Graco Inc (GGG) 2004 Q4 法說會逐字稿

Good morning and welcome to the fourth-quarter year-end 2004 earnings conference call for Graco Inc. If you wish to access the replay for this call, you may do so by dialing 1-800-405-2236 within the United States or Canada. The dial-in number for international callers is 303-590- 3000. The conference ID number is 11021236. The replay will be available through January 31st of 2005.

At the request of the Company, we will open the conference for questions and answers after the presentation. During this call, various remarks may be made by management about their expectations, plans and prospects for the future. These remarks constitute forward-looking statements for the purpose of the Private Securities Litigation Reform Act. Actual results may differ materially from those indicated as a result of various risk factors, including those identified in the Exhibit 99 to the Company's 2003 annual report on Form 10-K and its most recent 10-Q.

I will now turn the conference over to Mr. Mark Sheahan, Vice President and Treasurer. Please go ahead.

Good morning. Welcome to Graco's fourth-quarter conference call. This is Mark Sheahan. I am here with Dave Roberts, our President and Chief Executive Officer. I will start off by quickly hitting some of the highlights of the press release that we put out yesterday afternoon, and then we will open the call up for your questions.

First of all, on an overall basis, we are pleased to report another net sales increase in the quarter. The 19 percent growth in the quarter represents Graco's 11th consecutive quarter of sales growth. And again all divisions and regions reported sales increases from the same period last year.

The increase in the revenue in the fourth quarter was really driven by good growth across all of the divisions and all of the regions. Industrial automotive was up 20 percent, Contractor was up 17, Lubrication was up 19 percent, and then geographically our sales in Europe were up 29 percent with volume being up 19 percent and the rest coming from favorable currency translations.

In the Asia-Pacific region, sales were up 21 percent with volume up 18 percent. Again, favorable currency translations helped the Asia-Pacific sales numbers.

For the Company in the fourth quarter, for -- favorable currency translation rates added 3 percentage points of sales growth. And again with regard to exchange, the stronger Euro versus the U.S. dollar is the primary driver for our favorable comparisons in the quarter and on a year-to-date basis. In 2004 the Euro on an average basis was $1.24 versus 2003 where the same Euro was worth $1.13. This represents about a 9.7 percent strengthening of the Euro. And for the fourth quarter, the average Euro was valued at $1.29 versus last year's fourth quarter where the Euro was valued at $1.19. Again, this is about an 8.4 percent strengthening of the Euro.

For the quarter, the translation of currencies at about 2 pennies to the EPS and approximately 9 pennies for the full year. For the fourth quarter, our net earnings were very strong. They increased 29 percent, and for the year, our net earnings were also very strong, up 25 percent versus last year.

Touching briefly on each of the three segments, starting here first with Industrial/Automotive. Their sales in the quarter were 77.5 million, again that is up 20 percent versus the same period last year. Without the favorable impact of currency translations, sales were up a very healthy 17 percent. So although currency is contributing, we are still experiencing very strong underlying growth in this business. All of the regions had double-digit increases versus last year, and revenue gains were experienced in all of the major product categories.

If you look geographically at the industrial automotive segment, in the Americas sales were up 16 percent in the quarter, which is especially pleasing given that last year's fourth quarter in the Americas was very strong, up 25 percent. For the year, Industrial/Automotive sales in the Americas were up 15 percent with gains in all of the product categories and led by strong sales of our Reactor and Fusion protective coating products that we talked about previously.

Again, in Industrial/Automotive in Europe for the fourth quarter their volume increased 16 percent. The reported sales were 26 percent higher after (inaudible) currency translation. For the year, Industrial/Automotive sales volume in Europe was up 12 percent, and reported sales were 23 percent higher than last year. Much of the gains this year in Europe came from large projects, as well as ongoing growth in Eastern Europe in the middle East. Germany and France are still the largest revenue countries for Industrial/Automotive products in Europe; however, both those countries were flat in 2004. For the year, Industrial/Automotive sales in the Asia-Pacific region were up 17 percent, and reported sales were 20 percent higher than last year after reflecting favorable currencies.

Continued strong demand for products in all of the major categories including sealants and adhesives, process, protective coatings and finishing was evident throughout the region. The profitability for Industrial/Automotive equipment segment this quarter remains strong with operating margins improving to 31.3 percent versus 30.6 percent last year. Operating profit dollars grew 23 percent versus last year's fourth quarter, and for the year operating margin in this business was 32.1 percent versus 28.5 percent last year. Year-to-date Industrial/Automotive operating profit dollars were up 34 percent on a revenue increase of 18 percent.

