, you mentioned on the cost side, I thought you said you were able to hold on to $55 million of the cost cuts that you made in '09 -- '08 and '09, and then you've added an additional $20 million in costs. Is that correct?

Yes, the $20 million is from the current year. And every year, we go in with some cost-saving initiatives, and that's what we've accomplished thus far. And the $55 million, you're right, is from the '08, '09 time period.

Okay. And then lastly, do you have a share count for the end of the quarter?

Yes, we do, hold on a minute, Mike. We're right at 152 million.

Yes, we've got 151,812,000.

And your final question comes from the line of Gregory Melich of ISI.

This is Mike Montani on for Greg. I just had a question for you on, I guess, the inflation that you're seeing right now. Saw, it looks like mixing it out across the divisions about 2% increase this quarter from vendors and to you all. When you look at the 6% to 9% sort of back half top line guidance, can you just help us understand, number one, how much of that might be inflation versus volume, and then what you're hearing from the vendors?

We would expect price increases to be a bit above where we are by the end of the year, a bit above the second quarter numbers by year end. As far as what we're hearing from vendors, we have a lot of discussions with the vendors, and they continue to think that they need some price increases. Our posture on that is we're fine with that, provided that we don't lose competitive positioning and provided also that they're applied simultaneously across all of their customer segments. So we may see -- we will see those numbers go up a bit, but I don't know that they would double between now and year end.

Mike, let me just point out, there's a danger in saying that the price increases average out to 2%. You got Automotive at 1.4% and they represent 50% of our revenue, and you got Electrical at 3.6% and they represent 4% of our revenue. So I just caution you that it's not quite straightforward as that.

Understood, okay. And then just a follow-up on the gross margin rate. Obviously, you made substantial improvement there sequentially. And I'm not sure, Jerry, if you can just give a little more color. It sounds like a little bit better vendor rebates and also internal initiatives. And I think you had some work you were doing with price optimization on the auto side. Maybe is that one thing that's helping here? Or can you just share a little bit more?

Yes, it is a combination of all of that, Mike. The rebate certainly helped the Industrial side some. We do have the pricing software that we're working into the Automotive side. We've previously done that in the Office Products side. So it's a combination of a lot of things, and it's buy side and sell side and it's product mix, customer mix. There's a lot of tweaking, and that's why it takes some time to get gross margin turn around to start to improve. So it is a combination of all of those things. But you're right, the rebates did help show some improvement in the Industrial side.

Great, that's helpful. And just the last question I have was for the full year, the outlook for $700 million of cash flow from ops. I think, year-to-date, we're at about $250 million. And typically, it seems to be normally relatively flat 1 half versus 2 half. Is there anything specific, maybe inventories are up 4% and we should anticipate that, that would be up less? Or how do you sort of get there?

Yes, if you look at this point last year, that change there was a source of cash. And this year, it's a use of cash. And we were down at June 30 last year at 2% in inventory, and we're up 4% in inventory this year. And then we were also, last year, I think, the receivable was up 9% and you have 16%. And I think you'll see some further improvement in that inventory number, as well as receivables. We're comfortable that the $700 million in cash from operations, that we'll be able to achieve that.

And there are no additional questions in queue at this time.

David, thank you for your job on the call today, and we appreciate all of those that did call in. We appreciate everybody's ongoing continued support of Genuine Parts Company, and we look forward to talking to you, if not sooner, on our third quarter conference call.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.