So to summarize Industrial/Automotive, we continue to see underlying growth in the Americas where sales were up 16 percent from last year's strong fourth quarter. Underlying demand in Europe has improved with the exception of Germany and France, which have yet to experience any meaningful volume growth. Underlying growth in the Asia-Pacific region continued this quarter, and finally with the acquisition of Liquid Control on January 1, we are expected to see some incremental revenue and profit from the coming year.

Turning next to the Contractor segment. When compared to last year's fourth quarter, worldwide Contractor sales of $69.5 million increased by 17 percent. Sales in all three of the regions were higher in the fourth quarter with continued good demand for new products like our Ultra and GMax sprayers.

In the Americas, sales were up 15 percent in the fourth quarter, and this is despite a slight 3 percent decline in the Home Center Channel, which had a difficult comparison versus last year. For the year, the Contractor sales in the Americas were up 6 percent, again driven by higher Paint Store and Rental sales. Full-year Home Center sales were virtually flat.

In Europe fourth-quarter Contractor volume increased 24 percent, and their reported sales were 35 percent higher. For the year, Contractor sales volume in Europe was up 14 percent and reported sales were 24 percent higher, after reflecting again the favorable currency impact.

Several factors contributed to the increase in Europe this year including strong business in the South and Middle East, Africa and Eastern Europe, the successful launch of new products and incremental distribution.

In the Asia-Pacific region, fourth-quarter Contractor volume increased 7 percent. Reported sales were 9 percent higher. For the year, Contractor sales volume in Asia was up 18 percent and reported sales were 21 percent higher. Most of the growth in Asia came from higher sales in China and Australia. Operating profit dollars for the division grew 27 percent versus last year's fourth quarter, and year-to-date Contractor operating profit dollars are up 15 percent on a revenue increase of 9.

To summarize Contractor, revenue growth was driven by higher sales in the Professional Paint and Rental channels in North America and increases in both Europe and the Asia Pacific region. Europe is continuing to nicely growth with modest underlying growth in some regions, successful new product introductions, and the addition of new distribution outlets throughout the region.

Asia is growing. We continue to build our market position in airless spray equipment to serve the growing economies in the Asia-Pacific region and targeting new distribution outlets throughout the region.

Last, I will turn to the Lubrication business. In the fourth quarter, the Lubrication Equipment division, their sales were $13.8 million, which is up 19 percent from last year's fourth quarter. All three regions posted higher sales in the quarter, but since over 90 percent of this business is in the Americas, that region is primarily responsible for the growth. In the Americas, sales are strong across all of the major product categories, which includes pumps, meters and hose reels.

For the fourth quarter, operating margins in Lubrication were 19.7 percent versus 23.6 percent last year, and for the year, operating profit margin was 22.8 percent compared to 21 percent last year. In 2004 Lubrication operating profit dollars were up 19.8 percent on a 10 percent revenue increase.

Next, commenting on the gross profit margin. Graco's those gross profit margin expressed as a percentage of sales was 54.6 percent for the quarter versus 53.6 percent for the same quarter last year. For the year, Graco's gross profit margin was 54.3 percent versus 52.9 percent last year. Some of the factors that are contributing to these higher gross margins for both periods include additional volume, favorable exchange rates, process improvements in our factories, higher productivity, reduced purchasing costs in some areas, and a higher proportion of industrial automotive equipment products. These favorable factors more than offset cost increases, including higher material costs that we are experiencing for commodities such as steel.

In operating expenses, operating expenses declined as a percentage of sales versus last year's fourth quarter. In the fourth quarter of '04, operating expenses were 29.8 percent of sales, whereas in the fourth quarter of last year they were 30.3 percent of sales.

As was noted in the release, the fourth-quarter operating expenses include some items which were noted, including a $1 million expenses related to Home Depots' in-store service initiative. These dollars were really spent for putting informational televisions and other promotional materials into the stores which will help our customers better understand the benefits of using a paint sprayer. And in addition to that, money was also spent for brochures and some severance for redundant employees as a result of moving to this new initiative.

We also had about $2 million of additional spending versus last year's fourth quarter for incentives. This includes about $1 million for one-time performance payments which were given to all Graco employees due to the strong performance this year. The rest is really due to higher bonuses and incentives given the higher revenues and profitability the Company has experienced this year.

Also in the fourth quarter, there was a $1 million contribution to the Company's charitable foundation. That makes our total contributions for the year $3.7 million versus last year where total contributions were $1.7 million.

And then finally, in the fourth quarter, there were additional expenses versus last year's fourth quarter resulting from the extra week in the quarter versus last year.

The next item is the tax rate in the fourth quarter. I'm sorry, the effective tax rate was 32.4 percent for the year versus 32.2 percent last year. And as we look to '05, we expect the effective rate to be somewhere around the 33 percent range.

Some other items. In 2004 cash flow from operations was very strong at 122.9 million versus 109.8 million last year. Again, some of the significant uses of cash this year have been for payment of dividends totaling approximately $130 million, share repurchase totaling approximately $41 million and property plant, equipment and software additions totaling $19 million.

Accounts Receivables are up at year-end, mostly driven by the increased sales activity and the impact of foreign currency translations. Inventories are also up $11 million from last year. On a LIFO basis, that represents a 39 percent increase in inventories. However, on a FIFO basis, which is probably a better comparison when looking at percentages, inventories are up 18 percent.

We are carrying additional inventory. It was billed throughout the year, and we're using our inventory to help support Graco's higher sales and our industry-leading customer service levels.

In summary, Graco had a good fourth quarter, a 19 percent increase in sales, 29 percent increase in net earnings. While our visibility is limited due to the short cycle business that we have in small backlog, we do feel confident heading into 2005. We continue to see good demand for our products, and we believe that 2005 at this point should be another year of higher sales and net earnings for Graco.

At this point, I will ask the operator to open up the line for your questions.

(OPERATOR INSTRUCTIONS). Matt Summerville, McDonald Investments.

Good morning. Two questions. First, the $1 million worth of expenses for the Home Depot initiative, is there any ongoing run-rate there, or is that truly more one-time in nature?

That was a one-time investment. Home Depot announced maybe last year they were going through this ISSI initiative, and to ensure that we maintain our sales and actually we think are going to help increase our sales through Home Depot, we invested in what we call Magnum TV. So when you walk into our base, it is a small 6 inch screen that you will be able to understand how to use the equipment.

So this is a one-time purchase. Perhaps some replacements in additional stores as they open stores, but certainly nothing at a level that we spent in the fourth quarter.

Okay. Then second, can you talk about what your net raw material headwind was in 2004, what your thoughts are in '05, whether or not you got in any pricing in '04, and again what you're doing with respect to pricing in '05? And whether or not if you're raising prices, do you think you saw any kind of prebuy in any of your businesses in Q4?

Good questions. I cannot give you the exact amount of material cost pressures that we had in '04. I can tell you that we did have some that were offset by efficiencies in the factories.

We did go with a price increase coming into this year. We did nothing from a price standpoint in 2004. In fact, our people are out now attempting to get price from our customers, and we have had some good success. I don't think there is a buy ahead. In other words, the fourth quarter I don't think reflects a buy ahead based on potential price increase.

Okay, great. I will get back in queue.

Charles Brady, Hibernia Southcoast Capital.

Can you talk about if you look at your ongoing margins, and I know (inaudible), so what is your incremental margin you think you can get going forward on the business? Obviously you guys for a long time had fantastic margins, and everyone always asked the question, "How much longer can they go?" That is the question again is, "How much longer can it go?"

You know we continue to focus on improving margin. You know I think we have explained to most of you probably on the line that we really don't have a target for operating margins, but we still see that there is room for improvement. You know we are not satisfied with where they are, but obviously they are at very lofty levels.

I think there's upside to margin, particularly if you look at the volumes that we are generating today, the fact that capacity will probably support us over the next two or three years, so we're not going to have to layer any brick and mortar in to support manufacturing. So I think there is still upside, particularly with the increase in volume and sales.

Okay. And the comment in the release and what Mark said about the extra expenses because you had an extra week in this quarter, you also get the benefit of having the extra revenues. So how does that shake out? How is that really a factor?

You're getting the benefit of having the extra revenues. There is not any additional expenses for having an extra year beyond what would normally be a normal week would there?

I think the comment, Charlie, is more as it relates to last year fourth quarter, so not so much on the incremental or sequential margin as much as the year-over-year.

Okay. And then on the tax rate in the fourth quarter, it looked a little bit low, lower than I would have expected. Can you comment on that?

It is really driven by our foreign earnings. As we went through the year and the Euro continued to strengthen, the effective rate that we pay in Europe goes down. We bring more dollars back, but we still pay the same amount of Euros. So really that was the main driver there.

Okay and my last question and I will get back in queue, can you tell us what sales you had in the quarter and even for the full year came from new products?

We're right around that 30 percent target that we had. I cannot tell you what the quarter was, but you know we have established this 30 percent target, and we were very close to that for the year.

Michael Schneider, Robert W. Baird.

I was wondering first on the expenses, if I look at the comparison year-over-year, I guess I'm wrestling with whether these are truly non-recurring or recurring unusual items. Because last year, Mark, you had a $4 million swing in the warranty expense. You also had $2 million of severance. In this quarter, if we add up the unusual items, you're looking at about 4 million total. So year-over-year it actually looks like you had less unusual items. I guess are you sensing at all that there is any compression in your margins going on or compression in your incremental margins occurring?

You know, Mike, to answer that question, no, we don't think that there's anything there that would cause us concern with declining margins. You know many of the things that Mark talked about in his press release certainly were what we consider one-time events.

The foundation I mean obviously that's a discretionary spend. We contributed considerably more this year than we have in the past. This ISSI initiative certainly is a onetime event. We got caught in the fourth quarter frankly from a bonus standpoint in that, practically in our sales incentive side, that people got into what we call the accelerator in the fourth quarter. It really had a very strong fourth quarter, and frankly we just were not accruing at the rate we should have been you know to be able to reflect the higher level of sales. I don't think there's anything in there that really causes us any concern at this point.

Okay. Home Depot is obviously a tough customer. You know I think we can probably safely assume you're not getting any price increases out of them.

That is fair.

Should we view this ISSI program or whatever it is as in effect a price concession? (multiple speakers). What does it mean going forward? Are you just going to have to continue to invest in the shelf space there such that in effect you're suffering price degradation?

Well effectively what it was is they are bringing a third-party in to manage their stores, so there is going to be -- and just for Graco products, but for all products which are going into Department 24, and eventually they will be throughout Home Depot.

Third-party, what they are going to do is make sure the shelves are cleaned, stacked straight, and will actually take over some of the training responsibilities for in-store associates.

Now the good thing about it is that this third-party the individual only have two stores. So they will be in those stores basically every other day making sure that the associates are up to speed, so on and so forth. It really is not a concession from a pricing standpoint.

Now vendors did have to help support that from a price standpoint. What we did is adjust our sales expense level to where it is really a wash for us at Home Depot. So I don't see anything going forward that would suggest that there will be continued pressure for us to have to do something either by giving dollars back or by reducing our sales organization.

So Home Center sales were flat for the year. Was operating profit up?

Mark?

Mike, we don't give that data. Sorry.

Okay. You know I should have started by saying just an unbelievable quarter in organic growth. In the Contractor division, especially the Rental and the Professional segment, can you give us some color as to what occurred in the fourth quarter because if there was not a prebuy, the housing statistics are good but they are not growing. Why in the world is (multiple speakers) double-digit growth still occurring in that Professional channel?

It is a phenomenon, frankly, that is worldwide. They just did I think a very nice job. I don't think there was any buy ahead because we did not really talk price increase until very late in the quarter, and I think that is too early for people to react to that. It was just, frankly, a very good quarter from a sales standpoint in the Contractor business. Again, nothing -- not one thing that would indicate that it was a one-time surge or so on. I think people are buying equipment.

Well, the extra week I think adds about 8 points overall, Mark, to organic growth, or is there anything unusual about that extra week given that it maybe the holiday week or --?

No, mathematically I think you are right, Mike. I think the problem we have is we don't know when the extra week was. (multiple speakers). But you can pick whatever days you want. But if you just do a straight line mathematical competition, I think you're right.

And then new products, the pipeline has been full for several years. What is in store for 2005, and maybe just address it by saying what three you are most excited about?

Well, we don't like to talk about product prior to introduction for obvious reasons, not wanting to cannibalize existing product. I will say that we added the engineers last year. We talked about early last year adding the 20 additional people in the engineering staffs. I think there is some exciting new products that are going to come out of WUB(ph). There's definitely some products that are going to come out of Contractor, and later this year there will be some nice products coming out of Industrial. You know, frankly, we are excited about each of the divisions.

I think what we saw in 2004 was really a lag of product introduction as a result of us cutting back, engineers back in 2001 when the economy started to soften. We still had the momentum going in, and we recognized that there were a number of products that we could have been investing in that we were not, and that is when we made a decision to hire the engineers. I think you will see additional product coming out this year and into 2006. The pipeline is very full.

Okay and just one specific before I jump back, the tax rate, Mark -- I am sorry what is your forecast for '05 give the fourth-quarter adjustment?

It should be around 33 percent.

Okay. Thanks, again.

Matt Summerville.

In terms of the price increases you're looking at, David, what level of increase would you be pleased with on a net basis kind of across all the businesses?

I mean that is a difficult question. I would hope we would see something in the 2 or 3 percent range.

Okay. And then if you can maybe just provide a little more color, Dave, on a global basis and maybe just your Industrial/Automotive business, what you're seeing early on in January. Is it more of what you saw in the fourth quarter? Is your sell-through just as strong?

Well, you know obviously we don't forecast the future, but I can -- basically echoing what was in the press release is that we think the first quarter is going to be strong for us. We have seen no indication that there is any softening at all in the industrial business and actually all of the businesses. And you know the growth is coming -- the good news is the growth is coming from each of the three regions. We have seen nothing that would indicate that there is going to be a softening in any of the regions, and you know we're just, frankly, very optimistic about this year.

With respect to Europe, can you remind me how much on average Germany and France account for as a percent of your revenue? And then maybe talk about if you're seeing any little sign of life there yet.

We have not in Germany for sure. In fact, and I don't have the numbers in front of me, I think Germany was actually down a slight dip this year from our Industrial business. France was up slightly, and when I say slightly, probably a percent. The UK was very strong, and the Southern Cone (ph) was very strong. Italy, Spain, even Scandinavia actually was very strong for us. We have seen no life, though, frankly, in Germany and just very little in France.

And then how much as a percent of European revenue would you say Germany and France account for?

Mark, do you have that number with you?

Well, it is really when you look at Industrial/Automotive that is really the business we're talking about. And of their total Europe sales, it is about 35 percent would be in Germany and France.

Michael Schneider.

Guys, could you address the balance sheet for a minute? I know you are always looking for acquisitions. What is your appetite for buying back stock in the interim, and maybe you could give us a sense just without names obviously, what size and what number of transactions are at different stages in the pipeline of acquisitions?

You know, Mike, obviously we cannot comment on acquisitions other than we continue to look for them. You know I think we have stated before that something between 25 and 50 million would be a probability. We continue to look for something like that, and it is like new products. There are a lot of those companies in the pipeline at various stages. Really that is about all I can say about the acquisitions.

Certainly stock buyback will still continue to be a priority for us. You know the business generates great cash flow. We could not consume it all through acquisition and, frankly, would not want to consume it all through acquisition. So we will continue to buyback our stock and also provide dividends.

Mark, can you give us some specifics on how many shares you bought back this year and maybe in the fourth quarter?

I will give you some numbers. On the cash flow statement, you see the number there is about $41 million of share repurchases. That is roughly about 1 million 4 shares bought back in during the year. And in the fourth quarter, I think we bought back in pretty close to $10 million shares. So we really did continue to buy stock back in throughout the whole year.

Okay. That is it. Thank you.

Charles Brady, Hibernia Southcoast Capital.

Do you have the shares outstanding at the end of the year, the actual number?

Just the number that is in the release is the number we have.

For the -- back in the fourth quarter, that average is going to skew it a little bit, is it not?

Yes, it is not significant, though. That is a pretty good number that I would use if you are looking for the basic numbers, probably the number that it is closest to the outstanding.

Okay. I just want to come back to the steel cost issue because obviously in the past you have not -- you talked about absorbing it and not having to raise prices and margins. Is there any way you can quantify sort of the (inaudible) price increases, what is the benefit to margins? Are you going to overcome the impact of steel costs? What has been the impact of steel costs? And it sounds from your language that you're still working with some price increases, and it is not 100 percent across the board yet, and you know so where are you in that, and how far -- how much of price are you going to get across the businesses?

Well, I think I mentioned it earlier. We are hopeful for 2 to 3 percent. I think 3 percent would be on the high side.

I am not talking (technical difficulty)-- across every business. I am talking how much of the business do you get zero increase? Obviously you don't get anything out of Home Depot or Lowes.

We don't do Lowes. But that is correct. I mean it is very difficult. With Home Depot, you get price increase. Frankly, I think we have been very fortunate to maintain price there. We have a few other large customers that it is very difficult to get a price increase out of, primarily on the Contractor side. We have greater success in our Industrial businesses and in the Lubrication business to be able to get price increase.

The only thing I would add, Charlie, is that we do experience pressure from the steel and the commodities. And you know from our standpoint, the Company is doing a nice job of managing those expenses. And in particular, our manufacturing group has really done an outstanding job of working with our suppliers and working in the factories to become more efficient and more productive to help offset those costs.

Unlike some other industrial companies, while this is a topic and it is an issue and we're focused on it, the normal impact to our Company is not maybe as great as you might see from some other companies because of all the many many things that we are doing to try to proactively attack it internally.

How much is steel as part of your cost of goods sold?

We don't have that figure.

The problem there, Charlie, with that is that we obviously buy raw material, but we also buy a number of components that has steel as a component of that part that we buy. So it is difficult for us to go through and really identify that we buy X amount of steel each year.

Okay. Thanks very much, guys.

Tyrone Kana (ph), Wellington Management.

Just going back to the whole currency issue, Mark, I know you gave the stats $1.24 on the Euro side for 2004. And I'm just curious, you know obviously it's been a great tailwind for you guys. So if you know the currency goes back to 1.24 as an average for full year 2005 hypothetically speaking, you know, how do you overcome that? It is going to be kind of in a way a headwind because you're not getting the tailwind. I'm just curious. So how does that impact you, and what kind offsets do you have in place?

Well, what I would tell you is that when we put our plans together for 2005 that one of the assumptions we make is the level of the Euro versus the U.S. dollar, and we plan our sales and our spending with that assumption in our plan. The number that we use is significantly below the current level of the Euro to the dollar. So we sort of built-in for some of that in our plan. Obviously to the extent that the actual number is favorable, that will help us.

We also have in our arsenal I guess other thoughts and ideas and things that we can do if necessary. But clearly at this point we have not seen any indication of the Euro moving quickly to the other direction, and you know from our internal perspective we are actually seeing some benefit that we probably did not expect.

So if it stays at, let's say, 1.30 for the full year, is your tax rate expectations going to prove to be higher than at 33 percent?

It could because again our expectations are based on a different number.

One follow-up question, and I apologize if you may have answered this because I got on late. But the Lubrication margins were a little below expectations I guess. I mean they were down quite a bit year-on-year. Can you just help me understand what was going on there?

Well, in Lubrication what we did is we have invested heavily in product development that had some impact on the total overall margin. I think our product development spending was up about 80 percent. We had a release of a brand-new product. It was late third quarter I think it was, what we called the Mini Fireball, and plus there are other products that are being developed that will have some impact this year in 2005.

There were some warranty issues I guess that we had during the year that have been resolved. But that was basically it. Those were the negative impacts on margin this year. Actually gross margin this year was up 51 or 52 percent compared to 48 percent last year. So actually it was a marginal year in Lubrication.

So when you say they are going to have an impact this year in terms of new products and all the stuff you're investing in, are you talking an impact on the revenue line, as well as expenses, or -- (multiple speakers)

(multiple speakers). Revenue line. What you will see is that the expense level in R&D will remain at a constant level and actually could be down some this year because we were using some outside engineering services to help us, and we should have a nice positive impact on the revenue line, and the expense line I don't see it really increasing at all.

Michael Schneider.

Dave, I know I have asked you this before, but Home Depot's strategy with the rigid brand continues to roll. Aisle by aisle they seem to be surrounding Department 24 by putting rigid generators, rigid pressure washers. What do you know about the Paint aisle?

Well, obviously we monitor that very closely, and we have gone to Home Depot and asked if we could be the rigid brand, if they would like us to be the rigid brand?

The good news is I think that they recognize the value in the Graco brand, and as they try to attract the professional painter into their stores, you know they want that brand and they need the brand to get them into their stores. I think certainly through the short-term, and I don't know if that is three, four or five years, I don't think we will see an impact as far as a rigid brand spray product line. You know we are continuing to try to create that new market, that being the semiprofessional with that Graco brand, and I think Home Depot is very happy with it.

And that begs the question then about Lowes and Seers and the other major retailers, where are you with them? Is that a contingency plan if, indeed, you see a rigid sprayer?

Well, I mean there is -- there are some contingency plans. We continue to pursue business at other home centers. We won't do anything that would jeopardize our relationship with Home Depot. They are the largest. We have to have in terms of certainly -- there certainly were not anymore -- or were unfavorable compared to what we're doing at Home Depot.

You know, frankly, they are our customer. We think they are certainly the largest in that area and probably the most powerful in the Home Center area. We will look at the other home centers, but we are not going to do anything that would jeopardize our business with Home Depot.

Okay. And then just taking a step back and looking at the business in '05, when you put together your strategic plan for '05, can you give us a sense if in broad terms what is new or different? What are the drivers in '05?

Well, I think that the Liquid Control acquisition, the (inaudible) area will be important for us going forward. We recognize that there is -- it is probably the fastest-growing area within our Industrial business. We will focus on that not only from an acquisition standpoint but also a product development standpoint. So we've got engineers dedicated to sealants on the adhesive side of our business, and I think that will be a driver of growth not only in '05 but certainly years well beyond.

Our focus remains the same in Contractor. You know, new product there is very important to us, and it really drives our business in the Contractor business, as well as expanding that business outside of North America. Our European organization has had a great successful year this year with the Contractor business in Europe, and frankly, Asia has.

You know we have had great growth coming out of Australia over the last couple of years. We now have the two largest chains down in Australia. They are selling our product, which we did not have in the past. You know that really has driven our growth in the Contractor business. So we will continue to focus on regionalization and new product in our Contractor business.

Lubrication is really more of the same. We've got some new products coming out that we think are going to help us grow that business. We are in the mature marketplace, there is no question, but I think we can do some things that will actually allow us to grow in the Lubrication business.

You know we had obviously a great fourth quarter. You know I don't think you can expect that the business is going to grow at that rate going forward. I mean that is just phenomenal growth. But I think there is some growth opportunity in Lubrication.

Okay and final question. Mark, maybe just some more color in the Industrial segment. Do you have any data if you can cut it by end market or cut it by application as to where the growth is coming from?

Nothing that I can really give you other than what we said in that it's across all of the major product categories that we talked about, which would be the finishings; sealants and adhesives; process, which is really our diaphragm pump business and protective coatings. All of those are up across the board.

And then if you look geographically, it is really that same phenomenon. All those product categories are up across the board in Europe and the Asia-Pacific region. It's sort of a broad-based pickup in the underlying demand across all product categories.

If I may, Mike, if you look at those businesses, they have all grown at double-digit with the exception of finishing. Finishing was a very high single digit, but finishing is our largest segment in that area. As Mark said, it is across every region double-digit growth and in every product category with the exception of finishing. But again that was up a very high single digit number.

In the automotive business itself, in the U.S., it looks like there is going to be big production cuts in the first quarter. That may not impact the project activity, but has it begun to impact your day to day aftermarket business with the auto OEs (ph)?

No. We have seen nothing yet that would indicate that there is a reduction in spend either from a project side or from the parts business.

Thanks, again, and congratulations on a great year.

Ian Fleischer, Friedman Billings Ramsey.

I just had one small item. Did you see any prebuying ahead of the expiration of the depreciation tax credits?

You know, I really don't think so. I think our business really was not driven by that or if it was we certainly could not tell it. People were buying on a project basis. We did not see anybody who was trying to accelerate projects as a result of the tax impact. So, frankly, I just did not see it at all this year.

(OPERATOR INSTRUCTIONS). If there are no further questions, I will now turn the conference over to Dave Roberts. Please go ahead with any follow-up or closing comments.

Yes. First of all, I would like to thank everybody from the investment community that attended the meeting. We appreciate your interest in Graco and certainly are going to do everything we can to continue to perform the way we have in the past.

Secondly, I would really like to thank the 1700 Graco employees who really did an outstanding job this year to have both a record year in sales and also a record year in earnings. So with that, again, thank you to everyone, and we will talk to you next quarter.

Thank you. Ladies and gentlemen, this concludes our conference for today. Thank you for participating and have a nice day. All parties may now disconnect.